ICEA 2013 Conference Proceeding by Silviu Cojocaru

THE INTERNATIONAL CONFERENCE IN ECONOMICS AND ADMINISTRATION

2013

THE INTERNATIONAL CONFERENCE IN ECONOMICS AND ADMINISTRATION ● ICEA – FAA 2013 ● June 7-8th, 2013 ● http://conference.faa.ro ● ISSN: 2284 – 9580 ● ISSN-L: 2284 – 9580 The Faculty of Business and Administration University of Bucharest

Editor:

Elena Druică

The organizers of ICEA 2013 thank to the scientific advisory board of the Economic and Administrative Sciences Series of the Annals of the University of Bucharest, as well as to the members of the editorial board of the International Journal of Applied Behavioral Economics for their effort in reviewing the submissions. Independent reviewers have also contributed to raising the scientific level of the registered papers.

ISSN: 2284–9580 ISSN-L: 2284–9580

Content:

THE FUTURE OF SCIENCE POLICY IN IRAN; APPLICATION OF ERA-BASED CELLULAR PLANNING FOR KNOWLEDGE DEVELOPMENT IN THE LIGHT OF COLLAGE METAPHOR Author: Pourezzat, Ali Asghar; Sodagar, Hashem; Sadabadi, Ali Asghar …………... THE IMPACT OF THE GLOBAL FINANCIAL CRISIS IN ALBANIA Author: Merollari Klaudeta; Zoto Stela ....................................................................... THE IMPORTANCE OF PERFORMANCE AUDIT MISSIONS WITHIN THE CONTEXT OF PUBLIC AUDIT IN REPUBLIC OF MOLDOVA Author: Veronica Dolineanschi ………………………………………………………. SOCIAL REPRESENTATIONS – „READING GRID” OF PUBLIC INSTITUTION IMAGE Author: Corina Rădulescu ............................................................................................. INTERNAL CONTROL IN ROMANIAN PUBLIC INSTITUTIONS Author: Maria Valia Mihai; Oana David ....................................................................... LEARNING-BY-DOING IN SIMULATED ENTERPRISES Author: Radu Herman ……………………………………………………………….. BUSINESS PROCESSES IN CONTEMPORARY SOCIETY – A THEORETICAL APPROACH Author: Veronica Adriana Popescu; Gheorghe Popescu; Cristina Raluca Popescu …. DETERMINANTS OF PERFORMANCE IN CONTEMPORARY SOCIETY - A THEORETICAL APPROACH Author: Gheorghe Popescu; Veronica Adriana Popescu; Cristina Raluca Popescu … ANALYSIS OF INVESTMENT ENVIRONMENT IN ROMANIA Author: Valentin Mihai Leoveanu ……………………………………………………. RUMANIAN VS BULGARIAN TOURIST MARKET, A PERSPECTIVE FOR DESTINATIONS SUCH AS ALBANIA Author: Stela Zoto; Klaudeta Merollari ……………………………………………... ELEMENTS OF THE FORMATION AND EVOLUTION OF THE RAILWAY TRANSPORTS IN ROMANIA AND IN THE WORLD Author: Cornelia Nistor ………………………………………………………………. NICOLAS GEORGESCU - ROEGEN – BIOECONOMICS AND THE ECONOMIC PROCESS Author: Cristian Sima; Cătălina Bonciu; Marinescu Gheorghe .................................... IS THE POTENTIAL RISE OF THE BRICS A THREAT FOR THE EUROPEAN UNION? Author: Ionuț Mihai Ungureanu .................................................................................... ASPECTS OF ECONOMIC THINKING AND ECONOMIC ACTIVITY IN ROMANIA DURING THE INTERWAR PERIOD Author: Cornelia Nistor; Vladimir-Codrin Ionescu ………………………………….. DOW EFFECTS IN RETURNS AND IN VOLATILITY OF STOCK MARKETS DURING QUIET AND TURBULENT TIMES Author: Ramona Dumitriu; Razvan Stefanescu ............................................................ 3

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BUSINESS CYCLES AND FINANCIAL INSTABILITY Author: Cristian Ionescu ................................................................................................ LENDING AND FINANCIAL INSTABILITY Author: Cristian Ionescu ……………………………………………………………… IMPACT OF THE FOREIGN EXCHANGE RATES FLUCTUATIONS ON RETURNS AND VOLATILITY OF THE BUCHAREST STOCK EXCHANGE Author: Razvan Stefanescu; Ramona Dumitriu ............................................................ THE INFLUENCE OF MONETARY POLICY ON BANK LENDING IN ROMANIA Author: Valentin Mihai Leoveanu; Mihaela Cornelia Sandu ………………………… CIVIL LIABILITY AND PROFESSIONAL LIABILITY FOR DEFECTIVE PRODUCTS Author: Camelia Spasici; Anca Nicoleta Gheorghe ………………………………….. INTERNET LAW: NOTION AND PRINCIPLES Author: Dan Cimpoeru .................................................................................................. THE NEED TO SET UP A LEADERSHIP CENTRE IN THE ROMANIAN ACADEMIC ENVIRONMENT Author: Paul Marinescu; Sorin-George Toma ………………………………………. EMPIRICAL INVESTIGATION OF THE RELATIONSHIP BETWEEN EMPLOYEES’ PARTICIPATION IN STRATEGIC PLANNING AND ORGANISATIONAL PERFORMANCE Author: Olu Ojo ………………………………………………………………………. ENTREPRENEURSHIP IN TIMES OF ECONOMIC CRISIS Author: Ana-Maria Grigore; Vladimir-Codrin Ionescu ................................................ THE IMPACT OF ENTREPRENEURIAL CULTURE IN THE VIEW OF POLITICAL LEADERS WITHIN THE EUROPEAN UNION Author: Eleonora Gabriela Baban …………………………………………………... POLLUTION MANAGEMENT FOR A SUSTAINABLE DEVELOPMENT Author: Marius Bulearca; Constantin Ghiga …………………………………………. A REVIEW ON QUALITY MANAGEMENT AND INNOVATION IN THE IRANIAN CONSTRUCTION INDUSTRY Author: Shabnam Yazdani Mehr Abdelnaser Omran ………………………………... QUALITY AND COMPETITIVENESS WITHIN ORGANIZATIONS Author: Vladimir-Codrin Ionescu; Ana-Maria Grigore ……………………………… LANDMARKS IN THE HISTORY OF MANAGEMENT THEORIES AND PRACTICES Author: Vladimir-Codrin Ionescu; Cornelia Nistor ………………………………….. STRATEGY AND CREATIVITY Author: Sorin-George Toma; Paul Marinescu ……………………………………….. EFFECTS OF MAGICAL THINKING AND SUPERSTITIOUS BELIEFS ON CONSUMER BEHAVIOR Author: Adela Coman ………………………………………………………………… EFFECTIVE INFORMATION TECHNOLOGY GOVERNANCE DETERMINANTS: A STUDY OF INVOLVEMENT OF TOP MANAGEMENT IN IT AND INTERNAL CONTROL Author: Samuel David Lee; Aris Budi Setiawan ……………………………………. 4

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ESSENTIAL INGREDIENTS OF A SUCCESSFUL MANAGER Author: Marius Bulearca; Daniel Tamarjan ………………………………………….. MARKETING COMMUNICATION CHANNELS USED BY LOCAL GOVERNMENTS VS. TOURISTS` EXPECTATIONS HERNIK Author: Joanna; Smalec Agnieszka …………………………………………………... GENERATIONS AND MARKET ECONOMY Author: Jelev Viorica ………………………………………………………………… APPLICATION OF VANIN MODEL FOR THE WEB MARKET Author: Caraganciu Iulian ……………………………………………………………. AN APPLIED ANALYSIS ON THE USE OF SPECIFIC HUMAN CAPITAL OF HIGHER EDUCATION GRADUATES WITHIN THE FIELDS OF ECONOMICS AND ADMINISTRATIVE STUDIES Author: Ioana - Julieta Josan …………………………………………………………. IBM POWER SYSTEMS - ADVANCED SUPPORT FOR OPERATIONS CONSOLIDATION THROUGH VIRTUALIZATION AND CLOUD COMPUTING Author: Camelia Cojocaru; Silviu Cojocaru ………………………………………….

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THE FUTURE OF SCIENCE POLICY IN IRAN; APPLICATION OF ERA-BASED CELLULAR PLANNING FOR KNOWLEDGE DEVELOPMENT IN THE LIGHT OF COLLAGE METAPHOR (CASE STUDY: ADMINISTRATION)

Pourezzat, Ali Asghar University of Tehran, Iran.

Sodagar, Hashem Imam Sadiq University, Tehran, Iran.

Sadabadi, Ali Asghar University of Tehran, Iran.

ABSTRACT It is paradoxical to know that production of science in different disciplines has been significant in Iran, but it has played a very limited role in the production of administration science in the world. This fact refers to the gap between Iran and other countries in terms of administration science. This problem has no solution but transferring of knowledge and borrowing the scientific findings of more advanced countries; and the problem of localization of knowledge still remains unsolved. The present study, through a hermeneutic approach, embarks on the offering a phenomenological interpretation to provide a proper understanding of the application of EraBased Cellular Planning (ECP) for development of knowledge in light of collage metaphor. To this aim, and to relate the propositions abstracted in research process affected by rationalistic epistemology, analytic-logical method has been employed. Using the metaphor of collage for understanding scientific theories, skillful managers and theoreticians are trained. Hence, the knowledge of administration is produced throughout the world and is accumulated in large global knowledge management repositories. Iranian managers and theoreticians should be trained so that they can create collages of new theories by synthesizing the findings in practice and take collection of synthetic theories. In this way, a large number of country’s administration problems is redefined and developed in the process of solution. Keywords: Era-Based Cellular Planning (ECP), Collage metaphor, Administration science, Knowledge production 1. INTRODUCTION Developing countries perceive wide gaps between theory and practice as if theories belong to a world different from the world of action and practice. Perhaps, the reason is that the scientists follow the scientific schools of advanced countries, while practice deals with the realities of any given society.

Scientific issues are not confined in the borders of scientific communities, but take place in the wider area of actual societies. Hence, the need for formulation of problems in interdisciplinary, multidisciplinary, and trans-disciplinary fields is very necessary (Scott & Davis, 2007, 17). The relationship between science and practice is very accurate in advanced countries. In these countries, the science of administration has emerged and gradually developed in response to administration problems. This is while in developing countries, a sort of knowledge transfer has happened. Therefore, in a phenomenological analysis, the science of administration in developed countries is the result of the interaction between scientists and agencies; while in developing countries, it is the outcome of the interaction between scientists of these countries with the scientists of developed ones. The trend of knowledge transfer was valuable in initial stages. It is a precious opportunity through which developing countries, without having to pay for the experiments and experiences, benefit from the achievements of scientific endeavors of developed countries. However, this procedure has three main drawbacks:  Incongruity of the past findings of developed countries with present issues of developing countries, and the problems arising from the improper application of knowledge.  Intellectual laziness of the researchers and scholars of administration in developing countries and the habit of borrowing knowledge from the West.  Forgetting the necessity of exploration for identifying, detecting, and understanding problems as the starting point of scientific activities. Therefore, it appears that the responsibility of knowledge policy-making institutions in developing countries is greater than that of developed countries. In Iran, the High Council of Science, Research and Technology is one of knowledge policymaking institutions. This council tries to make the most out of research budgets by wisely allocating the limited resources. In this respect, the present study intends to propose a method which makes it possible to gradually develop knowledge in this area. The situation of administration science in Iran is very paradoxical; while in recent years Iran has had significant achievements in various scientific areas, its contribution to the administration science in the world was very low. This refers to the wide gap between Iran and other countries of the worlds in terms of administration science. In such a condition, the only solution is knowledge transfer and borrowing of the scientific findings of more advanced countries which keep the problem of localization unanswered. The present study suggests using the metaphor of collage for understanding scientific theories and training managers and artistic theoreticians. In this way, the science of administration is produced throughout the world and is accumulated in large global knowledge management repositories. Iranian managers and theoreticians should be trained so that they can create collages of new theories by synthesizing the findings in practice and take collection of synthetic theories. In this way, a large number of country’s administration problems is redefined and developed in the process of solution. 2. RESEARCH METHODOLOGY The main goal of this study is to investigate conceptual and philosophical propositions. The exploratory nature of research led researchers look into phenomena from a different perspective. This study has been conducted through a hermeneutic approach in which the research is directed toward construction of a phenomenological interpretation to reach a proper understanding of the phenomenon under study. Then, to relate the propositions 7

extracted through research and under the influence of rationalistic epistemology, analytic – logical method is employed. In analytic – logical method, the evident major premise is combined with the resulting minor premise, and the logical result is achieved (Glaser, 1978; Glaser & Strauss, 1967). The data used in this study were the articles, books, and scientific and organizational reports considered as objective realties. According to Glaser and Strauss, in theoretical sampling, it is not necessarily sufficed to one kind of data about an issue, or a specific method for collecting data; rather, different data and different perspectives and views are used to reach an understanding of the issue (Danaee fard, et al., 1383). In this method, sampling is continued up to the point where no new information is obtained (Glaser, 1978). In this study, references in the field of application of Era-Based Cellular Planning (ECP) (Pourezzat, 2010; Pourezzat et al., 2011b) and collage metaphor (Hatch, 1997, 54-5) were reviewed to get the theoretical richness of the final model. The validity of the final model in offering an appropriate answer to research question was estimated and minor modifications were made in some aspects. 3. THE PROBLEMS OF DEVELOPING ADMINISTRATION KNOWLEDGE IN IRAN Before commencing the discussion, some points are raised about the realities of administration knowledge in Iran:  Usually, the administration issues in Iran are formed under the influence of the mentalities and specific views of policy-makers in a given period of time.  Sometimes, the intellectual frameworks of policy-makers affect the identification and definition of administration issues to the extent that they can never understand the reality of administration issues.  Sometimes, the sense of belonging to an idea, belief, or attitude prevents policy-makers from perceiving the signs inconsistent with it in reality; therefore, they define and interpret administration issues differently.  Sometimes, the modern tools of administration affect the entry of real information on administration issue to the extent that make policy-makers receive wrong information and accordingly, define the problems wrongly.  The fact is that despite the long history of administration science in Iran (since Achaemenians), the production of this science is very weak at present.  Administration issues are very diverse and numerous; thus, prioritized collections of issues are formed which are continuously added up to.  The theories invented by other countries are useful, but not comprehensive and applicable prescriptions for solving the problems in Iran.  The combination of the achievements of world knowledge on administration, and selective and artful application of it in light of collage metaphor can be very fruitful.  Using theoretical collages and solving problems in the short run must not prevent scientists from focusing on the necessity of paying attention to the relation between science and practice in administration. That is to say, Iranian administration scientists must develop their scientific achievements rapidly and consider local problem solving as their target of knowledge production. As such, the science and practice of administration in developing countries must converge so that in future, the science of administration would serve its practice and sustainable development of the country. It can be argued that there is a wise relationship

between the advancement of countries in the science of administration and their sustainable development; a very trustable relationship. 4. SWOTN MATRIX FOR DEVELOPMENT OF ADMINISTRATION KNOWLEDGE Considering the diversity of administration issues in Iran, as well as issues imposed upon administration of every society by the realities of the world and social incidences, the science of administration deals with an increasing set of issues. As such, a sort of prioritization system is required to give order to such diverse problems of administration. Before addressing the use of Era-based Cellular Planning System (ECPS), it would be fruitful to present a discussion of SWOTN matrix. The policy-makers of administration in Iran face the following strengths:  Presence of universities and research centers of humanities relevant to administration, and significant number of graduates of higher education in this field Also, the following drawback must be taken into consideration:  Incompetency of some managers and their alienation with the science and practice of administration;  Political behaviors and spaces permeated to the various levels of Iranian public organizations; The main existing opportunities are:  Change of administration language affected by development of electronic administration;  The possibility of coordinating master’s and Ph.D theses and dissertations for solving administration problems, under supervision of the high council. The major threats are:  Fundamental changes in administration issues which, sometimes, changes priorities according to the necessities of time and place;  Decline of the spirit of useful research and study due to interest of some researchers and university professor in easy and repeated while productive work;  Brain-drain in unexplainable trends;  If any given problem is not solved, it might change into an increasing threat. Also, the main needs are: A problem must have one or more alternative solutions which provide the possibility of solving it in different situations.  The problem-solving capacity must be growing and flexible to provide priorities and policy packages in flexible frameworks, as necessary. The appropriate strategic planning system must be capable of considering all these 10 points. 5. THE APPROPRIATE STRATEGIC PLANNING SYSTEM Various approaches of theoreticians in the area of strategy to the way strategy is developed in organizations have led to various and numerous models in this area. Although this plays a very significant role in the richness of strategic management literature and contributes to the expansion of choices of practitioners in the area of strategy (e.g. researchers and senior managers of organization), in some cases, confuses the practitioners faced with the models and difficulty of choosing from among them. This has made some researchers of strategy offer a typology for classification of different kinds of strategies. Nutt and Backoff

(1995: 192), Hart and Naburry (1994: 253) and Galbraith and Schendel (1983: 154) provided lists of such strategy typologies in their studies. Investigating the typologies proposed by these researchers reveals a kind of contradiction among them. This led Galbraith and Schendel to provide a useful classification of different kinds of typologies in the work entitled “An Empirical Analysis of Strategy Types”. In their view, some typologies involved business level strategies, and some others cover corporate level strategies. Meanwhile, in the marketing literature, too, some typologies of marketing behavior strategies are seen. For example, Kotler proposes 9 marketing strategies some of which resemble the strategies stated in strategic management literature (Kotler, 1965: 104-109). Besides, Galbraith and Schendel identified other kinds of typologies which try to classify the patterns of organizational behavior (Galbraith and Schendel, 1983; 154) such as the typology of Miles and Snow (1978) who divide strategies into defensive, reactive, analytic, and exploratory strategies. These typologies study the relationship among strategy, structure, and process rather than focusing on the patterns of strategy (Miles & Snow, 1978: 30). Some of the main typologies of organizational behavior are the ones proposed by Mintzberg (1973), Miles et al. (1978), Acar et al. (1987), Nutt and Backoff (1995), Chaffee (1985), Laurial (1997), Mintzberg (1978), and Whittington (2001). Whittington (2001) is one of the researchers who classified strategies on the basis of the pattern of organizational behavior. In discussions of the nature of strategy and its importance, he introduces four classical, evolutionary, process, and systemic approaches.  In classical approach, the organization can predict market changes through planning and adapt itself to them. Thus, strategy can be developed through logical and rationalistic analyses. Hence, one must avoid the agitated space of business and develop strategies in the thinking room of the organization.  In evolutionary approach, the environment is complex and unpredictable. Therefore, spending energy for developing strategic plans is disastrous. In fact, considering the continuous changes of actors in the environment and market, strategy-makers of the organization should not limit their choices; rather, they should continuously increase their quantity and quality.  In process approach, it is not possible to separate planning from implementation (as suggested by classical approach) and an effective strategy is the one which is developed directly through participation and close involvement in all stages of activity in the environment. It is the outcome of action in environment and interaction with it.  In systemic approach, strategy must be developed in relation to environmental condition; it must be effective and efficient; and is developed and implemented in line with its specific social context. Therefore, a good strategy is the one which is designed and implemented in accordance with various considerations of the environment (Sodagar, 2009). Developing strategy is not easy tack considering the various scenes of social life, especially at national level and social macro systems it deals with numerous issues and variables the number and diversity of which are continuously increased. In general, classical and planned approached, despite their rather strong claims, cannot be useful in complex and changing environments, and their claimed rationality cannot be achieved by the existing technology and planning procedures. The evolutionary approach ignores many peculiarities of the system affected by demands of the environment; while the organizations are justified by their special, unique and distinguishing features. In this analysis, “presence” or “absence” of indistinguishable organizations are considered equal, i.e. if an organization dependent upon the environment is eliminated, no one would notice it. Therefore, analyzing the growing behavior in environment-dependent organizations is useless, because these systems play no role in the evolution of the environment. 10

However, adaptive, systemic, and process approaches deserve consideration. Adaptive approach refers to the necessity of gradual modification of the strategy in practice. Systemic approach contributes to the relation of micro-systems, systems, and macro-systems, logic of self-analysis of the system and its power in environment, and developing more logical and effective strategies. In addition, this changeable, problem-oriented, and flexible process approach adds to effectiveness and efficiency of developed strategies. This approach, drawing on the metaphor of artist potter, believes that the manger, like the potter, must always be at the core of practice and deal with real problems. Hence, it seems that one must enter the future with an approach with though strategies learning from the changes of the environment that can get the emergency factor from the feedback processes and exert influence in the process of continuous modification of strategies. The implication of two valuable researches on the process of strategy development in public organizations of Iran was that the strategy development must be deliberated as much as possible, but the system must have enough capacity for facing emergencies so that it can adapt its strategies with the requirements of the organization and environment according to rules of process approach (Sodagar, 2009; Naji, 2009). This reveals the necessity of combining the findings of these two approaches in an attempt to synthesize the advantages of “acting upon previous thought” and “flexibility for facing the emergencies of the era”. This necessity is the main claim of this work about the effectiveness and efficiency of the application of ECP. Hence, the present study, focusing on the unavoidable necessity of “rational stability” and “compulsive flexibility” for effective and efficient confrontation with the realities of contemporary world, emphasizes designing era-based cellular planning system. The main distinguishing features of this system are flexibility in the changes of era and high capacity for replacing pre-planned cells or scenarios with the framework of strategic plans. These two features provide ECPS with specifications which contribute to the capacity of the system (organization or government) for rational action facing with the rapidly-changing world. Strategy is the result of human thought. So, it is a convention in the language and can be repelled in it, too, and there is not unique and rigid way to develop it. The important point is to devise a way to achieve social goals with highest degree of effectiveness and efficiency (Pourezzat, 1389: 29-51). 6. ERA-BASED CELLULAR PLANNING SYSTEM (ECPS) AND ITS CAPACITIES ECPS is based on a strategic approach to planning in a highly-competed and challenged situation. Particularly, the vaster, more analytic, riskier, and more strategic a plan, the more there is the need to use ECPS. Here, the stages of applying ECPS for identifying, classifying, and prioritizing general problems, as well as organizing and managing academic and administration researches for solving those problems are briefly discussed (Pourezzat, 1389, 119-146). 7. ERA-BASED CELLULAR PLANNING (ECP) ECPS becomes very flexible to overcome the difficulties of planning and development, and using its cellular structure, makes it possible to review the stages of implementation of present and future plans of administration science and even manage the

undesirable effects of previous plans according to the situation of knowledge and technology development. The cellular structure of these plans creates a situation where the future plans are less affected by previous plans. In other words, the future is less dependent upon the past actions. For instance, if the long term plan refers to a 20-year outlook, it can be divided into some 5year plans, several 1-year plans, and a large number of some-month, 1-month, even smaller plans, so that each of these micro-plans constitute one cell of the ECPS (Fig. 1). It goes without saying that if the set of plans are designed as integrated packages, the planning and implementation system would be very vulnerable, as the planers, in the face of any change of the environment, will have to revise their plans, stop many parts being implemented, and remove many implemented parts. E11

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Fig 1. One Page of ECPS Involving an Infinite Number of Planning Cells (pourezzat, 2010) As it is shown in Fig. 2, every letter refers to one era, and each index refers to one plan from a family of plans. For example, cell A59 refers to plan 9 from the family of plans 5 in era A. Also, cell E76 refers to plan 6 from plans 7 in era E.

Fig. 2: Network of ECP System from A Era to Z Era (Pourezzat, 2010) Each cell refers to one scenario or plan of an era of one age. These cells must be designed as a collection of micro-systems based on the hard and soft relation. ECP is designed with the aim of providing the opportunity for continuous optimization of decisions and policies so that the continuous nature of the outcomes of any decision is

considered and understood by planers and administrators. This continuity is specially affected by the nature of systemic links among cells (Pourezzat, 1389, 95-99). 8. THE USE OF ECP To make a coherent connection in ECP, use of cellular structures to be consecutively placed in consecutive ages is recommended. These structures deeply complement each other in a network of strategies and can be called conceptual strategies (Fig. 3).

Fig. 3: Spread Dashboard of Planning in National Scale (Pourezzat, 2010) Conceptual strategies should not be limited by a strategy or a group of strategies; rather a set of numerous and divers scenarios must be designed and the possibility of using them in successive ages must be planed. Also, a large number of accompanying strategies can be devised in successive ages. This needs skill and creativity for developing matrix and completing its surface and depth (Pourezzat, et al. 2011a, 20-21). 9. CONCLUSION It is quite possible in the development process of developing countries that turning back has some advantages; such as the possibility of using tested technologies instead of reinventing it, and even moving toward previous technological standards of developed countries, but the necessity of using the experiences of pioneering societies in this area and localizing their successful experiences is felt. The situation of administration science in Iran is very paradoxical; while in recent years Iran has had significant achievements in various scientific areas, its contribution to the administration science in the world was very low. This refers to the wide gap between Iran and other countries of the worlds in terms of administration science. In such a condition, the only solution is knowledge transfer and borrowing of the scientific findings of more advanced countries which keep the problem of localization unanswered. As such, scientists focus on issues belonging to the advanced world while living the world which reflects the realities of the backwarded world. Hence, the relationship of theory and practice breaks down in developing world. For example, it developed countries, the presence of administration science in the face of social

phenomena is more serious that developing countries, as in those countries, the administration science has grown together with administration problems, and its function is problem solving. The present study, in light of a hermeneutic approach and using the metaphor of collage, embarks on providing a phenomenological interpretation to create a proper understanding of the application of ECP for development of knowledge. ECP has a remarkable capacity for knowledge policy-makers. Using this system, one can prioritize different problems and provide the possibility of solving them as vertical and horizontal packages in the dashboard of the action age and subsequent ages according to the nature of hard and soft relations among them. The final goal of this system must be defined in a way to direct any academic research to one or more problems, so that one problem is solved, mitigated, or at least identified and prioritized in every research. Hence, using the metaphor of collage for understanding scientific theories and training managers and artistic theoreticians is justified. In this way, the science of administration is produced throughout the world and is accumulated in large global knowledge management repositories. Iranian managers and theoreticians should be trained so that they can create collages of new theories by synthesizing the findings in practice and take collection of synthetic theories. In this way, a large number of country’s administration problems is redefined and developed in the process of solution.

ACKNOWLEDGEMENT This study was conducted by the support of “National Research Institute for Science Policy (NRISP)”, hence the authors express their gratitude from this organization. REFERENCES 1. Acar, W. & Melcher, A.J. & Aupperle, K.E., 1987, “Organizational Processes and Strategic Postures”, Academy of Management Proceedings. 2. Chaffee, E. E., 1985, “Three Models of Strategy”, The Academy of Management Review, Vol. 10, No. 1, pp. 89-98. 3. Danaee fard, H. Alvani, S. M., Azar, A. (1383). Methodology of qualitative research in management, a comprehensive approach. Tehran, Saffar. 4. Galbraith, Craig & Dan Schendel, 1983, “An Empirical Analysis of Strategy Types”, Strategic Management Journal, Vol. 4, No. 2, pp. 153-173. 5. Glaser, B. & A. L. Strauss. (1967). The Discovery of Grounded Theory. Ney York. Aldine. 6. Glaser, B. (1978). The Oretical Sensitivity: Advances in the Methodology of Grounded Theory. California. Sociology Press. 7. Hart, Stuart & Catherine Banbury, 1994, "How Strategy-Making Processes Can Make a Difference", Strategic Management Journal, Vol. 15, pp 251-269. 8. Hatch, Mary, Jo (1997). Organization Theory, Modern, Symbolic and Postmodern Perspectives, Oxford University Press. 9. Kotler, P., 1965, “Competitive strategies for new product marketing over the life cycle”, Management Science, 12, December, pp. B 104- B 119. 10. Lauriol, Jacques, 1997, “Une analyse des representations de la strategie et de son management dans la production”, ouvrages en langue francaise Management International; Vol. 2, No 1; ABI/INFORM Global, 51-66. 11. Miles, R.E., & Snow, C.C., 1978, Organizational Strategy, Structure, and Process, New York: McGraw-Hill. 14

12. Mintzberg, H., 1973, “Strategy-Making in Three Modes”, California Management Review, pp 44-53. 13. Mintzberg, H., Ahlstrand, B. and Lampel J., 1998, Strategy Safari, Prentice Hall. 14. Naji, Majed, 2009, Explanation of the Process of Strategy Formation in Economic Public Organizations of Iran, A Master of Science Dissertation, Imam Sadiq University, Tehran, Iran. 15. Nutt, P.C., & Backoff, R.W., 1995, "Strategy for Public and Third-Sector Organizations", Journal of Public Administration Research and Theory: J-PART, Vol. 5, No. 2, (Apr.). 16. Pourezzat Ali Asghar, Mostafa Nejati, Ghazaleh Taheri Attar, Seyed Mahdi Sharifmousavi. (2011a). Scenario planning and futurology of the Persian Gulf post-oil economy, Foresight, Vol. 13 Iss. 6, pp. 18 – 33 17. Pourezzat, Ali Asghar and Abdolazim Mollaee and Morteza Firouzabadi. (2008). Building the future: Undertaking proactive strategy for national outlook, Futures, Vol. 40, pp. 887–892 18. Pourezzat, Ali Asghar, and Ghazaleh Taheri Attar and Seyed Mahdi Sharifmousavi. (2011b). “Application of Era-Based Cellular Planning for Development of EGovernment in Developing Countries”, International Journal of Innovation in the Digital Economy, Vol. 2, pp. 1-11 19. Pourezzat, Ali Asghar. 2010. Era- based strategic management, A future studies approach to national interests. Imam Sadegh University publication. 20. Scott, W. R. & G. F. Davis, 2007, Organizations and Organizing: Rational, Natural, and Open Systems Perspectives, Pearson Prentice Hall. 21. Sodagar, Hashem, 2009, Explanation of the Process of Strategy Formation in Political Public Organizations of Iran, A Master of Science Dissertation, Imam Sadiq University, Tehran, Iran. 22. Whittington, R., 2001, What is Strategy and does it matter?, London: South-Western CENGAGE Learning.

THE IMPACT OF THE GLOBAL FINANCIAL CRISIS IN ALBANIA Merollari Klaudeta University “Fan S. Noli” Korça, Albania Zoto Stela University “Fan S. Noli” Korça, Albania

ABSTRACT What began as a financial crisis in the US in 2007 in less than a year has turned into a general economic crisis becoming a global phenomenon in terms of territorial coverage and universal in terms of its effects. The increased level of connection among countries has favored its rapid expansion all over the world and its effects so far are stronger and deeper compared to any economic crisis experienced so far, including the great Depression of 1929. The crisis plunged most of the developed countries into a serious recession but its negative consequences are already being felt even in countries such as Albania. Although a developing country characterized by a low level of integration of its economy to the global economy, Albania has not escaped the international crisis. Albania has had no direct effects of the crisis as there has been no banks exposure to “toxic assets” that lie at the root of current crisis but there has been a serious deterioration of its key economic indicators: investments, industrial production, exports, Key words: financial crisis, economic indicators, banking sector, crisis consequences, business financing

1. INTRODUCTION The financial crisis which gripped the US soon spilled over to the European and other markets. As an increasing number of participants on the financial market realized that the problem was of a system related nature, the crisis gradually started to spill over from the financial to the “real” sector plunging most of the industrialized countries into recession. In terms of its effects so far the crisis is stronger than the Great Depression of 1929 and it has undermined the public confidence in the functioning of economy. Governments and Central Banks are fighting to stabilize the financial system by restoring public confidence and soften this economic downturn. Furthermore, many international efforts are being made to redress the situation (G-8 Summit, G-20 Summit). IMF has revised downward growth projections for the world economy, reducing the number to minus 3.2% for 2009 for the euro zone - important for Albania, both as a key export destination and as a source of remittances. The actual financial crisis has affected Albania primarily through two channels: a fall in demand for its exports and sources of finance leading to a slowdown of economic growth. The economic indicators show that the Albanian economy is in some degree of trouble at the moment with exports, remittances, rate of growth of deposits, lending to the private

sector, value of local currency all falling, fiscal deficit widening, unemployment and poverty growing and important sectors of economy stagnating. Albania is already feeling the consequences of the crisis. Considering the huge number of person from Albania that live abroad and send private transfers to their families, the remittances are of immense importance to the economy of the region. As crisis is making itself felt in their countries of residence there has been a decline in the level of remittances. Wholesale and Retail businesses in the country have experienced sales and profit decline. Banks that operate in Albania have reported a decline of savings deposits. They have limited commercial lending in local currency and practically stopped lending in foreign currency. The preliminary data show that the construction and export-oriented apparel businesses are most hard-hit. 2. LITERATURE REVIEW -Agnieszka Paczynska “ Global Financial Crisis and Fragile States” Global Studies Review Vol.6 No.1 Spring 2010 -Bryan Noeth and Rajdeep Sengupta “Global European Banks and the Financial Crisis” Economic Research, Federal Reserve Bank of St. Louis, November- December 2012 - Gabriel di Bella ‘The impact of the Global Financial Crisis on Microfinance and Policy Implications” International Monetary Fund, Working Paper No.11/175 July 2011 -G.Gjançi, A. Çërrava, A. Pasholli, Klaudeta Merollari, E. Vangjeli “Current Global Financial Crisis and Economic Policy of Western Balkans” 2nd International Scientific Conference “Economic Policy and EU Integration” Durrës, 11-12 June 2010 - Jean- Paul Fitoussi “The hard lessons of the Global Financial Crisis” Europe’s World, Summer 2010 - Justin Yifu and Volker Treichel “The Unexpected Global Financial Crisis” The World Bank, Policy research Working Paper 5937, january 2012 - Kristin Forbes, Jeffrey Frankel and Charles Engel “Introduction to special issue on the global financial crisis” Journal of International Economics Vol.88, Issue 2, November 2012, pages 215-218 -Klaudeta Merollari, Anila Mançka, “Problems of financing in Albanian companies” Economy and Transition – Quarterly Economic Magazine, ISSN 2079-407X Nr. 2(62) April June 2010. -Klaudeta Merollari, Beshir Ciceri, “Difficulties of joint stock companies in Korca Region in finding financing sources” Economy and Transition – Quarterly Economic Magazine, ISSN 2079-407X Nr. 3(63) July- September 2010. Klaudeta Merollari, Genci Gjançi, Alketa Zheku “The Impact of the Global Financial Crisis in Albania’s key economic Indicators and its consequence on Korça region” International Conference Economic & Social Challanges and Problems 2009 - At the time of Global Crisis and Integration- Tiranë, 11-12 December 2009 -Klaudeta Merollari, Genci Gjançi “Albanian Companies’ Financing in local market” 5th Annual Meeting of Alb-Shkenca Institute ISBN 978-9928-4001-7-8 Tiranë, 2-5 September 2010 -Klaudeta Merollari, Genci Gjançi, Eleni Vangjeli “The difficulties faced by corporations in the Korça’s district in obtaining financing”

International Scientific Conference on: “South Eastern part of Albania for the Possibilities & Challenges of Albania and Western Balkan Countries towards the Integration processes” Korçë, 29-30 October 2010 - Massimiliano Cali, Issabella Massa and Dirk Willem te Velde “The Global Financial Crisis: Financial Flow to Developing Countries set to fall by one Quarter” Journal of International Economics Vol.5, No. 2, April2010 – September 2010 - Ozkan, F. Gulcin; Unsal, D. Filiz ‘Global Financial Crisis, Financial Contagion, and Emerging Markets” International Monetary Fund, Working Paper No.12/293 December 13, 2012 -Roger Berkowitz and Taun N. Toay “The Intellectual Origins of the Global Financial Crisis” 2012 -Stijn Claessens, Hui Tong and Shang –Jin Wei “From the financial crisis to the real economy: Using firm data- level data to identify transmission channels” Journal of International Economics Vol.88, Issue 2, November 2012, pages 375-387 -Yeva Nersisyan and L. Randall Wray ‘The Global Financial Crisis and the shift to Shadow Banking” Levy Economics Institute, Working Paper No. 587 february 2010 3. PAPER CONTENT 3.1 Trade Foreign Trade is the worst performing sector of Albanian economy with exports accounting for only ¼ of imports and trade balance deficit constantly continuously widening. The period 1992-1997 was characterized by low rates of export growth followed by an increase in the exports growth rate during the period 1998-2008. Since October 2008 the exports growth rate begins to fall compared to previous months with December 2008 recording the lowest level of exports for the year 2008. The decline has continued also for 2009 due to reduced foreign demand for Albanian products from its main trading partners in EU (Italy, Greece and Germany account for about 70%, 10% and 3% of total Albanian exports for Italy, Greece and Germany respectively) as they experience recession. Fason industry being totally dependent on foreign demand is particularly vulnerable now as the demand from the EU has been substantially reduced. They are grinding to a halt as demand from EU smelts away. Tabela.1 Albania’s Import-Eport performance in billionALL Viti 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Eksporti 12,499 13,387 18,710 22,001 21,044 31,104 48,430 37,037 44,096 47,490 54,487 62,121

Importi 58,336 57,019 66,147 98,060 95,022 126,271 159,465 157,109 190,155 210,368 225,983 236,072

Bilanci -45,838 -43,632 -47,437 -76,059 -73,977 -95,167 -111,035 -120,072 -146,059 -162,877 -171,496 -173,951

% 21,4 23,5 28,3 22,4 22,1 24,6 30,4 23,6 23,2 22,6 24,1 26,3

2005 2006 2007 2008 2009 2010 2011

65,818 77,405 97,171 112,393 103,244 160,962 197,470

262,191 299,147 376,194 438,188 431,107 458,429 520,659

-196,373 -221,742 -279,023 -325,795 -327,863 -297,467 -323,189

25,1 25,9 25,8 25,6 23,9 35,1 37,9

Table 2. Albania’s export performance (in billion ALL) September October November December January 2009 2008 2008 2008 2008 10,712 9,574 9,092 6,969 6,642 Source: Bank of Albania 3.2 Remittances Of approximately 1.2 million persons of Albanian origin living abroad, only those with commercial or family ties actually send money back to their country of origin. There has been an inflow of USD 4.367 billion in foreign currency during the period 1992-2002 or an average of USD 437 million per year. The inflow of foreign currency to Albania due to remittances has grown during the period 2003-2007 just before the crisis to approximately EUR 947 billion as of end of 2007 comprising a large share in GDP of the Albanian economy. A sharp decline in the level of remittances followed since 2008 as the financial crisis made itself felt in countries of origin with millions of people losing their jobs. Remittances inflows have declined from 13% of GDP in 2007 to 11% of GDP in the last quarter of 2008 (European Commission, DG ECFIN, p. 19). This decline is the direct result of economic downturn and rising unemployment in countries of residence particularly Greece and Italy where most of Albanian emigrants are currently living. As remittances are private transfers from abroad to support families in Albania, they are one of the most stable and independent sources of funds. As a result of the continuing growth in transfers of money by migrants to their country of origin they have become increasingly important for Albanian economy during the last years. A decline in the level of remittances since 2008 has negatively impacted other key economic indicators such as poverty, imports, savings and private investments. Different surveys indicate that most of remittances are used for food and clothing and a fall in the level of remittances means an increase of poverty for these families. A considerable share of remittances is used both for private investments particularly in real estate and education and a fall in their level is likely to result in lower savings and contracted private investments (two phenomena that have been observed since 2008). Furthermore, remittances usually increase the demand for foreign goods and services thus promoting imports. As foreign currency inflow from remittances have been very important for both financing and fueling Albania’s growing trade deficit, lower remittances can result in lower imports and consequently a reduced trade deficit.

Table 3. Inflow of remittances for 2003-2011 (in million EUR) 2003 2004 2005 2006 2007 2008 2009 2010 2011 718.8 826.3 927.6 936.5 947.0 802.0 781.3 689.8 687.9 Source: INSTAT Figure 1. Inflow of remitances for 2003-2011

Source: INSTAT 3.3 Deposits’ growth rate The data provided by the Albanian Banking Association indicate that the Albanian banking system has managed approximately ALL 645,114 million with 82.1% of them being deposits from private individuals. After the financial crisis emerged, the governments of developed countries in general responded by substantially raising the level of deposits insurance trying to restore public confidence in the financial system. Albania followed suit by increasing the level of deposit insurance from ALL 700,000 to ALL 2.5 million but as its response took some time to become effective some ALL 60 billion of deposits were withdrawn from the banking system as of end of March 2009 as a result of confidence crisis that hit Albania in October 2008 where the lack of confidence led to a withdrawal of deposits by population (Ibid, p. 3). Table 4. Deposits growth (billion ALL) Year Total Individuals % change 2003 323,234 271,620 84,0 2004 369,101 310,626 84,1 2005 428,347 357,781 83,5 2006 511,014 411,573 80,5 2007 630,114 514,308 81,6 2008 645,114 529,426 82,1 2009 694,258 592,689 85,4 2010 816,734 692,030 84,7 Source: Bank of Albania During the last three years the total amount of the deposits is increasing. Through 2011 the deposits were increased with 12.7% by reaching the amount of 920,459 miliard ALL.

3.4 Bank lending Unfavorable conditions in financial markets worldwide have had no direct impact so far on the portfolio quality of the Albanian banking system but the crisis has had several implications. The crisis has had a major impact particularly on the availability of foreignexchange denominated credit and the level of bad debts. The 2008 and the four previous years were characterized by rapid growth in lending by commercial banks operating in Albania. Total loans to the private sector totaled to ALL 397 billion for 2008 accounting for approximately 48% of the value of total banking portfolio. Table 5. Loans to the private sector (billion ALL) Nr. Description 2007 2008 1. Nominal GDP, billion ALL 979 1073 2. Total lending, billion ALL 292 397 As % of GDP 29.8 37 a) For Individuals, billion ALL 104 140 As % of GDP 10.6 13.0 b) For businesses, billion ALL 188 257 As % of GDP 19.2 24.0 3. Problem loans, billion ALL 9.9 26.2 As % of total loans 3.4 6.6 Source: Bank of Albania

% 9.6 36.0 24.2 34.6 22.6 36.7 25.0 165 94.0

The data in the table above indicate that bank lending has increased with ALL 105 billion in 2008 compared to 2007 representing 37% of GDP relative to 30% of GDP in 2007. However lending has stagnated and even declined with the onset of financial crisis. As a result of current crisis banks operating in Albania have drastically decreased the amount of lending since October 2008. The amount of lending for December 2008 rose only with 0.5% representing the lowest rate of growth since 2004. The rate of credits has going down from 2009 to 2011 as a result of world financial crises. This has directly influenced the albanian business financing, because one of the main financial resources for albanian business is bank lending.

Nr. 1. 2.

a) b)

Table. 6 Loans to the private sector (million ALL) Description 2009 2010 Nominal GDP, million ALL 1 151 019 1 242 418 Total lending, million ALL 230 736,71 268 060,35 As % of GDP 20 21,6 For Individuals, million ALL 38 531,97 40 445,25 As % of GDP 3,34 3,25 For businesses, million ALL 192 204,74 227 615,1

As % of GDP 3. Problem loans as % of total loans Source: Bank of Albania

16,66 10,27

18,35 13,61

2011 1 280 932 278 255,91 21,7 45 809 3,57 232 446,91 18,13 18,94

The very conservative approach adopted by banks when issuing new loans has caused a further decline in market liquidity that has negatively impacted the domestic demand. Lending in foreign currency has been more adversely affected. Loans in foreign currency represent approximately 75% of the total loans to the private sector. Foreign currency loans represented 72% of total loans to the private sector as of end of September 2009, a figure which has remained relatively stable over the past years. Lending in both EUR and USD has substantially contracted during 2009. This lower rate of growth of lending in foreign currency is mainly the result of restrictions imposed by parent banks for their subsidiaries in order to deal with the increasing risk of foreign exchange and bad debts. Bad debts have increased as local customers default particularly those that have borrowed in foreign currencies that have appreciated against ALL. In December 2008 the bad debts increased by ALL 5.4 billion totaling to ALL 26.2 billion for the year 2008. This figure represents a substantial increase in both nominal and relative value compared to year 2007 (ALL 16.3 billion and 165% respectively). As of end of 2008 the bad debts represented 6.6% of the total disbursed loans compared to 3.4% for of the previous year. Bad debts have increased even from 2009 to 2012. On the first half of 2012 they reached a level of 22.8%. Figure 2. Bad Debts as of end of year

Source: Bank of Albania 3.5 Exchange rate Data indicate that the exchange rate has been relatively stable during the period 19992008 with ALL appreciating against major currencies such as EUR and USD.

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Table 7. Exchange rate for ALL during 1999 – 2011 ALL/USD ALL/EUR 137,7 147,0 143,7 132,6 143,5 128,5 140,1 132,4 121,9 137,5 102,8 127,7 99,8 124,2 98,1 123,1 90,4 123,6 83,9 122,8 22

95.0 103, 9 100,9

2009 2010 2011

132,1 137,8 140,3

Source: Bank of Albania But as the crisis emerged and its impact began to be felt in the region, during the last quarter of 2008 ALL began to depreciate against both EUR and USD recording the highest figures for the last four years. Its value depreciated further even during the first part of 2009 and has remained relatively stable since then. Table 8. Exchange rate for ALL during 2008 - 2009 31.12.2008 07.05.2009 Change % change

Exchange rate ALL/USD 88.0 ALL/EUR 123.8 Exchange 31.12.2008 rate ALL/USD 88.0 ALL/EUR 123.8 Source: Bank of Albania

98.6 131.2 20.11.2009

10.6 7.4 Change

12.0 6.0 % change

92 137.4

4 13.6

4.5 11

Tumbling exchange rates raised the real burden of foreign currency loans increasing bad debts which has led banking problems to grow. This increased exchange rate volatility is influenced by changes in many factors, most of which as a direct result of the current crisis: increased demand for foreign currency particularly EUR to finance imports, increased domestic government debt, increased deficit of the current account and a continuously widened gap of trade balance, reduced remittances and profit repatriation from some foreign companies operating in Albania. ALL depreciation is affecting the well being of all Albanian citizens as it is likely to be reflected in higher prices of imported goods. However by boosting exports a weaker currency can offer a route to recovery but as EU countries are experiencing recession the demand for Albanian exports is going to miss for some time. 3.6 Construction sector Construction sector, one of the leading promoters of Albania’s economic growth during the last years, is in serious trouble at the moment. Data published by “Constructor’s Association” show that since 2008 they have been unable to sell almost 4000 completed apartments situated in Tirana-Durrës region due to insufficient domestic demand. Depreciation of ALL against EUR has lead to higher prices of construction materials exerting pressure not to lower the real estate prices. Contraction of bank lending is considered to be the main factor behind the drastic fall of demand for housing as it has adversely affected the purchase power of Albanian citizens. Apart from the inability to collect claims which resulted in losses this reduced liquidity has negatively affected their investments in construction of new buildings. All the owners of construction companies operating in the region interviewed declare that despite their efforts they have been unable to sell all the apartments that they have

finished during 2008 and that the financial situation of these businesses is being adversely affected also by price increases of imported raw materials resulting from a weaker ALL. 3.7 Inflation There has been a decrease of inflation in the country during the year 2008 and the first quarter of 2009 then there has been observed a small increase. This confirms once more that Albania has not escaped the crisis as inflation usually decreased during times of crisis. The last two months have experienced a small rise of inflation as there are signs of revitalization of economic activity. Figure 3. Inflation

Source: INSTAT Table 9. Average annual rate of inflation 2008-2012 Year Average annual rate

2008 3.4%

2009 2.2%

2010 3.1%

2011 2.9%

2012 2%

Source: INSTAT

3.8 Unemployment Official data indicate that unemployment in Albania has decreased during the period 1999-2008. Starting from the fourth quarter of 2008 there has been a slight increase in the unemployment rate. Table 10. Unemployment rate in Albania 2006 2007 2008 2009 2010 2011 2012 Year Unemployment rate 13.8 13.5 12.68 12.7 13.49 13.29 13.26 Source: INSTAT 3.9 Budget deficit Budget deficit in 2008 was 5.7% of GDP compared to 3.4% of GDP in 2007. This rising budget deficit reflected itself in increased public debt that represented almost 55.6% of GDP in 2008 compared to 37.5% of GDP in 2007 as the crisis has negatively affected government finances.

Figure 4. Albanian Budget deficit

Source: Ministry of Finance Decelerating economic activity has particularly affected government revenue collection. Actual revenues were lower than planned as of end of 2008. The difference widened during the first six months of 2009. Thus the growing budget deficit reflects deterioration of fiscal income that is the result of changes in two factors: - a fall of government revenues (as a result of decelerating economic activity). Lower remittances and lower private consumption (domestic consumer spending) due to weakened consumer confidence have lead to lower receipts from taxes on goods and services. - an increase of government public expenditures particularly public investments (in order to stimulate the aggregate demand) and debt payments. Unlike other countries in the region Albania has invested much into infrastructure projects even through accumulation of fresh debt. 3.10 Economic growth Albanian economy has boomed for the past 7-8 years mainly fuelled by increasing bank credit. Average real GDP growth rate during the period 2000-2008 has been 5.9%. But global crisis has slowed down Albania’s credit-fuelled boom. As a result of changes in the above-mentioned factors, economic slowdown has resulted in a contraction of real GDP that has been recorded during 2008 and forecasted also for 2009. Table 11. Real GDP growth rate 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year 6.5 4.7 6.0 Growth 7.7 rate (%) Source: IMF, INSTAT

6.0

5.5

5.0

6.0

3.7

3.8

3.4*

Figure 5. Real GDP growth rate

Source: IMF, INSTAT 3.11 The impact of world financial crises in financing albanian companies Bank lending remains a very useful source for albanian companies, although there are high norms of interests, and this due to the lack of other financial alternatives. There are many albanian companies which have used bank lending for the renovation of their technologies. Stock companies use some financing sources, but more important are the internal funds and bank lending. The table and figure below ilustrate this fact. Table. 12 Financing resources Alternatives Internal funds Family and friends

% 100 13

Private Banks

Lease agreement

Loan informal sources

Others *(specify)

*Alternative Other includes cases of government financing for public stock companies, as well as other different donations.

Figure.6 Financing resources

Source: Results of questonarie In general, these companies use the loan as floating capital and for investments. Table. 13 The use of bank lending The use of loan Floating capital

% 40

Real estate

Liquidation of existing debt

Other *(specify)

26.6

* Alternative Other includes investments in different projects Figure. 7 The use of bank loans

Source: Results of questionarie

The world financial crises and the bankruptcy of some of the most potential banks, influenced the albanian banks which increased the credit interest and take coercive measures on credit standarts. This influenced many albanian companies which reduced their investments. Through 2008, commercial banks of Albania evaluated the possibility of lending to private companies for buying machineries and equipment. The end of 2008 and the year 2009 has resulted with negative balance-sheet for albanian businesses. This has caused many delays in payment of credit installment and interests, and the bank system reacted with coercive measures on credits. The lending crises countiues to be present, by having a growing impact on business, which is having a number of difficulties, linked with the lack of financing, and accompanied by increase of costs which are a great barrier for them. After a tight behaviour concerning lending, business climate in Albania is worsten, followed by a declining demand, while sectors like construction has been totally out of financing. From 2009, banks have the tendency to support deposit offers, by increasing the persentage of interests in order to collect a big amount of likuidity. This kind of policy is applied by Albanian Banks as a result of an increased number of bed debts. Banks gave up agresive policies on lending and begin to increase offers in deposits. Eventhough they look pozitive, as they eliminate cash and informal money, they are considered as a non favourable policy for Albanian economy which need bank lending. During this period, bank lending became more expensive especially lending in euro. Albanian Bank pushed bank system to lend in local currency. These would avoid the risk of loss from exchange rate volatility. CONCLUSIONS  Albania has not escaped the current financial and economic crisis. Its negative consequences are also being felt in Albania although in a smaller scale compared to other countries of SEE due to the following factors: - Its financial system dominated by banks is not so developed and consequently is characterized by low integration with the global financial system. - Albania is a developing country with not fully integrated economy weak relations to the world’s economy. - The main contributor to the GDP continues to be the agriculture and fortunately it has not been negatively affected by the crisis. - Substantial government spending in public projects particularly in infrastructure.  Regardless to Albanian ranking among Regional Countries with highest growing rate of bank lending to private sector, the amount of this lending compared to PBB rates her amoung countries with low level of this indicator in the Region.  From second half of 2008 and ongoing, banks proved to be more conservatives in the approvement of new loans for the business. This in particualr for big businesses and long term maturity loans, in the form of loans for investments.  Bad debts from 2008 and on are increasing. As a result of world financial crises, commercial banks in Albania has resigned from agressive policy on lending, influenced by the growth of bad debts. The criteria for bank lending to coorporates and investment purposes were more austerity than the criteria for bank lending to small and medium enterprises as well as for financing purposes of floating capital.  Albanian bank system must lend more to the business and economy, because this will help the business growth and will bring economic development in Albania. 28

 Albania does not suffer from the lack of capital but from the lack of its effective use. This happens because capital reserves deposited per head of population in albanian bank system, are higher compared to some post-communist Balcan countries.  Deposited capital in albanian bank system is invested in lower level of local business compared to some other Balcan countries. Low lending level is one of the factors that Albania has high deficit trade level. Effective usage of capital will effect the softening of deficit. REFERENCES 1. Agnieszka Paczynska “ Global Financial Crisis and Fragile States” Global Studies Review Vol.6 No.1 Spring 2010 2. Bryan Noeth and Rajdeep Sengupta “Global European Banks and the Financial Crisis” Economic Research, Federal Reserve Bank of St. Louis, November- December 2012 3. Gabriel di Bella ‘The impact of the Global Financial Crisis on Microfinance and Policy Implications” International Monetary Fund, Working Paper No.11/175 July 2011 4. G.Gjançi, A. Çërrava, A. Pasholli, Klaudeta Merollari, E. Vangjeli “Current Global Financial Crisis and Economic Policy of Western Balkans” 2nd International Scientific Conference “Economic Policy and EU Integration” Durrës, 11-12 June 2010 5. Jean- Paul Fitoussi “The hard lessons of the Global Financial Crisis” Europe’s World, Summer 2010 6. Justin Yifu and Volker Treichel “The Unexpected Global Financial Crisis” The World Bank, Policy research Working Paper 5937, january 2012 7. Kristin Forbes, Jeffrey Frankel and Charles Engel “Introduction to special issue on the global financial crisis” Journal of International Economics Vol.88, Issue 2, November 2012, pages 215-218 8. Klaudeta Merollari, Anila Mançka, “Problems of financing in Albanian companies” Economy and Transition – Quarterly Economic Magazine, ISSN 2079-407X Nr. 2(62) April - June 2010. 9. Klaudeta Merollari, Beshir Ciceri, “Difficulties of joint stock companies in Korca Region in finding financing sources” Economy and Transition – Quarterly Economic Magazine, ISSN 2079-407X Nr. 3(63) July- September 2010. 10. Klaudeta Merollari, Genci Gjançi, Alketa Zheku “The Impact of the Global Financial Crisis in Albania’s key economic Indicators and its consequence on Korça region” International Conference Economic & Social Challanges and Problems 2009 - At the time of Global Crisis and Integration- Tiranë, 11-12 December 2009 11. Klaudeta Merollari, Genci Gjançi “Albanian Companies’ Financing in local market” 5th Annual Meeting of Alb-Shkenca Institute ISBN 978-9928-4001-7-8 Tiranë, 2-5 September 2010 12. Klaudeta Merollari, Genci Gjançi, Eleni Vangjeli “The difficulties faced by corporations in the Korça’s district in obtaining financing” International Scientific Conference on: “South Eastern part of Albania for the Possibilities & Challenges of Albania and Western Balkan Countries towards the Integration processes” Korçë, 2930 October 2010 13. Massimiliano Cali, Issabella Massa and Dirk Willem te Velde “The Global Financial Crisis: Financial Flow to Developing Countries set to fall by one Quarter” Journal of International Economics Vol.5, No. 2, April2010 – September 2010

14. Ozkan, F. Gulcin; Unsal, D. Filiz ‘Global Financial Crisis, Financial Contagion, and Emerging Markets” International Monetary Fund, Working Paper No.12/293 December 13, 2012 15. Roger Berkowitz and Taun N. Toay “The Intellectual Origins of the Global Financial Crisis” 2012 16. Stijn Claessens, Hui Tong and Shang –Jin Wei “From the financial crisis to the real economy: Using firm data- level data to identify transmission channels” Journal of International Economics Vol.88, Issue 2, November 2012, pages 375-387 17. Yeva Nersisyan and L. Randall Wray ‘The Global Financial Crisis and the shift to Shadow Banking” Levy Economics Institute, Working Paper No. 587 february 2010 18. www.aab.al 19. www.bankofalbania.org 20. www.dogana.gov.al 21. www.instat.gov.al 22. www.imf.org 23. www.monitor.al

THE IMPORTANCE OF PERFORMANCE AUDIT MISSIONS WITHIN THE CONTEXT OF PUBLIC AUDIT IN REPUBLIC OF MOLDOVA Veronica Dolineanschi – PhD student The Institute of Economy Finance and Statistics, Republic of Moldova

ABSTRACT The aim of the paper is to determine and conclude on the role and place of performance audit missions within the context of auditing in Republic of Moldova. Taking into account the fact that performance audit is a new approach for audit missions and it is mostly used for the public auditing; from this standpoint it is evident the need of its review. Thus, to accomplish the research and to find out the answers, the content of the paper will be focused on INTOSAI performance audit standards, information presented by the Performance Audit Guidelines of Romania and Republic of Moldova Courts of Accounts and as for a viewpoint of association there, it will be compared with the principles of Performance Audit Manual of European Court of Auditors and ASOSAI Guidelines. Another perspective of the paper is the presentation and examination of the existing points of view and ideas related to the subject, in order to make a personal conclusion and to report it to the Republic of Moldova. Key words: performance audit, public auditing, audit mission, Audit Standards, Court of Accounts of Republic of Moldova. On its way to European integration, Republic of Moldova is marked by many economic and legislative reforms that are a product of those commitments made as result of the necessities to adjust national regulations to the European ones. Therefore, performance audit is more open to judgments, analysis and elucidations, as being performed from the stand point of economy, effectiveness and efficiency and should bring an added value in order to predict and detect aspects of economic non-performance, fraud, corruption or other possible deficiencies of public funds management, as well as prevention and removal of human effort and financial resources spill for insurance of economic growth and social security. The main institution responsible for the public audit in Republic of Moldova is the Court of Accounts. As EUROSAI and INTOSAI member, it must respect junction criteria required for the European Integration process. According to fully respect its assurance and to adhere to the best external public audit standards and practices, Court of Accounts of Republic of Moldova should track all stages for a Supreme Audit Institution which respects standards of independence, objectivity and professionalism for public funds auditing. One of the major steps was the understanding and accomplishment of performance audits, which recently become an extended version of financial audits. The aim of performance audits is to offer relevant information regarding public activities implementation method and its consequences. Thus, economic and financial reality of Republic of Moldova disclosed that it is not enough to spend public money legally, but it is also very important to use money according to the principles of economy, efficiency and effectiveness. Court of Accounts of Republic of Moldova has to realize independent, reliable, transparent and professional audits concerning the management of financial resources and 31

public property, aimed to promote high standards of financial management for the wealth of country’s citizens in order to accomplish its mission. Therefore, the performance audit missions have a special place in this, which allow a general evaluation of the whole management process of public resources and not only the legality and regularity of their use. In order to present arguments for the importance of performance audit missions within the context of public auditing in Republic of Moldova it is necessary to show the role and place of public audit and the main or only authority able to carry out this kind of activities. Another important issue is the comparison analysis for the similarities and particularities of performance audit missions realized by public audit institutions or authorities from different countries as to clear up the way Republic of Moldova has to follow in order to get the advanced level of these activities and to establish at what stage are we now. The basic information for the audit activity, especially in public sector is defined by International Organization of Supreme Audit Institutions (INTOSAI) Guidelines. Thus, according to International Standards of Supreme Audit Institutions (ISSAI) 3100 performance auditing is an independent and objective examination of government undertakings, systems, programs or organizations, with regard to one or more of the three aspects of economy, efficiency and effectiveness, aiming to lead to improvements. Asian Organization of Supreme Audit Institutions (ASOSAI) has taken the performance audit definition from the INTOSAI standards as it is there presented without any changes or fillings. According to Performance Audit Manual of European Court of Auditors (ECA) a performance audit is an audit of sound financial management, namely of the economy, efficiency and effectiveness with which the Commission and/or other audited entities have used Community funds in carrying out their responsibilities. The same definition presented by Romanian Court of Accounts Performance Audit Manual says that it represents an independent and objective evaluation or examination of the measures of and public entity activity or program goes on efficiency and effectively in conditions of respected economy. The definition presented by Court of Accounts of Republic of Moldova in the Performance Audit Manual states that is an independent evaluation of the activity of an entity or/and a program based on economy, efficiency and effectiveness. It is important to mention that the definition makes references to the Law no. 261-XVI dated from 05.12.2008 (Law of Court of Accounts of Republic of Moldova). According to the Manual, there are also presented some other meanings of performance audit as it is declared that there is no a universal accepted definition. Another definition of performance audit says that is analyses if public financial resources were spend in a proper way”, mostly by examining those measures that were taken by the audited entities in respect with economy, efficiency and effectiveness, principles know as 3Es and it may also imply direct analysis of achieved performance. Generally speaking and summarizing the existing explanations it become obvious that performance audit is an independent evaluation activity based on 3Es principles (economy, effectiveness and efficiency). As the main idea of performance audit is made up clear, it becomes important to define its basic principles – those 3Es. Because all the checked sources for the findings of the main idea of performance audit came from the ISSAI, there will be shown below the definitions of 3Es as in International Standards. According to ISSAI 1006, an individual performance audit should have the objective of examining one or more of these three assertions:

(a) the economy of activities in accordance with sound administrative principles and practices, and management policies; (b) the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and (c) the effectiveness of performance in relation to the achievement of the objectives of the audited entity, and the actual impact of activities compared with the intended impact. Referring to the impact and need of performance audit missions for the public sector it is important to underline the difference between public and private sector auditing. Therefore, the main difference between private and public entities is that the public ones are influenced by political decisions, which makes public auditing more complex and exposed to risks defending an inconceivable audit report. Therefore, the auditors’ review on public organizations nowadays is not related to the accounts appreciation; as Burrowes A. states, it also takes into consideration the estimation of factors oriented to performance. The auditors are the ones that make judgments and give feedback according to the performance of the organization. In the same context Dittenhofer M. avows that auditors in public organizations also look at how efficient, effective and adaptable were budget executors against the budget. This is where the budget will serve as a performance measure in the public sector. According to the other standpoint authors’ states that performance auditing provides information to the government organization, program, activity or function by contributing to the accountability that helps to provide an independent appraisal of their performance, helping them to improve public accountability. According to professor Țurlea E. performance audits for public entities are absolutely necessary within the context of globalization process. The performance of public sector entities rouse an increasing interest and the concern for how public money were spent get many forwarders. Thus, the auditor, based on its professional reasoning, evaluates entity’ results and its performance from the stand point of economy, efficiency and efficacy, management quality, estimating the way entity use allocated funds. To audit the performance of entities from public sector and carrying out professional audit missions, auditors and those that form, evaluate and use auditors have to pay attention to an additional set of skills. One of them is to be able to make an overview of the entity functioning, for what they need to possess a minimum level of managerial culture and knowledge. Without this it is difficult to believe that an auditor will be able to size up the overall performance of the entity. In respect with the role of performance audit for the public sector entities, professor Țurlea E. believes that the consequences of working out without economy, efficiency and effectiveness, without legal conformity and with poor management implication influence the entire society and concentrates on:  misfit use of disposable resources that has large negative effects on realization of objectives;  ongoing of internal processes that make up the specific domain of activity, without benchmarks and notable performances;  protraction of social tensions as result of subjective decisions, insufficiently underlain;  discrediting the process of predetermined goals accomplishment. In the same context, but on the other hand, creditors and investors, Government and Administration Authorities, European Union and International Monetary Fund as well as World Bank are interested in the consequences of managerial decision making on public entity activity and by receiving committing related to the management process quality and public money usage.

The audits for public entities are different from the audits of private sector. It is because of the monitoring of public funds. In order it is important to see whether the money is used or not, in accordance to the Parliament’s decision and goal perspective. As stated by Blegvad K., taxation is a factor that differs between public organizations and private organizations. Private companies have need for profit in order to be able to have a competitive business, while public entities are financed by state. For this reason, income is not a long-term goal for a public entity; the goal is to offer high level services for citizens and to defend their interests. It is also important to mention that public entities are managed by those politicians that citizens have voted, and gave them the right to make decisions. Thus, these decisions should be oriented towards citizen interests and needs and it also gave them the right to know the amount of resources was spent in order to satisfy their expectations similar to performance measurement of the public entity. According to Talbot C., performance measurement is the relationship between organizational actions and the results that entity wants to achieve. Furthermore how the result will come out by the end. This could be related to public entities because its reality depends on social outcomes that it can provide as a part of the legal government activity. In this sense, another point of view is presented by Verbeeten F., who stated that performance management is how the public entity has set up goals in order to achieve and evaluate the performance of the actions that are made to reach the goals that were set up from the start. Thus, many public entities face the need to measure their performance. But how effortless is this process and are there any problems to face during this evaluation practice? There are difficulties for performance measurement in the public sector, and the main problem auditors have to face while estimate the performance measurement of a public entity is to assure its precision and credibility. It is much easier to measure performance of the private sector because of the customer situation, while in the public segment there are the perspectives of the citizens and of course political perspectives. This is why the use of economy, efficiency, effectiveness and conformance of public entity performance measurement related to the budget make it possible to prove the performance. As related by Tilleman S. and Bogt H., the performance of the public entity it is not only a matter of measure of efficiency and effectiveness but also non-economic issues such as equity, responsiveness, impartiality, social justice, legality and legitimacy. Thus, performance measurement for a public entity is much more then about the evaluation. It is also about the prevention of those factors that may influence negatively the performance of the public entity. In the same source, is stated that the use of performance audits is widespread across the public entities in many countries and similar to other forms of audits, performance auditing look forward to an independent body investigation in order to make an assessment of the entity. The findings are then used to draw up an audit report, which can be used by parties from or outside the public entity. Evaluation and assessment of administrative actions, effects, results and impacts by means and ratios can be seen as performance measurement. Performance measurements can be referred as the aim to attempt for improving administrative actions. It is a self-evaluation directed at monitoring institutional action analyzing, explaining and comparing it with other entities (benchmarking). Performance measurements vary in different countries depending on the actual application of indicators and the use of performance information for decision making declared Anderson M. and Nilsson R.. 34

As Kuhlmann S. pointed out, there are different types of performance measurements, internal measurements (within an organization), that take place vertically, as between central units of administration and the decentralized departments. And there also are external performance measures (between different institution), which can be conducted vertically as between central and local authorities, but it can also be horizontally, between two public entities on the same administrative level. CONCLUSIONS Even if performance audit is considered a relatively new field for audit activity, it became very popular among the researchers from the field and also a stand point for implementing innovations for the auditing institutions and organizations at the national, regional and international level. Analyzing different sources and opinions of related authors that are interested in auditing activity, it may be concluded that performance audit has a crucial role especially for the missions of public audits. In order to present reliable information about the use of public financial resources to the interested parties, it is not ample anymore to present an opinion regarding the accountability. Thus the performance audits principles of economy, efficiency and effectiveness give a truthful aspect of the audit mission report. Concluding about the importance of performance audit missions for the public audit, it can be mentioned that somehow public audit is more extensive according to its stakeholders (government, parliament, civil society, etc.) while results of a private audit can be interested for the only stakeholders that are the business owners. In this context, it is unfeasible to make a comprising analysis between these two. The report of a performance audit for a private company should focus on two aspects: (1) conformed accountability and (2) increased profit. If, speaking about the reported results of a performance audit for a public entity (authority) should mainly focus on the following: (1) Is everything done legally? (2) Was money spending according to the destination? (3) The final result was reached? (4) What were the costs of the achieved results? (5) Were the 3E’s principles respected? (6) How can be improved the management activity of the entity? (7) What to do in order to avoid any future deficiencies? and many other features associated to the audited entity. In Republic of Moldova the performance audit has even more important role for the public entities, as passing the reform period for adjusting to the EU criteria. Thus a confirmed stable activity of public authorities and its increased performance is a must that can be assured and proved only by the audits missions accomplished by the Court of Accounts of Republic of Moldova as the only institution with the Constitutional right to realize external public audits. REFERENCES: Books and Guidelines 1. Manualul Auditului Performanței; Curtea de Conturi a României (București, 2005), 7 2. Manual de Audit al Performanței; Curtea de Conturi a Republicii Moldova (Chișinău 2009), 14 3. Performance Audit Manual; www.eca.europa.eu 4. Performance Audit Guidelines – Key; ISSAI 3100; www.issai.org 5. Performance Auditing Guidelines; Fifth ASOSAI Research Project; (October, 2000), 8; www.asosai.org

Articles 1. Kuhlmann, Sabine “Performance Measurement in European local governments: a comparative analysis of reform experiences in Great Britain, France, Sweden and Germany”. International Review of Administrative Science. Vol. 76 (2); (2010); 331345 2. Blegvad, Kristoffer “Developing International Standards and Guidelines for SAIs”, International Journal of Government Auditing 34(3); (2007); 12-14 3. Talbot, Colin “Public Performance-towards a new model?” Public Policy and Administration 14(15); (1999); 15-33 4. Verbeeten, Frank H.M., “Performance management practice in public sector organizations Impact on performance”; Accounting, Auditing & Accountability Journal 21(3); (2008); 427-454 5. Tilleman, Sandra and Bogt, Henk J. “Performance auditing- Improving the quality of political and democratic processes?” Critical Perspectives on Accounting 21; (2010);754-769 6. Burrowes, Ashley and Persson, Marie ”The Swedish management audit: a precedent for performance and value for money audits”, Managerial Auditing Journal 15(3), (2000), 85-96. 7. Dittenhofer, Mort “Performance auditing in governments”, Managerial Auditing Journal 16(8), (2001), 438-442. 8. Țurlea, Eugeniu ”Auditul performanței, element esenţial al Perfecţionării managementului organizaţiilor Sectorului public”, Revista ”Annales Universitatis Apulensis series Oeconomica” Nr. 8 / 2006, volumul 1. Thesis 1. Andersson Mary-Ann & Nilsson Rebecka”Financial or Performance auditing? The role of elected auditors in Swedish Municipalities”; Kristianstad University (2011); www.hkr.se

SOCIAL REPRESENTATIONS – „READING GRID” OF PUBLIC INSTITUTION IMAGE Corina Rădulescu University of Bucharest

ABSTRACT: Being at the confluence of psychology and social, social representations intervene in the dynamics of the interaction between the projected image by a public institution, that is conveyed through communication supports and that perceived by the citizen. They constitute „a filter”, a re-reading of the real, a particular way of knowing proper to the common sense, that refers to the assemble of knowledge, faiths, opinions shared by a group towards a given social object – a system of values that directs perception. In the present paper we present classical definitions of social representations, features, functions and mechanism which produce them (objectivation and anchoring), with the view of underlying their importance at the point when we decode the image of an institution. Thus, the perceived image by the citizen is not a mere reproduction of reality (institutional), but a construction of it, an oriented ordering of interpretation „grids”, a remodelling which, at the last resort, carries the mark of its memory. Key words: perceived image, social representation, symbolic way of thinking, objectivation, anchoring, themata concept. 1. INTRODUCTION The real image of an institution (identity) is a result of the interaction between the projected image (A) by it, the transmitted image (B) and the perceived image by the citizens (C). Many times we can notice a gap between the projected image (A) and expectation horizon of the general public (C), in such a situation a subjective human perception is to be blamed (subjective distorsions, affective tendency, partial cognitivity), or lack of objectiveness of mass media. In reality, the perception of the general public is not so subjective as it seems at first sight, but rather it defines itself as a „durable” feedback related to the communication objectives (defined in the projected image of the institution) and the way they are transmitted through different communication supports (publicity, mass media, public relations, Internet). On one hand, there is no image management, a coordination of its three dimensions, and on the other hand between the first two layers and the third one it is interposed the phenomenon of social representation – having as a fundamental feature „reading grid” of reality. It is an „ambient”, an assessing apparatus that achieves the fusion of perception and concept. In the present paper, our scope is to highlight the specific difference of social representation, the importance of „point of view” of the citizen – who is the receiver in the process of building the image of an institution and justify his horizon of expectation. Compatibilities, incompatibilities respectively between the two perceptive horizons (A and C) become comprehensive through investigation of the social representation notion. For this reason firstly we present acknowledged definitions of social representations, their functions, then we discuss about the two complementary cognitive processes that 37

generate them – objectivation and anchoring. In the final part of the paper we will illustrate the fact that social representations are defined as a „grid” of interpretation of an institution image, using the results of a sociology survey (performed in 2012 in Bucharest, 400 interviewees) regarding the citizens’ perception on public audience service. 2. SOCIAL REPRESENTATION – DEFINITIONS When we approach the concept of institutional or organizational image, firstly we have to refer to the concept of social representation, mental construction with an important cognitive function – interpretation system of events and world, vectors of opinions, judgements and beliefs. Imagery, in a broad sense, is regarded as the study of image representation of diverse aspects of reality. In order to highlight the specificity of social representation we have to mention the well-known definitions in specialty literature: - Social representation is „a system of values, notions and practices related to objects, aspects or dimensions of social environment that allow not only the establishment of the life framework of individuals and groups, but equally constitute an orientation instrument of perception and elaboration of the answers” (Serge Moscovici, 1981, p. 43). - „The concept of social representation designates a form of specific knowledge, a science of common sense whose content is shown through operations, generative and functional processes socially significant. It designates, in a broader sense, a form of social thinking. Social representations are means of practical thinking, oriented to communication, understanding and mastering of the social, material and ideal environment (...) they have specific features when organizing contents, mental and logical operations” (Denise Jodelet, 1984, p. 361). - „Social representations always have two faces: that of the image and that of its corresponding significance; each image can have attached a meaning and each meaning, an image. They constitute a form of particular symbolic thinking, concrete images comprise directly and simultaneously a reference to an assembly of very systematic rapports that give an even ampler significance to those concrete images. In this respect, social representations differ however, on one hand from the very elaborate theoretical systems such as ideologies or scientific theories and on the other hand, from the images as immediate products of perception” (Al. Palmonari and W. Doise, 1986, p. 15). - „Social representations are defined as some principles generating position taking that are connected to specific insertions in an assemble of social rapports, with this we propose a definition in which the meaning should have the power to be understood both by sociologists and social psychologists (...) I insist upon the fact that taking position is done through communication rapports and they are concerned with any element of knowledge having an importance in the rapports established with the social agents. Organizational principles are found at the articulation between social dynamics and individual cognitive dynamics. They are part in representational content organization which suppose symbolic dynamics of the social rapports. We shold use the term of social representation only if there is a link established between cognitive organization and symbolic social rapports.” (W. Doise, 1990, p. 113). - „Social representation is a process of perceptive and mental elaboration of reality which transforms social objects (people, contexts, situations) into symbolic categories (values, faiths, ideologies) and gives them a cognitive status, allowing the understanding of common life aspects through a connection of our own behaviour to the interior of social interactions.” (N. Ficher, 1987, p. 118). 38

- „A representation is an organized assemble of cognites relative to an object, shared by the members of a population, in relation with that object”. (Claude Flament, 1997, p. 155). - „Social representations must be approached as forms of cultural expression, which make use of social codes in order to interpret individual’s experience in society, from values and models with the view of defining a certain social status, to symbols used in the thinking of collective entities”(Haineş R., 2000, p.43). As a conclusion, social representations are a kind of reading „grid” of reality, placed in the world of values and a specific interpretation of that world. A style of behaviour, a way of communicating with the exterior, an orientation in the world of objects and facts and an operation of ranking it. They designate a system of faiths, a mechanism through which they build theories about the social environment, a way of thinking the context in a practical way, communication with the exterior, a filter, a screen between social pressure and the system of personality, an enrichment of reality, a re-reading of it. 3. FEATURES OF SOCIAL REPRESENTATIONS a. A main feature of social representation is that it represents an object, it relates to a place, a situation, a fact, a person, an event, an idea and it renders presence of spirit, conciousness state of an individual or a real group, clipped from reality. b. It has the capability to make it fusion perception and concept. Its relation to the concrete does not mean however a reduction of representation to a collection of individual thinkings, proposed by the immediate reality. Representation is not a simple reproduction, but it presents itself as construction and „has autonomy characteristics and of individual or collective creation” (D. Jodelet, p. 362). It means an idea (conception, mental scheme, approach model) and an action (style of behaviour, action model, cooperative or competitive behaviour) reunited into one whole. c. Moscovici underlines the fact that social representations contribute significantly to the formation process of behaviour and social communication orientation. Social representations offer interpretational mechanism, a communication tool to settle the numerous normative, material and social conflicts. Unlike ideology, they are stronger if they rely on a conceptual system (stability is the main feature), social representations constitute a block of articulated concepts in different manners, not very systematic; sometimes they appear as a difuse structure, mobile and always in changing. Their concerns are less preoccupied with theories but more with reality, such as interest for image, money, psychological condition of the subject. Therefore, they appear as a product of human interaction and communication. d. Social representations modify themselves in the way the player dives into another communicational system when it enters other rapports. As a result, they fulfil an important social function, that is spreading ideas, analysis models, messages, behavioural style of the bearers. This „dissemination” function is achieved through different ways, that is: delivery, spreading and propaganda of opinions, attitudes and stereotypes (Serge Moscovici, 1981, p. 417). First of all, through transmitting information, answering public interest, keeping alive the interest in a subject, theme or way of thinking. Then, through spreading a well organized vision over the world, a faith, consolidating an attitude, structuring a consistent answer to the public’s questions, educating the public in the spirit of coherence. In addition, social representations exercise the work of impregnation through propaganda (utmost form of manipulation).This is a struggle „to set up”, a standstill, its features being rigidity and stereotypes. It simplifies reality, reduces complexity of phenomenon to some outpointed stimuli, it supposes an immediate reaction, acceptance or rejection of a group or person. Its 39

way of persuasion is repetition, polarized orientation, absence of ambiguity, stilization to stereotype schematization calling sometimes for a slogan. e. Symbolic feature of social representation Social representation can be, at the same time, the sign of an object and also an image, sometimes torn apart from ready reality, having a figurative or even mystic feature. Any meaning is represented by a figure, and each figure belongs to a meaning. Participation into the social life of an institution, organization, groups form an image about this „world”, giving birth to an organization which is thematically structured and fed by the energy of the person. „This image, dressed up in many figurative elements incorporates sone previous perceptions, but also the affective impact of the moment, social-cultural imaginary, as well as the reflection in the mirror of the immediate”. (Claire Bélisle, 1984, p. 322). The image is especially a social production, putting in order the reality with the signature of the „creator”, but a creator oriented by codes, interpretation grids in the point of outside world perception. What characterizes the image within the representational process is the symbolic functioning mode, its capacity to put in operation the interpretative „device”, integrated into the cognitive dimension, relational and imaginary. Mihai Ralea the Romanian psychologist said: language, morals and manners, everyday routine involve more or less a process of symbolism. Our whole life is full of such conventional signs. Symbols are „characteristic signs of the expansion of our appetite and aspirations”, they urge us „to think what we need to think”. (Mihai Ralea, 1938, p. 37). f. The representation process comprises two main dimensions: one ideological, another one imaginary. The imaginary dimension is that that contributes to mobilize energy, stimulates wish, introduces breaking off reality or idealizes it to make it bearable. Social imaginary explains the way in which social representation, ordering and maintaining an internal logicality, still calls for the individual’s affectivity. The unconciousness processes can be found between social and individual. Individual adhesion, however it has an institutional investiture, actually social, is of psychological and subjective nature. Although it is set in a certain context (organizational, sociocultural, ideological) which presses it, the subject builds the affective life on his own. Therefore, his speech on society is „a report” about the interactions that he had with the information sources. Pierre Bourdieu in Economy of Symbolic Goods (1986, p.38) ties social representation to the place of the social actor in a field of hierarchic relations and value oppositions. „The agents” of the field give recognizable signs, acknowledge contributions, establish internal rapports and functioning norms. Notions like „habitus” and „disposition” render this articulation between individual dynamics and sociological one. g. Pre-established fragmentation of reality – means that we do not succeed in seeing what is right under our eyes as if our sight or perception would be blurred. Thus, a class of given people, as they do not enter „our perception grid” – for instance, because of age (the elderly for the young or the young to the elderly), because of political bias (a left wing for a right wing and vice versa), because of race (black people for some white people, etc.), or because of many other reasons – it becomes invisible, while in reality „they look straight at our face”. This invisibility is not because of lack of information perceived by the retina, but to a pre-established fragmentation of reality, a classification of things and people which compose it that makes some visible and all the others invisible. Our reactions towards the events, our answers to stimuli are determined by a „code” – by a given definition, common for all the members of the community we belong to. We always see the intervention of representations which either direct us towards what is visible and to which we have to offer answers, or connect appearance to reality, or define that reality. 40

Moscovici states that: „where it is about reality, those representations are all that we have, those to which they are adjusted both our cognitive and perception systems” (1997, p. 17), (....)„when we contemplate those individuals and objects, our innate genetic predisposition, images and habits that we have learnt, preserved memories and our cultural categories all contribute to make them as we see them”(Idem, p. 18). h. Conventional and prescriptive nature of representations – two fundamental roles: Firstly, it conventionalizes objects, people, events with which we are in contact. It provides them a precise form, puts them into a given category and imposes them, gradually, as a model of a certain type, distinct and shared by a group of people. Thus we associate inflation with the depreciation of money, colour red with communism, etc. Even when a person, an object does not match the accuracy of the model, they are obliged to assume a given form, the risk being not to be understood. Related to this role of social representation, Barlett (in his studies on perception), concludes: „When a form of common representation and already conventional is in use before the introduction of the sign, there is a strong tendency of the special features to disappear, the whole sign is assimilated to a familiar form. Such an „intermitent light” descends, practically always, into a common form of zig-zag, usual form and the contours lose their angles, resembling more with conventional representations” (Barlett, 1961, p. 106). A clear example regarding the „weight” of conventions in our perceptive horizon is that of war criminals, responsible for unforgettable attrocities. Nevertheless people close to such criminals (both during the war and after it) praised their humanity and kindness. Thus, no mind is free from the effects of a preliminary conditioning imposed by representations, language and culture. We think using language, organize our thoughts according to a system that is conditioned both by representations and culture. “We see only what conventions allow us and we stay at the same time unconscious about the presence of the respective conventions” (S. Moscovici, 1997, p.19). Secondly, representations are prescriptive, that is they impose on us with an irresistible force. This force is a combination between a present structure, even before we start thinking, and of a tradition that makes us what we should think. „All classification systems, all images and descriptions that circulate in a society, even those scientific, suppose a connection with the previous images, being stratified in the collective memory and a reproduction through language which reflects, invariably, past knowledge and breaks the limits of current information” (Idem, p. 21). Representations have many roles: clarifying, giving a meaning to reality, integrating (incorporate notions and facts within familiar framework) and sharing (assure „common sense” in which a whole collectivity should recognize itself). That is why they are permanently under the influence of the social that works on them through discourse and in discourse. Why do we create these representations? What in the reasons we have explain their cognitive features? The scope of all representations is to make something unfamiliar or even unfamiliarity itself, familiar.”(...) On the whole, the dynamics of relationship is to become familiar where objects, individuals and events are perceived and understood in connection with the previous meetings and paradigms. As a result, memory prevails against deductions, past against present, answer against stimuli and images against „reality” (Idem, p. 34). The very same author underlines the fact that the act of representation is a means to transfer what troubles us, threatens our universe from the exterior to the interior, from far away to very near. The transfer is made through the separation of concepts and perceptions normally linked to one another and laying them into a context in which the unusual becomes 41

usual, where the unknown may be included in a known category. „The pressure between familiar and unfamiliar is always solved in our consensual universes in favour of the former. In social thinking, conclusion prevails over premises. Before seeing and hearing a person, we have already judged her/him; we have ranked her/him and made an image about that person. Therefore all researches we do, as well as the effort to get information do not serve but confirm that image – deja vu, deja connu” (Idem, p.37). According to Jean Claude Abric (1994, p.13) social representations play a fundamental role in the dynamics of social relations and in practice as they fulfil four essential functions: knowledge (allow to understand and interpret reality), identity (define identity and allow salvgardation of groups specificity), orientation (guide behaviours and practices), justificative (allow a posteriori to justify taking sides and behaviours). In a consensus with the mentioned authors Rosemarie Haineş states: „Social representations constitute a particular way to know, typical for common sense, that refer to the assemble of knowledge, faiths, opinions shared by a group towards a given social object. Social representations have with it simultaneously symbolizing rapports (being in its place) and interpretation rapport (giving it meanings)” (2010, p. 44). Thus, symbols and meanings are the result of a mental process resulting into a specific construction of the social object, or said in a different way, the subject re-constructs reality with which is confronted, the outcome is a real mental modelling of the object. They are found at the intersection between social and psychological, social representations are fed from religious faiths, cultural practices, rituals, everyday imaginary and are vehicled by language. A representation is often collectively generated – it is shared by the individuals of a group and therefore it represents the specific brand of a group. „A social representation can be achieved only within the terms of an iconic and linguistic process, sending down to ideas-sources (archetypes, prejudices, archetypal mental images that become toposes of common sense) and sending up to argumentative schemes and semantics.” (Haineş R., 2010, p.43). Thus social thinking is marked both by the mental iconic and linguistics. Discourse analysis highlights the exchange of thesis negotiating themata, therefore representations. 4. MECHANISM OF SOCIAL REPRESENTATION PRODUCTION 4.1. The (re)construction of reality is possible through two complementary cognitive processes, that is objectivation and anchoring. Objectivation corresponds to the conventional nature of social representation. This process simplifies information related to object, makes notions more concrete achieving the correspondence between objects and words, summing them up according to an internal logicality which is particular to the group. Information is selected from the context and reduced to a scheme to form a „figurative nucleus”. This contains the elements that form a coherent and imagined assemble, turning abstract into concrete. From that point the concrete becomes evident and it is integrated into a reality of common sense. The objectivation process is fundamental because only to the extent in which information is simplified and remodelled to be put into the logicality and internal coherence of the group it becomes consensual and thus, functional, communicable. Anchoring refers to the social implementation of representation; the construction of the representation of an object will call for faiths, values and knowledge that pre-exist and are dominated from within the interior of the group (its prescriptive nature). Thus something that was strange becomes familiar to the group, the very object is integrated in a network of significant objects constituted through hierarchization of the values that are proper to the 42

group or by generalization to society. Anchoring allows attachment of something that is new to something that is old and which, thus, is shared by the individuals of the same group. As Serge Moscovici states, anchoring is the process through which we transfer something foreign and disturbing in our peculiar system of categories and compare that element with the paradigm of a category which we consider suitable. The process resembles with anchoring a boat to one of our buoys in our social space. The extent to which an object or an idea is compared to the paradigm of a category, it receives the features of that category and is re-adjusted to be fit in it. Even if we are conscious about a certain gap, approximation of our statements we still cling to it only to preserve a minimum of coherence between something that is known and unknown. Anchoring means classification and naming something. Things that are unclassified and unnamed are foreign, nonexisting and at the same time threatening. „Classifying what is unclassifiable, naming what is unnamed, we are able to imagine that thing, to represent it. Indeed, representation is fundamentally a system of classification and grading, allocation of categories and names.” (Moscovici, 1997, p.40). To classify someone or something means to choose a paradigm from those stored in our memory and establish with it a negative or positive relation. „Any typical image contains abstract into concrete, this fact makes it reach the main scope of society: creation of classes of individuals. Classification and naming are two aspects of this anchoring of representations” (ibidem, p. 41). Our representations transforms the unfamiliar into familiar, a different way of saying that they depend upon memory. Memory density protects them from such unexpected modifications, on one hand, and on the other hands allows them a certain quantity of independence towards the present events – the same as an accumulated fortune protects us to live from one day to the next. „From this stuff of experience and common memories we extract our images, language and gestures required to defeat the unfamiliar with the help of anxieties. Experiences and memories are neither inert nor dead. They are dynamic and immortal. Anchoring and objectivation are, therefore, ways to treat memory. The former keeps the latter in movement; once it is oriented to the interior, introduces and extracts objects, people and events which then are aclassified according to their type and labelled using a noun. The latter being more or less oriented towards the others, it extracts concepts and images from memory and reproduces them in the exterior world in order to transform the things-which-are-to be known in what is already known.” (ibidem, p. 52). The analysis of social representation supposes identification and pointing out of what is called THEMATA – a concept developed by S. Moscovici and G. Vignoux. THEMATA concept designates an assemble of primary concepts, forceful ideas, archetypes deeply rooted in the collective memory of a group. Themata expresses through common notions, strongly anchored and shared within a culture. In the view of the mentioned authors, themata makes possible the appearence of social discourse and round those forceideas they constitute – as part of the basis society – the representations; they generate discoursive regimes that give argumentative coherence, cognitive and cultural attitudes. 4.2. Citizens’ perception about the public audience services in Bucharest constitutes only one of the examples regarding social representations defined as „reading grid” of the image of public institution. After processing the primary data of the questionnaire applied in 2012 (400 respondents) the conclusion is that the level of public audiences requested by citizens is very low – 17.5%, in comparison with 82.5%, who have not requested audiences to solve their problems. The question „What was the main reason for which you have not requested an audience at public authorities? The answers were: 43

Table 1 Reason I know that if I request an audience, my problem won’t be solved I have already solved my problems at the City Council without requesting any audience Problems with public authorities are solved by members my family, friends, etc. Other situations Total No. of calculation basis

Relative frequencies(%) 36.0% 38.5%

21.8% 3.8% 100% 138

Thus, 36% of the interviewed citizens consider that they do not solve their problems if they request an audience. Lack of confidence of population in the administartion, generally and audience services in particular (82.5% of the people interviewed have not requested an audience) is a feed-back, that has appeared during the years, as a result of indifference, lack of interest and involvement shown by the administration at the point when the citizen wanted to solve his/her punctual problems. In this example, social representation (citizens’ opinion regarding the public service) or the process of re-modelling, re-arranging of reality depended on memory (the unfamiliar was transformed into familiar). The experiences and memories of the citizens (dominantly negative) towards the public institution have been neither inert, nor dead, but on the contrary – through anchoring and objectivation – they have become dynamic. Their memory density had the last word in contouring the opinion about the public administratin in general, and the public audience service, in particular. 5. CONCLUSION The real image of a public institution (identity) results as an interaction between the wanted image, that is transmitted through communication supports and the citizens’ opinion about the institution in case. In the present paper we have analyzed the perceived image, social representations respectively – in their quality of decoding „grid” of the institution image. We have started with the definitions of social repesentations established in specialty literature, from the characteristics, functions and mechanism of their production and have shown their contribution in interpreting the image of a public institution. Social representations are those that have a positive or negative orientation upon the opinion of an institution/organization, they have a decisive contribution to the formation process of behaviour and direct social communication (being at the same time a product of the (inter)action and human communication). Representation is not a mere reproduction of reality, but a construction of it. In this respect, the image perceived by the citizen is an ordering of reality which has the signature of the „creator”, of a creator oriented by codes, interpretation grids, at the last resort by its memory. Social representations have a symbolic character, as well as a conventional and prescriptive nature. Thus formulated, no mind is free of the effects of a preliminary conditioning, imposed by representations, language, culture, they are imposed to us with an irresisitible force in the process of representation (through anchoring and objectivation), and our perceptive horizon is mainly oriented by them. Using the words of Serge Moscovici, our 44

representations transform the unfamiliar into familiar (deja vu, deja connu), that is another way of saying that they depend on memory (our experiences are neither inert, nor dead, but dynamic and immortal). In the last part of the paper, we presented their major role refering to the citizens’ opinion about the audience service (department of public communication). Therefore, in the above lines we have highlighted the contribution of social representations in the dynamics of managing the image of an institution, the importance of „the point of view” of the citizen (receiver in this process) and we have justified the expectation horizon. Compatibilities, respectivly incompatibilities between the two perceptive horizons (A and C) they become comprehensible through the definition of social representation – as a system of values, notions and practices relative to objects, aspects or dimensions of social environment, that allow not only establishing the life framework of individuals and groups, but constitute equally an instrument of orientation of perceiving the situation and elaboration of answers. ACKNOWLEDGMENTS This work was supported by the strategic grant POSDRU/89/1.5/S/62259, Project „Applied social, human and political sciences. Postdoctoral training and postdoctoral fellowships in social, human and political sciences” cofinanced by the European Social Fund within the Sectorial Operational Program Human Resources Development 2007 – 2013”. REFERENCES: 1. Abric, Jean-Claude, Pratiques sociales et représentations, PUF, Paris, 1994. 2. Bélisle, Claire, Les savoirs dans les pratiques quotidiennes sur les représentations, Ed. du CNRS, Lyon, 1984. 3. Bourdieu, P., Economia bunurilor simbolice, Meridiane, Bucureşti, 1986. 4. Doise, W. Les représentations sociales, in R. Ghiglione, C. Bonnet, J. F. Richard, Traité de psychologie cognitive, Tome 3, Dunod, Paris, 1990. 5. Ficher, N., Les concepts fondamentaux de la psychologie sociale, Dunod, Paris, 1987. 6. Flament, C., Structura, dinamica şi transformarea reprezentărilor sociale in Psihologia câmpului social: reprezentările sociale, vol. coordonated by Adrian Neculau, Polirom, 1997. 7. Haineş, Rosemarie, Comunicarea televizuală, Ed. Eficient, Bucureşti, 2000. 8. Haineş, Rosemarie, Imaginea instituţională, Ed. Universitară, Bucureşti, 2010. 9. Jodelet, J., Représentations sociales: phénomènes, concepts et theorie in S. Moscovici, Psychologie sociale, PUF, Paris, 1984. 10. Moliner, Pierre, Cinci intrebări în legătură cu reprezentările sociale, in vol. Reprezentările sociale, coordinated by Adrian Neculau, Polirom, Iaşi, 1997. 11. Moscovici, S., Structures et transformations des représentations sociales, Ed. Guimelli Ch., Delachaux et Niestlé, Lausanne, 1994. 12. Moscovici, S., Fenomenul reprezentărilor sociale, in Psihologia câmpului social: reprezentările sociale, coordinated by Adrian Neculau, Polirom, 1997. 13. Moscovici, S., Psihologia socială sau maşina de fabricat zei, Polirom, Iaşi, 1997. 14. Moscovici, S., Psychologie sociale, PUF, Paris, 1984. 15. Moscovici, S., La psychanalyse, son image et son public, PUF, 1981, Paris. 16. Palmonari, A. şi Doise, W., 1986, Caractéristiques de représentations sociales in A. Palmonari, W. Doise (sous la direction), L’étude des représentations sociales, Delachaux et Niestlé, Neuchatel-Paris.

17. Mihai Ralea, Câteva consideraţii asupra psihologiei simbolului, in Psihologie şi viaţă, Editura pentru literatură şi artă Regele Carol II, 1938. 18. Neculau Adrian (coordinator), Psihologia câmpului social: reprezentările sociale, Polirom, Iaşi, 1997.

INTERNAL CONTROL IN ROMANIAN PUBLIC INSTITUTIONS Maria Valia Mihai Petroleum-Gas University of Ploiesti; Oana David “Politehnica” University of Bucharest;

ABSTRACT: The concept of internal control comprises the complex set of policies and procedures conceived and implemented by the leader and personnel of the public entity, meant to carry out the goals of the institution in an economic, efficient and effective manner. The organization of internal control in public institutions is the responsibility of the authorizing officer, but the concrete responsibilities capable of accomplishing the mission of the institution are closely related to the managerial skills of the authorizing officer, as well as to the quality and professionalism of the personnel involved. Key words: internal control, public internal audit, preventive audit, authorizing officers, standard of management 1. INTRODUCTION Authorizing officers, in their quality of leaders of public institutions, are responsible for both the efficient and effective management of the entrusted patrimony, and for accomplishing the missions and objectives of the institution, using the necessary instruments of control of the institution activity, one of these being the internal control. The public character of the funds and of the patrimony which are administered at the level of a public institution requires that the internal control system be developed, so refined as to permit the authorizing officer to have a good control over the systemic functioning of the entity, so as to attain its goals. In its classic sense, internal control in the public institutions in Romania involves three levels: internal control, internal audit and preventive financial control. The changes in the social-economic life during the last two decades, together with the process of our country’s accession to the Community space have led to a more elaborate interpretation of control, where this is regarded as a function of the managerial activity rather than an activity of verification. The organization of internal control in public institutions is the responsibility of the authorizing officer, but the concrete responsibilities capable of accomplishing the mission of the institution are closely related to the managerial skills of the authorizing officer, as well as to the quality and professionalism of the personnel involved.

2. PAPER CONTENT Preoccupations with defining, delimiting and elaborating on the notion of internal control emerged in the second half of the 20th century and belonged to the accountants, internal and external auditors from the developed western countries. They demonstrated that implementing internal control in the financial-acconting domain can contribute to projecting and certifying the accounts, of the accurate and actual financial reports. The amplification and diversifiction of riscs in economy, the steady growth of complexity of the organization of entities, the high rate of deficiencies in their functioning, the permanent development of the legal framework to be observed, as well as its incrased rigidity, etc., determined a wider scope of internal control implementation, from the financial accounts domains, to all the activities of an entity, thus highlighting the urgent necessity that the managers/leaders of entities put the spotlight on creating and implementing more and more effective internal control systems, which will enable them to have a good control over the entity functioning so as to accomplish their envisaged objectives. The concept of internal control comprises the complex set of policies and procedures conceived and implemented by the leader and personnel of the public entity, meant to carry out the goals of the institution in an economic, efficient and effective manner, to protect the goods and information; in this way, prevention and tracking down of frauds and mistakes is possible; consequently, the quality of accounting documents is ensured, as well as the possibility of having access to reliable and timely information concerning the financial and management segments. The systemic approach of the internal control in public institutions was generated by the legislative framework, i.e., the promulgation of OG (Goverment Decree) 119/1999 on internal and preventive financial control, but also by our country’s committment, during the process of accession to EU, to adopt a new type of management, so as to enhance managerial responsibility, and one way out in this respect was by implementing the internal control system . The internal control, according to OMFP (Ordinance of the Public Finances Ministry) 119/1999 approved by Law 301/2002, has three instantiations: internal control, internal public audit and preventive financial control. In a few words, these three forms of internal control are characterized as follows: a) Internal control includes the set of forms of control exerted at the public institution level, agreed upon by the leadership of the entity in conformity with its objectives and with the legal regulations, with a view to managing the funds economically, efficiently and effectively. The internal control also involves the set of measures taken by the leader of the public institution regarding the la organizational structures, methods, control procedures, and control and assessment systems, instituted in order to:  Observe legality and the leadership rules;  Protect goods and resources;  Provide in due time accurate and complete information necessary for decision grounding at management level;  Accomplish quality standards required in carrying out tasks and economic-financial policies agreed by the institution leadership. The persons who administer public funds or public patrimony are responsible for a good financial management ensuring legality, regularity, prudence in the use of resources, 48

effectiveness and efficience in using the public funds and in the management of the public patrimony. b) The internal public audit is an activity organized independently in an institution structure, directly subordinated to the authorizing officer; it consists in performing verifications, inspections and analyses of its own internal control system, in order to achieve an objective assessment of the extent to which this system ensures that the objectives of the public institutions are accomplished and that resources are used economically and efficiently, enabling the leadership of the institution to have a professional opinion on the results obtained, and on further steps meant to remedy the potential shortcomings. It is organized as a specialized compartment within each public institution, with a higher or lower number of persons, according to the number of the employees of the public institution. The public internal audit compartment can be composed of internal auditors concerned with internal audit and accounting auditors specialised in financial control management, whose raports, minutes and actions are verified by the former. The public internal audit compartment is responsible for:  examining operation legality, regularity and conformity, identifying errors, waste, deficient management, frauds and proposing remedial measures and sanctions for those who are at fault;  examining the accounting system and its reliableness, as the main instrument of expertise, management and patrimonial control and of results assessment;  certify annually the balance sheet and of the institution budgetary execution account and to draw up the certification report;  supervise the regularity of the decision-making systems, plan, organize, coordinate, pursue and control so as decisions are carried out;  identify weaknesses in the management and control system and propose remedial measures. Public auditors have access to all data and information they consider relevant for the envisaged goal and objectives, and execution personnel involved in the audited activity are obliged to provide the required documents and all the necessary support so as the internal audit take place in good conditions. c) The preventive financial control consists in the systematic verification of the operation projects from the legality and regularity point of view, as well as in terms of fitting in the budgetary credit limits agreed upon. It is a preventive control over the operations effected on the public funds or patrimony, before the approval of these operations. Public institutions leaders must dispose operation projects liable to preventive financial control, justificatory documents and their circuit. From the project of the operations liable to preventive financial control, the authorizing officer is obliged by law to include the following operations: the contracts concluded with the internal and external partners; the transfer of certain losses to expenses; bailing, renting, leasing of goods; receipts and payments in foreign currency; payment from public funds; opening budgetary credit lines to subordinated institutions and deposits with amounts from budgetary allocations for investment financing; modifying the allocations on quarters of the budgetary gains and expenses. The documents liable to the preventive financial control visa are registered in the “Register of preventive financial control visa operation projects”. In order to obtain the preventive financial control visa, the operation projects presented are accompanied by concordant justificatory documents, certified for their verity

and legality by the signature of the directors of the specialised compartments that initiate the operation. The preventive financial control is exerted by the accountant-general or by other persons authorized to make this type of inspection. The in-house preventive financial control visa is exerted through the signature of the authorized person or of the designated delegate, and by stamping with his/her personal signet. The preventive financial control authorized persons are responsible for the legalitaty, regularity and compliance with the budgetary credit limits approved for the operations that have obtained the preventive financial control visa. Obtaining the preventive financial control visa for documents that contain inaccurate data or which later on turn out to be illegal does not exonerate the specialised compartment directors from being responsible for the documents they have drawn up. In the situation where the preventive financial control visa is refused, refusal which is motivated in writing, the credit authorizing officer can order, on his/her own responsibility, to commit himself/herself to effecting the respective expenses. In this situation, the accountantgeneral must inform in writing the Public Finances Ministry descentralised public services and, as the case may be, the public institution hierarhically superior body. The preventive financial control presents itself under two forms:  the in-house preventive financial control, discussed before;  the delegated preventive financial control. The delegated preventive financial control is organized and exerted by the Public Finances Ministry through delegated controllers. Delegated controllers are Public Finances Ministry public servants who independently exert preventive financial control actions. The Public Finances Ministry appoints in every public institution (where the positions of principal controller of budgetary credit, state social security budget or special funds budget exist) one or several delegated controllers, depending on the size and complexity of the respective institution. Delegated controllers apply the delegated preventive financial control visa to the operation projects after they have been checked by the institution in-house preventive financial control. Delegated controllers perform their activity in the public institutions where they have been appointed. At present, in our country there is a new approach to public institution internal control as a result of applying the Community procedures. The internal management/control standards stipulated in 946/2005 Decree are indicative in this respect. The Community regulations in the internal control domain , generally consist of principles of good practice, accepted both internationally and in the European Union. The way in which these principles are applied in the internal management or control systems is specific to each country, according to constitutional, administrative, legislative, cultural conditions, etc. In the context of general principles of good practice that compose the Community acquis, control is given a more comprehensive interpretation, as it is regarded rather as a managerial function, than as an operation of verification. Through its control function, the management identifies possible deviations of results from the objectives proposed, analyses the causes that engendered them and takes the necessary preventive or corrective measures. The internal control standards define a minimum number of management rules, that have to be observed by all public entities.

The aim of the standards is to create a model of unitary and coherent managerial control. In addition to this, the standards constitute a system of reference for de internal control system assessment, as it identifies the areas and directions of change. The management of every public entity is responsible for the establishing the control systems; these have to be founded on the standards drawn up by the Public Finances Ministry. The standards were formulated in general terms so as to allow managers to implement them, despite significant differences between public entities. The managerial control systems have to be developed in conformity with the particular legal, organizational, personnel, financial, etc. Situation of each public entity. The internal control standards are grouped into five key elements of the managerial control: 1. the control environment - includes issues regarding the entity organization, human resources management, ethics, deontology and integrity; 2. Performance and risk management –concerned with management issues connected with setting objectives, multi-annual planning, management action plan and performance monitoring; 3. Information and communication - groups the issues related to creating a viable informational system, a management operational plan, a reporting system concerning budget, use of resources, identification of deviations; 4. Control activities – the standards that are included in this key element have as their focus setting the necessary procedures, assigning distinct responsibilities, recording deviations from standard procedures, supervising; 5. Auditing and assessment – this group of standards are meant to develop the managerial control assessment skills, so as the assessment process be improved and permanently refined. Overall, the main standards and their associated references constitute the representative package of regulatory norms –The internal control code -, which governs the objectives, organization and operation of financial and control (internal control) management systems in the public institutions. 3. CONCLUSIONS Internal control is a process in which all the employees of an entity are involved and which is coordinated by the persons responsible for all compartments of an entity, through its operational procedures, a process for which the management /authorizing officer is responsible and has to implement and monitor. The internal control does not diminish each employee’s responsibility for doing a good work, nor does it infringe on the management authority to exert their competencies, nor does it substitute it. The implementation of procedures, policies, internal regulations and decision-making are the responsibility of each employee. Activity reports for the employees who are in charge with internal control are decided within the public entity so as to meet several exigencies: control efficiency, maximum valorization of results, result confidentiality and preservation of work secrecy, risk and malfunction prevention.

REFERENCES 1. 119/199 Government Decree, with further modifications, concerning internal and preventive financial control; 2. 945/2005 OMFP (Ministry of Public Finances Decree) concerning internal control code approbation; 3. 1389/2006 Decree concerning the modification and amendment of 945/2005 OMFP (Ministry of Public Finances Decree) on internal control code; 4. http://www.curtesdecontuir.ro –Public entities internal control system assessment guide; 5. http://www.cnas.ro/pdf/audit/Dezvoltare_.sist.manag.pdf;

LEARNING-BY-DOING IN SIMULATED ENTERPRISES Radu Herman University of Bucharest

ABSTRACT The purpose of this short paper is to analyse the important issue faced by the virtual organizations in the learning-by-doing process. In the actual context of the digital economy the students face a new challenge: switching from passive learning behavior to active learning behavior. Towards the knowledge-based economy many changes are taking place and include a more innovative behavior from all the stakeholders, including the University, the students and the business environment. Some key aspects are related to the value chain due to the virtualization of some components of the processes: the organization moves components from physical towards virtual and the relationships between the variables are changing. The researchers can invest their effort for a better understanding of the stages, components and structure of the organization which becomes more virtual rather than physical. While interacting in the complex social system, the students from the virtual organization learn new practices and can simulate in a safe environment different strategies and behaviors. Key words: learning-by-doing, virtual organization, value chain, active learning, simulated enterprise. 1. INTRODUCTION The Internet is providing a framework for knowledge learning, accumulation, communication etc. and can be used as a tool by the Universities to simulate different management strategies while working in virtual enterprises. The opportunity of developing virtual organizations (VO) is welcomed in the XXIst century environment and is a safe environment for a better understanding of the economic behavior of the stakeholders. The value chain is swithcing from physical to virtual and a better understanding of the new needs of the ways of organizing the new forms of organization become relevant for researchers. Becoming active learners is a recognized objective by all the stakeholders and the Universities could play an active role in designing and developing interactive virtual organizations due to its capacity of offering high quality learning products and due to its infrastructure possibilities. 2. LITERATURE REVIEW The economists agree that passive learning is an important factor of growth but on long term the productivity growth is limited. Peter Thompson (2010: 429) argues that passive learning is often an inessential component of long-run growth and to the contrary, too much learning can lead to the stagnation of the growth-productivity. Gary P. Pisano (1996: 1097) argues that problem-solving can also occur long before a new product or process design is introduced into the factory through computer simulations, laboratory experiments, prototype 53

testing, pilot production runs, and other experiments, referred as ‘learning-before-doing”. G. Cundill, R. Rodela (2012: 7) show that during the social interactions with multiple stakeholders the participants learn to work together and build relationships that allow for collective action. G. Cundill, R. Rodela (2012: 7) argue that social learning occurs through deliberate experimentation and reflective practice and the social learning curve is sustained by the process of a long-term interaction between the stakeholders and knowledge sharing in an environment built on trust. An effect of the social interactions and relationship building is that participants gain some practices of dealing with the complex social system and can reduce the uncertainty when taking future actions. The tool for the virtual organization is information technology and the purpose is creating competitive advantages through knowledge. Omar Khalil, Shouhong Wang (2002: 127) argue that the management of virtual organizations (VO), called meta-management, provides a systematic approach which exploits the competitive advantages of VO and consists of basic activities including analyzing and tracking requirements, allocating satisfiers to requirements, and adjusting the optimality criteria. Kai R.T. Larsen, Claire R. McInerney (2002: 445) show that University information studies programs can simulate VO’s and certain skill sets that are needed in VO work: critical thinking, analytical methods, ethical problem solving, stakeholder analysis, and writing policy are among the needed skills and abilities. Larsen, Claire R. McInerney (2002: 445) argue that simulated virtual teams allow participants to learn and trust team members and to understand how communication and product development can work effectively in a virtual workspace, and their paper argued that each team’s success or difficulties were apparently closely related to issues of trust in the team process. 3. PAPER CONTENT The virtual organization can be described as a network of people who can do activities in an amalgamated set and is a flexible way of structuring the organization. The structure of the organization is a sum of ways in which la labor tasks are divided in specific ways in order to achieve the management’s objectives. Vojko Potoèan & Zlatko Nedelko (2008: 1) argue that there is a tendency that virtual chain value is more important than the physical chain value in virtual organizations and an organization moves from physical to virtual along with an increase of degree of connectivity and levels of boundary of the organization and a decrease of linkage degree among organizational variables. All virtual organizations include many informatics and informational aspects both “soft” and “hard” and represent a transitory form towards the knowledge based companies which evolves in the present and will become more important in the future economy. Walter L. Turner, Antonis C. Stylianou (2004: 249) apply a model for the strategic and tactical use of IT that would allows academia to better focus the use of technology in response to the demands of its marketplace, termed “IT Advantage Assessment Model,” or ITAAM (derived from Michael Porter’s Value Chain Model) and the resulsts indicate a great advantage and better understanding of its use. The use of virtual organization has an important role in the education environment. The XXIst century student must be involved in important and provocative challenges from the real world. The practice in a simulated environment represents a teaching model which is a practical solution of “learning-by-doing” and a better understanding of the real market demands. In this framework there is a switch between passive learning behavior to active learning behavior.

3.1 Examples of Good Practices in Virtual Organizations The JA-YE Company Programme is recognised by the European Commission Enterprise Directorate General as a “Best Practice in Entrepreneurship Education”. JA-YE’s Europe Purpose is to “inspire and prepare young people to succeed in a global economy”. Some of the european initiatives from JA-YE include “Sci-Tech Challenge”, “Skills for the Future’’, “Enterprise without Borders”, “Enterprise without Borders”, “Social Innovation Relay” etc. The projects include activities like: An interactive and educational webspace, Classroom visits by ‘MST’ expert volunteers from ExxonMobil, 10,000 young people between the ages of 15 and 18 in 15 European countries will have the opportunity to try their hand at enterprise, Over 400 employees from the business community will volunteer, teaching practical skills necessary to function in an international market, an online ‘Social Innovation Relay’. (accessed 20 march 2013, http://www.jaye.org/pls/apex31mb/f?p=17000:1002:3102255803380050:::1002:P1002_HID_ID,P1016_HI D_INSTITUTION_ID:6896,1) The Virtual Organization GridMOSI represents a solution of valorification of the potential of Grid technologies for the benefit of akademik and research communities from Romania by offering two classes of specific resources for the research infrastructure: modelling solutions, simulation and optimization (MOSI) in different areas for applications and resources centers Grid which are installed and administrated at the partners institutions. Among the GridMOSI’s project objectives can be found: (accessed 20 march 2013, http://wiki.gridmosi.ro/wiki/GridMOSI:Info) - “Creating a Virtual Organization (VO) in Romania using the compatible technology with the european grid infrastructure EGEE and SEE-GRID-SCI”; - “Development and implementation of advanced algorithms for modelling, simulation and optimization in software applications accesible for the VO members”; - “Assurance of a user’s interface of portal for the facilitation of the access to VO resources”; - “Dissemination of the project’s results by publishing of scientific research papers and participation at national and international conferences”. Virtual Organization “Întreprinderea simulată” developes work skills of the students found in tranzition from school to an active life using innovative learning methods through a simulated enterprise. Some of the activities developed within the project include: (accessed 20 march 2013 http://intreprinderesimulata.ro/despre-proiect/activitati-si-rezultate/) - “founding and functioning of 8 work centers which will host 32 simulated enterprises within the partner Universities”; - “the organization of 12 events of networking with the participation of students, coordinators of the simulated enterprises and economic agents to establish the economic domains in which the simulated enterprises will develop activities”; - “experience exchange of good practices from the transnational partner to the national partner”; - “developing of methodological work instruments for the functioning of simulated enterprises”; - “organization of 8 seminar for the presentation of the entrepreneurship concepts for the students and the organization of 3 seminars of analysis and improvement of the concept and functionality of simulated enterprises”.

4. CONCLUSIONS AND IMPLICATIONS I consider that the role of virtual organization is increasing due to the switch of the value chain from physical to virtual and that Universities can play an important role in the learning process. Due to the virtual organization the students change their behavior from passive learners to active learners and the accumulated knowledge are becoming more relevant in meeting the market needs. REFERENCES 1. Cundill G., Rodela R., A review of assertions about the processes and outcomes of social learning in natural resource management, Journal of Environmental Management, Volume 113, 30 December 2012, Pages 7-14 2. Khalil Omar, Shouhong Wang, Information technology enabled meta-management for virtual organizations, International Journal of Production Economics, Volume 75, Issues 1–2, 10 January 2002, Pages 127-134 3. Larsen Kai R.T., McInerney Claire R., Preparing to work in the virtual organization, Information & Management, Volume 39, Issue 6, May 2002, Pages 445-456 4. Potoèan Vojko & Nedelko Zlatko, Suplly Chain Management and Virtual Organization, Business Logistics in Modern Management, Faculty of Economics in Osijek, Croatia, vol. 8, 2008, pages 1-13 5. Pisano Gary P., Learning-before-doing in the development of new process technology, Research Policy, Volume 25, Issue 7, October 1996, Pages 1097-1119 6. Thompson Peter, Chapter 10 - Learning by Doing, In: Bronwyn H. Hall and Nathan Rosenberg, Editor(s), Handbook of the Economics of Innovation, North-Holland, 2010, Volume 1, Pages 429-476 7. Turner Walter L., Stylianou Antonis C., The IT advantage assessment model: Applying an expanded value chain model to academia, Computers & Education, Volume 43, Issue 3, November 2004, Pages 249-272 8. *** Junior Achievement Joung Enterprise Europe, http://www.jaye.org/pls/apex31mb/f?p=17000:1002:3102255803380050:::1002:P1002_HID_ID,P1 016_HID_INSTITUTION_ID:6896,1, accessed 20 march 2013 9. *** Organizatia Virtuala GridMOSI, http://wiki.gridmosi.ro/wiki/GridMOSI:Info, accessed 20 march 2013 10. *** Întreprinderea simulata, http://intreprinderesimulata.ro/despre-proiect/activitati-sirezultate/, accessed 20 march 2013

BUSINESS PROCESSES IN CONTEMPORARY SOCIETY – A THEORETICAL APPROACH Veronica Adriana Popescu A. Commercial Academy of Satu-Mare, Satu-Mare and The Bucharest University of Economic Studies, Bucharest; Gheorghe Popescu N. The Bucharest University of Economic Studies; Cristina Raluca Popescu Gh. University of Bucharest

ABSTRACT Our paper focuses on the subject of business process and it represents a theoretical approach concerning this particular issue. The study is structured in a complex manner, starting with an introduction, in which we state the matter covered by us, our purpose and the importance of the research; the literature review states the main sources of inspiration that we took into account while we decided this approach; we continued with the importance and the role of business processes in the contemporary economy - definitions, role and importance, characteristics of business processes and classification, performance of the business process management, respectively with definitions and characteristics of business process management and performance and quality in the management of business processes and we ended with the section of conclusions and implications. The paper is an interesting enquiry both for academics and for practitioners belonging to the economic and the management field and not only. Key words: performance, management, business processes, knowledge, economics. 1. INTRODUCTION The introduction section of our paper focuses on four main issues presented as follows: (1) What matter does the paper cover? Given that current state belonging to performance management business processes, our strong belief is that in Romania there are not too many studies dedicated to this subject and the use its instruments in Romanian institutions. For this particular reason we believe that the achievement of the current work in this area may represent a step forward in contemporary society which is constantly evolving and changing. (2) Why is the studied matter important? Therefore, our approach takes into account presenting the current state of existing knowledge in this field. (3) How does the author intend to answer to this matter? And (4) What is the relation between the paper and the already existent specialized literature? 57

This paper, mainly dedicated to state of knowledge of this field, entitled "Business processes in contemporary society", focuses on several issues relevant to our approach, as follows:  First we focused on the business processes of the contemporary economy, in the sense of presenting the most representative definitions so that, later, to highlight the role and importance of business processes in society today.  Going forward, we analyzed what are the main characteristics of business processes and also we have represented some of the classifications of business processes, such as that concerning (A) business process management in the public sector, respectively (B) management business processes in the private sector.  Performance management business processes was another key element that we considered in our paper. At this stage, we considered two levels, the first consisting of definitions and characteristics of business process management and the second consisting of ways of understanding and representation of performance and quality in the management of business processes. 2. LITERATURE REVIEW Our study dedicated to state of knowledge in this field, focuses on the following issues relevant to our approach. For starters we focused on business processes in the contemporary economy, in the sense of presenting the most representative definitions, later, to highlight the role and importance of business processes in society today. Going forward, we analyzed what are the main characteristics of business processes and also have represented some of the classifications of business processes, such as that relating to: (A) business process management in the public sector, respectively: (B) business process management in the private sector. Performance of the business process management was another key element that we considered in our project development. At this stage, we considered two levels, the first consisting of definitions and characteristics of business process management and second in the ways of understanding and representation of performance and quality in the management of business processes. The following literature review is intended to generate the necessary background for other future research and further investigations in terms of real estate field, including, as well, for the authors of this article. Due to this fact, a very important step in the exploration of potential strategies concerning the real estate field is a thorough review of the currently available research, which will include books, peer-reviewed scholarly journals – mainly descriptive articles, rather than evaluative ones, practice guides, official professional sites, professional publications and official documents with an international impact towards real estate industry, economics and management. In most cases, practice guides and descriptive articles are more common in this field. Moreover, there are a few notable research studies in the topic of real estate industry, and in addition to this, there are significant gaps between the literature and the actual research, but all this was once more both a great opportunity and a great challenge for us as researchers - economists. 3. BUSINESS PROCESSES IN THE CONTEMPORARY ECONOMY DEFINITIONS, ROLE AND IMPORTANCE In the literature, the term "process" is used with different meanings and is also a continuing source of confusion and misunderstanding because, by reason of misuse of terminology. The general rationale of confusion is that the term "process" is a word that 58

means different things to different people. It should be noted that even for specialists practitioners who are not only very familiar with this concept, but also with various other related concepts such as "Business Process", "Process management", "business process management" and so on, can sometimes create confusion between disciplines.  A classic example is where software engineers documented on the processes within an organization. In fact, they are often interested in the relationship between static activities. While engineers when addressing issues related to industrial processes, most often focuses on the dynamics and correlation activities within the organization (eg, process flows within the organization). For these reasons, we believe that it is vital to define exactly what kind of "process" is for each party context otherwise communicating becoming ineffective or impossible. We present below some of these meanings, depending on the importance and relevance to our approach: a) The term "process" is essentially the act of transforming inputs into outputs, is basically how all the resources of an organization are used in a reliable, repeatable and consistent in order to achieve its objectives. b) The concept of "process" means also a number of actions related to a specific goal oriented and it aimed to transform a set of inputs into outputs desired by adding value. c) Davenport and Short (1990) define a business process as "a set of logically interrelated tasks in order to obtain a clearly defined business outcome". (see Davenport, T.H., Short, J.E. (1990)) d) Another situation is when we are talking about lawsuits caused by a specific chain of events. In this case, according to Scheer (1993), a "process is a result of a certain duration, which is started by an event and completed by another event." (see Scheer, A.-W. (1994)) e) For a better understanding of the concept of "process" we add the following: (1) firstly, that chain is a dynamic process, i.e. there is a sequence of explicit time between events, (2) second, some functions are performed simultaneously and Boolean logic defines relations, (3) thirdly, the business is multifunctional type comprising, in fact, every function within the organization. (see Kirchmer, M. (1999)) Therefore, understanding business processes multifunctional chains presented as event-driven process is a critical point because the idea that the most difficult problems in business process management involves managing across functional boundaries. Therefore, a more accurate understanding of business processes within an organization multifunctional dynamic is absolutely essential. Examples of "business processes" within different organizations:  The first example is from an organization focused on manufacturing processes. The analysis shown below, we can see that the primary function to "fulfill your order" is followed by a second level of functions that take place within an organization focused on manufacturing processes that are executed to complete your order. Therefore, it appears that there are two hierarchical levels corresponding to the two positions, which in turn can be decomposed into lower levels, from case to case. Considering the milestones set out in the definitions above, it appears that in this figure we have represented a business that meets the requirements of Davenport and Short (1990). Therefore, we have a static functional decomposition, i.e. a set of hierarchically decomposed activities. (Thomas R. Gulledge Jr, Rainer A. Sommer (2002)).  The second example relates to a business process caused by a specific chain of events (known as "Event Driven Process Chain (EEPC)", in English). In this case the functions are combined with the ones in the example above and the events required for 59

transforming functions of this figure in a business process. This will result in a more complex figure that is not easy to read and understand. From the analysis we can draw the figure below some elements indicative of our example: (a) chain process in the figure below contains all functions of the second level of the previous figure (b) these functions are related to the use of events that generate / triggers the chain of events, (c) define sequences shown in this figure, equally dynamic relationship, unlike a static relationship, like that of the first example. (Thomas R. Gulledge Jr, Rainer A. Sommer (2002)).  The third example concerns a complex business process in a company, the core elements are related to data systems / business information, control and operation. (Scheer, A.-W. (1994)) 4. CHARACTERISTICS OF BUSINESS PROCESSES AND CLASSIFICATION Essentially, there are four key features for any process, namely (Bulletpoint (1996)): (1) entry predictable and can be clearly defined; (2) a linear sequence, logic or flow; (3) a set of clearly defined tasks or activities; (4) predictable and desirable results. Business processes within an organization are extremely important. Business process management is a concept that can be found both in the private and public sectors is therefore a classification of business process management division (A) business process management in the public sector and (B) business process management in the private sector. (A) Business process management in the public sector: In the public sector, business process management to increase efficiency and effectiveness achieved by restructuring the organization with functional interrelated processes. By applying the principles of business process management in a public sector organization can be observed the following benefits (Thomas R. Gulledge Jr, Rainer A. Sommer (2002)):  Generate new public system management initiatives (such as increased government performance, increase the involvement of management responsible for the proper functioning of information technology, efficiency reforms, etc.).  Generate new creative and innovative approaches to increase organizational performance;  Allows efficient implementation of modern software systems standard;  Ensure implementation of laws, etc. (B) Business process management in the private sector (Thomas R. Gulledge Jr, Rainer A. Sommer (2002)): Business processes within private organizations in their customer center and can offer its high quality products. The primary objective of business process management in the private sector relates to the delivery of customer value. Embedded systems are secondary and allow delivery more efficient and effective customer value. Systems should be integrated organization around business process. Nevertheless, experts believe that it is possible to integrate systems without this alignment, but there is no guarantee that these systems will support non-aligned customer.  For example, the computer system in an organization is a very important element of business process management in the private sector. Literature on alignment of information systems with the idea of offering customer value is relatively rare but, 60

nevertheless, there are some references in the literature on trade, where there is a significant study conducted by the Boston Consulting Group (BCG) (2000). We present synthetic results BCG study because, in our opinion, they prove to be relevant for the present research (Boston Consulting Group (BCG) (2000)):  BCG study is comprehensive and is based on a survey of one hundred executives who were in charge and led the implementation of projects within the organization.  Managers who have spent time in advance in order to analyze how their systems could be aligned (correlated with each other, interconnected) with their business processes were more successful with their projects. In terms of business process management, both public and private sectors, we can conclude the following:  In terms of culture business processes in organizations where the management of the business is properly correlated with their computer system, they will not be able to fully exploit the benefits management process can bring.  However, those organizations where the management of the business is properly correlated with their computer system cannot respond quickly to customer needs and cannot provide adequate information management and decision support.  If organizations maintain their systems in an improper, inadequate, while wanting to have a competitive business process management will generate and more inefficient inhibition and business process management. Therefore, given these facts, it can be seen that there is tremendous pressure to return to hierarchical management practices. However, if the systems are aligned with processes, it is much easier to maintain a process-oriented culture. In this case, power is not subject, in its great majority, a particular person or a particular group and thus is more difficult for those in charge of the organization to undermine / to inhibit the efforts of business process management. 5. PERFORMANCE OF THE BUSINESS PROCESS MANAGEMENT Performance analysis in the management of business processes, assumed first of all define business process management and stating its main features and then the description and assimilate the performance and quality management of business processes within the organization. 5.1. Definitions and characteristics of business process management Business Process Management is a structured approach aimed at analysis and continuous improvement of basic activities within an organization, such as manufacturing, marketing, communication plus a number of other important elements functioning properly. Thus, business process management is concerned with key aspects of business operations, where there is high leverage and a high percentage of added values (Zairi, Mohamed (1997)). Business process management should be governed by the following rules (Zairi, Mohamed (1997)):  Emphasizes the most important activities of the organization, which must be properly mapped and documented.  Puts great emphasis on organization customers through horizontal links between key activities.  It is based on documented systems and procedures to ensure discipline, consistency and repeatability of performance and quality assurance.

  

It is based on the monitoring process to assess the performance of each individual in order to establish objectives and provide output levels that can meet business objectives. It needs to rely on a continuous optimization approach to the organization's activities by solving problems and increasing benefits. You have to start from the best practices in the field to ensure competitiveness. It is considering changing organizational culture.

5.2. Performance and quality in the management of business processes Nowadays, modern management is influencing the structure of an organization, one of its most important elements. Business process management is considered by specialists’ extremely important element in creating a strong corporate culture, being able to change the culture of the organization. However, business process management is an area of great controversy. In the next lines we will try to outline some of the current ideas about the concept of business process management, trying to capture the main points of contention (Zairi, Mohamed (1997)):  Business process reengineering Supporters (BPR), known also as business process reengineering (PRA), which is achieved through information technology, have suggested that this is the fastest and most effective way to make a difference in the organization. Referring to "their integrated management model based on the seven Ss", Peters and Waterman (1982) presented the following analysis: "In retrospect, what did our part is to really remember that what professional managers what is "easy" is really "hard". This allowed us to say, in fact, everything ... have considered intractable, irrational, intuitive, namely that informal organizations can be managed. Clearly, this is as much or more to do with how things work (or not) around your company, such formal structures and strategies within them." (Peters, T.J., and Waterman, R.H. (1982))  In addition, an organization can focus on structural changes is not sufficient to create an efficient process based on culture, in this sense, Waterman et al. (1980) came up with the following justification: "Our statement that production is changing organizations is not simply a matter of structure, although the structure is important. The change is not as simple as interaction between strategy and structure, although the strategy is critical as well. Our claim is that effective organizational change is really the relationship between structure, strategy, systems, style, skills, staff, and something we call super-ordinate goals." (Waterman, R.H., Peters, T.J. and Philips, J.R. (1980))  "The seven Ss" is sometimes referred to as "happy atom", reflecting the following: a) Is influenced by many factors, each of them being able to determine how organizations behave; b) Shows the interconnection variables, progress can be achieved by paying attention in all areas; c) All seven variables acts as a driving force, in particular points in time, in which case one or more of the seven Ss will appear as the most important variable.  In the process of implementing total quality management (TQM), type, role and usefulness competitive structure elements can vary from one organization to another, according to Black (1993). Also in the sense of Smith (1994), structural differences may reflect cultural differences approach. Therefore, in other words, the structure should be regarded as a "servant" in the service strategy and therefore must be evaluated and reviewed in accordance with corporate objectives.

Creating a culture of business process management is highly dependent on final alignment with corporate goals and each employee focus efforts on adding value to the end customer. This is recognized by many experts in the field of quality management, therefore (Olian , J.D. and Rynes, S.L. (1991)):  Deming (1986), for example, through its first "fourteen points", stresses the need for a closer connection between efforts to achieve quality within an organization and corporate goals.  The objectives of an organization are best communicated to all employees through a formal process of policy development and implementation strategy.  In fact, many existing strategies in an organization fail to reach their ultimate goal in an effective and efficient as what is planned and what is implemented is not the same thing. (Zairi, M. (1995), and Easton, G.S. (1993))  It is also very widely recognized that the implementation of policies and implementation processes are extremely difficult. (Groocock, J.M. (1986)) We provide below some examples of strategic management of the processes, which have many common elements:  When Rank Xerox Corp. has committed to adopting the principles of total quality management in 1984, their first step was to create a straight forward quality policy which then was communicated to all employees. (Coleman, R. (1991))  A policy primer to ensure that quality is essential for its efforts to gain a sustainable competitive advantage by mostly the result that the quality policy, strategy, objectives, vision, mission and values are contained even within policy quality. (Binney, G. (1992))  The Procter and Gamble strategic planning related to management leadership. (Bemowski, K. (1992) and Davidson, A.R. (1995))  The company Mitel Telecom Ltd. in the UK considers publishing its quality policy as the first evidence of its commitment to quality improvement. (Boyer, S.M. (1990)) Specialists in the field of management believe that most, if not all organizational activities are processes that cross traditional functional boundaries. Thus, functional approach creates barriers to achieving customer satisfaction. This allows control points between departments to be responsive to any "noise" of the organization (Edson, J. and Shannahan, R. (1991)), such as various types of "protection" and poor communication forms. Nevertheless, process approach improves customer focus and avoids the limitations of the vertical management functions. (McAdam, R. (1996)) What we need to remember here is that business process management is a key element in creating a strong corporate culture, being able to change the culture of the organization. However, within any organization to create a closer connection between efforts to achieve quality and corporate goals is vital for its future. Moreover, in most cases, an organization's objectives are communicated best all employees through a formal process of policy development and implementation strategy. At the same time, it is essential from the point of view of proper implementation of the organization's strategy, which is planned to be fullyeverything that is implemented in order to achieve the final goals in an efficient and powerful. Equally, the implementation of policies and implementation processes should be considered in a fair, consistent and unified for the smooth running of the organization.

6. CONCLUSIONS AND IMPLICATIONS In this paper dedicated to state of knowledge in this field report, entitled "Business processes in contemporary society" we have emerged a number of relevant issues that we have listed below. [1] First we focused on the business processes of the contemporary economy, in the sense of presenting the most representative definitions in relation to this area, because, then, to highlight the role and importance of business processes society today. The first conclusion we reached is that the term "process" is used in the literature under various meanings is also a continuing source of confusion and misunderstanding because, by reason of misuse terminology. The notion of "process" is essentially the act of transforming inputs into outputs. However, this requires a series of actions related to a specific goal-oriented self, actions aiming to transform a set of inputs into outputs desired by adding value. Moreover, a business process can be regarded as a set of logically interrelated tasks in order to obtain a clearly defined business outcome. Another situation is when we talk about processes due to a chain of events that is, if the process should be treated as a result of a certain duration, which arose as a result of an event being continued by another event. Regarding the main features of the process, our conclusions are that the chain is a dynamic process, i.e. there is a sequence of explicit time between events, some functions are performed simultaneously and Boolean logic defines relations and business process type is multifunctional, including, in fact, every function within the organization. Thus, understanding business processes multifunctional chains presented as event-driven process is a critical point because the idea that the most difficult problems in business process management involves managing across functional boundaries. Therefore, there are four key features for any process, namely the existence of predictable inputs that can be clearly defined, a linear sequence, and logic or debit card, a set of clearly defined tasks or activities, and also desirable and predictable results. [2] Going further, we analyzed what are the main characteristics of business processes and also have represented some of the classifications of business processes, such as that concerning (A) business process management in the public sector, respectively (B) business process management in the private sector. In the specific case of public sector business process management to increase efficiency and effectiveness achieved by restructuring the organization with functional interrelated processes. Therefore, with the application of the principles of business process management in a public sector organizations can be seen as a series of relevant benefits management initiatives generating new public system, generating new creative and innovative approaches to increase organizational performance, making effective implementation of modern software systems standard implementation of laws, etc. In the specific case of the private sector, management of business processes is centered on the customer and offering top quality products thereof. The primary objective of business process management in the private sector relates to the delivery of customer value. Some specific elements of business process management in the private sector can remember that embedded systems are secondary and allow delivery more efficient and effective customer value and organization systems should be built around business process. Nevertheless, experts believe that it is possible to integrate systems without this alignment, but there is no guarantee that these systems will support non-aligned customer. In this case, managers who have spent time in advance in order to analyze how their systems could be aligned with their business processes were more successful with their projects.

In terms of business process management, both public and private sectors, we can conclude the following:  According to their culture business processes in organizations where the management of the business is properly correlated with their computer system, they will not be able to fully exploit the benefits management process can bring.  Also those organizations where the management of the business is properly correlated with their computer system cannot respond quickly to customer needs and cannot provide adequate information management and decision support. If that organizations maintain their systems in improperly while want to have a competitive business management process will generate more inefficiency inhibition and business process management.  If the systems are aligned with processes, it is much easier to maintain a processoriented culture. In this case, power is not subject, in its great majority, a particular person or a particular group and thus is more difficult for those in charge of the organization to undermine / to inhibit the efforts of business process management. [3] The performance of the business process management was another key element that we considered in our project. At this stage, we took into account two levels, the first consisting of definitions and characteristics of business process management and the second consisting of ways of understanding and representation of performance and quality in the management of business processes. Business Process Management (known in English as "Business Process Management" (BPM)) is a structured approach aimed at analysis and continuous improvement of basic activities within an organization, such as manufacturing, marketing, communication plus a number of other important elements functioning properly. Thus, business process management is concerned with key aspects of business operations, where there is high leverage and a high percentage of added values. Business process management should be governed by the following rules:  It highlights their most important activities of the organization, which must be properly mapped and documented.  Puts great emphasis on organization customers through horizontal links between key activities.  It is based on its documented systems and procedures to ensure discipline, consistency and repeatability of performance and quality assurance.  It is based on its monitoring activities to assess the performance of each individual process in order to establish objectives and provide output levels that can meet business objectives. Must be based on a continuous approach to optimize the organization's activities by solving problems and increasing benefits.  It must start from the best practices in the field to ensure competitiveness. It is considering changing its organizational culture.  Modern management is influencing the structure of an organization, one of its most important elements. Business process management is considered by specialists’ extremely important element in creating a strong corporate culture, being able to change the culture of the organization. At the same time, however, business process management is an area of great controversy, as follows: Proponents their business process reengineering (BPR), also known as business process reengineering (PRA) and made using information technology, said that it is the most rapid and effective way to make a difference in the organization.



And more, so that an organization can focus on structural changes is not sufficient to create an efficient process based on culture, as effective organizational change is precisely the relationship between structure, strategy, systems, style, skills, staff, but has something extra, known as "super-ordinate goals".  "The seven Ss" mentioned in the literature under the name of "happy atom", reflects the following characteristics: a) is influenced by many factors, each of them being able to determine how organizations behave; b) Shows the interconnection variables, progress can be achieved by paying attention in all areas; c) All seven variables act as a driving force, in particular points in time, in which case one or more of the seven Ss will appear as the most important variable.  In the process of implementing total quality management (TQM), type, role and usefulness competitive structure elements can vary from one organization to another and structural differences may reflect cultural differences approach.  Therefore, the structure should be regarded as a "servant" in the service strategy and therefore must be evaluated and reviewed in accordance with corporate objectives. Creating a culture of business process management is highly dependent on final alignment with corporate objectives and to concentrate efforts on each of the staff confer added value to the end customer, therefore:  The organization is essential to close connections between efforts to achieve quality within an organization and corporate goals.  The objectives of an organization are best communicated to all employees through a formal process of policy development and implementation strategy.  Many existing strategies in an organization fail to reach their ultimate goal in an effective and efficient as what is planned and what is implemented is not the same thing. It is very widely recognized that the implementation of policies and implementation processes are extremely difficult. ACKNOWLEDGEMENT: Cristina Raluca Popescu is currently Lecturer PhD. at the University of Bucharest, Bucharest, Romania and PhD. student at her second PhD. in Management at The Bucharest University of Economic Studies, Bucharest, Romania. For Cristina Raluca Popescu the contribution to this paper is the result of the work done during the Doctoral School of The Bucharest University of Economic Studies, Bucharest, Romania, in the field of Management.

REFERENCES 1. Bemowski, K. (1992), “Carrying on the P&G tradition”, Quality Progress, Vol. 27 No. 3, pp. 51-4 2. Binney, G. (1992), “Making Quality Work: Lessons from Europe's Leading Companies”, The Economist Intelligence Unit, London 3. Black, S.A. (1993), “Measuring the critical factors of total quality management”, unpublished PhD thesis, University of Bradford Management Centre, Bradford.

4. Boyer, S.M. (1990), “TQM and new product development”, in Oakland, J.S. (Ed.), Proceedings of the 3rd International Conference on Total Quality Management, IFS Publications, Bedford 5. Boston Consulting Group (BCG) (2000), “Getting Value from Enterprise Initiatives: A Survey of Executives”, A Boston Consulting Group Report, The Boston Consulting Group, Boston, MA, March Bulletpoint (1996), “Creating a change culture – not about structures, but winning hearts and minds”, sample issue, pp. 12-13. 6. Coleman, R. (1991), “People and training - the progressive evolution of a training strategy in support of the implementation of total quality management”, în Oakland, J.S. (Ed.), Proceedings of the 4th International Conference on Total Quality Management, IFS Publications, Bedford 7. Davenport, T.H., Short, J.E. (1990), “The new industrial engineering: information technology and business process redesign”, The Sloan Management Review, Vol. 31 No. 4, Summer, pp. 11-27. 8. Davidson, A.R. (1995), “Quality management - do we believe in it 'totally'?”, in Kanji, G.K. (Ed.), Total Quality Management Proceedings of the 1st World Congress, Chapman & Hall, London 9. Edson, J. and Shannahan, R. (1991), “Managing quality across barriers”, Quality Progress, February, pp. 45-7 10. Groocock, J.M. (1986), “The Chain of Quality”, John Wiley, Chichester 11. Easton, G.S. (1993), “The 1993 state of US total quality management: a Baldrige examiner's perspective”, California Management Review, Vol. 35, No. 3, pp. 32-54 12. Kirchmer, M. (1999), “Business Process-Oriented Implementation of Standard Software”, Springer Verlag, New York, NY. 13. Olian , J.D. and Rynes, S.L. (1991), “Making total quality work: aligning organizational processes, performance measures, and stakeholders”, Human Resources Management, Vol. 30, No. 3, pp. 303-333 14. McAdam, R. (1996), “An integrated business improvement methodology to refocus business improvement efforts”, Journal of Business Process Re-engineering and Management, Vol. 2, No. 1, pp. 63-71 15. Peters, T.J., and Waterman, R.H. (1982), “In Search of Excellence”, Harper & Row, New York, NY 16. Scheer, A.-W. (1994), “Business Process Engineering: Reference Models for Industrial Enterprises”, Springer-Verlag, Berlin. 17. Smith, S. (1994), “The Quality Revolution”, Management Books 2000 Ltd, Didcot. 18. Thomas R. Gulledge Jr, Rainer A. Sommer (2002),”Business process management: public sector implications”, Business Process Management Journal, Vol. 8 Iss: 4 pp. 364 – 376, Permanent link to this document: http://dx.doi.org/10.1108/14637150210435017, Downloaded on: 17-01-2013 19. Waterman, R.H., Peters, T.J. and Philips, J.R. (1980), “Structure is not organization”, Business Horizons, June, pp. 14-16 20. Zairi, Mohamed (1997), “Business process management: a boundaryless approach to modern competitiveness”, Business Process Management Journal, Vol. 3 Iss: 1 pp. 64 – 80, Permanent link to this document: http://dx.doi.org/10.1108/14637159710161585, Downloaded on: 17-01-2013

DETERMINANTS OF PERFORMANCE IN CONTEMPORARY SOCIETY - A THEORETICAL APPROACH Gheorghe Popescu N. The Bucharest University of Economic Studies, Bucharest; Veronica Adriana Popescu A. Commercial Academy of Satu-Mare, Satu-Mare and The Bucharest University of Economic Studies, Bucharest; Cristina Raluca Popescu Gh.; University of Bucharest, Bucharest; ABSTRACT In the paper entitled "Determinants of performance in contemporary society", we focused on defining elements of the determinants of performance in contemporary society, according to: (a) the importance concept of "performance" and the history of this concept, (b) multidisciplinary approach to the concept of performance, (c) how to quantify performance, (d) performance, growth and competitiveness, and (e) the role of performance management in the organization. The paper is an interesting enquiry both for academics and for practitioners belonging to the economic and the management field and not only. Key words: performance, management, business processes, knowledge, economics. 1. INTRODUCTION The introduction section of our paper focuses on four main issues presented as follows: (1) What matter does the paper cover? Given that current state belonging to performance in management business processes, our strong belief is that in Romania there are not too many studies dedicated to this subject and the use its instruments in Romanian institutions. For this particular reason we believe that the achievement of the current work in this area may represent a step forward in contemporary society which is constantly evolving and changing. (2) Why is the studied matter important? Therefore, our approach takes into account presenting the current state of existing knowledge in this field. In our study we focused on defining elements of the determinants of performance in contemporary society, according to: (1) the importance of the concept of "performance" and the history of this concept, (2) multidisciplinary approach to the concept of performance, (3) how to quantify performance, (4) performance, growth and competitiveness, and (5) the role of performance management in the organization. (3) How does the author intend to answer to this matter? And (4) What is the relation between the paper and the already existent specialized literature?

This paper, mainly dedicated to state of knowledge of this field, entitled "Determinants of performance in contemporary society", focuses on several issues relevant to our approach, as follows:  Performance management business processes was another key element that we considered in our paper. At this stage, we considered two levels, the first consisting of definitions and characteristics of business process management and the second consisting of ways of understanding and representation of performance and quality in the management of business processes. Over recent years a constant concern has been noted among specialists, to increase the number of allocated performance studies in general. Also be noticed that lately appeared numerous concepts in the definition, classification, and role and demonstrate how to quantify and increase overall performance. 2. LITERATURE REVIEW Our study dedicated to state of knowledge in this field, focuses on the following issues relevant to our approach. The following literature review is intended to generate the necessary background for other future research and further investigations in terms of real estate field, including, as well, for the authors of this article. Due to this fact, a very important step in the exploration of potential strategies concerning the real estate field is a thorough review of the currently available research, which will include books, peer-reviewed scholarly journals – mainly descriptive articles, rather than evaluative ones, practice guides, official professional sites, professional publications and official documents with an international impact towards real estate industry, economics and management. In most cases, practice guides and descriptive articles are more common in this field. Moreover, there are a few notable research studies in the topic of real estate industry, and in addition to this, there are significant gaps between the literature and the actual research, but all this was once more both a great opportunity and a great challenge for us as researchers - economists. 3. PERFORMANCE CONCEPT - DEFINITION AND BRIEF HISTORY Below we present some of the relevant definitions of the concept of "performance" that exist today and which we consider to be important for the state and for our approach:  According to the Explanatory Dictionary of Romanian language, performance is "a great result achieved in a particular field of activity". Analyzing this definition, we can say that the explanation has economic connotations or managerial performance itself cannot be associated with any result obtained, but with a result "diverse". Therefore, we believe that the term "special" in terms of performance, can be associated with (a) superior results obtained in the present moment, to another one obtained in a prior period, or (b) a higher result obtained in relation to potential competitors, or (c) results anticipated, which was however overtaken by the current situation in a beneficial development organization. (Explanatory Dictionary of the Romanian Language, Scientific and Encyclopedic Publishing House, Bucharest, 1996)  According to other experts design (Venkatraman, N., Ramanujam, V. (1986), and Henri, J.F. (2004)), performance construction should be considered as a complex. The notion of performance has an abstract character and definition can be made by reference to other concepts, which is why we believe that performance is built. Therefore, we can say that, since 1950, studies aimed at organizational theories were 69

based on the concept of efficiency and effectiveness and performance terms were regarded as interchangeable, since the problems related to defining, measuring and explaining these were considered to be identical. (Dalton, D.R., Todor, W.D., Spendolini, G.J., Porter, L.W. (1980), and Thomson, G., Abernethy, M.A. (2000) and Henri, J.F. (2004))  Moreover, a careful analysis of the first studies on firms, one can notice that they do not analyze the performance, but organizational behavior, which shows the dynamic nature of the concept, as well as links to all organizational behavior variables. Thus, according to Bourguignon (Bourguignon, A. (1997)): "Performance is difficult to define [...] can have at least three meanings or connotations successful, the result of an action or the action itself [...]. Performance shown the ability to move, thanks to the constant efforts. The word performance is motivated by ideologies of progress, effort, always make better. "Basically, looking at this definition, we can say that the performance is considered a" stock "behavior (thus this dynamic vision) and not just a "result" (i.e., a static vision). The basic idea can be drawn from this is that the results should be viewed and analyzed in conjunction with the means always, the activities and objectives of an organization, because the performance is all logical steps, elementary action intended to result from simple effectively.  Referring to recent studies, Didier Noye believes that performance is to "achieve the goals that you have been given the convergence of enterprise guidelines." In his opinion, the performance is not simply finding a result; it is seen as just the result of a comparison between the result and objective. (Didier Noyé (2002))  However, C. and C. Barbulescu Bagua believe that performance is "a certain level of the best results obtained by this" (i.e., enterprise). (C. Bãrbulescu şi C. Bâgu (2001)) It can be seen that there are different views in the analysis of the concept of "performance" and, overall, they converge to the assimilation performance with a good result, especially obtained at the firm level or organizational component of it. In our opinion, we believe that performance generally is a great result achieved in a particular field, be it economic, managerial, accounting, auditing or economic analysis - financial, etc. Performance appraisal, however, requires a broader view, that either (a) a correlative approach, through this understanding a comparison with the results of competitors, for example, or (b) the auto-relative approach by realizing this comparison with the assumed objectives or results recorded in a prior period. Regardless of how we choose to analyze the concept of "performance", it should be noted that not every result can be equated with performance. 4. A MULTIDISCIPLINARY APPROACH TO THE CONCEPT OF PERFORMANCE In this section we performed an analysis of the concept of "performance" in terms multidisciplinary, in order to show that there are a number of concepts addressed over time in the literature in the field, each of which their relevance. At present, the performance can be found in almost all areas and, therefore, it can be of several types, such as: (a) performance management, (b) economic performance, (c) performance analysis in the field of economic - financial (d) financial performance, (e) social performance, (f) technical and technological performance, (g) commercial performance (h) accounting performance (i) performance within the scope of the audit, (j) environmental performance within (k) performance in marketing, etc.

Just because identification performance in the areas mentioned above, it can be said that, at present, are used increasingly more concepts that are closely related to performance, such as: (a) performance management and performance-based management; (b) organization performance, (c) economic activity / performance management, (d) performance criteria, (e) performance indicators and performance measurement indicators, (f) performance management, etc. Scope of the performance derives precisely two elements mentioned above, namely the fact that performance can be found in almost all areas and the concepts that are closely related to performance. Thus can be identified the scope of the performance: 1) individual performance; 2) group performance; 3) organizational performance. We analyze below each of the performance areas of coverage as follows: 1) Individual Performance The first form which is within the scope of performance is individual performance. Based on individual performance synthetic definition, we can say that this represents outstanding results expected from an individual, manager or contractor. Achieving this performance is determined by factors such as:  individual objectives in the job description;  achievements of the previous period, to the extent that activities meet the jobholder linear repetitive;  situation recorded in similar positions within the same organization or from other organizations (situation quite difficult to identify because of the existing difficulties in collecting relevant data and information in the field);  post some requirements imposed by management theory or endogenous and exogenous variables affecting the functionality, efficiency and effectiveness job. 2) Group Performance The second form which is within the scope of performance is performance group. Group performance may fall within the situations described below:  First, can be identified in the functional and operational departments or the groups of items in them.  Second, are similar to results obtained in relation to specific objectives or derivative of the second degree, where are superior to those objectives. 3) Organizational Performance A third form which is within the scope of performance is organizational performance. Organization performance and organizational performance is, in turn, a performance group, depending on the objectives highlighted fundamental or first-degree derivatives. Of course that is how performance varies across the organization by nature objects of the organization; it’s dimensional and functional and so on. In our view, the defining element of performance analysis, whether such individual, group, or organizational level, is the performance management because in their absence it is not possible to obtain economic performance, financial, social, technical and technological, commercial accounting, the audit scope, the environmental sphere, in marketing, etc.. Therefore, the central idea is widely supported by experts (Verboncu, I., Zalman, M. (2005)) that only good management exercised by professional managers, capable of performance management, in turn generating economic performance - financial, social, etc. Performance of the three forms studied above, we will focus on organizational performance, whose study involves the analysis of organizational behavior and performance improvement can come only from an improvement in organizational behavior. In this way, we 71

analyze the elements that make a clear reference to organizational strategy. Thus, in what follows we will refer to Bourgeois (1980) who proposes a model (Bourgeois, L.J. (1980)). Analyzing his model, we can see that it is based on individual rationality and the separation between formulation and implementation of organizational strategy. Therefore, from the previous model, we will keep under review a new model belonging to Gordon (2003), which suggests a more complex performance. The model has the characteristics of the current environment and also need entrepreneurial strategies. Thus, the model belonging to Gordon (2003) contains six forces of success, namely: (a) founder (or founder of a company leader company), (b) opportunity, (c) resources, (d) environmental (e ) strategy and (f) time, which is integrated in a holistic nature (Gordon, M.E. (2003)). 5. PERFORMANCE MEASUREMENT TOOLS In this section, we performed an analysis of the concept of "performance" in terms of its size, we found directions emerging from addressing this concept and also I made a presentation of how to quantify performance. Thus, after analyzing the concept of "performance" in terms of its size, we found directions emerging from addressing this concept, namely: 1) Performance is strategic objectives: From this perspective we mention the following defining:  Performance is linked to the concept of "efficiency", defined in this manner by Thompson (1967, cited by Govindarajan, 1986) (Govindarajan, V. (1986)).  However, this concept has generated rational model in which the organization is regarded mechanically. (Pache Paraponaris (1993) cited by Watiez, J.C. (2002))  Thus, we have two ways, first the efficiency is taken into account implicitly in setting goals, and the second in which effectiveness is measured quantitatively. (Endlich, N.A. (2001) and Vilain, L. (2003)) 2) Performance is an unstable equilibrium between efficiency and effectiveness: From this perspective we mention the following defining:  This vision belongs to Ostroff and Schmitt (1993); Niculescu and Lavalette (1999), Kebe (2002).  Going on this line, the performance is essentially a state of competitiveness of the company, reached by a level of effectiveness and efficiency intended to confer a sustainable position in the market. (Niculescu, M., Lavalette, G. (1999))  However, Nicolescu et al. (1996) show that the starting point in addressing the determinants of strategy, core variables that have a significant influence on the content and results within an organization is to achieve efficiency and effectiveness. We define and analyze the following concepts of efficiency and effectiveness of organizational perspective: a) The first notion of the analysis is the notion of "efficiency". According to specialists (Burlaud, A., Simon C.J. (1999), and Morris, M. H., Noel, T., Schindehutte, M. (2001)) 'efficiency' is reaching a level of activity, or a result, the minimum consumption of resources or means. Moreover, "efficiency" is expressed as a ratio of type I / O (in English: "input-output ratio") (Ostroff, C., Schmitt, N. (1993), and Nicolescu, O. (coord.) (1996)). "Productivity" is another term often used in relation to that of "performance" is perhaps the most commonly used concept in the field of economic efficiency. Thus, the "productivity" is regarded as the ratio of production and the means used to achieve it.

b) The second notion of the analysis is the notion of "efficiency". According to experts (Nicolescu, O. (coord.) (1996), and Burlaud, A., Simon C.J. (1999)), the "effectiveness" is the objectives set. However, "efficiency" is regarded as specialists (Morris, M. H., Noel, T., Schindehutte, M. (2001)) and obtain results that fit the strategy defined or required tasks. Going further in our correlations, we can say that a firm or company is operationally effective when it is able to identify, master and control the interaction between internal and external sources of development, responding to the expectations as external partners. According to literature, the concept of “economic efficiency” (Niculescu, M., Lavalette, G. (1999)) has a broad approach at both the micro and macro level, has many dimensions and expresses different sides of the socio-economic processes and phenomena. Therefore, "economic efficiency" (Dictionary of Economics (2001), Second Edition, Publishing House, Bucharest) has the following basic elements:  It is a specific element of human activity aimed at producing a practical effect.  It is expressed as the ratio between the effects obtained efforts, in other words, is expressed by comparing the effect of social capital due to the effort made and can be expressed as a relationship than when maximizing the effects produced per unit of resource allocation or minimum when minimizing resource consumption per unit resulting effect. In the first case, efficiency is regarded as the best combination of data resources to obtain maximum profit. Profit is maximum when each resource is used up to the level where price equals marginal revenue induced. In the latter case, efficiency expresses the minimum cost combination of resources to achieve a certain level of production.  It is a feature of economic activity microeconomic and macroeconomic level, located on any point on the production possibilities frontier, it is impossible to increase the volume of production of a good, but not decrease the amount produced of another good.  At the micro level, economic efficiency is the main form of assessment of company profitability and macroeconomic main form of national labor productivity, the most important factor intensive growth.  At the macroeconomic level is determined by increasing national wealth, the social product and national income, is in direct correlation with the law of economy of time, the law trend of declining rate of profit, the law of capitalist accumulation, laws that circumscribe the fundamental law of production and appropriation of surplus value.  It is considered to be a state of economic activity due to a particular resource consumption to achieve a certain economic good in a given time, the additional production from a property, given limited resources, cannot get unless they reduce production for another economic good. Through a careful analysis of the literature, we can see that the experts used in many situations notions of performance and efficiency with similar meaning.  One of the cases is, for example, that the performance obtained when the production process is synonymous with efficiency when using rational inputs, we obtain maximum profit from the sale of products and services. Moreover, another example lies in a combination of minimum and maximum relations, becoming the ultimate performance efficiency. Thus, viewed from a systematic point of view, there may be more efficient variants, but variant ensures performance when the results are maximized.  Another example is that economic performance depends on both the level of resource endowment of the company, organization and performance management in all spheres 73

of activity and especially in the economic and financial sphere, whereas it finality of the act (process) decision should be economic efficiency. In essence, a proper and sound management of the relationship between an organization's efficiency and effectiveness is virtually managing internal and external environment of the company. Moreover, in our view, competitiveness must be regarded as a form of effectiveness against the competition that is today a real challenge at any organization, regardless of the profile where it operates. On the other hand, research in this area showed that although firms or firms can be efficient in some circumstances, while both efficient and effective progress in one of the two spheres of decline in performance may mean another (Ostroff, C., Schmitt, N. (1993)). Therefore, an organization can be either efficient or effective, be both efficient and effective, or any of these colors (Pache Paraponaris (1993) cited by Watiez, J.C. (2002)). Basically, the performance should be seen here as an adaptable organization, being a natural model. If you remember, for example, management tools within an organization, we can mention that they were placed, most often in the area efficiency and less in that of effectiveness (Morris, M. H., Noel, T., Schindehutte, M. (2001)). 3) In terms of economic performance involves the creation of wealth, the value in the organization: From this perspective we mention the following defining:  From an economic perspective, "performance" is a relationship between cost (it being understood by organization staff costs) and the amount of benefits obtained. (Lorino, P. (2001)) For these reasons, the "performance" must be considered in conjunction with the concept of "value".  However, given the current economic environment, the performance of an organization requires, however, adopting a comprehensive approach to internal and external interdependencies between elements, both quantitatively and qualitatively speaking, in an attempt to incorporate factors - technical, technological, human, physical and financial management of belonging to the organization (Alazard, C., Sépari, S. (1998)). In this vision, to reach a global socio-economic performance (Savall, H., Zardet, V. (2001)) or a multidimensional and subjective performance (Vilain, L. (2003)). On this new perspective, we believe that the performance of an organization is essentially a higher dimension of the area created its effectiveness and efficiency, gaining new dimensions, both quantitative and qualitative.  A new view of performance analysis is outlined in terms of the notion of "sustainability".  In agreement with the notion of "sustainability", in relation to performance, we have the notion of "sustainability" or "sustainable development". Currently, the international economic environment, there are two very commonly used concepts within the organization and business, management, accounting, etc. it. The two concepts are "value" and "performance". In line with the concept of "value" (Barnard, 1938 and Bass, 1952 according to Keeley, M. (1978)), the notion of "performance" involves estimating achievement within an organization, and to know the causes of value is to "translate" performance - basically achieve the elements that led to its realization. Based on this definition performance in many specialized works, "value" and "performance" are actually two adjoining concepts (Vilain, L. (2003)). Going further in our analysis, we believe that, for the reasons mentioned earlier, in studies to be published, should be reconsidered and redesigned processes involved in the mechanism of value creation. Of course, when we think about the processes involved in the mechanism of value creation, we make direct reference to economic processes of production 74

and consumption type, to which we add natural environment but also processes and society. We believe that these processes, be they economic or managerial, or social, the natural environment and society, accounting, and so on, should be carefully considered and should be given equal attention to all, whether it refers to the process of value creation or that refers to the share of value. In conclusion, in our opinion is not limited to the performance of the firm, company, organization or only outside, but can also result from balancing the internal and external forces. A new view of performance analysis is outlined in terms of the notion of "sustainability". In agreement with the notion of "sustainability", in relation to performance, we have the notion of "sustainable development" and "sustainable development". The concept of "sustainability” should be considered in conjunction with the notion of "performance" (Herriau, C. (1999)). (Analyzing the literature to date, we can see that the two variants in Romanian meet the definition of "sustainability": the first is the "sustainability" (as neologism), and the second is the "sustainable development". In English, the term has been translated into French literature specialist by "sustainable development" (French: "développement durable")) About the close link between the notions of "performance" and "sustainability" can say the following:  Some specialists use their writings associated with the concept of sustainability performance, considering sustainability as maintaining sustainable performance gains achieved. (Kettinger, W.J., Grover, V., Guha, S., Segars, A. (1994))  The concept of "sustainability" was first used in the 1987 United Nations report "Our Common Future". The central idea that emerges from this study is that "sustainability" the economic future of the world in close connection with the health and integrity of natural systems. Basically, the report was launched the idea that, at the present time mankind requirements must be met without compromising the ability of future generations to meet their needs, generate economic growth, generating as a form of economic development, known as sustainable development or sustainable (or "environmentally sustainable economic development") (Elkin, B. (2002)).  How the concept of sustainability refers to the concept of sustainable development sustainable, we can say that experts believe that sustainable development involves creating a link between economic and environmental planning. (Elkin, B. (2002)) (According to Elkington (1997) (cited by McCartney, J. Rouse, P. (2002), "A framework for sustainability, strategy and management control", research paper, The University of Auckland Business School, Department of Accounting and Finance, Auckland, New Zealand), sustainability aims to profit, people and the environment. In other words, sustainability requires social justice, environmental quality and economic prosperity.)  A definition of "sustainability" was surprised by Bieker et al. (2001): "The term sustainability has proven to be difficult to detect in an acceptable definition [...] Things become more complicated when the term is associated with the companies. Some equate organizational sustainability and survival in a market. It is so simple [...] I concur in the definition rather that states that a strategy for sustainable organizational business partners to meet the needs without compromising the ability to meet the needs of partners. " (Bieker, T., Dyllick, T., Gminder, C.U., Hockerts, K. (2001))  Continuing our analysis places the notion of sustainability performance on a longer time horizon and its analysis allows for more complex. Authors Ward and Griffiths

(1996) consider performance as a "long-term prosperity and strength of the company over its competitors." (Berland, N. (2002))  On the other hand, as an addition to the definition mentioned above, we believe that analysis of the concepts of sustainability and performance provides an overview of future-oriented, where we could consider past performance as a result. (Vilain, L. (2003))  According to Herriau (1999), survival and also the success of companies, businesses, organizations, and so on, depend mainly on the skill with which it is created and assigned value. (Herriau, C. (1999)) The need to manage customer value through value management (or "customer value"), taking into account strategic factors (most often external factors firm) is an extremely important phenomenon in the current uncertain economic environment with we face today. Moreover, the concept of "sustainable performance" assumes that the client is one of the partners of the firm (or "stakeholders") which create value.  Similarly, the performance should be seen as a form of control over environmental resources, such as environmental control respectively. In this sense, we can say that the performance involves cooperation with partners, their satisfaction, and coherence of almost a direct reference to the concept of "adaptive organization", in which flexibility is the central organizing principle. (Pache Paraponaris (1993) cited by Watiez, J.C. (2002)) 6. CONCLUSIONS AND IMPLICATIONS Performance plays a decisive role in economic and social plan as a result of the acceleration of elements belonging competitive environment after 2000 respectively as a result of globalization, trade liberalization, internationalization of business, etc. In the newly created context, competition is increasingly high, so that for any firm, company or organization becomes increasingly clear that achieving performance in modern economy and generate competitiveness is the key of survival in the market. From a careful and rigorous analysis of the literature, we concluded that competitiveness does not occur naturally, but must be planned in advance. Therefore, competitiveness should be seen as a driver of efficiency and economic progress, in other words, is the key performance both at a company and in an organization or, more to the national economy, for all the world economic circuit. Basically, performance and competitiveness associated with a company or organization, give them safety, efficiency, quality, high productivity, adaptability, successful, modern management, superior products, optimum cost. In our opinion, the management of modern organization is currently facing a dilemma, namely: how can costs be minimized and how can we have a management organization founded on a solid basis with, while performance and increased competitiveness in agreement with a production capacity or increased marketing. We have demonstrated in previous pages that performance, analyzed in terms of its components economic, social, managerial, environmental, and so on, is essentially a state of competitiveness of the organization, achieved a certain level of effectiveness and efficiency Designed to ensure a sustainable market presence. In this way, we are entitled to conclude that proper management in terms of organization, by harmonizing the relationship between "efficiency and effectiveness" is a way to achieve a level of competitiveness that facilitate achieving the organization's performance in the contemporary economy.

ACKNOWLEDGEMENT: Cristina Raluca Popescu is currently Lecturer PhD. at the University of Bucharest, Bucharest, Romania and PhD. student at her second PhD. in Management at The Bucharest University of Economic Studies, Bucharest, Romania. For Cristina Raluca Popescu the contribution to this paper is the result of the work done during the Doctoral School of The Bucharest University of Economic Studies, Bucharest, Romania, in the field of Management. REFERENCES 1. Alazard, C., Sépari, S. (1998), Contrôle de gestion (manuel et applications DECF), Paris: Dunod 2. Barnard, 1938 și Bass, 1952 conform citării lui Keeley, M. (1978), “A social-justice approach to organizational evaluation”, Administrative Science Quarterly, vol.23, nr. 2, iunie 3. C. Bãrbulescu şi C. Bâgu (2001), “Managementul producţiei, vol. II – Politici manageriale de producţie”, Editura Tribuna Economică, Bucureşti, pag.55 4. Berland, N. (2002), “Comment peut-on gerrer sans budget?”, 23ème Congrès de l’Association Française de Comptabilité, Toulouse, Franța 5. Bieker, T., Dyllick, T., Gminder, C.U., Hockerts, K. (2001), “Towards a sustainability Balanced Scorecard. Linking environmental and social sustainability to business strategy”, Conference of Business Strategy and the Environment, Leeds, UK 6. Bourguignon, A. (1997), “Sous les pavés la plage…ou les multiples fonctions du vocabulaire comptable : l’exemple de la performance”, Comptabilité, Contrôle, Audit, martie 7. Bourgeois, L.J. (1980), “Performance and consensus”, Strategic Management Journal, vol. 1, nr. 30 8. Burlaud, A., Simon C.J. (1999), Controlul de gestiune (traducere), Editura Coresi, București 9. Dalton, D.R., Todor, W.D., Spendolini, G.J., Porter, L.W. (1980), “Organization structure and performance: a critical review”, The Academy of Management Review, vol. 5, nr. 1 10. Didier Noyé (2002), “Manager les performances”, INSEP CONSULTING Editions, Paris, pag.6 11. Gordon, M.E. (2003), “The FOREST Model”, www.AngelDeals.com 12. Govindarajan, V. (1986), “Decentralization, strategy, and effectiveness of strategic business units in multibusiness organizations”, The Academy of Management Review, vol. 11, nr. 4 13. Henri, J.F. (2004), “Performance measurement and organizational effectiveness: bridging the gap”, disertație doctorală, Université Laval, Québec, Canada 14. Herriau, C. (1999), “Le concept de performance soutenable en comptabilité de gestion”, Finance – Contrôle - Stratégie, vol. 2, nr. 3 15. Elkin, B. (2002), “Creating sustainability – designing organizations to do well by doing good”, Summit Strategies, Canada 16. Endlich, N.A. (2001), “An investigation of the nexus between strategic planning and organizational learning”, teză de doctorat, Faculty of the Virginia Polytechnic Institute, Falls Church, Virginia, SUA

17. Lorino, P. (2001), “Le Balanced Scorecard revisité : Dynamique stratégique et pilotage de la performance”, 22ème Congrès de l’Association Française de Comptabilité, Metz, Franța 18. Kebe, P.I. (2002), “Modes d’évaluation (processus/contenu) et performance des projets de R&D. Les résultats d’une recherche empirique”, 23ème Congrès de l’Association Française de Comptabilité, Toulouse, Franța 19. Kettinger, W.J., Grover, V., Guha, S., Segars, A. (1994), “Strategic information systems revisited: a study in sustainability and performance”, MIS Quarterly, vol. 18, nr. 1 20. Ostroff, C., Schmitt, N. (1993), “Configurations of organizational effectiveness and efficiency”, The Academy of Management Journal, vol. 36, nr. 6 21. McCartney, J., Rouse, P. (2002), “A framework for sustainability, strategy and management control”, research paper, The University of Auckland Business School, Department of Accounting and Finance, Auckland, Noua Zeelandă 22. Morris, M. H., Noel, T., Schindehutte, M. (2001), “Entrepreneurship and the need for management control: efficiency versus effectiveness”, United States Association for Small Business and Entrepreneurship Conference 23. Nicolescu, O. (coord.) (1996), Strategii managerială de firmă, Editura Economică, București 24. Niculescu, M., Lavalette, G. (1999), Strategii de creștere, Editura Economică, București 25. Pache Paraponaris (1993) cited by Watiez, J.C. (2002), “Flexibilité et adaptation de l’organisation à l’environment : la flexibilité en tant que réponse à l’asymétrie inter et intra entreprises”, Finace Contrôle Stratégie, vol. 5, nr. 1 26. Savall, H., Zardet, V. (2001), “Evolution des outils de contrôle et des critères de performance, face aux défis de changement stratégique des entreprises”, 22ème Congrès de l’Association Française de Comptabilité, Metz, Franța 27. Thomson, G., Abernethy, M.A. (2000), “Facilitating and managing knowledge creation in innovative firms: the role of management control systems”, research paper, The University of Melbourne, Department of Accounting, Australia 28. Venkatraman, N., Ramanujam, V. (1986), “Measurement of business performance in strategy research: a comparison of approaches”, The Academy of Management Review, vol. 11, nr. 4 29. Vilain, L. (2003), “Le pilotage de l’entreprise : l’utilisation d’un tableau de bord prospectif”, thèse professionnelle, Mastère Spécialisé HEC, Ecole des Mines de Paris 30. Verboncu, I., Zalman, M. (2005), Management şi performanţe, Editura Universitară, Bucureşti, pag. 63 31. *** Dicţionar explicativ al limbii române, Editura Ştiinţifică şi Enciclopedică, Bucureşti, 1996, pag. 778 32. *** Dicționar de economie (2001), Ediția a doua, Editura Economică, București, pag.188

ANALYSIS OF INVESTMENT ENVIRONMENT IN ROMANIA Valentin Mihai Leoveanu University of Bucharest

ABSTRACT Further developments concerning the occurrence of financial and economic crisis revealed significant differences in terms of macroeconomic conditions in each country in the European Union. Despite differences of opinion on the measures taken and tools used to revive the national economy and the resumption of economic growth, ensuring an enabling environment for investment processes in each country becomes a calibration factor of economic potential. The high level of liquidity in the banking system or at different investors call for predominantly targeting the real economy and, for this purpose, providing a favorable climate for capital investment is one of the priorities. Regarding Romania, this paper seeks to highlight important aspects of the topic in question for 2012, such as macroeconomic conditions and developments regarding fiscal and monetary policies, investments incentives, the impact of assessments made by international rating agencies, labor market conditions, the absorption stage for EU funds, infrastructure and technology. The research paths try to create a framework - like in a PEST analysis - in order to bring an investor the motivation to invest in Romania. Key words: investment incentives, legislative environment, rating agencies, education to business needs, labor market, EU funding 1. INTRODUCTION This paper aims to investigate the political, economic and social environment in order to highlight the main features of the Romanian investment climate. The present analysis tries to capture like in a photographic image the main issues considered by the author as essential to give it to an investor - either individually or institutionally – the basic support of its investment decision. The importance of this study is reflected by the survey that highlights the strengths and the weaknesses related to Romanian investment environment in 2012. Its targeted objectives capture the 2012 developments occurring in the fields like: politics, law and environmental protection, economy, social life, education and technologies, as well as how all these interact and interwoven in influencing the investment decisions. The methodology for analyzing the investment climate in Romania is similar to a research type of country risk analysis, the particularity of this study consists in doing a qualitative analysis based on the research of various components of the investment environment. Research methodology takes into account the economic and financial information, and also social and political ones taken from the main public institutions, the national research institutes, the international rating agencies, the government and the monetary authorities. Analysis aims to present relevant information by a comparative study in time and by highlighting the main positive and negative aspects, useful for the investors.

Nowadays, the state of knowledge regarding country risk analysis is reflected by different types of methodologies of which can be pointed both qualitative and quantitative analysis. Qualitative approaches take into account the parameters of the financial, macroeconomic, legal and political environment, while quantitative approaches considering scoring calculation and rating of the country, mathematical modeling and econometric analysis. Quantitative approach based on providing a scoring or rating involves transforming a number of comments made by survey / Delphi method, or quantitative indicators into a single number. The result is a rating rule intended to present country risk to enable comparisons between countries and over time (Bouchet; 2008; p.2). 2. ANALYSIS OF INVESTMENT CLIMATE IN ROMANIA 2.1 Political stability and judiciary system Romania is a member state of the European Union from January 1, 2007 - the seventh member state by the number of votes - and a full member of NATO from 2004. EU accession marked the beginning of a new stage of development of the Romanian society, helping to accelerate the development stages to reach Western European countries and strengthening democratic political system through a better functioning of institutions. These coordinates that Romania accepted were and remain essential to ensure a stable political environment and in accordance with it, to ensure the creation of a favorable investment climate. However, the political turmoil of 2012 summer was not auspicious for building investor confidence. Political instability factors included: suspension and request of dismissal of the President of the Republic by a referendum, the intention of the President to initiate a process to amend the Constitution in order to reduce the number of the members of Parliament and to abolish one of the Parliament Chambers (that has not found any support in the majority of political forces), the government's intention to change certain provisions concerning the status, the powers and the functioning of law institutions such as the Constitutional Court, or autonomous bodies such as the National Integrity Agency which verifies possessions and situations of incompatibility of Romanian dignitaries. The 2007 Romania's accession was accompanied by a series of specific measures to support EU integration in order to prevent or remedy deficiencies in certain areas, some of which are those of judicial reform and the fight against corruption. In this respect, a mechanism for cooperation and verification was established to improve the functioning of legislative, administrative and judicial systems and to address serious deficiencies in the fight against corruption. In the latest report on this matter issued on 30 January 2013, the European Commission presented the results of monitoring progress on the ten specific recommendations made in July 2012, designed to help resolve controversies regarding the rule of law and judicial independence. The assessment shows that "Romania has implemented several but not all of the Commission's recommendations aiming at restoring rule of law and the independence of the judiciary. While the Constitution and the Constitutional Court's role and decisions have been respected, commitments regarding the independence of the judiciary and regarding the response to integrity rulings have not been adequately implemented. At the same time, the appointment of a new leadership for the prosecution and the DNA is still outstanding." (Report from the European Commission on MCV; 2013). After EU accession, the lack of a functioning judicial system has often been reported as the main problem in Romania for foreign investment. Inability of Romanian administration to tackle corruption and to institute legal reforms led the EU institutions to postpone the planned integration of Romania to Schengen Agreement in March 2012, as originally planned. Despite positive technical assessments undertaken to date in this area and the fact 80

that there is no legal connection between Romania's accession to Schengen Agreement and CVM report on justice there are issues linked to inefficient judiciary system and corruption in the police and customs officers that led some EU member states to decide that Romania can not entrust the management of common borders and visa system. Regarding the national defense system and the international military commitments, Romania has military service age at 18-35 years of age for male and female voluntary military service; conscription ended in 2006; all military inductees (including women) contract for year initial 5-year term of service, with subsequent successive 3-year terms until age 36. Military expenditures reach 1.9% of GDP. (CIA; 2012). In a report from October 2012 of the Bureau for Europe and Asia of the U.S. State Department was stated: "Romania is a strategic steadfast partner in the North Atlantic Treaty Organization (NATO), and it has provided Significant contributions of troops, equipment, and other assistance in Afghanistan and Kosovo. [...] Romania has AGREED to host elements of the U.S. European Phased Adaptive Approach to missile defense in the 2015 timeframe. The two countries signed a Ballistic Missile Defense agreement in 2011 allowing the deployment of U.S. personnel, equipment, and anti-missile interceptors to Romania over the next five years. The United States and Romania have ADOPTED Also the bilateral Joint Declaration on Strategic Partnership for the 21st Century" (US Bureau of European and Eurasian Affaires; 2012). Concerning the international disputes involving Romania, CIA report states that "the ICJ ruled largely in favor of Romania in its dispute submitted in 2004 over UkrainianAdministered Snake Island and Black Sea maritime boundary delimitation; Romania opposes Ukraine's reopening of a navigation canal from the Danube border through Ukraine to the Black Sea" (US Bureau of European and Eurasian Affaires; 2012). In this respect, strengths of the political and legal field can be considered: Romania is a factor of stability in the SE Europe and NATO membership, Romania is a member of the United Nations and other international organizations such as: OSCE, Council of Europe, the International Organization of the Francophone Countries; there are bilateral diplomatic relations with 177 countries of the 191 member states of the UN; Romania have signed free trade treaties with the EU, EFTA, CEFTA and is also a member of the World Trade Organization (WTO) from January 1995; in this regard, Romania has concluded bilateral agreements with other states on the promotion and reciprocal protection of investments. The weaknesses in that field are linked by the functioning of the judiciary system and the fight against corruption and by manifesting bouts of political instability. In a report prepared by the Council of Foreign Investors in Romania in October 2011 there are some points that highlight: the existence of a governance deficit that affects public life and generates inadequate institutional arrangements, managerial incompetence, inefficient regulatory process and the absence of consistent application of law; corruption is one of the major issues affecting the economic and social development; the Romanian authorities and the private sector should take measures to increase the country's competitiveness and welfare through improved management of public resources (CIS; 2011). The report indicates also some measures to improve the present situation such as: judicial accountability, homogeneous jurisprudence, strengthening the capacity to combat corruption and improving the legislative process. 2.2 Legislation and Environmental Protection In the CVM report of July 2012, one of the main recommendations was about entering into force of four important legal codes, but by the end of 2012 this has not been done. The entry into force of the Code of Civil Procedure was planned for 15 February 2013. „The new 81

Civil and Criminal Codes and the accompanying procedural codes were adopted in 2009 and 2010, but only the Civil Code has entered into force so far. [...] The entry into force of the Criminal Code and the Code of Criminal Procedure is tentatively scheduled for February 2014” (Report from the European Commission on MCV; 2013). Once Romania joins the European Union, the competition was governed both by national and European legislation. National relevant legislation includes the Competition Law no. 21/1996, amended and supplemented, and the auxiliary legislation adopted by the Competition Council. The relevant provisions of the Treaty on the Functioning of the European Union are also directly applicable in Romania, as any anticompetitive agreement, concerted practice or abuse of dominant position investigated by the Competition Council affects trade between EU Member States. On environmental legislation adopted by Romania, EU environmental acquis comprises over 450 directives, regulations and decisions, which are the horizontal and transversal legislation on environmental protection. Environmental contributions that a company must consider are: contributions packaging, tires, emissions from stationary sources, selling ferrous and nonferrous metals, timber and so on and contributions to management on compliance waste. Also, there is a requirement for registration of manufacturers / importers / exporters of electrical and electronic equipment and recording producers / importers of chemical substances and preparations (REACH registration). The strength of legislative and environmental field is that of a similar legislation with the EU (implementation of acquis) and the weaknesses: lack of a transparent market for CO2 allowances, limited access of industrial companies to obtain funding from the Environment Fund. 2.3 Macroeconomic conditions Following the EU accession, Romania has progressed steadily towards establishing a functional market economy, a status that Romania acquired in 2004 from the United States and the EU. Her type of economy is upper-middle income and is the 11th largest in the EU after the total nominal GDP and the 8th after GDP calculated at purchasing power parity (CIA; 2012). Regarding macroeconomic realities, Romania is favored for its retail market size and geographical position, being one of the largest markets in Central and Eastern Europe (7th in the EU, with over 19 million inhabitants) (INSSE; 2012). Romania also boasts a commercially attractive position. Situated at the junction of the European Union, the Middle East and the CIS, Romania is crossed by three important pan-European corridors: corridor 4, which connects Western and Eastern Europe, corridor 9, which connects the North and South of the continent and corridor 7, which facilitates navigation within Europe. Romania also has an advantage in terms of size of certain resources, with specific reference to: relatively skilled labor force that is associated with competitive costs to all EU countries (knowledge of foreign languages, technology, IT, engineering etc.), richness in natural resources, including surface and underground waters, fertile agricultural land, oil and gas and also a significant touristic potential. Since the nineties Romania has known a process of deindustrialization by reducing the share of industry in the whole economic activity. That could be seen by analyzing the evolution of percentage of GDP accounted for by industry, which declined relatively steadily, although with a reduced rate for the period 2000-2009, a trend that is expected to continue in the future. However, by 2009 Romania had a rate of growth among the fastest in Europe, approximately 8.4% in 2008, which at the time was more than three times the average rate in Europe. 82

World Bank stated in its website dedicated to Romania that: "When the Global Financial Crisis hit in 2008-09, Romania made a quick recovery thanks to prudent macroeconomic management. The crisis prompted long-Needed Reforms, with support from the International Financial Institutions in health, education, the financial sector, public financial management, public administration, social insurance, and social assistance. Some of These Reforms address short-term responses to the crisis, while others have Anchored in the longer-term coherent strategy " (World Bank; 2012). As for 2012, one of the main macroeconomic indicators, the gross domestic product (GDP) grew in real terms by 0.2% in the last quarter of 2012 compared to the previous quarter, after falling 0.4% in July-September (shows the data published by the National Institute of Statistics). Thus, the Romanian economy has avoided the enter into recession. For the current year 2013 authorities estimated for GDP a modest increase of about 1.5%, forecast revised several times down from an initial estimate of 2.5%. The estimate rate of GDP per capita for 2012 is $12,800 compared with $12,700 (2011) and $12,400 (2010). The estimation of real GDP growth rate is 0.9% for 2012 compared with 2.5% for 2011 and -1.6% in 2010. For 2011 the GDP composition by sector was: agriculture 7.9%, industry 32.9% and services 59.2% (Eurostat; 2012). Table 1 Key Economic Indicators 2008-2013 Macroeconomic indicators 2008 2009 2010 2011 2012* 2013* Real GDP growth (%) 7.3 -7.1 -1.3 1.5 1.8 3.2 Domestic demand (%) 8.3 -14.6 -1.0 0.3 1.5 3.6 Consumer price index (%, average) 7.8 5.6 6.1 6.4 2.9 3.2 Fiscal balance (% of GDP) -4.8 -7.3 -6.5 -4.4 -1.9 -2.0 Structural fiscal balance (% of GDP) -8.5 -7.0 -5.1 -2.6 0 -0,5 Current account balance (% of GDP) -11.6 -4.2 -4.1 -4.5 -4.7 -5.0 FDI balance (% of GDP) 6.7 3.0 1.8 2.2 2.6 2.2 Gross external debt (% of GDP) 51.8 69.0 75.7 75.4 77.8 72.9 * estimation Source: World Bank 2.4 Budgetary and fiscal policy For 2012, budgetary and fiscal policy was meant to be a conservative one, balanced, goals targeted, based on the following priorities: fiscal consolidation to ensure a sustainable deficit target that was circumscribed to the expenditure framework on the medium term; maintaining public debt to a sustainable level in long-term; predictability and simplification of the tax system; a policy of reduction and preventing the emergence of arrears. The budget for 2012 anticipated that the growth in real terms of GDP must be between 1.8% -2.3%, setting a reduction in the deficit from 4.3% of GDP in 2011 to 1.9% of GDP in 2012. The second half of 2012 was characterized by significant adjustments of fiscal policy and, as a result of this measure, the budget deficit increased from 1.9% of GDP to 2.2% of GDP. Romania has a fiscal risk close to the average of that of the European Union (EU) and two times lower than that of Greece, highlighting thus the vulnerabilities related to current and projected funding. A high fiscal risk indicator show the urgent need to adopt substantial fiscal measures, says the report 'Tax reforms in Member States 2011" (Eurostat; 2012). For Romania, this indicator stands at 0.54 points, slightly above the EU average of 0.51 points. Greece shows the greatest risk in the EU at 1.02 points, followed by Italy with 0.88 points.

In the last few years, the Romanian fiscal environment was improved by reducing taxes owed by businesses and individuals, and the country's tax system harmonization with EU legislation brought some long-term stability. In January 2011, legislation on social security contributions was incorporated in the Tax Code, which helped to ensure greater transparency and transfer pricing legislation has been clarified now closely following the principles of the OECD and EU (CIS; 2011; p.27). In 2012 the number of taxes that Romanian companies paid decreased threefold, from 113 to 41, but Romania is still in the last place among Central and Eastern European countries. The consulting company PricewaterhouseCoopers believes this performance is due to the introduction of online mechanisms of reporting taxes. In return, Romania has a total tax rate lower than the average rate in Central and Eastern Europe (44.2%). Romania is much better in terms of time required to fulfill tax obligations (216 hours than the average in the region of 263 hours). Better than Romania are Bulgaria (28.7%), Slovenia (34.7%), Latvia (36.6%), Lithuania (43.7%) and Poland (43.8%). PwC representatives see a potential to reduce social security contributions because Romania have the highest share in fiscal costs of a company and this reduction in labor taxation could stimulate the creation of new jobs. Taking into account the provisions of the Tax Code of 2012, there may be highlighted several important features of taxes. On the taxation of individuals, most types of income earned by individuals are subject to a flat tax of 16%: dividend income, income from prizes and income from other sources, capital gains arising from the transfer of securities, income from interest received from Romania. Instead, income from the transfer of real estate is taxed according to the period in which they were held and their value and tax rate varies between 1% and 3%. Regarding corporate taxation, the standard rate is 16%, while micro-enterprises may choose to pay income tax at a rate of 3% tax instead. The tax on dividends is 16% for both dividends paid to resident legal entities in Romania, as well as dividends paid to companies, but this rate can be reduced by double taxation conventions. Value Added Tax (VAT) has a standard rate of 24% and reduced VAT rates are 9% and 5% respectively. The rules for determining the place of the supply of goods or the provision of services (and thus the place of VAT taxation) are fully harmonized with Directive 112/2006 and Directive 8/2008 of the EU VAT. Billing deadline is the 15th of the month following the month in which to make the delivery / performance. VAT refund is available for companies established and not established in the EU. Regarding the customs and international trade operations, as a member state of the European Union, Romania applies the EU common customs tariff and customs regulations of the EU. Also, Romania enforces EU free trade agreements concluded with third countries. Import licenses are required for goods such as mineral oils, certain chemicals and weapons. No customs formalities for Community status goods (goods produced in the EU or are allowed to move freely within the EU) (Romania Trade & Invest; 2012). 2.5 Monetary Policy In accordance with its own statute the National Bank of Romania conduct the monetary policy in order to achieve and maintain price stability, and also to ensure financial stability. In this respect, the monetary policy decisions took into account Romania's commitments in adopting the euro (even if accession remains uncertain), especially the convergence criteria, as well as the peculiarities of economic and financial environment both domestically and internationally. The inflation target set for 2012 was 3% and the actual rate of inflation in December 2012 was 4.95%. According to NBR (NBR; 2012), "Continuing the gradual adjustment of real broad monetary conditions was aimed to anchor inflation 84

expectations, and thus to strength the variation of inflation around the central targets for 2012 and 2013, which would create prerequisites for a sustainable recovery of the Romanian economy." In the first quarter of 2012, the central bank extended the downward of the monetary policy interest rate, which is reduced in two consecutive steps by 0.25 percentage points to 5.25. Since May 2012, the monetary policy rate was maintained at 5.25 percent throughout the year, while the central bank has preserved the reserve requirements rates applicable to domestic and foreign currency liabilities of credit institutions (15% and 20%). The decisions taken by the Board of the Governors of the National Bank during this period was marked by a significant emphasis of depreciation pressures on the RON against the major currencies. They aimed the adequacy of the broad monetary conditions taking into account the domestic and international macroeconomic context, in order to keep the prospects of annual inflation rate within the range of variation associated with the inflation target in the medium term. 2.6 The labor market The labor market in Romania has suffered significantly from the effects of recession and in March 2010 it reached the highest unemployment rate in the last 20 years, at 8.4%. But in 2012 there was an improvement in terms of lower unemployment and provision of small wage increases. The labor force was 9.252 million (2012 estimation) while the labor force by occupation was by sectors the following: in agriculture 30%, industry 20.2% and 49.8% in services (CIA; 2012). The official unemployment rate was at its lowest values in 2008, hovering somewhere around 4%. However, in 2009 and 2010, the official unemployment rate rose, reaching 7.4% at the end of the 3rd quarter of 2010. Unemployment rate was 5.4% in 2012 compared with 5.1% in 2011. Gross average wage in the Romanian economy was 1,846 RON at the end of the 3rd quarter of 2010, while a period of three years, there has been a rapid growth, i.e. between 2006 to 2008, the average gross wage increased by an average of 20% per year (12% in 2006, 33% in 2007 and 12% in 2008). During 2009, there was a decrease of the gross average wage by 2%. In 2012, the gross nominal average wage per month in Romania was RON 2,117, while the net nominal average wage was RON 1,534, with 0.04% more than in 2011 (INSSE; 2012). According to the National Institute of Statistics, the fields that encountered the largest increases in wages have been the information technology (IT), including computer service activities, while the fields with the smallest increases were the hotels and restaurants. Romania is an attractive destination for investment due to its educated work force. However, Romania has a labor surplus on poorly educated labor force and a deficit in other two categories: higher and secondary education. Therefore, education at these levels must take account of changes and trends in the global business environment so that skills acquired in school to meet market demand. In this respect, the 2011 CIS report highlights the importance of the concept "education to business needs" showing that "government has a responsibility to invest in skills development and youth education, and to ensure that they meet the needs of employers. Authorities should leverage the competitive advantage that Romanian labor force currently has in terms of skills. It is essential that governments and businesses to develop an ongoing partnership for creating a modern education system" (INSSE; 2012). Regulations on employment and employer-employee relationship are governed by the Labor Code (Law 53/2003, as amended). The law provides individual employment contracts 85

for an indefinite period as a means of employment. In addition, other types of employment permitted by law are: employment contract for a fixed period, temporary employment, parttime employment, working from home etc. Problems faced by employers in the labor market are generally divided into three categories: reduce the cost of employment, retention or retraining key personnel, attracting employees with a higher level of quality and education / training. Strengths that stand out in the workforce are agreements between government and unions; nonexistence of major trade union movement, labor market and labor relations enacted by the Labor Code. Highlighted weaknesses: lack of skilled labor and higher average, relatively high cost of labor, weak links between labor market needs and skills obtained through education. 2.7 EU Funding In 2012, Romania continued to have the lowest rate of absorption of EU funds compared with countries that joined the EU in 2004. According to data published by the Ministry of European Funds regarding the absorption stage of Structural Instruments by 31 January 2013, payments made to beneficiaries is 22.42% share of EU funding. The most sensitive case is recorded in the POS Transport – the Operational Program Transport and PO AT – Operational Program Technical Assistance. Table 2 EU funds absorption stage for each operational program Program

EU allocations

Projects submitted

Projects approved

Contracts signed

Payments to beneficiaries

Total 47404

No. 93

Total 15814

No. 87

Total 12431

Value 1885

% 9,30

Statements of expenditure submitted to EC Value % 467,38 10,24

POS Transport

20266

No. 155

POS Mediu POR POS DRU POS CCE

20028

635

39550

366

19396

347

18564

4116

18,09

581,14

12,88

16538 15429

8232 10380

57276 43602

3693 3027

17268 15215

3377 2455

16183 12580

6597 5529

35,63 32,67

953,83 410,41

25,60 11,81

11337

15187

76646

3732

10385

2521

7493

2693

20,27

369,17

14,45

PO DCA PO AT TOTAL

923 756 85277

1371 130 36090

3674 846 268998

420 114 11445

1089 560 79727

420 106 9313

1089 494 68834

246 145 21211

25,38 18,99 22,42

53,00 31,54 2866,14

25,48 18,53 14,92

Source: Ministry of European Funds 2.8 Investments incentives According to the national legislation in force, investors who choose Romania as a destination to implement their investment projects enjoy the same rights and the same obligations, either Romanian or foreign citizens, residents or non-residents. As a result of EU accession, Romania benefits from EU financial assistance provided in the forms of structural and cohesion funds. Legal framework for governmental aid in order to stimulate investment was regulated by OUG no.85/2008, as amended and supplemented, which establishes principles for investments stimulation, areas where investments can be made so the investor can access an aid scheme, the types of state aid that may be granted, the general conditions of eligibility of investments and investors etc. Thus, investor incentives takes the form of grants at the acquisition of tangible and intangible assets, grants for new jobs created, allowances for 86

interest to contract loans and other forms required by law. State aid can be accessed both by large companies, as well as small and medium enterprises, depending on the type of investment and the field of activity (Romania Trade & Invest; 2012). Romanian authorities envisaged some important directions in promoting investments: providing incentives for investments that ensure the development of those priority economic activities and contributing to one of the following objectives defined under state aid law: development and regional cohesion, protection and environmental rehabilitation, increase energy efficiency and/or production and use of energy from renewable resources, dynamic process of R & D and innovation, employment and training workforce, implementation of innovative technologies and research results in the national production, development of new infrastructure for tourism. 2.9 Health and education Romania's population is 19 million, provisional value resulting from the census in October 2011. According to the CIA Fact Book, Romania's population in 2012 recorded a negative growth of -0.26% placing them ranked 209 in the world. The birth rate was 9.49 births per thousand population compared to a death rate of 11.84 deaths per thousand inhabitants. In terms of population structure by age groups, the most important one group 2554 years is 45.2%. Maternal mortality is high for a European country, namely of 27 deaths per thousand. Despite progress, Romania is still European state with the highest rate of infant mortality. Economic crisis, cuts in investment in the health system and increased poverty affects the most vulnerable evolution of infant mortality. The infant mortality rate is 10.73 deaths per thousand people (ranked 142 in the world). Net migration rate recorded in 2012 was -0.26 migrants per thousand people (ranked 126 in the world). The urban population is 57% of total population (2010), and the rate of urbanization is 0.6% (2010). Regarding the health sector given state spending they evolved from 5.4% in 2009 to 5.6% in 2010 (WHO). Medical assistance was given by 1.91 doctors per thousand people, and the number of beds was 6.54 / 1,000 inhabitants. Improved sanitation facility for access was 72% for the total populations (54% of Population in rural and in urban areas 88% of population). Spending on education stood at 4.3% of GDP in 2007, the literacy rate (people aged over 15 years able to read and write) representing 97.7% of the total population. The average period of schooling is 15 years and the unemployment rate at age 15-24 years is 20.8% (ranked 51 in the world). The Romanian system of school education is structured in 4 levels: Pre school comprising 4 stages such as junior, middle group, large group and preparatory school; Primary, comprising grades I-IV; Secondary, including: a) Lower secondary education, organized in two stages: gymnasium grades V-VIII and secondary high school or arts and crafts classes IX-X; Upper secondary education: upper secondary school classes XI - XII / XIII, preceded, if necessary, by a year of completion; Post high school (edu.ro; 2012)). The Higher education in Romania is offered in both public and private higher education institutions that include universities, academies and colleges organized in specialized departments. University education comprises three stages according to Bologna Agreement and providing specific training: bachelor (3 years), master (2 years) and doctorate (3 years). Both Public and Private higher education institutions are coordinated by the Ministry of Education and Research, but university autonomy is fully guaranteed by 87

legislation. 2.10 Infrastructure and technologies Infrastructure undergoes a continuous process of modernization (commitment at government level in order to align road to EU standards). In this sense, we can highlight the followings:  Mobile telephony in GSM systems are well developed, starting to introduce 4G system;  There is an important network of branches of foreign banks in the domestic market;  Industrial infrastructure is highly developed, including oil and petrochemical industry;  There are extensive features of river and maritime navigation;  Romania ranks 21 in the latest Top 35 countries attractive to investors in renewable energy ("Renewable Energy Attractiveness Indices Country 2011") published by Ernst & Young. They were considered potential wind energy sources as land / water, solar, geothermal, biomass, and infrastructure;  Romania rank first in Europe and fourth place worldwide in terms of average speed of Internet connections ("The State of the Internet", Akamay company, 2012). As weaknesses of this section one can highlight: underdeveloped road and highways infrastructure; maintenance and security issues on railways infrastructure. 2.11 Ratings and scorings for Romania in 2012 Taking into account the ratings for 2012, Romania’s risk was considered “moderate” by the main rating agencies looking at the conditions of the global economy. There were important issues slowing down the economic growth such as banking sector and the public deficit crisis. Figure 1 Ten Economic Freedoms for Romania in 2012

Source: Heritage Foundation / Wall Street Journal - Index of Economic Freedom 2012 Index of Economic Freedom 2012 - The score obtained by Romania in terms of economic freedom is 64.7, classifying economy ranks among the 63 freest economies in the Index 2011. Romania rank 27 of 43 countries in the European region, and its overall score is higher than the global average. The ratings assigned to Romania for 2012 by the Standard & Poor’s agency show a continued improvement of economic framework. Romania’s deficit will be reduced below 5 percent of GDP in 2011 from 9 percent in 2009, the reduced costs leading to reducing the deficit in 2012.

Table 3 S&P ratings for Romania in 2012 Issuer Credit Rating Ratings

Rating Date

Regulatory Identifiers

Foreign Long Term

BB+

27-Oct2008

Foreign Short Term

27-Oct2008

Local Long Term

BB+

29-Nov2011

Local Short Term

29-Nov2011

Transfer & Convertibility Assessment Local Long BBB+ Term Source: Standard & Poor’s

27-Oct2008

3. CONCLUSIONS The present study did not set out to make a quantitative and comprehensive evaluation of the main conditions linked to the investment and credit risk climate in Romania, on the contrary, it tried to achieve, based on the author's own criteria, a qualitative analysis of the economic situation for 2012. Summarized by chapters, the analysis revealed the following outcomes for Romania in 2012: Politics: Romania is a factor of stability in Europe as EU and NATO membership and member of the United Nations and other international organizations; Romania have signed free trade treaties with the EU, EFTA, CEFTA and is also a member of the World Trade Organization; the presence of bilateral agreements with other states on the promotion and reciprocal protection of investments. The weaknesses are linked by the functioning of the judiciary system and the fight against corruption and by manifesting bouts of political instability. Economic: fiscal consolidation to ensure a sustainable deficit target; maintaining public debt to a sustainable level in long-term; predictability and simplification of the tax system; a policy of reduction and preventing the emergence of arrears; gradual adjustment of real broad monetary conditions to anchor inflation expectations around the central targets; lowest rate of absorption of EU funds compared with other EU countries; important issues such as banking sector and the public deficit crisis are slowing down the economic growth. Social: the presence of agreements between government and unions; nonexistence of major trade union movement; labor market and labor relations enacted by the Labor Code; lack of higher average skilled labor; relatively high cost of labor; fable links between labor market needs and skills obtained through education. Technology and infrastructure: mobile telephony in GSM systems are well developed; important network of branches of foreign banks; industrial infrastructure is highly developed; extensive features of river and maritime navigation; attractiveness to investors in

renewable energy; underdeveloped road and highways infrastructure; maintenance and security issues on railways infrastructure. Future research should take into account some important aspects for the economic environment of an European country such as: the external adjustment capacity of an economy - concerning the external debts and current account deficits, the evolution of exchange rates, labor flows; the robustness of institutions and the growth potential on medium-term (Roubini; 2012). REFERENCES 1. Bouchet, M.H., “Country Risk Analysis, Sovereign Risk Rating”, CERAM - Global Finance, March 2008, p.2 2. European Commission, “Report from the Commission to the European Parliament and to the Council on progress in Romania under the Co-operation and Verification Mechanism”, Brussels, 30.1.2013, COM(2013) 47 final, p.2, 7 3. Central Intelligence Agency, “ T he Worl d Fac t book 2012” , Washington, DC, 2012, available at https://www.cia.gov/ library/publications/the-world-factbook/index.html 4. Bureau of European and Eurasian Affaires, “US Relations with Romania”, Fact Sheet, October 2, 2012 5. Consiliul Investitorilor Străini din România, “Investind în creșterea economică”, octombrie 2011, București, p.15, 23, 27, 57 6. World Bank, “Romania overview”, http://www.worldbank.org/en/country/romania/overview 7. Eurostat, “Eurostatistics - Data for short-term economic analysis” - Issue number 02/2013 8. Eurostat, “Tax reforms in EU Member States”, European Economy. 5. October 2011. Brussels. 9. Romania Trade & Invest, “Facilități pentru investiții”, București, 2012, http://www.romtradeinvest.ro/index.php/De-ce-Romania/facilitati-pentruinvestitii.html 10. BNR, “Raport asupra inflației”, mai, august, noiembrie, februarie 2012 11. INSSE, “Buletin Statistic Lunar” nr.1-12/2012 12. Roubini Country Risk, “Eurozone Case Study”, 2012, http://countryrisk.com/casestudies.php

RUMANIAN VS BULGARIAN TOURIST MARKET, A PERSPECTIVE FOR DESTINATIONS SUCH AS ALBANIA

Stela Zoto Universiteti “Fan S. Noli” Korca Albania

Klaudeta Merollari Universiteti “Fan S. Noli” Korca Albania

ABSTRACT According Gravity Model, the tourist flow between two countries depends on three categories of factors; driving factors (the origin), attractive (the destination) and resistance factors (individual among an origin and a specific destination). In this context, we see the development of tourist flows between Bulgaria and Rumania toward Albania, and will try to make some interpretations about the market share occupied by Rumanian and Bulgarian tourist flows and the growth of these flows in Albania. It will also make an exploration of Bulgarian and Rumanian touristic demand in origin, so what are the major destinations for these tourists, the main motives of these tourists travel, and finally will try to give some idea of the importance of this market in the future for Albanian. Key words: gravity model, touristic flows, touristic demand, market share, growth rate. 1. INTRODUCTION Searching and segmenting touristic markets are the first steps in formulating a good marketing strategy for international tourism. Design all elements of marketing-mix function of selected segments is much easier, at the moment we know these markets. Why it was chosen this theme relates to the importance of market segmentation to draw all other policies of this tourism development. This relates to the fact that today is spoken more about market segmentation, but little is done in reality. This study seeks to accomplish the following objectives: • To study the motivation of foreign tourists discovering the reasons that push them to come to Albania. • Identify the general characteristics of tourists arriving in our country. • Understand what are their favorite destinations, as well as the level of perception that have for each destination. • To discover the relationships between different variables of the trip, in order to make a description of how to choose better the proper markets. Given these developments are thought to offer some modest recommendations for decision-makers in the field of tourism, whether central or local, in order to improve the effectiveness of these policies. 91

2. LITERATURE REVIEW There is much literature on tourism demand forecasting. Request Study tour begins in the 1960s. About 420 essays studying this object were published from 1960 onwards (Li G, Song H, Witt S F., 2006). The real development happened until 1980 because more than 90% of these essays were published in 1980 and others are published later. Researchers, like Crouch, Lim, Witt, Li and Song etc, to clarify and observe literature list approximate literature or study the previous one. Among many models for forecasting the demand, the most common are traditional quantitative or qualitative research methods, as DELPHI methods, life cycle methods, econometric methods, spatial gravity model, and time sequence methods. Since 1980, comparative studies of the suitability of different models to forecast travel demand began to emerge. Scholars like Martin and Witt, Gonza'lez and Moral Kulendran, King Kim, Song Kulendran and Witt compared the suitability of such methods by analyzing the data of various countries. But none of the existing models hyas in focus Albania. Additionally, international demand forecast models currently used time sequence methods. Although this method is believed to be a practical model in tourism forecasting, it provides only increase or decrease future number of tourists but does not interprets any predictive factor. So tourism enterprises or departments can not take measures to promote increasing tourism. 3. THEORETICAL BACKGROUND (if the case) According Gravity Model (Matias, 2004; Dubarry, 2000) and latter Linnemann (1966), the demand between two countries for tourism depends on three categories of factors; driving factors ( of the origin), attractive (of the destination) and the resistance factors (individually between an origin and a specific destination) Push factors, sometimes called “diffusers” factors, are the characteristics of a population in a market that encourages origin travel. Push factors (the origin) a. Size of population b. GDP (gross domestic) and revenue trends c. Distribution of income d. Distribution of education e. Distribution of age f. Time for fun g. Family structure h. Momentum (inertia) Pull factors (destination) a. Friends / relatives b. Climate / weather c. Commercial links d. The social / cultural e. Destination marketing programs f. Distribution channels g. Attractive destination h. Special events 92

i. Additional destinations j. Habits 3. Resistant factors a. Prices i. The price of the product (products) ii. Prices of substitutes iii. Prices of participants iv. Needs prices v. Exchange rate vi. Taxes and fees b. Actions of competitors c. Supply capacity d. Distance e. Travel time f. Place of origin where exchange shall be carried out g. Border controls, customs and other border formalities h. Taxes arrival / departure and terminal fees i. War / terrorism / crime / social unrest j. Natural and man-made disasters k. Physical obstacles Figure I; Potential explanatory variables in a regression model to forecast tourism demands For example, if everything else is equal, a large population of a region will generate more trips than a smaller population. Momentum-boost, push, “mobility” force, refers to the effects of custom, recommendations of friends or relatives, institutional relations and other factors that may trigger the requirements of a certain origin. Pull factors are those factors that attract visitors to a destination to impose. Visits to friends and relatives is a primary motivation for visiting that has for purpose entertainment, and cities that have mostly ethnic populations may especially benefit from this type of travel. Commercial include presence of major offices of large corporate in destination, or having a concentration of financial or manufacturing firms. The social / cultural ties might include ethnic neighborhood or particular institutions, cultural centers, religious sites, museums and monuments. Religious similarities between the two countries may also be a strong influence to carry travel between them. Such other factors include the similarity of language and presence in a state (country) in a population with residents of another state (country) Stable factors (resistance) include those factors that bind to travel between the country of origin i and a destination j. For example price is a modifier of resistance, because more powerful travelers have limited incomes, especially in relation to their everyday and long-term needs. From this point of view we will try to explain tourism flows originating from the Rumanian addressed to Albania. The methodology is based on secondary data collection and processing. There are assembled time series of annual arrivals during 1999-2010 period and quarterly arrivals series during 2005-2010 period. The market share is calculated as the ratio of total annual Bulgarian arrivals. The growth rate is calculated as a percentage of current arrivals to an earlier period. While the growth trend is calculated as a simple regression equation coefficient depending on

time period. Seasonality coefficient is calculated as a component of seasonality, in the decomposition model. 4. BULGARIAN VS. RUMANIAN TOURISTIC DEMAND Graph of the demand for Bulgaria is showing a decline until 2003, following from a growth. Average tourist arrivals from the year 1999 to 2010 is 7 849 tourists / year in 2010, compared with 7 305 tourists / year for the period from 1999 to 2009. The average number of arrivals per capita is 0.001 tourists.

Graphic 1. The number of Bulgarian tourists coming in Albania during 1999-2000. Romania demand graph shows a slight increase up to 2002, a greater increase in the coming years. Average tourist arrivals is 3,177 / year for 2010 compared with 2,609 tourists / year in 2009. Number of arrivals / resident is 0.00014 tourists

Graphic 2 . The number of Romanian tourists coming in Albania during 1999-2000. So the performance of touristic demand is better for Bulgaria, because it has the greatest number of arrivals in total as well as per capita, but the Romanian touristic demand has increased much faster than Bulgarian touristic demand toward Albania. Market share chart for Bulgarian part shows a continuous fluctuation margins 0.56% (2010) to 1.2% (1999). In general, we can say that market share has fallen. Market share (on average) is 0.92% in 2010 compared to 0.96% in 2009 (-0.04%)

Graphic 3. The share of Bulgarian touristic demand from the total of touristic demand. The graph shows the market share for Romanian part with little change until 2005, increased 2005-2007 (from 0.24% to 0.42%), and an decrease till 2010 to 0.36%. The average market share for the period 1999-2010 is 0.29%.

Graphic 4. The share of Romanian touristic demand from the total of touristic demand. Bulgarian touristic demand has occupied a considerable part from the total market, but these last 10 years it is losing its importance, while the Romanian demand has occupied a modest but steadily and continuously growing part. Growth chart, shows a decrease in 2000 (-20%) and in 2002 (-10%) for the Bulgarian demand, the maximum increase in 2003 by 50%, growing smaller below. Feature is the regular cycle of ups and downs of growth pattern. In the 2010 it is noticed a decreased (0.4%). Average / year of growth during the period of 1999-2010 were 12.9%, with a deviation of ± 3.9%, an increase comparable to France. Bulgaria has a growing rhythm that changes almost in a cyclical way. There is a positive trend and the growth rate coefficient is 0.011.

Graphic 5. Trend of long-term growth of Bulgarian touristic demand for the period 19992010 Romania has average increase rhythm of 28.9%, with a deviation of ± 3.9% for 2010. There is a long-term positive growth trend with coefficient 0.022. The graph of growth indicates a growing demand from 0% (2002-2001) to 65% (2007-2008). For the years 20092010 it has been a constant growth of approximately 20%.

Graphic 6. Trend of long-term growth of Romanian touristic demand for the period 19992010 The coefficient of growth rate is larger for Romania than Bulgaria (0.022 compared to 0.011). But in both cases it is positive. Bulgaria has a peak period during July-September, with the coefficient of 1.3, the period from April to June it has a 1.1 coefficient, October-December period it has the coefficient of 0.9, and the period from January to March (the period of decline) with the coefficient of 0.7. Bulgarian touristic demand is not seasonal. This means that it is mainly a business tourism, and other minor fluctuations are due to reasons such as extreme sports tourism, transit, (the tourists who go to Greece but who want to travel to see all Riviera (Mediterranean coast), as well as tourism remains attributed to friends and family. Bulgarian demand is more seasonal compared to Turkey. This is because the Turkish request is made only for business and family relationships. While in the case of Bulgaria it is a small part coming for tourism genuine. This is because Bulgaria is closer, and those who love special interest tourism can use Albania as a destination. Also take advantage from transit flows to Greece.

Graphic 7. 3-months demand of Bulgarian tourists for Albania. The period belongs to January 2005-june2011.

Romania has the peak in July-September period with coefficient 1.6. April-June period was 0.85 coefficient, October-December period has coefficient of 0.86, and the period from January to March was 0.6 coefficient.

Graphic 8. 3-months demand of Romanian tourists for Albania. The period belongs to January 2005-june2011. The seasonality pattern of Romanian demand is just alike Bulgarian seasonality but higher than that of Bulgarian. Bulgaria has the highest peak coefficient, 1.6 compared to 1.3 of Romania. Bulgaria has a touristic demand generally evenly distributed throughout the year. Average three monthly demand of Bulgaria is 2896 tourists/quarterly, and the tendency of demand is 83.5 tourists/quarterly. Bulgaria ranks 13 on average arrivals / year, and 10th place for the number of tourists / residents Quarterly average demand of Romania is 1349 and it increased by 82.5 tourists/quarterly. Romania ranks 25th for arrivals / year and 33th place for arrivals / residents. Although Bulgaria has an average (deseasonalezed) 3-month touristic demand higher than that of Romanian, the growth rate of this demand in both countries is the same. Table 2. Ranking of countries of origin according to the annual average growth for the period 1999-2010. COUNTRY

AVERAGE

DISPERSSION b0

Malta

1.24453084

6.247080896

0.177994

0.06977

Slovakia

0.887172592

1.615696338

-0.10925

1.608218

Kosovo

0.70896073

0.171848064

0.655368

-0.60177

Russian Federation

0.612427125

0.914046897

0.037313

0.366162

Poland

0.5300764

0.129559052

-0.04619

0.834933

Czech Republic

0.402494364

0.152462949

-0.05867

0.789747

Croatia

0.384758562

0.091058367

0.046224

0.079678

Bosnia and Herzegovina

0.363364495

0.085270746

0.01902

0.237834

Israel

0.35179

0.133535883

0.045317

0.052695

Korea, Republic of

0.326933375

0.086275149

0.011517

0.263589

China

0.311660775

0.249393225

-0.05297

0.661235

Ukraine

0.305110724

0.989166917

0.056018

-0.06461

Slovenia

0.3016549

0.111153292

0.015092

0.202051

Finland

0.298267203

0.124437853

-0.01889

0.422966

Romania

0.288687365

0.038973015

0.021588

0.146203

Canada

0.28746578

0.02051933

-0.02324

0.440819

Hungary

0.268882741

0.032762708

-0.02363

0.424827

Switzerland

0.266074308

0.081925929

0.010515

0.196676

Sweden

0.257950709

0.04355457

-0.00673

0.302365

Belgium

0.252019932

0.035410199

-0.01791

0.370209

Austria

0.238861053

0.036420959

-0.00741

0.287782

Australia

0.23376011

0.054457369

-0.01941

0.361839

Norway

0.193480095

0.046235932

0.009613

0.130032

United Kingdom

0.186222379

0.028283763

-0.01894

0.310553

Ireland

0.182028588

0.023308277

-0.01765

0.29854

Netherlands

0.179466574

0.023037031

-0.01993

0.311022

Spain

0.175758306

0.015856167

0.014692

0.078789

United States of America TFYR of Macedonia Greece

0.16313412

0.016705895

-0.01125

0.237404

0.160376624

0.040236792

0.001611

0.149746

0.154851438

0.016443786

0.020935

0.016677

Germany

0.154814078

0.006674737

0.016429

0.046386

Turkey

0.150959135

0.03676285

0.016561

0.041659

France

0.144378079

0.029598691

0.02061

0.00835

Bulgaria

0.129055652

0.039998044

0.011137

0.055553

Japan

0.116265899

0.003636186

0.024288

-0.04403

Italy

0.109524434

0.006567243

0.012576

0.026522

Denmark

0.085647151

0.052326801

0.016717

-0.02469

Montenegro

0.05686619

0.005123911

-0.08692

0.230697

Serbia

-0.08541451

0.029007615

0.020935

0.016677

This in terms of arrivals in Albania but let's see what type of tourists are Bulgarians and Romanians in their origins; following conclusions have emerged from the study "Flash EB No 291– Survey on the attitudes of Europeans towards tourism, wave 2”, as well as other studies international organizations have done in this both countries. Table 3; European Community countries as potential demand for tourism outside the European community. nr COUNTRY EU NON EU Potencial 1 GERMANY 81802257 EU 26994745 NON EU 6544181 2 POLONI 38167329 EU 5725099 NON EU 1526693 3 SPAIN 45989016 EU 6438462 NON EU 1379670 4 CHECK REPUBLIK 10506813 EU 3782453 NON EU 1260818 5 NETHERLANDS 16574989 EU 6795745 NON EU 1160249 6 FRANCE 64716310 EU 7765957 NON EU 970744.7 7 SLOVAKIA 5424925 EU 1790225 NON EU 922237.3 8 TURKY 72561312 EU 2902452 NON EU 725613.1 9 SLOVENIA 2046976 EU 184227.8 NON EU 655032.3 10 BELGIUM 10839905 EU 4769558 NON EU 650394.3 11 HUNGARY 10143324 EU 1521499 NON EU 608599.4 12 SWEDEN 9340682 EU 2241764 NON EU 560440.9 13 NORWAY 4858199 EU 1457460 NON EU 437237.9 14 ROMANIA 21461186 EU 4721461 NON EU 429223.7 15 BULGARY 10839905 EU 975591.5 NON EU 325197.2 16 FINLAND 5351427 EU 1070285 NON EU 321085.6 17 DENMARK 5529449 EU 2101191 NON EU 276472.5 18 UNITED KINGDOM 62026962 EU NON EU 248107.8 19 PORTUGALY 10637713 EU 1276526 NON EU 212754.3 20 LITHUANI 3329039 EU 1797681 NON EU 199742.3 21 CROATIA 4415747 EU 44157.47 NON EU 176629.9 22 IRELAND 4467854 EU 1965856 NON EU 134035.6 23 AUSTRI 8375290 EU 2763846 NON EU 83752.9 24 ESTONI 1340127 EU 415439.4 NON EU 80407.62 25 ITALY 60340328 EU NON EU 60340.33 26 MACEDONIA 2052722 NON EU 32843.55 99

27 28 29 30 31

LUKSEMBURG MALTA CYPRO ISLAND GREECE

502066 414372 803147 317630 11305118

EU EU EU EU

276136.3 240335.8 401573.5 85760.1

NON EU NON EU NON EU NON EU NON EU

30123.96 16574.88 16062.94 15881.5 11305.12

4.1 Bulgarians travel trends Bulgarians make more short trips than the European average. Only 63% of Bulgarians do long vacation. They make long trips, less than an average European. Bulgarians like mostly passive vacations (more than the average for Europe), the sea and sun holidays also, like keeping themselves. But they like a few visits to cities, sports, getting acquainted with the culture of the country they visit. They are natural tourists 2 times more than an average European. 4.1.1 They do not travel a lot by plane (far less than the European average). This is for two major reasons; because it is expensive for them and they do not travel very far (2 major international destinations for Bulgaria are Turkey and Greece). Bulgarian tourists do not use at all water transport, but use a lot the railway transport, bus (3 times the European average), as well as they use a lot the car mode. They use bike mode, relatively a lot compared to Europeans. Bulgarians are trying to use cheaper forms of transport. Proximity addressed to Albania enables catching of this destination, with these forms of transportation. 4.1.2 77% of Bulgarians organize the journey by themselves (much more than the European average). While elements of travel or the entire journey, booked by travel agencies or on the internet, is made, far less than the European average. Unfortunately Bulgarian small percentage of the total population that has visited Albania makes it difficult for Bulgarians to capture it with this form. But an advantage for Albania is the fact that with Bulgaria has old historical connection (the common period in the communist bloc, as well as strong cultural exchanges of that period). Another element that should be mentioned are the exchange of students of that time, especially Albanian student who went to Bulgaria and some of them get married with Bulgarian girls, have created a specific market called 'visiting friends and family. " 4.1.3 49% of Bulgarians prefer traditional destinations, only 25% prefer emerging destinations (Albanian case), while 22% does not see this fact as an important fact. Approximately 50% of Bulgarians can see as a potential destination Albanian country. 4.1.4 Approximately 70% of Bulgarians are value oriented a value that is considerable. Albanian country can compete with Bulgarian country as a destination, only looking to provide a good product with good quality, which remains a challenge for Albania. 4.1.5 Approximately 70% of Bulgarians rely on personal sources and the recommendations of friends and companions searching information about the destinations. We cannot compete with the recently price with Turkey or Greece. But an important source, media, remains apparently high in decision-making weight (greater than the European average tourist). This means that we need to be present with reports on Albania country in the Bulgarian media. Bulgarians and Albanians have confidence in the media. 4.1.6 Attractions; Mainly want to perform outdoor activities you like entertainment (more than European average), they like cultural attractions, (less than the European average). This summer trips to other countries rose by 50 percent. Bulgarian tourists prefer charter flights and all-inclusive vacations. Increased market demand for vacation need much cheaper packets. This caused a significant decline in prices. Also began purchasing sites massive

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boom, where tour operators and hoteliers speculate with very cheap packages for marketing purpose. Bulgaria has 2 main advantages in comparison with Albania. The first is the fact that Bulgaria itself has access to the sea, Black sea, with a beautiful coastline and very low prices, the lowest to Balkans. However a portion of the population travels outside Bulgaria, driven by the trend of change, to see something different. 4.2 Romanian travel trends 4.2.1. Romanians tend to travel abroad for only short periods, with just 23% of all departures lasting longer than one week in 2011. 4.2.2 In the long run, however, people will take longer breaks, with holidays of seven days and longer expected to account for 25% of total outbound trips by 2016 and the share of 4-7 day long trips abroad set to fall to 47%. 4.2.3 9 million outbound Romanian tourists (year 2011); the main destinations are Italy, Greece, Hungary, Bulgaria, Spain, Austria and Turkey. Romanian tourists are curious about visiting other countries but tend to limit travel to within the EU (85% of trips in 2011, 2% outside the community but within Europe (429,224 tourists compared to 8705 Romanian tourists in Albania in 2010). One of the reasons for the popularity of these destinations is the fact that many Romanian emigrants live in these countries. 4.2.4 The Romanian public continues to be attracted by the US (34% increase), and the UK (25% increase). as well as Bulgaria’s inexpensive all-inclusive resorts. The number of Romanian visitors to most European destinations, increased by 1-10% in 2011. However, as a result of recent political developments in certain countries, there have also been some noticeable changes in consumer preferences. For example, the number of departures to Greece fell by 2% in 2011. In addition, the number of visitors to France fell by 8% due to the country’s efforts to expulse people from the Roma community. In addition, Bulgaria also continued to attract Romanians to its all-inclusive resorts on the coast and in the mountains, with the number of visitors to the country rising by 10%. 4.2.5 The leading destination in spending terms remains Italy, which accounted for 19% (RON1.6 billion) of total outbound expenditure in 2011. Spain, Germany and Austria followed, accounting for 14%, 13% and 10% of expenditure respectively. 4.2.6 Romanians are tourists who love the rest (the highest rate in the region), 17% travel to visit friends, 13% like sun and sea (less than the European average). They too like beauty treatments (7%), and journeys in the city (6%). 4.2.7 60% of Romanians are looking for traditional destinations, 17% emerging destination. 18% of Romanians have no preference. Thus, only 35% of traveling Romanians are a potential market for Albania. 4.2.8 To the new destinations they are looking for lower prices (more than the European average), quality / price rate (as the average), better quality of service (less than the average). Romanian tourists like local culture and a better quality environment less than the European average. 4.2.9 The main attractions evaluated in a destination from the Romanian tourists are; 28% evaluator the overall environment, 20% entertainment, 11% cultural property, 10% festivals, 7% like the arts, 4% gastronomy. 4.2.10 Romanian tourists usually travel by land. Some 82% of outbound trips were made by land in 2011. The main driver of this trend remains cost as travelling by bus, coach and even personal car is cheaper than by alternative methods of transport. It should be noted that most consumers prefer private vehicles to buses or coaches.

101

Low cost carriers continue to expand in Romania. Tourists are increasingly opting to travel with such carriers. The vast and reasonably priced offer of low cost airlines and special discounts for city breaks or early bookings Low cost airlines have been a great driver of growth within the area represented some 20% of all outbound departures. Railways benefited from significant investment in 2011. Whilst this raised the price of tickets, it also enhanced the quality of journeys and comfort. These improvements helped to fuel a 5% increase in the number of customers. However, the overall share of rail travel with regard to outbound departures did not exceed 3%. 4.2.11 Romanians like making holiday by traveling with cruises. Mediterranean cruises are particularly popular due to their cheap price. Romanians prefer cruises that depart from Greece, Spain etc. Cheaper cruises can be booked in the Adriatic (Albania can be involved in this tours). Other Romanian tourists choose the Norwegian fjords, the British Isles, the Scandinavian peninsula or the Baltic capitals. Vacations on cruise ships have become an affordable luxury for many Romanian tourists. Standard cruises last for a period of seven days and are based on itineraries in the western Mediterranean 4.2.12 Couples accounted for 40% of leisure departures in 2011 and were followed in importance by families (34%) and organised tour groups (23%). Backpackers, singles and friends departures accounted for the remaining 1% (<60,000 people). The significant difference between these shares can be attributed to varying disposable income levels of the various social groups which spend their holidays abroad. Families, couples and organized tour participants tend to have higher disposable incomes and to be interested in particular types of services and spending a specific number of nights at a destination. 4.2.13 There is little doubt that outbound tourism numbers will continue to increase as a growing number of Romanians are taking their holidays across Europe, on cruise ships, or in exotic locations in South America Currently, the RON5.5 billion spent outside Romania has a negative impact on the country’s balance of payments. However, this figure should decline gradually as investment in Romania’s tourism industry starts to pay-off. 4.2.14 Due to low disposable income levels, price remains the main decision factor for the average Romanian tourist. Last minute offers, city breaks, early booking deals, promotions and discounts are all expected to gain further popularity among eager tourists. Depending on seasonality, Austrian skiing resorts and Mediterranean islands will continue to appeal to Romanian travellers with medium incomes. 5. CONCLUSIONS AND IMPLICATIONS From the perspective of Albania as a destination that is trying to catch two markets as bullgariadhe Romania can say that each of them has its opportunities and challenges. Bulgaria and Romania are relatively large market for Albania, but with lower incomes than Western European countries. They both have a bipolar distribution of income, but they have a new age population, and this population has a great desire to rest, travel and entertain. Albania on the other hand, is a destination for this two origins with many fascinating attractions, new places to be seen, natural resources, cultural and historical sites, with a warm Mediterranean climate, suitable for travel from April-November, with a very interesting story (with common period, Ottoman occupation and communist periods, but different in various forms) and a culture that arouse interest, similar in some respects to that of Bulgaria, but also very different in many other aspects. Unfortunately we have problems with the quality of our product (an infrastructure that leaves much to be desired, a not good quality service),

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distribution (Albania has not entered on the agenda of any major tour operator, and it cannot compete with the price to travel agencies in Bulgaria or Romania). Prices are our biggest problem, because are high for a given quality. Our neighbors are our direct competitors, with a superior offer. A advantage for Albania is the short distance from these two origins, but since travel is done mainly by car or bus it returns in a long journey. One possibility is that to extenuate the registration procedures and customs control at the border line. Table 4. Albania versus his competitors from East-Europe Country Score 2011 Italy 4.87 Greece 4.78 Slovenia 4.64 Croatia 4.61 Montenegro 4.56 Hungary 4.54 Bulgaria 4.39 Turkey 4.37 Slovak Republic 4.35 Romania 4.17 Albania 4.01 Macedonia, FYR 3.96 Serbia 3.85 Bosnia and Herzegovina 3.63 Source: The Travel & Tourism Competitiveness Report 2011, Word Economic Forum at http://www3.weforum.org/docs/WEF_TravelTourismCompetitiveness_Report_2011.pdf [accessed 02.12.2011] Bulgaria is a stronger competitor in the total international market than Romania. So for this reason the competition from the market outself will be even stronger. In this context, in terms of sun and sea tourism, Bulgaria is really a strong competitor. The biggest problem for Albania is that none of the countries mentioned Albania is not part of the map of important mentioned destinations. To enter in this map will be difficult for Albania. Its handicap is the image. Special attention should be paid to Romania. It is an emerging market for Albania but with great perspective. It has a steadily growing stable touristic demand for the past 10 years. The growth rate is greater than that for Bulgaria demand. As regard to Bulgaria it is a market that will require a hudge amount of investments to direct attention towards Albania as a destination. From my perspective Bulgarian and Romanian interest market segments for Albania must be; 1. Youth and student Market. Young people require new experiences and tries to expand them borders. Albania appears a good alternative to prove himself, facing a challenge in a unknown place, but close and that does not require a high cost to capture. 2. The business market. It is currently the largest market that comes to Albania from Bulgaria. It is much important to convince the businessmen to return together with families and friends, this time for tourism.

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3 .Visiting friends and relatives. For the reasons we mentioned above it is an important market for Albania. It is important to have a specific strategy to attract this market. 4. Transit market, that transit in Greece. They must return next time to visit Albania, or at least to stay a few days in the country. REFERENCES 1. Anderson, P. S. (1979). A Theoretical foundation for the gravity equation. American Economic Review, 69:106-116 2. Dubarry R. (2000). Tourism expenditure in the UK: Analysis of competitiveness using a Gravity-Based Model.Tourism & Trade Research Institute, Discussion paper 2000/1, University of Nottingham. 3. Head, K. (2003). Gravity for beginners. Working Paper. University of British Columbia 4. Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North-Holland Pub. Co. 5. Martinez-Zarzoso, I., Nowak-Lehmann, F. (2003). Augmented Gravity Model: an empirical application to Mercosur-European trade flows. Journal of Applied Economics, VI (2): 291-316 6. Matias A. (2004). Economic Geography, Gravity and Tourism Trade: the case of Portugal. In Brebbia C. A., Wessex Institute of Technology, United Kingdom & F.D. PINEDA, Complutense Univerisity (eds).Sustainable tourism. Spain. 7. Rose, A. (2002). Do we really know that the WTO increases trade. NBER Working Paper N. 9273 8. Serlenga, L., Shin, Y. (2004). Gravity Models of intra-EU trade: application of the Hausman-Taylor estimation in heterogeneous panels with common time-specific factors. Edinburgh School of Economics Discussion Paper, n. 88, University of Edinburgh 9. Tinbergen, J. (1962). Shaping the World Economy: Suggestions for an international economic policy. New York, The Twentieth Century Fund

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ELEMENTS OF THE FORMATION AND EVOLUTION OF THE RAILWAY TRANSPORTS IN ROMANIA AND IN THE WORLD

Cornelia Nistor University of Bucharest

ABSTRACT The Industrial Revolution represented a process of a great importance for the development of the general economic activity. The industrial technical progress had a major impact on all the other sectors of the national economy, including the transports. The increase of the capacities of production imposed to solve the problems regarding the mobility of the production factors and of the products. The increasing flow of goods and passengers, the modernization of the urban structures and the increase of the population led to a fast upgrading of all the existing means of transport and to discover new ones. In turn, the progress in the field of transports stimulated the industrial development. Key words: railway, railway passengers, cargo carried, modernization, efficiency.

1. INTRODUCTION In all the countries, in the new conditions of the globalization trends, the tertiary sector is growing and takes an increasingly higher share of all the economic activities. The transports, as part of this sector, experienced a significant progress only after the start of the Industrial Revolution in the eighteenth century. The changes in the quantity, quality and structure of the production of goods and services and the population growth led to increase the economic flows between all the economic sectors, changed their spatial orientation and their volume. The importance of this branch arises from the fact that it is a basic factor that contributed to the current global economy and it is, in turn, boost by overall economic development. Currently, the territorial distribution of transport networks is an indicator of connections between different areas. Until the nineteenth century, the most developed branch of the transports was represented by the shipping transport, on sea and on rivers. Railways developed with an increasingly higher rhythm during the nineteenth century, when were built thousands of kilometres of railroads and there was obviously observed progress on their effectiveness in most countries. This work aims to demonstrate that the transport’s development had and has a great importance for the national economy because it made possible the transport of larger quantities of goods, of a greater number of passengers, the increase of their speed, the reduction of the unit costs for the railway transports, which allowed fix accessible prices for the customers. The fact that much of the railways had initially the extremities in the ports shows that the railway development has helped to increase the domestic and the foreign trade, because it made possible the distribution of the imported goods brought by ships all across the country.

105

Although in the last century appeared other forms of faster transport, as the air transport, will show in this paper that the further development of this branch it is very important for each country because, as it was shown in some international studies, at the global level on medium distances, the most efficient form of transport remains the railway transport. 2. LITERATURE REVIEW The complex issue of the railway development over time is addressed in the paper of D. Muresan, M. Muresan, "The History of Economy", Economic Publishing House, Bucharest, 2003, which detailed on different historical periods, the formation phases and the development of this branch, highlighting its importance in stimulating all the other sectors of the economy. The study begins with the nineteenth century, when the development of railways was made at a fast rhythm. The study continues in the interwar period, with its specificity determined by the start and manifestation of the Great Depression between 1929 1933 and then in the post-war period, when the progress of science has led to the discovery of more advanced technical means of transports, to the modernization of railways and of the transports structure. Aspects of the current development of railway transport and of the territorial distribution are reflected in "Global economic geography”, coordinated by S. Neguţ, Meteor Press, Bucharest, 2006, which presents the issues related on the need and on the implications of the development of this branch in the global economy and in Romania. The same ideas are found in the works "Global issues of mankind " by L. Brown, Technical Publishing House, Bucharest, 2000, and "Geographie humaine et Economique" by Fr.Debie, PUF Publishing House, Paris, 2000. The accents on the quantitative and qualitative aspects related to the transports are largely presented in the work “Theoretical and economic statistics", coordinated by T. Baron and E. Biji, Didactical and Pedagogical Publishing House, Bucharest, 1996, where there are bolded the most important factors and statistical – economical indicators that help to assess the transport quality and efficiency. In "Economic geography", by P. Morelli, D. Vincenzo, G. Spinelli, L. Scarpelli, Mc Graw-Hill Publishing House, Milan, 2010, the authors combine the geographical aspects related to the transports with those historical, but especially with the economic ones, related to the efficiency, costs, productivity and also to the sustainable regional development and the economic policy of the state, in the context of the changes due to the mutation of the areas of influence and of the increasing globalization trends. 3. RAILWAY TRANSPORTS IN ROMANIA AND THE INTERNATIONAL RAILWAY TRANSPORTS Transport activity is a special activity that has certain features which can not be assigned to other areas of the tertiary sector: it adds value, although it does not create new use values, it can not be stored because the time of production coincides with the time of consumption, it can be done only in great open spaces and, although this activity is permanent, it is affected by the seasonality. Through their rapid development during the nineteenth century, both in Europe and in America, the railway transports were a fundamental factor in the process of industrialization. In an accelerated rhythm until the late nineteenth century, there was a significant progress in this area, based on the unprecedented development of the techniques and technologies used in the production, which increased the speed, reduced 106

the unit costs of transport and improved the conditions of the transport of goods and especially of the travellers. The significant investments have stimulated, in turn, the other branches of the economic activity, especially in the extractive industry, iron and steel, machine building and construction materials of whose products were and are still used both in the production of the rolling stock, wagons and locomotives, as well as in the modernization of the stations. These activities have boosted overall economic activities contributing to the increase of the gross domestic product and of the number of jobs. For example, in the late nineteenth century in England there were nearly 300 companies that produced wagons and locomotives. In Romania, as in most other European countries, the development of railway transports was supported to a large extent by the state, which has been involved with a significant share of the total capital. The first railway was built between the cities of Bucharest and Giurgiu and was inaugurated in the year 1869, followed by the inauguration of the second railway in the country, towards Moldova, between Bucharest and Romania (1870). The state support has materialized also by the establishment, in the year 1880, of the state administration of the railways. After that, the construction of the new railroads would be done based only on the state capital. Until the start of the World War I, railroad length increased by about 20 times, and the production wagons about 12 times. Extending this form of transport meant a significant increase in the quantities of transported goods and of the number of passengers, about 10 times. This brought a great success to CFR, which received significant profits every year. In the interwar period, the state was particularly concerned by the railway transport development, which suffered extensive damage after the military conflicts in the country. Were introduced into use new types of locomotives, were built new routes, which involved also the increase of the number of stations. Such modernization works, on considering the destructions caused by war, have seriously reduced the profitability for CFR that had deficits every year until the start of the Great Depression in 1929. After completing the Economic Crisis, in 1933, the accelerated development of the industrial activity, determined and increasing profitability for CFR, but the most important contribution was represented by the subventions offered by the state and by the loans with state guarantees, as well as the possibility of increasing the transportation tariffs. After the end of the Second World War, the state has placed a particular emphasis on the development of the industrial sector to which guided most of its investments. In transport, by 1990, the average annual investment was approximately 10%. Most of the available amounts were used to increase the railway length (approximately with 10%) and to the electrification of a large part of the network, from which resulted a significant increase in the rate of the movement of goods and passengers. The total volume of the transports of goods and passengers increased, during 1945 – 1990, 10 times, but has noticed, as trend, the reduction of the share of railway transports in the total transport forms, along with the increase of the road’s transport share. In the other states, the railway transports development was achieved mainly in the nineteenth century and continued also in the twentieth century. The first international railway was built between the cities Strasbourg (France) and Basel (Switzerland) and was inaugurated in 1841. In most European countries, the development of railway transport was done mostly with the state support, while in U.S.A. the investments were made only based on the private capital. The field was very successful, due to the exponential growth of overall economic activity, so the companies in the field of railway transport achieved the highest profits, there was a rapid and intense concentration and centralization of the capital and the shares of these companies were sold to the largest stock exchange courses. 107

In the early twentieth century, the attention was directed to other areas of the transports, such as road and pipeline transports, generally neglected before, or to the new forms, like the air transport. In recent years appeared high-speed trains, which are very fast and modern, the quality is superior and the prices are affordable for a large part of the population. Among the most important achievements in the field of railway transport in present days, can be mentioned the European countries with the highest density of railway network to 1.000 square miles: Switzerland, Czech Republic and Germany. The longest railways in the world, called “highways” because they have a special importance for the national and international traffic and the heavy traffic of passengers and goods are: Trans-Siberian (Moscow - Irkutsk - Vladivostok), Balt Orient Express (Bucharest - Budapest - Berlin), Danubius Express (Sofia - Bucharest - Chisinau - Moscow), Trans-Australian (Perth Melbourne - Sydney), Trans-Andes (Buenos Aires - Mendoza - Valparaiso), Trans-Africa Highway (Lagos - Mombasa). It can be highlighted also the construction of the highest altitude railways in the world in countries like Peru, Bolivia, Chile and USA. Such services must be accessible to a large part of the total population, so the activity can not be concentrated in certain centres, but is widespread in the territory, reflecting the increase of the links between states, their economic and social integration, even globalization that require the increased of the material and immaterial flows between nodes of convergence. Currently, worldwide transport development is taking into account an important number of criteria. The traditional models only took into account the criteria of the geographic distance to be covered, while today it is considered the economic distance, including items regarding the unit costs of transports, including cargo if changing trains in certain points on the route and also regarding the speed of movement for each mean of transport. In this way, it was shown that if goods are transported on short distances, the most efficient form of transport is transport by road, on medium distances is the railway transport and on long distances is the shipping. Currently, the transport network can be considered an indicator of the connections between areas, connections that must take into account the complementary areas, the supply alternatives in other areas, the economic distance, which could cause even substitute some products and the other factors of other nature than economic. The development of the material and immaterial international flows causes an increase of the interactions between countries and a higher territorial integration. 4. CONCLUSIONS The purpose of this paper is to highlight the impact that the railway transport’s development had on the other economic activities, the way in which it encouraged the development of the material and immaterial flows between countries and areas, the way in which it fostered the increase of the economic and territorial integration trends and of the globalization trends. Also, it should be noted how developed this branch of transport and particularly the role of the state, by subsidizing or advantageous lending the companies in this field. Further research can analyze how increased in time the efficiency of this form of transport in Romania, as an effect of the economic policy measures undertaken by the state, and the effects of the progress made in the technique and in the technology. One factor to consider is the experience of other countries and the elements that they have supported in the

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decisions of the economic policy in this field. Analysis could be extended by applying statistical models that reflect quantitative and qualitative changes in this area. REFERENCES 1. T. Baron, E Biji (coordinators), "Theoretical and Economic Statistics", Didactical and Pedagogical Publishing House, Bucharest, 2003 2. L. Brown, "Global problems of mankind" Tehnical Publishing House, Bucharest, 2000 3. Gh. Cretoiu, V. Cornescu, I. Bucur, "Economics", CH Beck Publishing House, Bucharest, 2011 4. Fr. Debi, "Geographie humaine et Economique" PUF Publishing House, Paris, 2000 5. M. Dutu, "Public Environmental Policies" Legal Universe Publishing House, Bucharest, 2012 6. I Ianos, "Urban Dynamics", Technical Publishing House, Bucharest, 2004 7. P. Morelli, D. Vincenzo, G. Spinelli, L. Scarpelli, “Economic geography”, Mc GrawHill Publishing House, Milan, 2010 8. Maria Muresan, Dumitru Muresan, "The History of Economy", Economic Publishing House, Bucharest, 2003 9. Negut S. (coordinator), "World Economic Geography", Meteor Press, Bucharest, 2006 10. Ivanciu Nicolae-Valeanu, "The History of the Economic Thinking", Didactical and Pedagogical Publishing House, Bucharest, 1992 11. A. Vallega, "Esistenza. Societa. Ecosistema," Ugo Murcia Publishing House, Milan, 1990 12. Romanian Statistical Yearbook, National Institution of Statistics, Bucharest, 2010

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NICOLAS GEORGESCU - ROEGEN - BIOECONOMICS AND THE ECONOMIC PROCESS Cristian Sima; Centre for Industry and Services Economics Romanian Academy;

Cătălina Bonciu; University of Bucharest Marinescu Gheorghe University Dimitrie Cantemir, Bucharest

ABSTRACT Bio-economics is a paradigm that can hardly be absorbed by the dominant orientation of economics. Its basic postulates are totally different from the mechanist assumptions of traditional economics. Thus, Georgescu-Roegen and his followers are situated outside the standard economics, because, in accordance to this, for a sustained economic growth there must beadequate and cheap energy and raw materialresources. In early classical economics, the focus of economic analysis was placed on the scarcity of resources. Some economists of today deny the scarce resource problem and invented the “unlimited subsidiarity principle”. Georgescu-Roegen noted that according to the fourth law of thermodynamics, even the most efficient recycling system could not prevent the gradual depletion of resources. The Roegian dialectics clearly demonstrates that technological optimism of standard economists lacks of solid background. Key words:.economics, energy, natural resources, environment, the entropy law, recycling. 1. INTRODUCTION The economic theories regarding the scarcity of natural resources sustained by some thinkers over the years in the modern and contemporary age may be grouped either under the “pessimistic Malthusian models”, which suggest that, on the long term, the scarcity of natural resources is absolute, or as “optimist Ricardian models”, which considers that there is not an absolute limit but only a decline of the quality of natural resources and sometimes, a relative crisis of these. In this historical context,Nicolas Georgescu-Roegen made remarkable contributions to the development of mathematical economics and, directly or indirectly, to the development of neoclassical economics. The most important of these is, probably, the consumer behavior theory which, in the neoclassical theory, acts as a bridge between the demand and the production theories.

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Another contribution is the clarification of the integrality problem in the choice theory, the innovation of the term statistical choice theory, abandoning the Leontief limitative restriction from the input-output model and building a generalized Leontief model, a more veridical analytic representation of economic cycles. But, maybe the most important contribution of his work is represented by the Entropy law and the economic process (Harvard University Press(1971), with a series of books written also in Romanian at the Editura Politica publishing house(1979),Academia Romana (1998), by which he manages to revolutionize the economic science by linking physics with economy. For the economists, the Roegen works may represent a basis in the development of economics. His innovative ideas and relevant analyses turn him into a pioneer in addressing the resource depletion problems. The problem of resource depletion represented, in the 1970s, a particularly controversial subject supported by followers but also fought fiercely. The theories stated by Geogesco-Roegen proved their validity until today, creating true mainstreams for the present and the future. The origin of economic scarcity and therefore, of the economic value, is in the entropic nature of energy and compact matter. The scarcity of mineral resources does not put a reasonable limit to the amount we can use in a single day, but represents another more terrifying limit of the survival of the human species on Earth. What can mankind do under the imminent crisis that is looming? In the spirit of the strictest logic, the answer is to practice conservation and in order not to remain just a word spoken, this problem has to be analyzedfrom the epistemological point of view. Two factors appear to be particularly important. The first refers to the necessity to reduce consumption in order to slow down the depletion of vital resources to a minimum limit as to permit a reasonable survival of the human species. 2. LITERATURE REVIEW Addressing the economic and social problems in terms of the entropy law, determined Georgescu-Roegen to act in two fundamental directions: on the one hand, to reconsider economics in terms of concept, ie the interpretation and representation of several economic processes and categories, such as the limit of economics, the human-nature relation, the production processes, the economic development as opposed to economic growth, the value theory, etc., and on the other hand, to propose a methodological reconstruction of economics. With regard to the reconsideration of economics, Georgescu-Roegen took into account several key elements that define his concept of bio-economics,namely: - The economic process represents an extension of the biological evolution: in its biological and social evolution, man has invented and developed different tools meant to enhance productivity and to change his lifestyle, as well as the entire economic and social life. - The social and economic process extends beyond the traditionalboundary (production – consumption), taking into account the relations and continuous exchange with the environment taken as living environment, as a source of exhaustible energy and available materials (with low entropy) and as a storage for waste (high entropy); - Between the economic processes, the environment and man (as a living, complex being, representing a mixture of rational and irrational behaviors, as well as a generator and recipient of goods and services) there are systematic links; - The evolution of economic processes should be interpreted as a qualitative (dialectical) change of these processes with predominantly random character, in which the specific institutional ingredient is ubiquitous. 111

All these are defining elements of the concept bio-economics outlined by Georgescu-Roegen, a concept totally different from the standard economics. N.Georgescu Roegen and especially his work appear in the vision of famous economists such as the Italians Stefano Zamagni and Giacomo Becattini, the Americans Mirowscki Miernyk and Lozada, the Romanians Mihoc, Iancu, Onicescu and Gheorghe Dolgu. But his foremost admirer is Paul A Samuelson, the one who has invited Georgescu- Roegen to remain in the US and to write together a definitive treaty of economics. 3. PAPER CONTENT In the traditional economic research, the economic and social processes have been regarded only as circular flows within the boundaries (production – consumption), without describing and underlining the close, real and systematic links with the processes beyond these boundaries, namely, the relation with the environment: once man has developed, once he has alienated from nature, because of the unprecedented development of social division of work and technical and scientific progress, he forgot that, between him and nature there is a constant exchange. Precisely for this reason, critical issues such as those concerning the natural resources, including energy, as well as the protection of the environment, have remained outside the interest of economic researches. In reality, we are talking about a systematic exchange not only inside the economic process, but also between this process and the environment. Inside the economic process, viewed as a whole, we are confronted with the use of natural resources, the use of which results in an output of waste and residues. Among these, the mineral resources are generally part of the non-renewable resources category that include fossil fuels and mineral ores, that can be used to produce metals or nonmetal materials (ceramics, glass, cement). The world mineral resource potential is composed almost entirely of this type of resources. In order to understand the problem of non-renewable resources we have to clarify the concepts reserves and mineral resources. So far, most of the minerals necessary to man have been extracted from the earth’s crust. Even though its thickness is considerable, reaching up to 40 km, the mining or extraction activities have reached depths of 2000-3000 m. By carefully analyzing the research results we can say that the earth’s crust contains, in absolute terms, practically inexhaustible resources of virtually all metals and minerals necessary to man, although many are evenly distributed in the crust and found in low concentrations. The costs required for the extraction of inferior ores overcome their economic and social value and therefore, with the current technology, they cannot be considered exploitable. The mineral accumulations now considered exploitable can be found as geological forms named mineral ores and include large deposits of certain elements and minerals. For such a concentration to be considered an ore, it has to allow the extraction in an economical way of one or more metals or minerals. This definition seems to provide a relatively simple method to determine when the concentration of a metal or mineral deposit is a mineral ore or not. Still, this simplification is not beneficial, because the criteria for an economic assessment of the exploitation are very diverse. Therefore, the majority of mineral ores are evaluated taking into account a more or less immediate exploitation. The assessment of a certain region is based on a specific general criterion adopted for this type of evaluation, 112

namely the classification as reserve of any deposit exploitable under the current or future economic and technological conditions. The anticipation of future conditions is clearly arbitrary and subjective and, therefore, the estimations regarding the mineral wealth of a region may vary from one evaluator to another. Therefore, we can say that the mineral wealth of an area or region cannot be expressed in absolute terms, but only in connection to a particular economic and technological situation and, under these circumstances, there may be a large margin of error. The mineral reserves of a country include both the known and declared reserves, as well as the estimations based on the best information available. This information refers to the ore regions which, if not already operational, have been at least prospected. This apparently influences the figures published in statistics related to the mineral reserves of a certain country, region or of the world as a whole. These estimations are not expressing the entire wealth of a certain region; they are just the result of the discoveries made under the present and near future technological conditions. For this reason, the data published related to the current reserves, especially of the known reserves, are mostly outdated at the moment of their publication. We may say therefore that the term “reserve” largely depends on the economic and technological conditions existent at the time of the evaluation. Also, we can say that in the future the evolution of these two conditions shall lead to very different results in terms of reserve evaluation, type of minerals and available quantities. This can be illustrated with data available from recent history. Thus, for the majority of mineral raw materials, the consumption in this century was higher than the reserves known back in 1900. The reserves known at that time were not only exhausted, but for almost all important minerals, the reserves currently known are much higher than the ones in 1900. Therefore, it is wrong to consider mineral resources as a fixed and unchangeable stock, which may eventually vary in terms of quantity, as we can see in the projections that foresee a catastrophe (Amilcar O., Herrera, Hugo D.Scolnik etc., 1981). Consequently, the theoretical hypothesis of insufficiency, as traditionally formulated in economics, cannot be applied to mineral resources. The assumption that the in past a series of resources were not known, that the current technologies only manage to extract minerals from depths of 2-3 km, leads us to believe that the future technologies shall allow increasing extraction depths and the crust will be particularly generous. The concept of reserve is essentially dynamic. That is why the terms used to define mineral reserves, namely quantity, type, concentration, etc. must be regarded as variables that can change over time, together with the technological and economic conditions. In theory, the assessment of natural assets is based on the development of an integrated model, essentially founded on the extention of the capital theory and the development of the welfare theory in dynamic and uncertain conditions. From this perspective,the natural assets are known as capital goods, non-produced by the economic system, but directly and indirectly affected by the production and consumption of the economic goods in this system (Amigues, J.P., 1997). Therefore, we are talking about an explicitly temporal approach, as well as about the introduction in a uncertainty model, which gives it a double nature. On the one hand, the uncertainty comes from not knowing if the potential ecosystems can maintain a certain amount of services made to society, as well as the impacts on human activities. On the other hand, the uncertainty depends on the dynamic of economy and society, on the role of technical progress, on the demographic trends, the dynamics of production and consumption, as well as on the spatial distribution of agricultural, industrial and population assets.

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In purely economic language, the uncertainty is caused primarily by the “efficiency” and “dynamics” of the accumulation and dispertion of natural assets, which revives the problem of the “sustainability” of economic development trends in interaction wit the environment dynamics. Secondly, the uncertainty weighs equally on the criteria to be adapted for the evaluation of the quality of decisions regarding the evolution of economy-environment relations, which requires taking into consideration the future generations when taking decisions. These problems, according to Amigues (1997), raise two major questions, among the many possibilities for sustainable development, which can be favored in terms of future generations: can future generations build certain societies whose interests are not a priori convergent ? What attitude should be adopted today against these interests? Let us return to Nicholas Georgescu-Roegen. In the work that made him famous, "The entropy law and the economic process" (1979), he urges not only to reflection but also to action, drawing some basic milestones in this regard. Indeed, the entire structure of his work, which by the problems it raises and the way these are approached, revolves around certain fundamental requirements that economics and other sciences have a duty to solve: a) A representation of the evolution of humankind in terms of certain demographic trends, of the development of science and technology and the situation of the natural resources (including energy of mineral orginin and those coming from the solar radiation); b) The need to take into account, both physically and in terms of value, the evolution of the environment and the value of the economic processes, considering the state of the phenomena and the natural resources; c) A real representation of the evolution and behavior of economy, society and nature by analyzing not only quantitatively but also qualitatively, using an appropriate tool for this purpose. It is, therefore, a profound and convincing argument about the necessity to take into account the research process, the real development of the social and economic phenomena, their qualitative changes, as well as the necessity of a broader approach, including in the economy system the natural factors of the evolution of resources as well as the environmental problem (Georgescu-Roegen N., 1975). Therefore, must be considered problems such as the limited quantity of raw materials and energy, the human action on the environment, which risks “to degrade and treathen life of Earth.” In this regard, it should be noted that N.Georgescu-Roegen is among the first economists to lay the theoretical foundations of environmental protection, describing and explaining, with the help of the scientific arsenal created by mankind for centuries, the main consequences of human actions on the phenomena and processes occurring in the biological and non-biological world on the long term, as well as the consequences these changes may have on the economic life, in which man is directly and vitally involved (Georgescu-Roegen, 1975). Law covering a wide range, entropy may be used to explain the phenomena in nature, in the biological life and in economy. The human actions have entropic consequences; N.Georgescu-Roegen demonstrates this and gives a "warning on the long term consequences of reckless human actions ", which should be considered a great merit. The entropy law also bringson the forefront some fundamental yet overlooked issues, “the two problems that represent a reason of concern for the led, the rulers and all scientists: pollution and the continuous growth in population". It is natural that the pollution took by surprise “an economic science that enjoyed playing with all kind of mechanistic models.” However, it is strange that even after the pollution appeared, “the political economy shows no sign of recognition of the role that natural resources play in the economic process.”

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The entire network of political, social and economic life began to desintegrate. Under these conditions a new energy base, which is still operational today, emerged: coal. But it is not only a change of the energy base, a shift from resources that can be renewed to those which cannot be renewed. The entire wood civilization was deeply transformed, lifestyle has changed: behavior, clothing, institutions, political leadership structures. But coal is harder to extract and process, and requires a greater energy consumption than wood. The explanation can be found in the Entropy Law. The sources of energy more available are the first to be used. Each generation feeds itself from a form of energy less accesible than the one before. Coal mining, including its processing, it is harder than cutting wood from the forest. More difficult than that it is to pump and process oil and even harder the atomic fission to generate electricity. Because, as shown by Nicholas Georgescu-Roegen, man’s natural heritage consists of two completely different components: a) the low entropy resources on Earth and inside of it, and b) the solar energy flow, whose intensity slowly, but constantly, decreases with the entropic degradation of the Sun. The crucial element for the population problem, as for any reasonable speculation on the evolution of mankind, is the relative importance of these two elements. As surprising as it may sound, "the entire stock of natural resources is not worth more than a few days of sun light". If we exclude other causes that could lead to the "twilight of human race", it is clear that natural resources are one factor that may limit its existence. Currently, human existence is irrevocably linked to the use of exosomatic tools and therefore to the natural resources, as it is conditioned by the "use of lungs and air”, professor N.Georgescu-Roegen warns: "We do not need complicated arguments to realize that a maximum amount of life requires a minimm rate of depletion of natural resources". Because, using these resources too fast, man wastes that part of solar energy which will continue to reach Earth "long after he will cease to exist ", N.Georgescu-Roegen underlines. The Sun is an inexhaustible energy resource; this energy could be widely used, but the technical progress has not moved in this direction. On the other hand, we have to admit it is not easy to capture and convert solar energy, unlike hydropower. “And yet, professor Georgescu-Roegen adds, in the solar energy field the model is not longer mechanical, but thermodynamic.” Under these circumstances, is it possible to end the energy criss by using other sources of energy that are renewable? One possible answer would be nuclear energy; professor Georgescu-Roegen being a good connaiseur of the controversial problem of nuclear energy (Georgescu-Roegen, 1979). For some specialists, namely for those who are partisans of the “supra-generators”, nuclear energy is a radical solution to the energy crisis. Professor Georgescu-Roegen (a genius!) is rather concerned about the development of the nuclear technology. On the other hand, nuclear energy is feasible in terms of high costs, involving extremely high costs and generating extremely serious ecological, social and health problems. The so called “clean” nature of the fusion reactor is also questionable. The health of miners shall be always be affected by the radioactive ores, as it is currently the case with uranium mining. The energy crisis is continuously worsened because of the growth in population. But the era of cheap energy from non-renewable sources has long ended. The flow of nonrenewable resources, such as fossil fuels, directly affects the consumption of renewable resources (forests, fishing, vegetation of arable soils, pastures) on which humanity relied in the past in order to obtain the necessary flow of energy. The economic system that accelerates

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the entropic processes mobilizes the renewable resources up to the point where these themselves become non-renewable resources. Synthetic fuels, produced by coal liquefaction, cannot solve the energy crisis. On the other hand, another illusory solution to this problemis the thesis of obtaining nonferrous metals from the seabed (marine mining), a source that could provide a quarter of the copper produced today, three times more nickel and six times more managanese than the current production. These experts consider that it is possible to obtain four times these figures sometime in the future. However, if we keep the current growth rates of consumption, in a hundred years the demand for copper shall be 90 times higher than the current levels, demand for nickel 28 times higher and demand for magnesium 17 times higher than the existing level. Therefore, all these extra quantities of metals obtained by marine mining shall be shattered by the increasing demand. Moreover, the substitution of rare minerals b other less rare minerals (copper by aluminium, for example) requires high energy consumption and, on the other hand, many minerals cannot be replaced. Recycling is currently used and it is satisfying half the annual demand for antimony, one-third of the demand for iron, lead and nickel, and a quarter of the demand for mercury, silver, gold and platinum. Though, every time a mineral is recycled it is inevitably and irreversibly lost, which confirms the second law of thermodynamics, the entropy law. But recycling also creates pollution and requires a higher energy consumption for the collection, transportation and processing of recyclable materials. Due to the exponential growth in the use of minerals, despite the most efficient recycling technologies, in the foreseeable future we will not be able to meet more than 2% of the total need for metals. In this regard, professor Georgescu-Roegen assesses man’s current situation as close to the end of an unrepeatable idyllic era of cheap fuels. “When this idyllic era will disappear, we will have to adapt, like other species, for example some fish that have learned to live in swamps. However, in our case, this will be a politicial and sociological change, not a biological one.” But what direction will take this change caused by the depletion of resources? Excepting a small number of economists, led by Georgescu-Roegen, the other economists agree with the thesis that the resources from the general economic environment will never deplete. It is stated that the new technologies will always find a way out, identifying and exploiting yet untouched resources. The resource base itself is thus considered inexhaustible. As professor Georgescu-Roegen shows, whenever the human or mechanical energy or any other form of energy is used to obtain something valuable, such a realization is obtained solely by generating an even larger disturbance and waste in the general environment. Even works of great economic value that people produce, end up becoming waste or dispersed energy. The growth in productivity is nothing but a growth in the energy flow, which will create even greater disorder that will eventually be borne by society. The industrial economic system promotes the illusion of a more orderly and valuable world from the material point of view, because the added value is given priority to energy dissipation and entropy growth. In reality, Georgescu-Roegen writes, when we leave this world we leave it less endowed as a result of our presence on the planet. Environmental protection has become one of the most debated problems of our days and a very important issue for our leaders. The environment itself is defined in terms of human understanding as an integral part of nature and reason for overall development; it represents all natural factors and those created by man which, in close interaction, influence the ecological balance, determine the life and work conditions of mankind and development prospects for the society (N.N. Constantinescu, 1976). On its turn, environmental protection is 116

created to ensure the dynamic ecological balance, to consevate and improve natural factors, to develop the natural resources of a country, to provide better life and work conditions for the present and future generations. The evaluation of resources is important not only from the theoretical point of view, but especially from the practical point of view, for the removal of waste in economic processes (production and consumption), for the rational exploitation of these in the context of economic growth. Georgescu-Roegen denounced the insufficiency, explanatory incapacity, por logic and existent contradictions in the different miths regarding economic growth (Georgescu-Roegen, 1976). At the root of this myth, the Romanian scientist identified a fundamentally flawed economic vision because of its exclusively quantitative, arithmomorphic and mechanistic character. To the mechanistic vision of the economy, Georgescu-Roegen opposed the revolutionary conception of the intepretaton of the productive activity as bio-economy marked by entropic processes. The complicated mathematic models, related to the economic reality only by terminology, bypass, as Georgescu-Roegen asserts, the essence of economic growth, which is related to entropy and it is composed of two basic elements: (1) the development itself, ie the technical progress, the innovations in obtaining low entropy to reduce the amount of waste and (2) pure growth, improving the process for obtaining low entropy by improved techniques. As a whole, the economic process consists of a continuous and irreversible transformation of low entropy into high entropy. 4. CONCLUSIONS AND IMPLICATIONS Under these conditions, the limited reserves of low entropy from the crust and the fact that free energy can only be used once, we have a clear picture of one of man’s fights with the limited heritage at his disposal, a heritage that is exhaustible. The rigorous analysis of Georgescu-Roegen on the role of energy – matter transformations in the economic process showed that complete recycling is imposible (IV Law of thermodynamics established by Georgescu-Roegen). Also, solar energy collection systems cannot be achieved at industrial scale without the use of other forms of energy. On the contrary, the standard political economy considers that a technology capable of supporting a renewable energy source will appear in the future. As stated by Solow (1974), “at a certain finite cost, production will be released from its complete dependence on exhaustible resources” (an allusion to the nuclear fusion). These assumptions are made on the premise that natural resources are merchandise like any other, and the market mechanisms will ensure their best allocation. The market is the best calculation device in determining the short term relations between the income distribution and resource allocation under the influence of taxation, technology and preferences, totally ignoring the fate of future generations. Also, the price mechanisms have never been able to cope with the bio-economic deficiences and the peril of an ecological catastrophe. People’s behavior on the market is affected by myopia because it encourages the depletion of resources. The costs of subsoil reserves are not considered and the demand price is not adequate because “the future generations are not present at the auction.” Georgescu-Roegen’s warnings on the ecological dangers are not mere assertions, but arguments based on facts. In his opinion, the only solution is to use more and in different ways the solar energy and to exploit more wisely, responsably the soil and subsoil resources – albeit in large quantities - in a spirit of international collaboration and fairness, as we all are on the same ship, with its natural limits. Of course, in the current international situation the 117

globalization phenomenon is stated more strongly, the assertions of the great scientist must be understood and respected, the natural riches being the universal wealth of all mankind. Before closing this communication we have to make a final assertion. Most economists, regardless of their beliefs, do not venture outside the boundaries of their discipline. After reviewing the scientific and literary work of Georgescu-Roegen we say that he covered a very wide range of knowledge. In his work we find information about biology, chemistry, ecology, thermodynamics, mathematics, philosophy, information theory and, of course, economy. Trained in mathematics, was, two years after obtaining the PhD diploma, the student of Karl Pearson, and in economy he was introduced by a famous personality in this field – Joseph A. Shumpeter. However, what Gottfried von Haberler said about Schumpeter, can also be said about Georgescu-Roegen: “He is no one’s pupil”, (Spiegel, 1952, 742). REFERENCES 1. Amilcar, O., Herrera, Hugo D., etc., Catastrofă sau o nouă societate, un model latinoamerican al lumii, Editura Politică, Bucureşti, 1981. 2. Amigues, J. P., Favard, P., Gaudet, G., Moreaux, M., Ressources naturelles et ordre optimal d’exploitation, Revue d’Economie Politique,vol 107, nr 2, 205-230.1997. 3. Constantinescu, N.N., Economia protecţiei mediului înconjurător, Editura Politică, Bucureşti, 1976. 4. Georgescu-Roegen, N., Bio-economic aspects of entropy, în Entropy and information in science and philosophy, Elsevier Scientific Publishing Company, Amsterdam, 1975. 5. Georgescu-Roegen, N., Energy and economic myths: institutional and analytical economic essays, Pergamon Press, New York, 1976. 6. Georgescu-Roegen, N., Legea entropiei şi procesul economic, Editura Politica, Bucureşti, 1979. 7. Georgescu-Roegen, N., Energy analysis and economic valuation, ‘n Southern Economic Journal, 45, 1979. 8. Georgescu-Roegen, N., Opere complete, I, Omul şi opera (coord.A.Iancu), Editura Expert, Bucureşti, 1996. 9. Iancu, A., Georgescu-Roegen, N., (1906 – 1994),în volumul Marieconomişti europeni, Editura Universităţii Romano – Americane, Bucureşti, 2011. 10. Nicolae-Valeanu I., Istoria gândirii economice, Editura Didactică şi Pedagogică, Bucureşti, 1992. 11. Nicolae-Valeanu I., Tratat de Doctrine Economice, Editura RAO, 1996. 12. Raducanu, V., Economia resurselor naturale, Editura ALL BECK, Bucuresti, 2000. 13. Solow, R.M.,The Economics of Resources or the Resources of Economics,The American Economic Reviw, 64(2),1-14,1974, 14. Solow, R.M., Growth Theory, An exposition, Oxford University Press, 1970 15. Spiegel, H. W.,The Growth of Economic Trought, Library of Congress Cataloginc,1952 16. Suta-Selejan, S., Doctrine şi curente în gândirea economică modernă şi contemporană, Editura All, Bucureşti, 1992, 1994

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IS THE POTENTIAL RISE OF THE BRICS A THREAT FOR THE EUROPEAN UNION?

Ionuț Mihai Ungureanu 1st year Master of Management in Management Science Vrije Universiteit Brussel Faculty of Economic, Political and Social Sciences and Solvay Business School

ABSTRACT This paper presents the relationship of the European Union (EU) with the emergent global actors, so-called the BRIC countries (Brazil, Russia, India and China). More than a decade, the European Union has not given enough attention to the rise of the emergent countries, therefore nowadays the new leading powers take into consideration if the EU is an attractive economic partner for them. An important problem that affects the EU is that the BRIC countries all belong to the G-20 group, representing the 20 most important economies worldwide. Due to this fact the paper raises challenging questions: is the potential rise of the BRICs a threat for the EU? Is the EU still attractive for the BRICs? Do the BRIC countries play an increasingly important role at the WTO? Keywords: BRIC, emergent economies, EU, FTA, PCA JEL classification: F50, F59 1. THE BRIC COUNTRIES: BRAZIL, RUSSIA, INDIA AND CHINA In order to define this group of countries, in 2001, Jim O’Neill used for the first time the “BRIC” acronym (O’Neill 2001, 3) which stands up for Brazil, Russia, India and China. The main idea of the chief economist of Goldman Sachs was that these four emergent countries would play a major role in the global economy (The BRICS Report New Delhi 2012, 1). When Jim O’Neill coined the acronym “BRIC”, he was most uncertain for Russia, regarding a positive economic outlook (Cooper 2006, 3). Together, the BRIC countries account for more than 3.3 billion people (more than 40 percent of the global population) and covers more than a quarter of the world land area (EUROSTAT 2012, 15). Also the BRICs account almost 25 percent of the total global gross domestic product (GDP) in terms of purchasing power parity (PPP) (The BRICS Report New Delhi 2012, 1). An interesting and also important thing is that the economies of the BRIC countries are different from each other in terms of natural resources and the level of industrialization (Almeida 2009, 146-156): Brazil is specialized in agriculture, China in manufacturing, India in services and Russia in commodities. The BRIC countries all belong to the G-20 group. G-20 or the Group of Twenty represents a group of finance ministers and central bank governors from 19 major world economies plus the European Union. Due to this fact the BRIC countries are representing the 119

20th most important economies worldwide. According to the 2010 GDP in PPP terms, the BRIC economies figure among the G-20 top ten: China – 2nd place, India – 4th place, Brazil – 6th place and Russia – 8th place. Between 1992 and 2008 the export average annual growth reached the value of 18 percent for China and 14 percent for India, transforming these two emergent countries in two of the biggest and significant new players in global trade (Hanson 2012, 42). Due to this fact, the EU showed concern for the new trade players. Over the years the BRICs have increased their productivity and raised their quality standards. Because of this, they managed to become an important competitive group of countries (Rosales 2009, 75-76). Compared with the EU, the 2008 economic crisis, shown a temporarily slowdown for the BRICs. Due to the collapse of the US investment bank Lehman Brothers in 2008, the Indian economy shown a decrease in its annual GDP from 7.5 percent to 6.0 percent. On account of the 2008 financial crisis, China registered a sharp decline on its external demand which led to an economic slowdown. From all the BRIC countries, China, followed by India, had the fastest growing economies. Also the growth performance of Russia and Brazil started to improve after the 1990s financial crises. Since 1978, China’s economy grew at an annual average rate of 9.9 percent (The BRICS Report New Delhi 2012, 5). The 2010 proved to be a prolific year for China, managing to become the biggest world producer of goods and surpassing Japan in the world hierarchy. Since 2010, China is ranked second after the USA in terms of GDP, but taking into consideration the GDP at PPP, China occupied this position for almost a decade (Oehler-Sincai 2011, 33-34). In the last decade the BRIC countries are the winners of the globalization process. Due to this fact they earn the right to participate and to influence the global economy and political institutions such as the G-20, International Monetary Fund (IMF), World Bank or World Trade Organization (WTO) (Skak 2011, 2-3). If these markets will continue to grow at fast rates they will increase their importance in the world economy. According to the 2003 Goldman Sash’s projection, in 2040 the BRIC countries will overtake the G-8 countries (Taylor 2011, 227-230). 2. THE RELATIONSHIP BETWEEN EU AND THE BRIC COUNTRIES The BRIC countries had an important role in their region, but more and more, their influence is becoming global (Frank and Frank 2010, 47-48). During their rise, the economy of the BRIC countries remained stable and they managed to intensify their economic cooperation with other development countries (Directorate-General for external policies of the Union 2012, 7). Since their accession to the WTO, the BRIC countries represent an attractive partner for the EU. The European Union does not recognize the BRIC countries as a group, even if it has a strategic partnership with all the BRIC countries. The EU negotiates with each of the BRIC countries through bilateral discussions (EUROSTAT 2012, 7). The EU is the largest trade partner for the BRIC countries that generates a mutual benefit as well as greater economic and political ties (Leal-Arcas 2009, 117). One of the reasons why the European Union is the largest trade partner for the BRIC countries is its lack of resources. Brazil is famous for its rich resources such as crude oil, sugar cane or coffee, Russia is known for its substantial deposits of natural gas, oil and minerals, India for its services provided and China for its manufacturing with relatively low wage costs (The BRICS Report New Delhi 2012, 3). One of the European Union’s main objectives is to create economic ties and to generate more prosperity by developing its relationships with the BRIC countries. Due to this, trade relationships contribute to peace and security (Leal-Arcas 2009, 346). 120

The relationship between the EU and the BRIC countries is very important for the EU because the economic power is shift away from the mature and developed countries such as Japan and Western Europe to the emerging countries (EUROSTAT 2012, 31). This relationship ensures to the European Union a connection with 3 continents, especially with Asia and Latin America (Directorate-General for Trade). 3. EU – BRAZIL The diplomatic relationships between EU and Brazil were established in 1960. Since the partnership was signed, the cultural, economic and political relationships permanently developed. For the EU, Brazil is the largest trade partner in Latin America with a 35 percent of the total trade between the EU and Latin America. Bilateral summits are holded between the EU and Brazil and their main purpose is to strength the bilateral relationship. In 2010, at the 4th summit that took place in Brasilia, capital of Brazil, the main goal was to accelerate the negotiations for the EU-Mercosur Agreement that was suspended in 2004 and re-launched at the beginning of 2010 in Madrid (OehlerSincai 2011, 34-35). The purpose of the EU-Mercosur Agreement is to reduce the tariff and non-tariff barriers and to reduce the actual trade deficit between EU and Brazil. Due to the fact that Brazil has a high protectionism level for goods and services markets, the summits between the EU and Brazil represent an important way to improve the bilateral trade and the investment relationships. Taking into account Brazil’s foreign policy of focusing on changing the international status quo in different areas including finance and international trade, the EU position is in line with the Brazilian interests. In the last decade the consolidation of the EU managed to improve the longstanding ties between the 27 Member States of the EU and Brazil (Ortega 2004, 43). 4. EU – RUSSIA The consolidation of cooperation between the EU and Russia was remarked within the new bilateral discussions launched in the 1990s. The third biggest trade partner of EU is Russia. The EU imports Russian supplies of gas and oil, which represents a big percentage of Russia’s exports. Even if the EU and Russia concluded a partnership and a co-operation agreement in 1994, the tensions between them are still alive and they continue in the field of energy and geo-politics. The relationship between the EU and the Russian Federation is based on the principle of complementarity (Oehler-Sincai 2011, 35-36). For the EU, Russia is a strategic partner because is highly dependent of the Russian natural resources. On the other side, until last year, Russia needed the European technologies, the internal market and the support for joining the WTO. Now the EU support for joining the WTO is no longer needed, because on 22 august 2012, Russia becomes the 156th member of the WTO. Along with Russia's WTO membership, the EU will bring a significant impact and a major push for further development in the economic field between the EU and Russia (European Commission - External Trade). Being the largest gas supplier for the EU, Russia has a privileged position. Even if they have a big percentage of natural resources, the Russian economy under the Vladimir Putin’s presidency does not rely on knowledge and useful technology. Based on the relationship with the EU, Russia must diversify its economy and start the process of modernization, even if this means to seek for foreign investments (Codoban 2011, 50-51).

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The cooperation between the EU and Russian Federation is based on four specific policy areas, according to the Partnership and Cooperation Agreement (PCA). The common fields cover the following areas: economic, security and justice, education and culture. The bilateral relationships between the EU and Russian Federation were based on the PCA signed on the 1st of December 1997. After the end of the PCA on the 1st December 2007, new EU – Russia negotiations were launched at the Khanty-Mansyisk Summit in June 2008 for updating and replacing the existing PCA (Oehler-Sincai 2011, 35-36). This new Agreement should provide a comprehensive framework for EU – Russian Federation relations. The negotiations that were started in 2008 and ended in 2010 included 12 rounds of negotiation. During these negotiations the new PCA includes legally binding commitments, political dialogue and economic cooperation (World Trade Organization). The negotiations of the new PCA, also contribute to the relationship between the two parties and the strengthening of trade, investment and energy. Despite the bilateral divergences between Russia and the EU, the EU’s behavior is based on the principle of engagement, referring to the opportunities of developing bilateral discussions with Russia where it is possible, but keeping a strong position on the own principles where it is necessary (Council of the European Union 2010, 35).

5. EU - INDIA The relationship between the EU and India started in the 1960s. The first Framework Agreement was signed in 1973 and it was followed by a new Agreement in 1981 that included the negotiations for trade and cooperation between the two parties. The bilateral negotiations between the EU and India let to a new Agreement in 1994 that opened the door for political dialogue. This Agreement represents the current legislative framework for cooperation. The first bilateral summit between the two parties took place in 2000, in Lisbon, the capital of Portugal. In 2004 India became a strategic partner for the EU and in 2005 at the New Delhi Summit was concluded the first common action plan that provides a high level in bilateral trade and it amplified the investment relationships (Oehler-Sincai 2011, 35-36). This plan was revised at the Marseille Summit in 2008, as an integral part of the strategy “Global Europe”, started in 2006 by the European Commission (EC). The EU and India signed in 2001 a bilateral cooperation agreement in the science and technology field, due to their strong relationship in these sectors. Based on this agreement, the EU and India work on the 7th Framework Program (FP7). Taking into account the feasibility studies, the EU and India agreed to start the negotiations for a bilateral Free Trade Agreement (FTA). Since June 2007 the FTA between the EU and India took several round negotiations, but has not been yet finished. For the EU, the conclusion of the FTA can generate a series of benefits such as the increase of bilateral trade and the decrease of the protection level imposed by India. Despite the relationship between the EU and India and their bilateral efforts to enhance the cooperation at all levels, the absence of the FTA reduce the bilateral trade and investment exchanges. 6. EU – CHINA The first official bilateral relationship between the EU and China was in 1975 and in 1978 it was signed. In 1985 this Commercial agreement was replaced in 1985 with the EU – China Trade and Cooperation Agreement. In 1995, the EC defined in an official document its 122

first strategy about the bilateral economic relationship between the EU and China. In 1998, it was initiated a new stage of cooperation by the EU – China Summit held in London. After several rounds of negotiations, in 2003, China made public the strategic partnership that was initiated between the two parties. In 2006, the EC published an EU – China communication that describes the responsibilities of the two parties. As they are closer partners, their responsibilities will increase significantly. Due to this fact the exchanges between the EU and China will increase also in the political and economic field, so they will have high expectations regarding the field of cooperation and competition. An important step was taken in 2008 when the EU and China started in Beijing a bilateral dialogue at a high level on the economic and trade field (Oehler-Sincai 2011, 37-38). This dialogue between the EU and China started with the need of developing the existing bilateral cooperation that can generate bilateral benefits. The initiative to start the dialogue at high level on the economic and trade field belongs to China and the main objective was to reduce the disequilibrium on bilateral trade. This mechanism between the two parties includes the following action fields: investments, innovation, bilateral trade and bilateral technology cooperation. In 2010, a high level summit between the EU and China was held in Brussels with the occasion of celebrating 35 years since the first diplomatic relationships were set up. At this summit, China expressed its intention to open a new stage for bilateral relationships between the two parties. During the last decades, China’s economy records a significant growth due to the relationships between the EU and the USA. A high impact on Chinese trade balance was represented by the revaluation of their national currency and the domestic consumption growth. The cooperation between the EU and China represents a key factor for the implementation of their national strategies for modernization and innovation. Due to this, China intends to become until 2050 a world leader in science and technology products. 7. PCAs, PAs OR FTAs? The EU external relations, trade policy and foreign policy, are constitutionally separated. The EU trade policy is the core of supranational integration and the foreign policy is forming the subject of evolving (Eeckhout 2004, 422). The EU is a world player due to its size, trade and financial terms (European Union - External Relations). The EU trade and partnership agreements cover most of the world countries, the BRIC countries being among them. All the PCA’s with the BRIC countries were negotiated individually, so their terms vary in details. The main objectives of all PCAs were: to establish new trade relationships, to institutionalize political relations, including political dialogue and to ensure cooperation. After the fail in 2006 of the WTO - Doha round on reaching an agreement concerning agricultural subsidies and import taxes, the BRIC countries turned towards the South-SouthCooperation (SSC) at the bilateral and regional level, SSC becoming the main topic on the existing panels of international development cooperation (Directorate-General for External Policies 2012, 10). Due to the BRIC’s influence on the SSC, the Organization for Economic Co-operation and Development (OECD) and the United Nations (UN) introduced task forces on the SSC. Taking into account that the SSC was institutionalized in all the BRIC countries, the EU considers the SSC is an important challenge for international development strategies since 123

the South-South-Dynamics (SSD) seem to be out of reach (Directorate-General for External Policies 2012, 11). Due to this the relationship between the EU and the BRIC countries can increase. The relations between the EU and the Soviet successor states, including Russia were taking shape from early 1990’s (David et al. 2011, 183-184) in parallel with the development of the Common Foreign and Security Policy (CFSP) (Zagorski 2002, 3). Since 1994, when the EU started the negotiations with Russia to establish a partnership with the two parties, the relations between them started to work better and in 1997 the PCA came into force for an initial duration of 10 years. In 2007 it was renewed and the legal basis for the EU-Russia relations remained. The trade between Russia and the EU is mainly concentrated on the energy sector and minerals sector. Due to this Russia’s main trading partner and investor is the EU (EUROSTAT 2012, 73). The last agreement signed in 2011 is based on the administration of the tariff-rates quotas (European External Action Service). Due to the commitment between the EU and Russia to liberalize trade, based on the principles from the General Agreement on Tariffs and Trade (GATT), the agreement between the two parties will create a new climate for economic relations. A major difference between the relationship between the EU and the BRIC countries is that the relationship with Russia is no longer based on a PCA. In May 2005 at the EURussia Summit held in Moscow, the legal framework for the four spaces created at St Petersburg Summit, in May 2003, (1 - economics and energy; 2 - internal security and justice; 3 - foreign and security policy; 4 - education and culture) were implemented within a new partnership, called Partnership Agreement (PA). Due to this fact, the PCA signed in 1994 was replaced with a new PA (Konoplyanik 2009, 259). In 2008, at the Russia–EU Summit held in Khanty-Mansiysk, the oil capital of Russia, the two parties opened a new round of negotiations for a new PA. The main objective of this PA is to develop a legal framework for developing a common economic space between EU and Russia. This new PA is renewing the existing PCA under the provisions of Article 106 from the Treaty of the European Community (TEC). The PA includes new additions and amendments to the old PCA (Arbatova 2006, 103). The novelty of this PA is that the two parties included the energy in their discussions. According to the EU-Russia Summit held in Nice, France the new PA will include an energy chapter, but the architecture of this chapter remains to be discussed. The previous PCA, signed in 1994 did not include an energy chapter, so to develop a legal energy framework between the two parties would be possible in two ways. The way preferred by the EU is to export Union’s emerging acquis communautaire to the countries outside the European Union, and Russia wants to start a new bilateral PA based on the energy chapter or a totally new PA (Konoplyanik 2009, 260-261). By the end of 2011, this new PA, also known as “The Partnership for Modernization” will fail with the exception of small pilot projects. Beyond the energy chapter in the new PA, significant opportunities have been opened up for cultural co-operation, being an important factor in the development of the relations between the EU and Russia (Christou 2011, 226-227). Although the oil sales to the EU declined, Russia became in 2012 the largest oil producer, displacing South Arabia. After the size of Nabucco (the European gas pipeline project), was reduced, Russia has urged the EU to grant the Russian South Stream pipeline construction a high priority. Due to this fact, Russia can sign a new PA between the two parties, but by Nabucco, the EU wants to reduce its dependence on Russia. The 27 Member States (MS) trading bloc hopes to start a new round of negotiations for a free-trade agreement (FTA) with Russia, which can bring a big benefit to the EU (removal of the non-tariff barriers and the achievement of regulatory convergence). For 124

Russia, either a FTA or its accession to WTO does not seem to be attractive, given the fact that the Russian energy exports are not subject to restrictions (Leal-Arcas 2008, 264). China and the EU are two of the biggest traders in the world, China being EU’s 2nd trading partner and the EU, China's biggest trading partner (Casarini 2006, 7). The EU is willing to develop new trading relations with China, but in the same time the EU wants to ensure that China trades fairly, respects its WTO obligations and respects intellectual property rights (IPR). For many years, China wanted to establish a strategic partnership with the EU and in contrast with the China-US relationships, the relationship with the EU is free of competition and rivalry (Crossick and Reuter 2007, 4-5). In 2006 at the EU-China Summit held in Helsinki, the two parties agreed upon a PCA, so in the beginning of 2007 the negotiations started. This PCA will cover both the political and economic dimensions between the EU and China. The PCA will be an upgrade of the 1985 Trade and Economic Cooperation Agreement (TECA) (European Commission External Trade). The PCA between the EU and China is designed to create a framework for further liberalization of trade and investment and it is not a preferential trade agreement. The PCA with China will mainly focus on trade and investment issues and one of its main objectives is to remove the restrictions on investment and foreign ownership in China (Zeng 2009, 127). Within the negotiation of the new PCA it seems to be a hard and time-consuming process. According to the EU internal aspects, the PCA with China represent a form of a mixed agreement where issues like market access, transparency, IPR, high-tech trade, rule of law or dispute settlement clauses should be respected (Zeng 2009, 123-124). The dialogue between the EU and China for establishing a PCA included market access and more efforts to enforce the WTO obligations (Dreyer and Erixon 2008, 9). For many years the EU, had adopted a series of measures submitted to China. These measures include rules on safeguards, anti-dumping measures and bars on arms trade (Gaenssmantel 2010, 379-380). Most probable both sides will put in place a systematic, stable and sustainable treaty law. This treaty will be based on a comprehensive strategic partnership between China and the EU, where principles like mutual respect, trust, and equal consultation will persist (Zeng 2009, 125). The PCA between the EU and China or the “new TECA”, is part of the comprehensive strategic partnership between the two parties and it is based on the present TECA signed in 1985, that it will be implemented separately (Zeng 2009, 126). The PCA with China must respect the general provision contained in Article 300 of the TEC as amended in the Nice Treaty and the common commercial policy from the Article 133 of the TEC. In 2007 and 2008 a significant number of anti-dumping cases were opened against Chinese concerning goods such as candles and steel (Wu 2012, 473). From a legal perspective, the economic sanctions applied to China raises a difficult issue between the two parties (Eeckhout 2004, 36-37). Due to this and in opposition to its own anti-dumping assessment the EU Commission introduced a new anti-dumping tariff (Dreyer and Erixon 2008, 3-4). The trade sanctions which will be applied to China are based on the current Article 133 and Articles 301 and 60 of the TEC (Eeckhout 2004, 36). The last dialogue between the EU and China took place at 2012 Summit, in Beijing, where the two parties agreed to launch new negotiations on a bilateral investment agreement as soon as possible (European Commission - External Trade). Having a closer look at the other BRIC countries, Brazil and India, it can be noticed that the EU did not launched a common dialogue with this countries for establishing a PCA. The negotiations with India and Brazil were set up for a future FTA. 125

The EU has outgoing negotiations with Mercosur (Spanish: Mercado Común del Sur / English: Southern Common Market), a regional group from South America, group of which Brazil belongs (European Commission - External Trade). The FTA and the current negotiation between the EU and Mercosur are part of a bi-regional association agreement which also includes a political and a cooperation chapter. The negotiations between the two parties were restarted in Madrid at the 2010 EU-Mercosur Summit (European Commission External Trade). Being the largest economy in Latin America, the FTA with the EU will help Brazil to expand its agricultural exports (Monteagudo and Watanuki 2003, 54). The FTA between the EU and Mercosur will cover important issues like: trade in goods and services, foreign investment or IPR, but also it will cover trade in agricultural goods and government procurement (European Commission - External Trade). A future agreement with Mercosur, especially with Brazil would provide a big support and will stimulate new opportunities for trade and investment with the EU and with the 27 Member States (MS). The major objective of the FTA is to negotiate a comprehensive trade agreement and to remove the tariff and non-tariff barriers for trade and foreign direct investment (FDI) (Estevadeordal and Krivonos 2000, 1-2). During the last decade, for about 45% - 50% of the FDI in Brazil stems from the EU (European Commission - External Trade). This preferential trading agreement with Brazil will bring an important impact for the both parties and it will increase the economic effects on the trade and also on the welfare of Brazil and the EU (Francois et al. 2005, 1548-1549). The EU’s gain for establishing a FTA with Mercosur is represented by its access to the largest market in Latin America. Until the present date nine negotiation rounds have taken place between the EU and Mercosur. Currently it was not established any fixed date for signing the FTA between the two parties. Due to the fact that India's economy is not well integrated in the world, the EU had shown a big interest for a FTA with India (Achterbosch et al. 2008, 7). Once started the negotiations in 2007 for a FTA, the EU and India hope to increase their trade, especially in goods and services (European Commission - External Trade). Within the negotiation for a FTA with India, the EU wants to remove the substantial tariff and non-tariff barriers that are still present in the trade with the EU and its 27 MS. Another issue that is still present in the trade with the EU is represented by the quantitative restrictions and the import licensing. The FTA with India is very important for the EU because India showed in the last decade a rapid growth and a high market protection, combination that obvious attracts the EU. Due to the fact that India made huge efforts to integrate in the global economy, the EU is providing assistance to India, to develop new economic ties and to attract FDI’s. At the present time, India has a preference trade with the EU under the Generalized Scheme of Preferences (European Commission - External Trade). 8. THE EU-BRIC DEPENDENCE Taking into account the data presented above, it can be considered that the BIRC countries and the EU have three things in common: external trade, G-20 membership and the WTO membership. From this list, external trade is the most important issue that made possible the agreements and the partnerships between the EU and the BRIC countries. Even if the EU has different partnerships (PCAs, PAs or FTAs) with Brazil, Russia, India and China, the final result remains the same: a better cooperation and development between them.

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Having a look at the beginning of the paper, the relationships between the EU and each of the BRIC countries were made because of their need for trade. Each country of the BRIC’s is specialized in different fields and the EU is one of the biggest trade partners for them. Due to this, the EU is dependent on the BRIC countries and the BRIC countries are dependent on the EU. Another proof of dependency is represented by the bilateral discussions for cooperation between the EU and the BRIC’s. These dialogues between the both sides were able to start ongoing future partnerships and agreements. Due to their political problems, with the support of the EU, Russia managed to enter in 2012 the WTO. Even if the EU has decreased its imports of gas and oil, the EU still remains the largest market for Russia. The support shown by the EU to Russia’s accession to the WTO it is closely linked to the obvious features between the EU and the WTO: they promote trade between states. The difference between them is that the WTO is a multilateral organization while the EU geographically limited organization (Burca and Scott 2003, 2-3). The fact that the BRIC countries showed a large increase in their GDP in the last decade is a pleasant fact for the EU, because it will raise their trade and FDI’s. This will bring to the EU and the Greater Europe Zone (GEZ) many benefits and opportunities because the biggest economy from the BRIC countries, China started its investment program in the EU (Apoteker 2012, 8). Due to their rapid growth, their approach with other economies and their industrial policy, the BRIC countries managed to resist the pressures from the international economic law. The BRIC markets all belong to the most important economies worldwide, being able to increase their influence in international organizations such as WTO, IMF or World Bank (Trubek 2012, 3). It was unavoidable the fact that the BRIC countries will grow and also their power and worldwide influence. Even if the BRIC countries fundamentally diverge from the vision of the Western countries, now these emergent economies managed to set up a coalition to compete with these powers and to overthrow the political sovereignty of these states (Laidi 2012, 614-615). Emergent economies, such as China and India, increased their importance and capacity toward the WTO reforms, acting as the current leaders, the US and the EU. These new actors, managed in a short period to bring diversity in the leadership of the WTO and to be part of the global trade governance (Kim 2009, 4-5). Now, the global trade governance and the legitimacy of the WTO reform are in the leading of the most important economies worldwide. Taking into consideration the last studies conducted by experts from The Economist, the world, led by the BRIC countries, including other emerging countries, in 2017 will constitute over 50 percent of the world GDP (Trubek 2012, 4-5). According to the willingness shown by the EU and the BRIC countries to conclude strategic partnerships between them, it can be obvious noticed that the BRIC’s do not represent a threat for the EU and the EU is the most important trade partner for each of the BRIC countries. 9. DIRECTIONS FOR FUTURE RESEARCH: This conceptual paper is based on established literature and the research cited here recognizes the link between the European Union (EU) and the emergent global actors, socalled the BRIC countries (Brazil, Russia, India and China). The framework presented in this paper contributes to the literature by emphasizing the differences and the dependences between the two parties. Besides extending the context and using empirical data to measure the importance and the impact on the financial development and economic growth of the BRIC countries, there are other avenues for future research. 127

The challenge of differentiating the BRIC countries becomes even more important due to the fact that the EU diplomacy is focused on bilateral relations with each member of the BRIC countries. This calls for research into how the EU will deal with the BRIC countries as a group, taking into account the fact that in 2017, this grouping, including other emergent countries will constitute more than 50 percent of the world GDP. Measuring the actual growth gap between China, and the other members of the BRIC group, will China become the first economy by 2050, according to the 2003 Goldman Sachs forecast? In addition a very important future research issue is the dependence of the two parties and the interaction effect. REFERENCES: 1. A. Codoban, “ European Union’s quest for energy policy: a geo-economic approach”, Romanian Journal of European Affairs 11(3) (2011): 50-51. 2. A. Estevadeordal and E. Krivonos, Negotiating market access between the European Union and Mercosur: Issues and prospects (Buenos Aires: INTAL – ITD, 2000): 1-2. 3. A. Konoplyanik, “A Common Russia–EU energy space: The new EU–Russia Partnership Agreement, Acquis Communautaire and the Energy Charter”, Journal of Energy & Natural Resources Law 27(2) (2009): 260-261. 4. A. Zagorski, “EU Policies towards Russia, Ukraine, Moldova and Belarus”, Occasional Paper Series 35 (2002): 3. 5. C.R. Taylor, “Editorial on advertising in the BRICs and other emerging markets”, International Journal of Advertising 31(2) (2011): 227–230. 6. Council of the European Union, Annual Report from the High Representative of the Union for Foreign Affairs and Security Policy to the European Parliament on the Main Aspects and Basic Choices of the CFSP (Bruxelles: European Union, 2010): 35. 7. D. M. Trubek, Reversal of Fortune? International Economic Governance, Alternative Development Strategies, and the Rise of the BRICS (Florance: European University Institute, 2012): 4-5. 8. Directorate-General for external policies of the Union, The role of BRICS in the developing world (Bruxelles: European Union, 2012): 7. 9. Directorate-General for Trade, “Bilateral Relations Statistics Database”, accessed 12.12.2012, 10. http://ec.Europa.eu/trade/creating-opportunities/bilateralrelations/statistics/. 11. Dreyer and F. Erixon, An EU-China trade dialogue: a new policy framework to contain deteriorating trade relations 3 ECIPE Policy Briefs (2008): 3-4. 12. European Comission, “External Trade”, accessed on 17.12.2012, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/russia/. 13. European Commission, ‘External Trade’, accessed on the 29.12.2012, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/brazil/. 14. European Commission, ‘External Trade’, accessed on the 29.12.2012, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/regions/mercosur/. 15. European Commission, ‘External Trade’, accessed on the 29.12.2012, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/india/. 16. European Commission, ‘External Trade’, accessed on the 29.12.2012, http://trade.ec.europa.eu/doclib/docs/2009/february/tradoc_142373.pdf.

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17. European Union, “European External Action Service”, accessed on the 27.12.2012 http://ec.europa.eu/world/agreements/searchByCountryAndContinent.do?countryId=3 853&countryName=Russia. 18. European Union, “External Relations”, accessed on the 29.12.2012, http://europa.eu/pol/ext/index_en.htm. 19. Eurostat, The European Union and the BRIC countries (Luxembourg: Publications Office of the European Union, 2012): 15. 20. F. Gaenssmantel, “Chinese Diplomacy towards the EU: Grand vision but hard to manage” The Hague Journal of Diplomacy 5 (2010): 379-380. 21. G. Christou, “Bilateral relations with Russia and the impact on EU policy: the case of Cyprus and Greece”, Journal of Contemporary European Studies 19(2) (2011): 226227. 22. G. de Burca and J. Scott, The EU and the WTO (Oxford: HART Publishing, 2003): 23. 23. G. H. Hanson, “The rise of middle kingdoms: emerging economies in global trade”, Journal of Economic Perspectives 26(2) (2012): 42. 24. I.M. Oehler-Sincai, “The strategic character of the cooperation relationship between the EU and the BRIC countries”, Romanian Journal of European Affairs 11(2) (2011): 33-34. 25. J. Cooper, “Russia as a BRIC: Only a Dream?”, European Research Working Paper Series 13 (2006): 3. 26. J. F. Francois, M. McQueen and G. Wignaraja, “European Union–Developing Country FTAs: Overview and Analysis”, World Development 33(10) (2005): 1548-1549. 27. J. Monteagudo and M. Watanuki, “Regional trade agreements for Mercosur: A comparison between the FTAA and the FTA with the European Union”, Économie internationale 94-95 (2003): 54. 28. J. O’Neill, “Building better global economic BRICs”, Global Economics Paper 66 (2001): 3. 29. L. Zeng, “A preliminary perspective of negotiations of EU–China PCA: A new bottle carrying old wine or new wine or both?”, European Law Journal 15(1) (2009): 127. 30. M. David, J. Gower and H. Haukkala, “Introduction: The European Union and Russia”, Journal of Contemporary European Studies 19(2) (2011): 183-184. 31. M. Ortega, “Global Views on the European Union”, EU Institute for Security Studies 72 (2004): 43. 32. M. Skak, “The BRIC Powers as Actors in World Affairs. Soft Balancing or?”, IPSAECPR Conference in Sao Paolo (2011): 2-3. 33. Ministry of Finance, Government of India, The BRICS Report New Delhi 2012: A Study of Brazil, Russia, India, China, and South Africa with special focus on synergies and complementarities (New Delhi: Oxford University Press, 2012): 1. 34. Moshes, “Russia’s Europen policy under Medvedev: how sustainable is a new compromise?”, International Affairs 18(1) (2012): 20. 35. N. Arbatova, “Russia-EU Quandary 2007”, Russia in Global Affairs 4(2) (2006): 103. 36. N. Casarini, “The evolution of the EU-China relationship: from constructive engagement to strategic partnership”, Occasional Papers 64 (2006): 7. 37. O. Rosales, “Globalization and the new international trade environment”, CEPAL Review 97 (2009): 75-76. 38. P. Eeckhout, External Relations of the European Union: Legal and Constitutional Foundations (New York: Oxford EC Library, 2004): 422.

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39. P.R. de Almeida, The Brics’ role in the global economy, Cebri-Icone-British Embassy in Brasilia: Trade and international negotiations for journalists (2009): 146-154. 40. Q. Wu, “EU-China Competition Dialogue: A new step in the internationalization of EU competition law?”, European Law Journal 18(3) (2012): 473. 41. R. Leal-Arcas, “How will the EU Approach the BRIC Countries? Future Trade Challenges”, ICL Journal 2(4) (2008): 264. 42. R. Leal-Arcas, “The European Union and new leading powers: towards partnership in strategic trade policy areas”, Fordham International Law Journal 32(345) (2009): 346. 43. R. Leal-Arcas, The European Union and the BRIC countries, in: F. Laursen (ed.), The EU in the global political economy (Brussels: P.I.E. Peter Lang, 2009): 114. 44. S. Crossick and E. Reuter, China-EU: A common future (Singapore: World Scientific Publishing Co., 2007): 4-5. 45. S. Y. Kim, Who Will Reform the WTO? Power, Purpose, and Legitimacy in Institutional Reform “Global Trade Ethics and the Politics of WTO Reform” (2009): 4-5. 46. T. Achterbosch, M. Kuiper and P. Roza, EU-India free trade agreement: A quantitative assessment (The Hague: LEI, 2008): 7. 47. Treaty of the EC: Article 60, Article 133, Article 300, Article 301. 48. W. P. Frank and E. M. Frank, “International Business Challenge: Can The BRIC Countries Take World Economic Leadership Away From The Traditional Leadership In The Near Future?”, International Journal of Arts and Sciences 3(13) (2010): 46-54. 49. World Trade Organization (WTO), WTO Membership, accessed on the 22.12.2012, http://www.wto.org/english/thewto_e/countries_e/russia_e.htm. 50. Z. Laidi, “BRICS: Sovereignty power and weakness”, International Politics 49(5) (2012): 614-632. 51. T. Apoteker, Chinese investment in the Greater Europe Zone (London: Europe China Research and Advice Network, 2012): 62.

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ASPECTS OF ECONOMIC THINKING AND ECONOMIC ACTIVITY IN ROMANIA DURING THE INTERWAR PERIOD

Cornelia Nistor University of Bucharest

Vladimir-Codrin Ionescu University of Bucharest

ABSTRACT The interwar period was a period full of events with a strong impact on the future evolution of the economy, both in Romania and in the other states. The analysis of these theories and economic realities may be useful in explaining how changed the structure of the national economic activities on branches and how it influenced the subsequent development of the country. Although profoundly different between them, the common goal of all these economic doctrines was the realization of a better and more accurate society and of a more modern and effectively economy. The economic doctrines were obviously influenced by the existing political regime in the interwar period, characterized by the dominance of a few powerful parties. In the early interwar period, the focus was on rebuilding the agriculture and on raising the living standards in the rural areas. In the next decade, the state encouraged through adequate measures, the development of the industry, but this does not mean that the state neglect the agriculture, but it encouraged the further development of this branch at a rate higher than that achieved in the early years of the twentieth century. Key words: economic doctrines, protectionism, peasant-ism, industrial – agricultural development, international trade, economic policy.

1. INTRODUCTION The complex economic thinking in the interwar period in Romania had an important influence on the economic policy of the state. The serious and complex economic, political, social or climatic events at the global and national level were important factors that led the state to choose the specific instruments of economic policy. The interwar period was a period full of events with a strong impact on the future evolution of the economy, both in Romania and in the other states. The analysis of these theories and economic realities may be useful in explaining how changed the structure of the national economic activities on branches and how it influenced the subsequent development of the country. When the World War I ended, Romania's economy has undergone a period of recovery after the devastation of military conflicts and at the same time, a period of clotting and building up the new national state. The total area of the country has approximately doubled and the total population increased significantly, which meant a large increase of the total resources available and of the potential economic development. Between the years 1924 -

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1929, the country went through a phase of economic boom in which developed most of the activities. The start and the development of the Great Depression during 1929 - 1933 was a turning point that influenced the economic way of thinking and imposed taking some measures of economic policy different from those from the previous periods, in order to restore the economic activity through a strong state intervention in the economy. In the present paper will be analyzed the way in which was made the transition from a predominantly agrarian economy, where about 80% of the population lived in rural areas, to an industrial-agricultural economy. In the early interwar period, the focus was on rebuilding the agriculture and on raising the living standards in the rural areas. In the next decade, the state encouraged through adequate measures, the development of the industry, but this does not mean that the state neglect the agriculture, but it encouraged the further development of this branch at a rate higher than that achieved in the early years of the twentieth century. The economic doctrines were obviously influenced by the existing political regime in the interwar period, characterized by the dominance of a few powerful parties. The most important was the National Liberal Party, representing the bourgeoisie and supporter of the idea of development by the own strengths, especially by encouraging the industrial development. One of its important members was the economist Mihail Manoilescu. The second party, in order of its importance, was the National Peasant Party, which promoted especially the interests of the peasantry, considering that this is one of the most important classes. The Peasant Party doctrine aimed primarily the agricultural development, accepting the contribution of the foreign capital by "Open Policy". Among the most important economists member of this party is Virgil Madgearu. As far-left party, whose ideology was strongly influenced by Marxist ideas, stands the Romanian Communist Party. Consequently, the major economic doctrines in Romania in the interwar period were: the neo-liberalism, the peasant-ism, the protectionism and the communism. From this paper will result that although profoundly different between them, the common goal of all these economic doctrines was the realization of a better and more accurate society and of a more modern and effectively economy. 2. LITERATURE REVIEW The main issues related to the economic way of thinking in the interwar period and to the evolution of the economic activity in our country are primarily reflected in the works of the economists to which this paper refers. The most important contributions in this respect are individualized in prestigious works of the most important Romanian economists from the interwar period. The works of Grigore Antipa analyzes the economic system as a complex, with important influences of the extra-economic area. His ideas reflect its multidisciplinary training in various fields of study and his concerns that have combined mainly the economy and the biology. The author highlighted in his work "The development of the Roman people" (1919) aspects of the society’s progress, seen as a result of the amount of interaction between biological, geographical, economical, social and moral factors. The economic activity is influenced by objective and subjective, economic and extra-economic factors. In contrast, the economist Ion Angelescu was distinguished mainly by his works on the rural and urban economic history, in which he analyzed with appropriate statistical tools, its main concern regarding the explanation of the specific issues of the market mechanisms. The most representative of his work is: "Romanian economic policy to economic policy of imperialism" (1923). 132

George Tasca, being a neoliberal and post-classic economist, with some interventionist accents, was concerned with the possibility of achieving the economic optimum, with the possibility of increasing the country’s resources, wiht the influence of the geographic, ethnographic and historical impacts on the economic field, with the way in which the economic policy instruments can be adapted to the specific conditions of each country. Among his most important works are: "Cooperative issues - Romanian capitalism and cooperatives. Economic relations between villages and towns "(1927) and "Liberalism and corporatism” (1937). One of the most prominent Romanian economists, who lived and wrote in the interwar period is the liberal economist Mihail Manoilescu. He promoted the development of the private property, especially the bourgeoisie class, considered to be the only one able to provide the national industrial development. Mihail Manoilescu is also one of the most important proponents of the protectionist measures that states must take, in order to encourage the industrial development, which was considered the basic element able to reduce the macroeconomic imbalances and to increase the foreign trade volume. On the same line are his ideas inspired by the Italian corporate doctrine. Two of his most important works, which have enjoyed the worldwide recognition are: "The importance and the perspectives of industry in the new Romania" (1921) and "Protectionism and international trade theory" (1929). Virgil Madgearu is one of the leading representatives of the peasant-ism, an economic doctrine with strong roots in the economic reality of Romania in the interwar period. The author supported the agricultural development, as the fundamental branch of the national economy, including on the foreign capital, which was encouraged to enter in the country and which was considered an important element for the national economy’s development. Virgil Madgearu opposed some of neoliberal ideas, which favored the bourgeoisie class and some of the socialist orientation, which neglected the importance of the private property. After completing the Great Depression of 1929 - 1933, Virgil Madgearu concluded that the industrial development does not conflict with the agricultural development, but completed it. An important role had the capital accumulation. The industrial policies are not contrary to the agricultural ones, but complement them, as was reflected his work: "Agrarianism, capitalism, imperialism" (1936). An important representative of the Romanian protectionism was Dumitru Constantinescu, who studied in particular the problems of the internal development of the Romanian economy in correlation with the participation of the country on the foreign markets. The three asymmetries of economic development which have especially concerned Constantinescu were: between the development of industry and of the agriculture, between the public sector based on dirigisme and private, and the free enterprise, between the quantitative and qualitative sides of foreign trade, which generated imbalances and the deficit of the external balance of payments. Dumitru Constantinescu considered that the best solution for the national economic recovery was represented by the development of the industry called "double industrialization". This process reflected a common aspiration of all the countries with agrarian – industrial economies. The industrialization affected the foreign trade relations by replacing a part of the total imports by domestic goods, made within the country and by developing, through the state’s measures of economic policy, those branches which were the most productive and could effectively support the country's exports. One of his important works in this regard is: "Contributions to the problem of raw materials in Romania" (19391941). Key issues related to the history of the Romanian economic thought in the context of the international economic changes are highlighted in the works: "The History of the Economic Thinking" by Nicolae Ivanciu-Valeanu and "Economic Doctrines" by Sultana Suta133

Selejan, who made a fresco of the economic thinking in Romania, in the context of the international developments, particularly from Europe. Historical issues and recent contributions are reflected also in the work: "Economics" by Gheorghe Cretoiu, Viorel Cornescu, Ion Bucur, in correlation with the way of functioning and manifestation of the economic laws, the economic phenomena and processes. A broad overview of the most important contributions of Romanian economic thinking is realized in the work: "The History of the Romanian Economic Thinking Illustrated by Portraits of Romanian Economists", having as authors N.N. Constantinescu and Ileana Constantinescu. The evolution of the global economic activity, is described and analyzed in detail, in the most important historical stages, in the work: "The History of Economy", by Maria Muresan, Dumitru Muresan, in which the economic phenomena and processes are presented and analyzed both with the historical and logical methods. 3. THE MAIN ECONOMIC DOCTRINES IN THE INTERWAR PERIOD IN ROMANIA Grigore Antipa Grigore Antipa is known primarily as a biologist, with ecological concerns. In his writings, he correlates the social and economic fields with the laws of nature, in terms of biotopes, that causes the universe’s evolution laws. His research has a strong innovative and interdisciplinary side. The most important of his works is "General organization of the collective life of the organisms and of the mechanisms of production in the biosphere" (1935). The basic principle that guides the author is that the biology constantly interacts with other fields, like the geographical field, social field and economical field. Grigore Antipa believes that the society is naturally organized according to some rules based on sociability and the social structure of the community is organized and regulated by natural laws (bio-sociology). It also exist a bio-economical organization that determines the organization and the development of the economic activities from the national economy. The bio-economic organization can be an individual organization and a general one. The two types of organization, bio-social and bio-economical, are reunited in the biotechnical machine, which maintains the production mechanism on the laws of the universe, the same laws that govern all the forms of life, from all the types of environment. Another widely known of his works is "The evolution problems of the Romanian people" (1919), in which are reviewed the issues regarding the progress of the society as a result of the interaction of the biological, geographical, economical, social and moral factors. Through his works, Grigore Antipa is the first Romanian economist concerned with the environmental issues and the environmental protection. Studying the different aspects of the efficiency of the lease of some plots of land by the state to private economic agents, the author noted that the state can better organize the economic activity in certain areas (for example: fishing on the Danube) by creating autonomous state enterprises. The role and the execution power of the state are outlined also related to the organization, to the national labor productivity, to the natural resources exploitation, to the regulation of the economic relations of foreign trade, to the collection and efficient administration of budgetary funds. The importance of the state for the national economy is also emphasized in his work "Progressive general paralysis of the national economy and its remedy" (1923), where the state, in addition to its purely economic functions, is seen as an important factor that should provide the national defense, the political and the economical independence of the country. On this basis, the state needs to ensure the full freedom of action for the economic agents, especially in the production and trade activities. 134

Grigore Antipa also published some works that examines the issues of the organization and the development of the scientific research and of the Romanian village issues and the possibility to ensure the economic development in the rural areas. Ion Angelescu Ion Angelescu was noted by his works on the rural and urban history of economy, statistics, issues related to the way of functioning of the market mechanisms "The history of the universal trade related to the history of economy and the cultural history of the peoples" (1915). In his concerns to analyze the economic field, the emphasis is on the production relations, which are analyzed not only in the national context, but in correlation with the European or the global economic realities. In the interwar period, Ion Angelescu was concerned especially by the financial and the monetary issues, along with the industrial and commercial ones: "Romania's economic policy compared with the economic policy of the imperialism" (1923), "Les financies monetaire publiques et la situation en Roumanie" (1926). Although Ion Angelescu recognized the important role of increasing the economic interdependence between states and the important role of the foreign capital, he supported maintaining economic independence of Romania in order to protect it by the dominant trends of the more developed states. He emphasized the state’s role, which takes into account the evolution of the world economy. The state should develop an economic policy appropriate to its own interests. Along with this, the state has an important role in ensuring the national defense and the public security, which are essential for the functioning of any economy in optimal conditions. In his works on cooperatives, Ion Angelescu emphasizes the role of the democracy, the solidarity, the socio - economical classes, an important role having, along with the cooperatives, the trade unionism and the social security. The historical observation of the economic reality, as method of study, is completed with a quantitative and a qualitative analysis of the economic phenomena and processes, focusing on the issues of the market of goods and services, as well as the financial one, on the price variation, on the links between the markets and on the influences that the situation of the global economy exercises on the national economy. The economic variables are analyzed by Ion Angelescu in their dynamics, together with the factors that are determining them and that produce them a certain present and future trend of evolution. Ion Angelescu was concerned also by the problem of the inequalities between the income of different social classes, the distribution of the national wealth, showing that in Romania, in the interwar period, a increasingly smaller part of the national wealth was given to the poorer classes (peasants, artisans, industrial and commercial proletarians), who had no economic power to own the productive capital which brings incomes. For this reason, Ion Angelescu believed that an economic reform was necessary, in order to change the modality in which the national wealth was distributed between the classes. In the reform, the state had an important role, which should harmonize the groups of power, the cooperatives, the trade unions and the social security. Gheorghe Tasca Gheorghe Tasca's economic ideas cumulate neoliberal, post-classic and interventionist concepts. Among his most important works from the interwar period are: "The financial situation of Romania after the war" (1925), "Cooperative problems – The Romanian capitalism and the cooperatives. Economic relations between villages and towns "(1927) and "Liberalism and corporatism "(1937).

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Gheorghe Tasca was especially concerned about the possibility of achieving the economic optimum, the possibility of increasing the resources which are responding to the needs, the influence of geography and ethnography on the economic field, the conditions of time and space, considering the fact that the instruments of economic policies should be adapted to the specific conditions of each country. In his works, there are rather liberal concepts, even though he admits himself the weaknesses of the economic liberalism. Gheorghe Tasca criticizes the liberal concepts, according to which the economy is governed by natural laws and also the importance given by the liberals at the role of the deductive method introduced by D. Ricardo, which eliminates the analysis of some factors like geographical, climatic and social ones, targeting only the personal interest of the individuals. In his opinion, the individuals can maximize their own satisfaction only by living in a prosperous community and not acting individually, only on the basis of the self-interest. Other issues that especially concerned Gheorghe Tasca are those related to the property, which he believed that it should have a social character and a social function, to achieving an optimal balance between labor and capital inputs, to the degree of the state intervention in the economy. The State may intervene in the economy or as owner of public enterprises, either as a producer of public goods and services, it must have the role of arbitrator between different social groups, it must provide the national defense, it must supervise the free functioning of the economy, it must ensure the free expression of the competition, the freedom of pricing, the consumer protection. The State shall ensure the achieving of the general public interest, even if it does not coincide with the private interest. Mihail Manoilescu Mihail Manoilescu is one of the most important representatives of economic liberalism in Romania in the interwar period. Like other representatives of this school of thought, Manoilescu promoted the development of the private property, especially the property of the bourgeoisie class, who was considered the only one capable to ensure the development of the national industry. Along with the liberal measures, in his opinion, the most important role had the protectionist measures of economic policy, which the State must take in order to encourage the industrial development, the protectionism being considered the basic element of reducing the macroeconomic imbalances and of increasing the foreign trade volume. On the same line are also his ideas inspired by the Italian corporatism. His most important works in which he promoted the protectionist theories are: "The importance and the perspectives of the industry in the new Romania" (1921) and "Protectionism and international trade theory" (1929) and, in the second decade of the interwar period, his strong preference for the corporatism is illustrated in his work "The century of the corporatism. The doctrine of the whole and pure corporatism" (1934). Mihail Manoilescu defined the national economy as the sum of the factors of production and of the individual economic subjects. The political economy, as science, must find the answers to all the problems related on these. Like its predecessors, the representatives of the classical liberalism in the world, Manoilescu believed that the most important factor of production was the labor and he formulated a theory according to which in the industry, the labor productivity is higher than in other branches. Based on this theory resulted another theory, which was contrary to the classic theories based on free trade, according to which maintaining the freedom of the trades in the international economic relations leads to widening the economic disparities between the industrialized and the agricultural countries.

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To support this idea, Mihail Manoilescu calculated for the Eastern Europe countries, the ratio of the added value of an industrial worker per capita and the added value of an agricultural worker per capita, which in the interwar period was 1: 10. The author highlighted that this situation affects a country only if the exchanges are made with the other foreign countries because, if the exchange would be made just inside of the country or not across the border, the country would not lose a part of the national added value. In his macroeconomic analysis, Mihail Manoilescu gave an important role to the state, which should support the private initiative and carry out a new economic order, based on the national corporatism, able to reduce and even to eliminate the market failures. The state should also pay a special attention to subsidize the economic subjects and to growing the international power of purchasing by controlling the foreign trade operations. Regarding the international economic relations, Mihail Manoilescu promoted the idea of the worldwide industrial decentralization and of the industrialization of the countries with agricultural economies, of accomplishing the international division of labor that can reduce the gaps between the national economies. In his opinion, the specialization of the countries had to be done so that they produce within the country only those goods for which the productivity is superior to the national average productivity. This specialization should aim the branches and the sub-branches of the agricultural and industrial production, given that the situation could be different from one sub-branch to another. In order to select those sub-branches that should be encouraged to develop, Mihail Manoilescu recommended to calculate a quality factor, based on the net product, the labor productivity and the capital productivity. The quality factor served to rank the sub-branches so that they can choose those sub-sectors that produced the higher net value and that had the lower consumption of labor and capital. In this way, by promoting the protectionist measures, which should encourage the development of the sub-sectors with a higher quality factor, the state could determine the increasing of the international purchasing power of the country. Virgil Madgearu Madgearu is one of the important representatives of the peasant-ism, a doctrine of economic thinking which promoted the development of the agriculture, as the main branch of the national economy and the widespread penetration of the foreign capital, as an important part of the development of the national economy. The peasant-ism was in opposition to some of the neo-liberal ideas, that have advantaged especially the bourgeoisie class and with some of the ideas of the Socialist orientation, which neglected the importance of the private property. Among the most important works of Madgearu are: “The Peasant-ism” (1922) and “Agrarianism, capitalism, imperialism” (1936). Madgearu considered that the agricultural development is the most suitable for the structure of the country's population, being also the traditional branch of the national economy. This idea is rejecting also the theory, promoted by the representatives of other economic doctrines, of the large scale industrialization, Romania being a semi-capitalist agricultural state. Madgearu noted as disadvantages of the future development of this branch: the persistence of some feudal remaining in Romania even during the inter-war period, the existence of the agricultural over-population in relation to the structure of the land properties, the low level of the technique used in production, the difficulty of access to credits and the weak involvement of the State in the economy. Madgearu recommended organize the farming activities in production cooperatives, who had greater financial resources and may be able to introduce on a larger scale the technical progress, to practice the diversification of cultures and, in general, an intensive farming. 137

After the end of the Economic Crisis in 1933, also Madgearu supported the development of the industry, but mainly as a mean of maintaining the independence of the country, emphasizing the special role of the education and of the scientific research. The most important of the factors of production is the labor, and the employees from the industrial activities should cooperate with the organizations of consumers. Madgearu believed that, for the national economy, the most important role had the domestic market of consumer and the products manufactured inside the country had to participate freely in the world economic change system, based on the free trade. After 1933, he even accepted the practice of protectionist measures by the State, to follow up the development of those branches of industry which have a special potential, starting from the observation of the disadvantages that had in international trade the countries with a specific agricultural economy, in which the foreign capital entered in the industry. Madgearu concludes that the development of industry is not in conflict with the development of the agriculture, but is intensifying it, an essential role having the accumulation of capitals and the industrial economic policies are not contrary to the agrarian ones, but they complete them. The State intervention in the economy is accepted in certain limits, relating to the planning of the agricultural and the industrial activities, so as the State encourage and to help the private subjects in their economic activities. Dumitru Constantinescu The protectionist economic doctrine had many representatives in the Romanian economic thinking, but most importantly it can be considered to be Dumitru Constantinescu. Among his most important works are: "Evolution of the rural properties and the land reform in Romania" (), "Contributions to the problem of the raw materials in Romania" (1939-1941) and "Applied economic policy" (1939-1941). The intervention of the State in economy was supported by Dumitru Constantinescu, that analyzed the persistence of the imbalances created as a consequence of the inappropriate structure of the national economy and it was characterized by large differences and a pronounced asymmetry between the development rhythm of the branches. There were three asymmetries which have especially concerned Constantinescu in his works: the asymmetry between the development of the industry and the development of the agriculture, the asymmetry between the public sector, based on dirigisme and the private sector, based on the freedom of the economic subjects and the asymmetry between the quantitative and the qualitative sides of the foreign trade, that generates imbalances and deficits of the balance of external payments. Dumitru Constantinescu aimed to develop the industry, which was a common goal of all the agrarian – industrial countries, meaning, on the one hand, replacing a part of the total imports with domestic products, produced within the country in the branches that could being developed and where they could achieve a higher productivity and, on the other hand, the development, by the intervention of the state in the economy of those branches which were the most productive and could effectively support the country's exports. This process was called "double industrialization". In order to industrialize the country, it was necessary, in his opinion, that the state ensures an optimum supply of the imported raw materials (especially wood, oil, plastics, ferrous metals, natural and synthetic textile fibers) so that all the branches depending on they can develop continuously and be able to achieve a leading position in the global economy. Regarding the agriculture, Dumitru Constantinescu highlighted the positive effects of the Land Reform from 1921, the necessity of restructuring the land ownership and of organization the production within associations and cooperatives of production, with larger 138

dimensions, which could bring a more advanced technology in the production process and could benefit from greater financial means. All of these represented a necessity for reducing the imbalances in the agricultural production, for increasing the quality of the agricultural products and for the competitive pricing on the foreign markets. Analyzing the whole national economic activities, in terms of production and in terms of inputs supply, Dumitru Constantinescu show that the most important instruments of economic policy which the state needed to take in the interwar period in Romania, aiming to correlate the development of the industry with the development of the agriculture, were: creating the industrial national complex, improving the agricultural production, controlling the imports, increasing the imports of materials and supplies needed for the domestic production, reorganizing and improving the geographical structure of the exports and subsidizing it and creating a unitary economic policy for all the interdependent economic sectors. The import controlling was justified by the fact that Romania, in that period, exported raw materials with low-tech content and fluctuating prices, thus wasting a large share of the national available resources and imported manufactured goods, with higher technology content and with much higher prices. This situation caused the reduction of the purchasing power of the national currency and lower living standards for the population. 4. THE EVOLUTION OF THE MAIN ECONOMIC ACTIVITIES IN THE INTERWAR PERIOD IN ROMANIA The Agriculture In the interwar period, Romania's economy has grown particularly because the country's reunification meant a significant growth of the potential available resources. In the next period after the World War I, the economy was affected by numerous human and material losses that have affected the real economy and the monetary variables, which had as result an increased inflation. After 1924, the Romanian economy has registered an evident growth trend, like most European countries. Regarding the restoration of the agricultural production, an important role had the Land Reform from 1921, after which they were allotted numerous peasant families, 97.5% of properties belonging to poor and middle peasants. The great owners were expropriated by the State which offered them state rents as compensation. The possibility to accumulate capital in the agriculture was affected in the long term by the fact that the surface of the agricultural land per capita decreased, as a result of population growth. According to the trend of the previous periods, also in the interwar period, in the field of crops the most significant areas (80% of the total arable land) were occupied by the cereals (mainly maize and wheat), but, unlike the earlier periods, it was registered a significant increase of the industrial plants, used in new industries recently developed, and of the production of fruit trees. The agricultural development was affected by the insufficiency of the performance capital’s stocks and by the unfavorable weather conditions. The yield increased in a slow rhythm, which was below the European average yields. Only towards the end of the interwar period, the yields registered a significant growth based on the development of the automobile and farming tools industries. For the livestock activity was given a less attention, failing to achieve the pre-war production. The best results were obtained in the production of pigs and sheep, and in the second half of the period, in the production of draft animals. The agricultural development was realized with the support of the state, which supported the agricultural education, but ignored the fact that funding opportunities were quite 139

low, and the banks were mainly focused on the industrial loans. This, added to the fact that there was an obvious imbalance, both domestically and internationally, between the prices of the agricultural products and the prices of the industrial products, led, especially in the second decade of the interwar period, to an alarming increase of the agricultural debts, so that in 1934, the state had to adopt a law that reduced the debts to half of their real value, that created the opportunity to repay them within 17 years and that set the interest rate at 3%. Most of the population of the country was involved in agricultural activities and the employment in agriculture was 80% of the country's total employment. The average working day was only 120 days per year due to the climatic conditions of the country, which meant an under-use of labor, with negative effects on the national income’s level. The Industry The industrial development was done differently on branches and sub-branches, depending on the needs of each stage. In the next period after the World War I, most enterprises were in wood processing, food industry, textile and metal industry, but the largest increases were recorded in construction materials industry, where the production doubled in just five years. In the period that followed, characterized by the boom that began in 1924, the industry has developed into an accelerated rhythm, benefiting of the regulations made by the state, who adopted several laws that aimed to encourage the private capital, especially one who was involved in the enterprises with mixed and private ownership. The state provided also some awards and certain advantages for them in sharing the benefits. The protectionist economic policy aimed to promote the domestic industry by charging high customs duties on imports of the products that could be manufactured within the country. The production was encouraged, especially in the second half of the period, by the measures to increase the state orders, to ensure advantageous lending by the central bank and to receive fiscal advantages, for the industrial enterprises. In the first decade of the interwar period, Romania had an important place in the world production, in particular by the results of the extractive industries, especially in the oil industry. This was favored by the Mining Law of 1924, which stated that the state remains the owner of all the mineral resources and has sought to encourage the development of the domestic capital, which had to account for at least 40% of the total capital of the companies in the industry. The growth of the oil production has favored the growth of the domestic consumption and also of the oil exports. During the Economic Crisis of 1929 - 1933, many industrial enterprises went bankrupt, especially the smaller ones, causing the drastic reduction of the total production. Other effects were the unemployment growth and the reduction of the incomes, the worst situation being recorded in the year 1931. After the end of the Economic Crisis, some industrial sub-branches have applied the refurbishment process, which had as result an increasing productivity and, because of this, a further growth of the unemployment. Although during the Economic Crisis, the industrial output value was reduced by a third, even since the year 1933 there have been significant increases, especially in leather, textile, building materials and chemical industries. An important moment in the development of the general economic activity was the foundation, in 1936, of the Supreme Economic Council, which was responsible for monitoring the revaluation of the domestic products, for regulating the labor relations, for solving the foreign trade problems, for controlling the investment process. Following these steps, towards the end there of the interwar period, there was a significant development of the cartel companies, which had over 40% of the total capital which was invested and where the state had the right to control the prices, the quantities that were produced, the quality of the 140

products, the production and sales conditions. About 25% of the total big industry production was made by the cartel firms. Although the state has sought to encourage the domestic capital, the foreign capital, although it reduced its share in the total capital, continued to have a substantial impact on the Romanian economy, being more profitable than the Romanian one. The industry accounted an increasingly higher share in the total economic activity, its contribution to GDP increased, while the Romanian economy was transformed into an industrial- agricultural economy. The Trade In the interwar period, trading activity has grown significantly in our country and Romania has participated in many international fairs in order to promote its products. In the first years after the World War I, there was an increase of the number of the commercial enterprises included in the domestic trade, from which 95% were small, with a maximum number of 5 workers. In the urban areas, these traded especially foods, clothes and footwear. The trend was also increasing for the number of restaurants and cafes. In the rural areas, was still maintained the basic form of trade at fairs, held regularly, where increased the volume of the sales for the industrial products, which shows an increase in industrial products consumption per capita and an increase of the economic flows between the rural and urban environment. After the economic crisis of 1929 - 1933, the trade volume has grown at a fast rhythm, the number of companies increased by about 40%, mainly due to the modernization of the legislation. An important factor that has boosted the domestic trade was the extension of the stock exchanges, where the volume of the trading with securities and bonds has increased considerably. Thus, in 1936, the volume of transactions on the stock exchange was 4 times higher than in 1929. Regarding the foreign trade, it had some important changes, both quantitative and structural, because after the World War I Romania has canceled all the trade agreements previously concluded. In the first decade of the interwar period, most of the international economic exchanges were carried out on the basis of provisional trade agreements, concluded on short term. The main products that were exported were: grain, oil, wood, livestock, and the main products that were imported were finished products, but their volume in a continuous declining due to the development of the domestic industry, which could cover an increasingly higher part of the domestic demand. Romania's foreign trade was mainly oriented to the European countries, but a significant volume of transactions took place with U.S.A., Canada, Japan and the Arab countries. Although it was significantly affected by the crisis, the foreign trade recovered rapidly and Romania's trade balance was in surplus in most of the years in the interwar period. 6. CONCLUSIONS The interwar period was a period full of events with a strong impact on the future evolution of the economy, both in Romania and in the other states. The analysis of these theories and economic realities may be useful in explaining how changed the structure of the national economic activities on branches and how it influenced the subsequent development of the country. Although profoundly different between them, the common goal of all these economic doctrines was the realization of a better and more accurate society and of a more modern and effectively economy. 141

The economic doctrines were obviously influenced by the existing political regime in the interwar period, characterized by the dominance of a few powerful parties. In the early interwar period, the focus was on rebuilding the agriculture and on raising the living standards in the rural areas. In the next decade, the state encouraged through adequate measures, the development of the industry, but this does not mean that the state neglect the agriculture, but it encouraged the further development of this branch at a rate higher than that achieved in the early years of the twentieth century. The economic activity has grown significantly in the interwar period, as demonstrated by transforming the Romanian economy from an agrarian one to an industrial – agricultural economy. The state was concerned about the development of the agriculture which was a traditional branch of the national economy and which increased its potential due to the increasing of the natural resources and as a result of the increasing opportunities to introduce in the production process the most advanced technical equipments. The industry was driven by the need to restore the economy after the World War I and after the Economic Crisis between 1929 and 1933. An important role had the State, by the protectionist economic policy measures that encouraged the development of the industrial branches within the country and by adopting the laws that stimulated the establishment of new businesses in the poor fields. The development of the domestic production led to increase the volume of the foreign trade operations, which led to obtain a better position for Romania on the international market. Future research might focus on deepening the economic analysis and on detail the study of the legislative elements that influenced the development of economic activity at the level of economic sub-branches and of the positive and negative influences caused by the international context. REFERENCES 1. Ivanciu Nicolae-Valeanu, „The History of the Economic Thinking”, Didactic and Pedagogical Publishing House, Bucharest, 1992 2. Sultana Suta-Selejan, “Economic Doctrines”, Efficient Publishing House, Bucharest, 1996 3. Gheorghe Cretoiu, Viorel Cornescu, Ion Bucur, “Economics”, CH Beck Publishing House, Bucharest, 2011 4. Maria Muresan, Dumitru Muresan, “The History of Economy”, Economic Publishing House, Bucharest, 2003 5. N.N. Constantinescu and Ileana Constantinescu, "The History of the Romanian Economic Thinking Illustrated by Portraits of Romanian Economists", Milena Press, Bucharest, 2005 6. http://ro.wikipedia.org/wiki/Mihail_Manoilescu, 7. http://ro.wikipedia.org/wiki/Virgil_Madgearu 8. http://ro.wikipedia.org/wiki/Miti%C8%9B%C4%83_Constantinescu

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DOW EFFECTS IN RETURNS AND IN VOLATILITY OF STOCK MARKETS DURING QUIET AND TURBULENT TIMES Ramona Dumitriu; University “Dunarea de Jos” Galati, Romania Razvan Stefanescu; University “Dunarea de Jos” Galati, Romania

ABSTRACT The persistence in time of the calendar anomalies is one of the most disputed subjects from the financial literature. Quite often, the passing from quiet to turbulent periods of time provokes radical changes in the investors’ behaviors which affect the stock markets seasonality. In this paper we investigate the presence of the day of the week effects in returns and volatility for 32 indexes from advanced and emerging markets. We analyze this seasonality for two periods of time: a relative quiet period, from January 2000 to December 2006, and a more turbulent period, from January 2007 to September 2012. A GJR-GARCH model allows us to identify, for the two periods, various forms of day of the week effects in returns and volatility. However, only for few indexes we find the stability in time of the daily seasonality. For many of the advanced markets indexes, the day of the week effects in returns identified for the quiet period disappeared during the turbulent period. A less radical decline occurred for the day of the week effects in volatility. In the case of indexes from the emerging markets, the persistence in time of the daily seasonality in returns was more consistent in comparison with advanced markets indexes. Regarding the volatility of emerging markets, we find that during the turbulent period many day of the week effects in volatility disappeared, while new others appeared. Key words: Calendar Anomalies, GJR - GARCH, Volatility, Day of the Week Effects, Stock Markets JEL Classification: C58, G02, G14, G15 1. INTRODUCTION The day of the week (DOW) effects are among the first discovered seasonal behaviors that affect the financial markets. One of the most known forms, the so-called week-end effect, consisting in significant differences between the stock returns from the last trading day of a week and those from the first trading day of the next week, was revealed many decades ago (Kelly, 1930; Fields, 1931; Cross, 1973; French, 1980; Gibson and Hess, 1981; Lakonishok and Levi, 1982; Gultekin and Gultekin, 1983; Keim and Stambaugh, 1984). In general, the empirical researches concerning the week-end effect reported that returns from the last trading day of a week were higher than those from the first trading day of the next week. Later, there were found significant differences among the returns from other days of week (Rogalski, 1984; Chang et al., 1993). The study of such patterns is justified by practical and theoretical reasons. The knowledge about differences among the returns from the specific day of a week could be used in the stock market investment. In fact, this kind of investment is opposed to

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one of the main Efficient Market Hypothesis (EMH) principles which proclaimed the impossibility of obtaining profits by extrapolating the past evolutions of capital markets (Fama, 1970). In the last decades the calendar anomalies existence was one of the main arguments against EMH provided by the Behavioral Finance Theory. The researches on calendar effects from the last decades approached various aspects such as the different behaviors of the advanced financial markets and the emerging markets, the seasonality of the stock markets volatilities and the persistence in time of the calendar anomalies. Empirical researches revealed some differences between the calendar anomalies from advanced financial markets and those from the emerging markets (Wong, 1992; Balaban, 1995; Ajayi et al., 2004; Doyle and Chen, 2009). There are many explanations for such differences. Usually, by comparing to the developed financial markets, the emerging markets are perceived by the international investors as having superior potential of growing but also as much riskier. The emerging markets lower development makes them less sensitive to some factors with high influence on the advanced financial markets. While the strong linkages between developed financial markets make them very vulnerable to the contagion of the stock prices declines, many emerging markets are immune to this phenomenon (Claessens, 1995; Phylaktis and Ravazzolo, 2002; Li et al., 2003; Gupta and Donleavy, 2009). The analysis of the financial markets seasonal behaviors gained a new dimension after the appearance of the so called General AutoRegressive Conditional Heteroskedasticity (GARCH) models pioneered by Engle (1982) and Bollersev (1986) which were meant to capture the time-varying volatility. Many empirical researches that used GARCH models found calendar effects, including DOW effects, not only on returns of stock indexes but also on their volatilities (Choudhry, 2000; Kiymaz and Berument, 2003; Yalcin and Yucel, 2006). Another important dimension of the a seasonality analysis consists in its persistence in time. The disappeareance or the decrease in intensity of some calendar anomalies were used by EMH partisans to prove that such inefficiency of stock markets was just temporary (Fama, 2007). A Murphy‘s law for financial markets anomalies, proposed by Dimson and Marsh (1999), consider that a calendar effect could disappear or could go to reverse after a lot of investors became aware by it. The changes in the seasonal behavior of the stock markets could be linked by the passing from relatively quiet to turbulent time periods (Holden et al, 2005; Marquering et al, 2006; Wong et al., 2006; Kourkoumelis, and Hourvouliades, 2010). In this paper we approach the DOW effects on some capital markets for two periods of time. The first period, from January 2000 to December 2006, could be considered, for most of the financial markets, as relatively quiet. Instead, during the second period, from January 2007 to September 2012, the stock markets were affected by some processes (real estate speculative bubble from 2007, the adhesion of new members to European Union, the recent global crisis etc.) that brought substantial turbulences. We use daily values of 32 indexes from 31 advanced and emerging stock markets (due to the importance of the capital market from United States we employed two indexes from this country: Nasdaq – 100 and Standard & Poor's). We identify and study the DOW effects on these indexes by Glosten et al. (1993) GJR – GARCH models which allow taking into consideration the different stock behaviors in the circumstances of bull and bear markets. The remainder of this paper is organized as it follows: the second part describes the data and the methodology used in our investigation, the third part approaches the prior researches on DOW effects, the fourth part presents the empirical results of our investigation and the fifth part concludes.

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2. LITERATURE REVIEW The week-end effect was highly approached in the Behavioral Finance literature which offers many hypotheses explaining this calendar anomaly such as the settlement issue, the institutional trading issue, the liquidity issue or the short sellers issue (Pettengill, 2003; Dicle and Levendis, 2010). The settlement hypothesis, developed by Lakonishok and Levy (1982) explained the weekend effect, in part, by a practice, established in 1968 in United States, which imposed that settlement of the common stocks had to take place five business days after trading. Because of the non-trading days from weekend, for the stocks purchased on Friday the payment occurred with a two calendar days delay. These circumstances motivated the investors to buy stocks on Friday rather than other days. However, Dyl and Martin (1985) investigation found no significant impact of settlement practice on the weekly pattern of stock returns. The institutional trading issue highlights the differences between the individual and the institutional investors’ behaviors during and after week-ends. Miller (1988) revealed that on non-trading days, in the absence of their brokers’ advices, many individual investors decide to sell risky assets from their portfolios. In these circumstances, on Monday, the sell orders exceed the buy orders causing the decrease of returns. Lakonishok and Maberly (1990) confirmed these findings adding that during Monday the individual investors were much more active than the institutional investors who dedicated the beginning of the week to discussions about their strategies. Instead, Sias and Starks (1995) indicated the institutional investors’ behavior as the primary source of DOW effects. The liquidity hypothesis linked the low stock returns on Mondays to the decrease of the liquidity on capital markets (Foster and Viswanathan, 1993). Abraham and Ikenberry (1994) found that reduced activity of the institutional investors during Mondays caused, in part, the low level of liquidity. The short sellers issue explains the week-end effect by the investors risk aversion regarding the uncertainty from the non-trading days. Chen and Singal (2003) claimed that behaviors of the speculative short sellers, who used to close their risky positions on Fridays and to re-establish new short positions on Mondays, were, at least in part, responsible for the week-end effects. The anxiety of investors to close their positions on Fridays was justified by the large amounts of news, many of them bad news, arriving during the non-trading days. In fact, it was revealed that many firms and even government entities preferred to delay for the weekends the announcement of bad news (French, 1980; Rogalski, 1984; Penman, 1987; Kiymaz and Berument, 2003). However, the results of Blau et al. (2008) investigation about weekend effect on New York Stock Exchange didn’t support the short sellers’ hypothesis. The results of some researches proved significant patterns of stock returns not only for Monday and Friday but also for other days of the week (Solnik and Bousquet, 1990; Athanassakos and Robinson, 1994; Angelidis and Lyroudi, 2004). Such findings were explained by delayed influence from leading markets (Aggarwal and Rivoli, 1989) or by Murphy Law of the calendar anomalies (Dimson and Marsh, 1999). There were also researches that failed to find evidences of the presence of DOW effects on stock returns. Santemases (1986) proved that no significant DOW effects characterized the behavior of Madrid Stock Exchange between 1979 and 1983. Brooks and Persand (2001) investigated the presence of daily effects for five South - East Asian stock markets finding no DOW effect for Korea and Philippines. The importance of markets instability on investment decisions stimulated the researches on seasonality of volatility. Chukwuogor - Ndu (2006) studied the day-of-the-week 145

effects on returns and volatility for 15 emerging and developed European capital markets. Eleven of them exhibited the highest volatility, as expressed by standard deviation, on Monday. Later, Chukwuogor - Ndu (2007) investigated the daily seasonality for ten East Asian stock markets for the turbulent period 1998 - 2003. The results indicate that the lowest volatility occurred on Tuesday for Japan, Philippines, Singapore and Thailand, on Wednesday for Indonesia and India and on Friday for China and Korea. Instead, the highest volatility occurred on Monday for China, Japan, Malaysia, Philippines, Singapore, Korea and India, on Tuesday for Thailand, on Wednesday for Taiwan and on Friday for Indonesia. Other researches revealed the presence of daily patterns on the volatility for various capital markets by employing GARCH models to capture the conditional variance. Bhattacharya et al (2003) investigated the stability of the DOW effects in returns and volatility at the Indian capital market, covering the period January 1991 – September 2000 using GARCH and OLS with lagged returns models. They divided this period of time in two sub-periods: first from January 1991 to December 1995 and second from January 1996 to September 2000. The analysis in a GARCH framework provided results that were different from those obtained in the OLS framework. Regarding the seasonality in volatility, for the first sub-period it was found no DOW effect. Instead, for the second sub-period, there were revealed significant positive day effects for Monday, Tuesday and Wednesday. Berument et al. (2003) investigated DOW effect on the volatility of Istanbul Stock Exchange between 1986 and 2003. Their results indicated the highest level on Monday and the lowest level on Tuesday. Apolinario et al. (2006) examined daily seasonality of stock prices returns and volatility for 13 European capital markets using symmetric and asymmetric GARCH models. The results indicate significant DOW effects on volatility for all the countries, excepting the Czech Republic. Yalcin and Yucel (2006) studied the evolutions of 20 emerging markets proving significant DOW effects on volatility for five of them. Kenourgios and Samitas (2008) analyzed the day-of-the-week effects on returns and volatility for Athens Stock Exchange during two periods: an emerging period from 1995 to 2000 and a developed period from 2001 to 2005. While for the first period there were obtained strong evidences in favor of the daily seasonality of returns and volatility, for the second period the results suggested the weakening of DOW effects. Batuo Enowbi et al. (2009) found significant DOW effects on the volatility of stock markets from Egypt, Morocco, South-Africa and Tunisia. Duran (2010) investigated DOW effects on stock returns and volatility in four Latin American capital markets: Argentina, Brazil, Chile and Mexico for the period March 1998 – March 2010. It was found significant daily seasonality of volatility only for Brazil and Mexico. The lowest volatility for both countries occurred on Friday while only for Brazil it was found a peak of volatility on Monday. 3. DATA AND METHODOLOGY In our investigation we employ daily closing values of the indexes from 32 stock markets for a time period between January 2000 and September 2012 (Table 1). Half of them are from 15 developed countries stock exchanges (due to the importance of US capital market we use two indexes from this country: Nasdaq – 100 and Standard & Poor's) and the other 16 from emerging markets. (Appendix - Table 1) In order to capture the differences between quiet and turbulent circumstances we divide the sample of data into two sub-samples: - first sub-sample, corresponding to a quiet period, from January 2000 to December 2006;

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- second sub-sample, corresponding to a turbulent period, from January 2007 to September 2012. We use continuous return of indexes (ri,t), each of them being computed by the formula: ri , t  [ln( Pi , t )  ln( Pi , t 1 )] * 100 (1) where Pi,t and Pi,t-1 are the closing values of index i on the days t and t-1, respectively. We analyze the stationarity of returns by employing the Augmented Dickey – Fuller (ADF) tests (Dickey and Fuller, 1979). Based on the graphical representations of the returns time series we chose to use intercept terms in the ADF regressions. The numbers of lags are determined by Akaike (1973) Information Criteria. As a preliminary stage before the investigation of DOW effects in a GARCH framework we perform ARMA (p, q) models on returns, using a Box-Jenkins methodology to find the appropriate values of p and q. Then, we study the autocorrelation and the heteroscedasticity of the residuals by Ljung-Box test Q and the Engle (1982) Lagrange Multiplier (LM) test for ARCH effects. We define five dummy variables associated to the five working days of a week: - D1, taking the value 1 for returns from Monday and value zero otherwise; - D2, taking the value 1 for returns from Tuesday and value zero otherwise; - D3, taking the value 1 for returns from Wednesday and value zero otherwise; - D4, taking the value 1 for returns from Thursday and value zero otherwise; - D5, taking the value 1 for returns from Friday and value zero otherwise. A special case is Tel Aviv Stock Exchange which, from the most of the period 20002006, was closed on Fridays. In these circumstances, for this market, we don’t use D5 in the regressions for the first sub-sample. The GJR - GARCH (q,p) model applied to reveal DOW effects on returns and volatility is described by two equations: the conditional mean equation and the conditional variance equation. In the conditional mean equation of the returns the constant term is excluded in order to avoid the collinearity: n

rt    j * D jt    k * rt  k   t j 1

(2)

k 1

where: - μj (j=1,2…5) are coefficients which reflect the DOW effects on returns; - Djt are dummy variables corresponding to the five working days of the week; - ξk (k=1,..n) are coefficients associated to lagged returns; - n is the number of lagged returns, calculated by the Akaike (1969) Final Prediction Error Criterion; - εt is the error term. In the conditional variance equation the dummy variable associated to Wednesday (D3) is excluded in order to avoid the dummy trap: 5

2 t

     j * D jt   [ k *  j 1

p 2 tk

 k *

2 t k

k 1

* I ( t  k  0)]   ( l *  t2 l )

(3)

l 1

where: -  t2 is the conditional variance of the returns; - ω is a constant term reflecting the seasonal effect on volatility for the excluded dummy variable (associated to Wednesday); 147

- νj (j=1, 2, 4, 5) are coefficients which reflect the DOW effects on volatility for the other four working days; - αk and γk (k=1,..q) are coefficients associated to the squared values of the lagged values of error term from the conditional mean equation; - I(εt-k<0) is a dummy variable taking the value 1 if the k-lagged error term is strict negative and value zero otherwise; - q is the number of lagged values of the error term, calculated by the Akaike (1973) Information Criteria; - βl (j=1, 2, …p) are coefficients associated to the lagged values of the conditional variance; - p is the number of lagged values of conditional variance, calculated by the Akaike (1973) Information Criteria. For each return we analyze the robustness of GJR - GARCH model by employing Lagrange Multiplier (LM) test for ARCH effects on the residuals. 4. EMPIRICAL RESULTS The Table 2 reports the results of ADF tests. For all 32 returns the null hypothesis of unit root was rejected for both sub-samples. (Appendix - Table 2) The results of Ljung-Box Q and ARCH LM tests are presented in the Table 3. For all the returns and for both sub-samples there cannot be rejected the null hypothesis of autocorrelation and the heteroscedasticity of the residuals. (Appendix - Table 3) The Table 4 provides the coefficients of the GJR-GARCH conditional mean regressions performed on the advanced markets indexes for the first sub-sample. The results reveal the presence of DOW effects on the returns. Most of significant coefficients are positive: four for D1 (AEX General, All Ordinaries, ATX, BEL-20 and S&P TSX Composite), one for D2 (ATX), two for D3 (ATX and BEL-20), two for D4 (ATX and OSEAX) and six for D5 (All Ordinaries, ATX, FTSE 100, OSEAX, Straits Times and TAIEX). Only for Nasdaq – 100 and Standard & Poor's resulted negative coefficients of D5. (Appendix - Table 4) The coefficients of GJR-GARCH conditional variance equations of advanced markets indexes for the first sub-sample are presented in the Table 5. The results indicate various DOW effects on volatility for the advanced markets indexes from the first sub-sample. Some significant positive coefficients result: five for ω (All Ordinaries, ATX, FTSE 100, Hang Seng and OSEAX) and two for D1 (Straits Times and TAIEX). There are also some significant negative coefficients: five for D1 (AEX General, All Ordinaries, CAC 40, DAX and FTSE 100), one for D4 (All Ordinaries) and three for D5 (All Ordinaries, Hang Seng and OSEAX). (Appendix - Table 5) For the second sub-sample, the GJR-GARCH conditional mean equations of the advanced markets indexes indicate only positive significant coefficients: one for D3 (TAIEX) and two for D5 (DAX and OSEAX). (Appendix - Table 6) The GJR-GARCH conditional variance regressions performed for the second subsample on the advanced markets indexes revealed DOW effects on volatility. Positive significant coefficients were found for ω (All Ordinaries and Straits Times), for D2 (S&P TSX Composite and TAIEX), and for D4 (S&P TSX Composite and SSMI). Significant negative 148

coefficients were found for ω (S&P TSX Composite), for D2 (All Ordinaries, Straits Times,), for D4 (Straits Times) and for D5 (All Ordinaries). (Appendix - Table 7) The results of GJR-GARCH conditional mean regressions performed on the emerging markets indexes from the first sub-sample are presented in the Table 8. There are positive significant coefficients for D1 (BUX, PX and TA 100), for D2 (BET-C, CROBEX, IPC, OMXT and SSE Composite), for D3 (BET-C, Bovespa, MerVal, OMXT, SEMDEX, IDX Composite and IPC), for D4 (Athex Composite Share, BET-C, BSE 30, KOSPI, IPC, IDX Composite, MerVal, OMXT, PX, SEMDEX and TA 100) and for D5 (Athex Composite Share, BET-C, Bovespa, BSE 30, IDX Composite, IPC, KLSE Composite, OMXT, PX and SEMDEX). There are also negative significant coefficients for D1 (Athex Composite Share) and for D4 (SSE Composite). (Appendix - Table 8) The Table 9 reports the coefficients of GJR-GARCH conditional variance equation for the first sub-sample data of the emerging markets indexes. Positive significant values were found for ω (BUX, IDX Composite, KLSE Composite, SEMDEX, SSE Composite and TA 100) and for D1 (BET-C). Negative significant values occurred for D1 (BUX and KLSE Composite), for D2 (KLSE Composite, SSE Composite and TA 100) and for D5 (Athex Composite Share, Bovespa, IPC and KLSE Composite). (Appendix - Table 9) The results of GJR-GARCH conditional mean regression for the second sub-sample data of emerging markets indexes are presented in the Table 10. There are positive significant coefficients for D1 (IPC), for D2 (IDX Composite, KLSE Composite, CROBEX, IDX Composite, KLSE Composite, MerVal and PX), for D3 (CROBEX, KLSE Composite, IDX Composite, KLSE Composite, MerVal and PX), for D4 (KLSE Composite) and for D5 (BETC, IDX Composite, KLSE Composite, OMXT and SEMDEX). There are also negative significant coefficients for D1 (Athex Composite Share, BET-C, CROBEX, OMXT and SEMDEX). (Appendix - Table 10) The Table 11 reports the coefficients of GJR-GARCH conditional variance equation for the second sub-sample data of emerging markets indexes. Positive significant values were found for ω (KOSPI, SEMDEX), for D1 (Athex Composite Share, BET-C, MerVal, OMXT and TA 100), for D2 (Athex Composite Share, Bovespa, for D4 (Athex Composite Share, OMXT and TA 100). Negative significant coefficients were found for ω (Athex Composite Share), for D2 (KOSPI, TA 100), for D4 (SEMDEX) and for D5 (SEMDEX). (Appendix - Table 11) For all GJR-GARCH regressions the ARCH LM tests revealed no ARCH remaining effects. (Appendix - Table 12) 5. CONCLUSIONS AND IMPLICATIONS In this paper we investigated the presence of daily seasonality on returns and volatility for 32 indexes from advanced and emerging markets during two periods of time: a relative quiet one and a turbulent one. Based on GJR-GARCH models we identified various DOW effects in the two periods. Our investigation revealed significant differences between quiet and turbulent times. In fact only few DOW effects identified for the first period survived to the second one. For the returns we found persistence in time for Monday (Athex Composite Share), Tuesday 149

(CROBEX), Wednesday (MerVal) and Friday (BET-C, IDX Composite, KLSE Composite, OMXT and SEMDEX). The DOW effects on volatility survived for Monday (BET-C), Wednesday (All Ordinaries and SEMDEX) and Friday (All Ordinaries). Instead, for many indexes, new forms of daily seasonality appeared during the turbulent times. Such evolutions could be associated to changes in investors’ behaviors from the quiet to the turbulent period. The results suggest that the decline of DOW effects on returns was more consistent for the advanced markets than for the emerging markets. In fact, for many emerging markets, the investors had highly risk perceptions even during the quiet times so the changes induced by the turbulences were less sharp as in case of the most advanced markets. In the recent context of financial instability it is hard to formulate irevocable conclusions about the causes of the changes in DOW effects. Such changes could be provoked by the turbulences on the financial markets or there could be viewed as the confirmation of Dimson and Marsh (1999) Murphy‘s law for the calendar anomalies. In these circumstances, the researches on the persistence in time of DOW effects should be extended to the postglobal crisis periods. REFERENCES 1. Abraham, A., and Ikenberry, D. L. (1994). The individual investor and the weekend effect. Journal of Financial and Quantitative Analysis, vol. 29, 1994, pp. 263–77. 2. Agathee, Ushad Subadar (2008). Day of the Week Effects: Evidence from the Stock Exchange of Mauritius (SEM). International Research Journal of Finance and Economics, Issue 17 3. Aggarwal, R. and Rivoli, P. (1989). Seasonal and day-of-the week effect in four emerging stock markets. Financial Review, vol. 24, pp. 541–550. 4. Ajayi, Richard A., Seyed Mehdian, and Mark J. Perry (2004). The day of the week effect in stock returns: Further evidence from Eastern European emerging markets. Emerging Markets Finance and Trade, vol. 4, pp. 53-62. 5. Akaike, H. (1969). Fitting autoregressive models for prediction. Annals of the Institute of Statistical Mathematics 21, pp. 243-247. 6. Akaike, H. (1973). Information theory and an extension of the maximum likelihood principle, in B. Petrov and F. Csáki (eds). 2nd International Symposium on Information Theory, Académiai Kiadó, Budapest, pp. 267-281. 7. Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control AC-19, pp. 716-723. 8. Al-Loughani, N., and D. Chappell (2001). Modeling the day-of-the-week effect in the Kuwait stock exchange. Applied Financial Economics, pp. 353-359. 9. Aly, H., Mehdian, S. and Perry, M. (2004). An Analysis of Day-of-the-Week Effects in the Egyptian Stock Market. International Journal of Business, 9 (3), Available at: http://ssrn.com/abstract=551101 10. Angelidis, D. and Lyroudi, K. (2004). Seasonalities in the French Stock Market: The day of the Week Anomaly, 11th Annual Conference of the Multinational finance Society, Constantinople, Turkey, Available at: http://mfs.rutgers.edu/MFC/MFC11/mfcindex/files/MFC077%20AngelidisLyroudi.pdf 11. Apolinario Rosa María Cáceres, Santana Octavio Maroto, Lourdes Jordán Sales and Caro Alejandro Rodríguez (2006). Day of the Week Effect on European Stock Markets. International Research Journal of Finance and Economics, Issue 2

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APPENDIX Table 1 - Indexes from advanced and emerging markets used in DOW effects investigation Index AEX General

Advanced Markets Market Amsterdam Stock Exchange

Emerging Markets Market Athens Stock Exchange

All Ordinaries ATX

Australian Securities Exchange Vienna Stock Exchange

Index Athex Composite Share BET-C Bovespa

BEL-20 CAC 40 DAX FTSE 100 Hang Seng Nasdaq - 100 Nikkei 225 OSEAX S&P TSX Composite Standard & Poor's Straits Times

Brussels Stock Exchange Paris Bourse Frankfurt Stock Exchange London Stock Exchange Hong Kong Stock Exchange Nasdaq Stock Market Tokyo Stock Exchange Oslo Stock Exchange Toronto Stock Exchange

BSE 30 BUX CROBEX IDX Composite IPC KLSE Composite KOSPI MerVal OMXT

Bucharest Stock Exchange São Paulo Stock, Mercantile & Futures Exchange Bombay Stock Exchange Budapest Stock Exchange Zagreb Stock Exchange Indonesia Stock Exchange Mexican Stock Exchange Kuala Lumpur Stock Exchange Korea Stock Exchange Buenos Aires Stock Exchange Talinn Stock Exchange

New York Stock Exchange

Prague Stock Exchange

Singapore Exchange

SEMDEX

SSMI

SIX Swiss Exchange

SSE Composite

The Stock Exchange of Mauritius Shanghai Stock Exchange

TAIEX

Taiwan Stock Exchange

TA 100

Tel Aviv Stock Exchange

Table 2 - Results of ADF tests for the returns First sub-sample

Second sub-sample

Index Number of lags

Test statistics

Number of lags

Test statistics

Panel A: advanced markets AEX General

All Ordinaries

ATX

BEL-20

CAC 40

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

OSEAX

-10.7823 (0.0001***) -10.0896 (0.0001***) -9.77552 (0.0001***) -11.8373 (0.0001***) -10.5709 (0.0001***) -8.53843 (0.0001***) -10.8309 (0.0001***) -15.3832 (0.0001***) -9.56295 (0.0001***) -11.2584 (0.0001***) -13.2077 (0.0001***)

18 6 24 11 15 24 5 17 17 20 7

155

-8.32651 (0.0001***) -15.5319 (0.0001***) -6.23618 (0.0001***) -10.6814 (0.0001***) -9.76248 (0.0001***) -7.37193 (0.0001***) -17.5394 (0.0001***) -9.19713 (0.0001***) -9.26676 (0.0001***) -8.51149 (0.0001***) -13.8879 (0.0001***)

S&P TSX Composite Standard & Poor's Straits Times

SSMI

TAIEX

Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite IPC

KLSE Composite KOSPI

MerVal

OMXT

SEMDEX

SSE Composite TA 100

15 5

-11.1597 11 (0.0001***) -10.1123 15 (0.0001***) -16.6154 11 (0.0001***) -10.156 6 (0.0001***) -11.0642 13 (0.0001***) Panel B: emerging markets -10.2631 16 (0.0001***) -8.22136 (0.0001***) -8.96446 (0.0001***) -10.7685 (0.0001***) -13.3637 (0.0001***) -19.5391 (0.0001***) -22.1749 (0.0001***) -15.2835 (0.0001***) -11.9723 (0.0001***) -17.1261 (0.0001***) -13.4829 (0.0001***) -18.3964 (0.0001***) -9.62865 (0.0001***) -11.8471 (0.0001***) -8.89945 (0.0001***) -9.26086 (0.0001***)

21 19 13 6 5 4 6 1 2 4 4 12 3 14 7

-11.5512 (0.0001***) -9.51837 (0.0001***) -10.6075 (0.0001***) -16.9921 (0.0001***) -8.61777 (0.0001***) -7.96602 (0.0001***) -6.59446 (0.0001***) -7.92883 (0.0001***) -9.04364 (0.0001***) -15.3365 (0.0001***) -14.7376 (0.0001***) -18.0152 (0.0001***) -16.2523 (0.0001***) -31.5414 (0.0001***) -21.7521 (0.0001***) -17.2232 (0.0001***) -14.9384 (0.0001***) -9.75293 (0.0001***) -16.4603 (0.0001***) -9.00431 (0.0001***) -12.8812 (0.0001***)

Notes: p-values are within brackets ***, **, *; mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 3 -Results of Ljung-Box Q Tests and ARCH LM Tests First sub-sample

Second sub-sample

Index Ljung-Box Q Test

AEX General All Ordinaries ATX

13.446 (0.00376***) 6.51525 (0.08906*) 27.8973

ARCH LM Test

Ljung-Box Q Test

Panel A: advanced markets 391.334 8.96528 (0.0001***) (0.02976**) 91.3962 5.05377 (0.0001***) (0.07991*) 182.746 58.2389

156

ARCH LM Test

396.203 (0.0001***) 280.89 (0.0001***) 296.366

BEL-20 CAC 40 DAX FTSE 100 Hang Seng Nasdaq - 100 Nikkei 225 OSEAX S&P TSX Composite Standard & Poor's Straits Times SSMI TAIEX

Athex Composite Share BET-C Bovespa BSE 30 BUX CROBEX IDX Composite IPC KLSE Composite KOSPI MerVal OMXT PX SEMDEX SSE Composite TA 100

(0.06364*) 15.583 (0.0013***) 6.38657 (0.09424*) 28.0102 (0.0001***) 14.5175 (0.0022***) 9.37888 (0.0247**) 7.64417 (0.0539*) 3.18548 (0.0743*) 19.9717 (0.0676*) 26.4092 (0.0908*) 24.9918 (0.03465**) 12.226 (0.0067***) 12.4504 (0.0060***) 10.1508 (0.0173**) 13.0424 (0.0003***) 7.63799 (0.0541*) 72.9216 (0.0760*) 14.0105 (0.0029***) 7.96806 (0.0467**) 54.8695 (0.0724*) 4.38838 (0.0362**) 48.2081 (0.0189**) 22.994 (0.0604*) 29.7704 (0.0280**) 39.0468 (0.0270**) 59.7153 (0.0572*) 42.0537 (0.0828*) 7.34232 (0.06175*) 52.8942 (0.07812*) 7.83988 (0.0494**)

(0.0001***) (0.0003***) 258.237 26.9399 (0.0001***) (0.01268**) 288.244 16.0411 (0.0001***) (0.0011***) 373.69 14.2688 (0.0001***) (0.0025***) 390.88 27.8931 (0.0001***) (0.0001***) 53.57 17.4304 (0.0001***) (0.0259**) 245.89 8.81411 (0.0001***) (0.0318**) 88.7815 28.8302 (0.0001***) (0.0505*) 243.456 24.4474 (0.0001***) (0.0177**) 68.0158 17.6595 (0.0001***) (0.0005***) 235.028 8.19199 (0.0001***) (0.04221**) 50.7723 32.1008 (0.0001***) (0.0004***) 300.031 40.1069 (0.0001***) (0.0001***) 144.199 15.187 (0.0001***) (0.0188**) Panel B: emerging markets 264.699 16.3939 (0.0001***) (0.08890*) 171.096 (0.0001***) 68.6832 (0.0001***) 336.769 (0.0001***) 56.0144 (0.0001***) 134.155 (0.0001***) 60.1264 (0.0001***) 129.471 (0.0001***) 161.162 (0.0001***) 94.412 (0.0001***) 266.118 (0.0001***) 38.4731 (0.0001***) 132.742 (0.0001***) 107.484 (0.0001***) 34.8136 (0.0001***) 62.7447 (0.0001***)

7.27873 (0.06352*) 39.5832 (0.0024***) 25.3007 (0.0317**) 25.0094 (0.0001***) 6.64009 (0.03615**) 6.61387 (0.0366**) 14.5206 (0.0243**) 26.8158 (0.0203**) 49.5997 (0.09854*) 12.2962 (0.0064***) 10.9985 (0.0117**) 6.09437 (0.04749**) 6.67927 (0.0829*) 8.35051 (0.0393**) 27.1864 (0.0755*)

(0.0001***) 276.957 (0.0001***) 238.082 (0.0001***) 198.317 (0.0001***) 311.59 (0.0001***) 333.17 (0.0001***) 299.15 (0.0001***) 405.995 (0.0001***) 393.726 (0.0001***) 374.746 (0.0001***) 385.787 (0.0001***) 259.125 (0.0001***) 383.978 (0.0001***) 136.241 (0.0001***) 77.0799 (0.0001***) 245.17 (0.0001***) 371.278 (0.0001***) 114.615 (0.0001***) 206.719 (0.0001***) 303.79 (0.0001***) 172.101 (0.0001***) 191.49 (0.0001***) 315.752 (0.0001***) 325.521 (0.0001***) 251.076 (0.0001***) 102.436 (0.0001***) 318.364 (0.0001***) 286.652 (0.0001***) 61.7187 (0.0001***) 160.63 (0.0001***)

Notes: p-values are within brackets ***, **, *; mean significant at 0.01, 0.05, and 0.1 levels, respectively.

157

Table 4 - GJR - GARCH conditional mean equation for advanced markets indexes: first subsample Index AEX General

All Ordinaries

ATX

BEL-20

CAC 40

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

OSEAX

S&P TSX Composite Standard & Poor's Straits Times

SSMI

TAIEX

μ1 0.0755424 (0.0425985) [0.0762*] 0.0767990 (0.0319269) [0.0162**] 0.100589 (0.0461255) [0.0292**] 0.0699541 (0.0373864) [0.0613*] 0.0326705 (0.0490380) [0.5053] 0.0814277 (0.0563164) [0.1482] 0.0304428 (0.0412265) [0.4603] 0.0940742 (0.0601015) [0.1175] 0.0391001 (0.0657167) [0.5519] 0.0637049 (0.0782963) [0.4159] 0.0755638 (0.0523840) [0.1492] 0.126156 (0.0417848) [0.0025***] 0.0374551 (0.0444341) [0.3993] 0.00612006 (0.0521439) [0.9066] 0.0670227 (0.0437310) [0.1254] -0.0712241 (0.0797420) [0.3718]

μ2 -0.014037 (0.0463955) [0.7622] 0.0285597 (0.0265139) [0.2814] 0.0771809 (0.0425585) [0.0698*] 0.0468310 (0.0375811) [0.2127] -0.0102087 (0.050220) [0.8389] -0.0248078 (0.0516843) [0.6312] -0.0521080 (0.0388607) [0.1800] -0.0214411 (0.0507183) [0.6725] -0.0167946 (0.0626917) [0.7888] -0.0172316 (0.0580664) [0.7667] 0.0597820 (0.0491672) [0.2240] 0.0390491 (0.0434801) [0.3691] 0.00049457 (0.0449662) [0.9912] 0.0356064 (0.0465193) [0.4440] 0.00926668 (0.0433340) [0.8307] -0.0898057 (0.0603976) [0.1370]

μ3 -0.045273 (0.0480921) [0.3465] 0.0420356 (0.0341807) [0.2188] 0.106041 (0.0441400) [0.0163**] 0.101732 (0.0373977) [0.0065***] -0.0317669 (0.0528445) [0.5477] -0.0497526 (0.0584292) [0.3945] -0.0512377 (0.0414916) [0.2169] 0.0269410 (0.0590832) [0.6484] 0.0487685 (0.0634829) [0.4424] -0.00367104 (0.0594898) [0.9508] -0.0155395 (0.0524583) [0.7671] 0.0291947 (0.0427279) [0.4944] 0.00702435 (0.0447479) [0.8753] 0.0507027 (0.0453576) [0.2636] 0.0373755 (0.0449233) [0.4054] 0.0526373 (0.0634890) [0.4071]

μ4 0.0242148 (0.0492975) [0.6233] 0.0453442 (0.0334003) [0.1746] 0.0850316 (0.0456686) [0.0626 *] 0.0456243 (0.0407414) [0.2628] 0.0404277 (0.0526624) [0.4427] 0.0415427 (0.0549179) [0.4494] -0.00280678 (0.0424596) [0.9473] 0.0348119 (0.0544895) [0.5229] 0.0599143 (0.0594164) [0.3133] -0.0102692 (0.0625170) [0.8695] 0.200088 (0.0559445) [0.0003***] 0.0464563 (0.0400900) [0.2465] 0.0285865 (0.0410869) [0.4866] 0.0325270 (0.0470304) [0.4892] 0.0257060 (0.0427924) [0.5480] 0.0646611 (0.0626027) [0.3017]

μ5 0.0397865 (0.0501093) [0.4272] 0.0614361 (0.0252957) [0.0152**] 0.122212 (0.0451495) [0.0068***] 0.0375359 (0.0392643) [0.3391] 0.0511922 (0.0551603) [0.3534] 0.0213303 (0.059217) [0.7187] 0.0782482 (0.0407947) [0.0551*] 0.0734177 (0.0459185) [0.1098] -0.101019 (0.0598356) [0.0914*] 0.0976279 (0.0612161) [0.1108] 0.220883 (0.0478317) [0.0001***] 0.0593796 (0.036458) [0.1034] -0.0674330 (0.0409787) [0.0999*] 0.104062 (0.0375684) [0.0056***] 0.00674820 (0.0385334) [0.8610] 0.198857 (0.0589379) [0.0007***]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively

158

Table 5 - GJR - GARCH conditional variance equation for advanced markets indexes: first sub-sample Day of the week variables Index AEX General

All Ordinaries

ATX

BEL-20

CAC 40

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

OSEAX

S&P TSX Composite Standard & Poor's Straits Times

SSMI

TAIEX

ω 0.069117 (0.06571) [0.2929] 0.116228 (0.0260930) [0.0001***] 0.130381 (0.0651009) [0.0452**] 0.0096560 (0.0465206) [0.8356] 0.0672835 (0.0585675) [0.2506] 0.132803 (0.0888274) [0.1349] 0.0591741 (0.0355662) [0.0962*] 0.157792 (0.0852169) [0.0641*] 0.0918860 (0.120317) [0.4450] -0.0519134 (0.111793) [0.6424] 0.170605 (0.0961636) [0.0760*] 0.0274643 (0.0619646) [0.6576] -0.00541086 (0.0604250) [0.9286] -0.0159532 (0.0590535) [0.7870] 0.0729621 (0.0517219) [0.1583] -0.110675 (0.141213) [0.4332]

ν1 -0.21395 (0.09199) [0.0200**] -0.0700591 (0.0316015) [0.0266**] -0.0673397 (0.0892650) [0.4506] -0.0440816 (0.0697419) [0.5273] -0.218619 (0.0968381) [0.0240**] -0.218094 (0.117754) [0.0640*] -0.128583 (0.0521320) [0.0136**] -0.0188709 (0.108922) [0.8625] -0.111892 (0.144467) [0.4386] 0.237786 (0.159214) [0.1353] 0.0950489 (0.140852) [0.4998] 0.0342679 (0.0853346) [0.6880] -0.0211977 (0.0769656) [0.7830] 0.158551 (0.0774300) [0.0406**] 0.0115838 (0.0691287) [0.8669] 0.337181 (0.179067) [0.0597*]

ν2 0.009673 (0.11095) [0.9305] -0.145880 (0.0350167) [0.0001***] -0.127099 (0.105459) [0.2281] 0.0285455 (0.0828361) [0.7304] -0.0136544 (0.113720) [0.9044] -0.152345 (0.163741) [0.3522] -0.0537116 (0.0669453) 0.4224] -0.169943 (0.134824) [0.2075] 0.0251918 (0.175397) [0.8858] -0.176526 (0.221939) [0.4264] -0.188489 (0.164505) [0.2519] 0.0364816 (0.0988075) [0.7120] 0.102185 (0.0961420) [0.2878] 0.0338716 (0.102396) [0.7408] -0.0790849 (0.0851100) [0.3528] -0.0222709 (0.254942) [0.9304]

ν4 -0.03552 (0.12786) [0.7812] -0.0869523 (0.0478562) [0.0692*] -0.0873039 (0.106051) [0.4104] 0.0389628 (0.0751039) [0.6039] -0.0736037 (0.101956) [0.4703] -0.201320 (0.153543) [0.1898] -0.0265733 (0.0698259) 0.7035] -0.165205 (0.143637) [0.2501] -0.191255 (0.192655) [0.3208] 0.269265 (0.188953) [0.1541] 0.0656093 (0.171233) [0.7016] -0.0877512 (0.0996926) [0.3787] -0.0533156 (0.0863178) [0.5368] 0.0615633 (0.101916) [0.5458] -0.125081 (0.0965111) [0.1950] 0.0982198 (0.198429) [0.6206]

ν5 -0.04056 (0.10243) [0.6921] -0.206828 (0.0440856) [0.0001***] -0.0496915 (0.0906895) [0.5837] 0.0243701 (0.0658809) [0.7114] 0.0288606 (0.103654) [0.7807] -0.00241635 (0.102610) [0.9812] -0.0286375 (0.0719706) 0.6907] -0.385455 (0.139066) [0.0056***] -0.152514 (0.157670) [0.3334] 0.0893470 (0.145633) [0.5395] -0.333945 (0.138399) [0.0158**] -0.0443450 (0.0877460) [0.6133] 0.0330222 (0.0816537) [0.6859] -0.0732825 (0.0888782) [0.4096] -0.0905412 (0.0750840) [0.2279] 0.213084 (0.204167) [0.2966]

Other conditional variance variables Index AEX General

All Ordinaries

α1 0.0359564 (0.006201) [0.0001***] 0.0326235 (0.00598842)

α2 x

γ1 0.990887 (0.013041) [0.0001***] 0.976623 (0.0287170)

159

γ2 x

β 0.917023 (0.01286) [0.0001***] 0.898325 (0.0176162)

ATX

BEL-20

CAC 40

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

OSEAX

S&P TSX Composite Standard & Poor's Straits Times

SSMI

TAIEX

[0.0001***] 0.0677402 (0.0214342) [0.0016 ***] 0.0982407 (0.0217138) [0.0001***] 0.0309540 (0.00497699) [0.0001***] 0.0356813 (0.00515075) [0.0001***] 0.0379096 (0.00607039) [0.0001***] 0.0160259 (0.00346387) [0.0001***] 0.0285278 (0.0154484) [0.0648*] 0.0659869 (0.0123894) [0.0001***] 0.0816038 (0.0255899) [0.0014***] 0.0269631 (0.00751698) [0.0003***] 0.0302520 (0.00559027) [0.0001***] 0.0743685 (0.0250608) [0.0030***] 0.0397917 (0.00689665) [0.0001***] 0.0421033 (0.0112890) [0.0002***]

0.0300864 (0.0146464) [0.0400**] x

[0.0001***] 0.403252 (0.142376) [0.0046 ***] 0.348152 (0.0896264) [0.0001***] 0.984412 (0.0184129) [0.0001***] 0.981625 (0.0190388) [0.0001***] 0.984430 (0.0170426) [0.0001***] 0.977247 (0.0305710) [0.0001***] 0.745991 (0.419150) [0.0751*] 0.320605 (0.0999821) 0.0013***] 0.434648 (0.143545) [0.0025***] 0.104373 (0.0293401) [0.0004***] 0.993993 (0.00722113) [0.0001***] 0.199799 (0.0735604) [0.0066***] 0.970371 (0.0589502) [0.0001***] 0.296706 (0.0876213) [0.0007***]

-0.0296341 (0.0144567) [0.0404**] x

[0.0001***] 0.840959 (0.0331369) [0.0001***] 0.866056 (0.0218759) [0.0001***] 0.928840 (0.00995893) [0.0001***] 0.918774 (0.0107879) [0.0001***] 0.908964 (0.0135027) [0.0001***] 0.959993 (0.00848066) [0.0001***] 0.951707 (0.00984780) [0.0001***] 0.912522 (0.0147372) 0.0001***] 0.815866 (0.0455215) [0.0001***] 0.912324 (0.0233715) [0.0001***] 0.932818 (0.0118254) [0.0001***] 0.904503 (0.0306879) [0.0001***] 0.904977 (0.0136424) 0.0001***] 0.947357 (0.0132104) [0.0001***]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 6. GJR - GARCH conditional mean equation for advanced markets indexes: second sub-sample Index AEX General

All Ordinaries

ATX

BEL-20

CAC 40

μ1 -0.00154014 (0.0616886) [0.9801] 0.0244476 (0.0594320) [0.6808] -0.0259364 (0.0892951) [0.7715] -0.0133871 (0.0651973) [0.8373] -0.0458785

μ2 -0.0484031 (0.0688564) [0.4821] -0.00962768 (0.0530526) [0.8560] -0.0893432 (0.0842077) [0.2887] -0.0556456 (0.0677728) [0.4116] -0.0422756

μ3 -0.0394375 (0.0645827) [0.5414] -0.0130367 (0.0568489 ) [0.8186] 0.0123288 (0.0859728) [0.8860] 0.0152431 (0.0661938) [0.8179] 0.0150984

160

μ4 -0.0165317 (0.0671994) [0.8057] 0.0909229 (0.0586453) [0.1210] -0.0069001 (0.0926134) [0.9406] -0.0863495 (0.0672150) [0.1989] -0.0568853

μ5 0.0511868 (0.0588107) [0.3841] -0.0456738 (0.0551605) [0.4077] 0.0289874 (0.0797465) [0.7162] 0.0275490 (0.0619648) [0.6566] 0.0531790

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

OSEAX

S&P TSX Composite Standard & Poor's Straits Times

SSMI

TAIEX

(0.0689226) [0.5056] 0.0200216 (0.0634883) [0.7525] 0.0151388 (0.0583701) [0.7954] 0.0706178 (0.0878434) [0.4215] 0.0389407 (0.0666882) [0.5593] -0.0127374 (0.0824980) [0.8773] 0.0466948 (0.0707644) [0.5093] -0.00315342 (0.0543088) [0.9537] 0.0212589 (0.0504691) [0.6736] -0.0154191 (0.0677824) [0.8201] -.0324872 (0.0477756) [0.4965] 0.0944737 (0.0785341) [0.2290]

(0.0708645) [0.5508] 0.0355220 (0.0660633) [0.5908] -0.0168573 (0.0637588) [0.7915] -0.0668694 (0.0815728) [0.4124] -0.0145717 (0.0659888) [0.8252] -0.0831226 (0.0670854) [0.2153] -0.0920927 (0.0802278) [0.2510] -0.0210763 (0.0734330) [0.7741] 0.0228199 (0.0545812) [0.6759 0.0428444 (0.0551151) [0.4369] -.0244685 (0.0538065) [0.6493] 0.00189929 (0.0615602) [0.9754]

(0.0713530) [0.8324] 0.0524474 (0.0696703) [0.4516] -0.0481037 (0.0626174) [0.4424] -0.00089909 (0.0803999) [0.9911] 0.0936727 (0.0641544) [0.1443] 0.0196591 (0.0738713) [0.7901] 0.0183655 (0.0756938) [0.8083] 0.0744394 (0.0573689) [0.1944] 0.0803565 (0.0547923) [0.1425] 0.0703298 (0.0619488) [0.2563] 0.0213740 (0.0490269) [0.6629] 0.164928 (0.0655463) [0.0119**]

(0.0723867) [0.4320] 0.00016441 (0.0694342) [0.9981] -0.0047505 (0.0600161) [0.9369] 0.0198497 (0.0740114) [0.7885] 0.0653279 (0.0672002) [0.3310] 0.116310 (0.0743260) [0.1176] 0.0526510 (0.0744943) [0.4797] 0.0187790 (0.0581985) [0.7469] 0.0856502 (0.0583547) [0.1422] -0.0452142 (0.0508141) [0.3736] 0.00526163 (0.0553460) [0.9243] 0.0482840 (0.0670236) [0.4713]

(0.0761244) [0.4848] 0.112974 (0.0679473) [0.0964*] 0.0822111 (0.0580826) [0.1569] 0.0634904 (0.0760585) [0.4039] 0.00816826 (0.0703892) [0.9076] -0.120585 (0.0792662) [0.1282] 0.167674 (0.0673503) [0.0128**] 0.0673859 (0.0494494) [0.1730] 0.0704222 (0.0561053) [0.2094] 0.0809787 (0.0507811) [0.1108] 0.0143190 (0.0559189) [0.7979] 0.0174514 (0.0641278) [0.7855]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 7 - GJR - GARCH conditional variance equation for advanced markets indexes: second sub-sample Day of the week variables Index AEX General All Ordinaries ATX

BEL-20

CAC 40

DAX

ω -0.04324 (0.12852) [0.7365] 0.142746 (0.078788) [0.0700*] 0.0789616 (0.195994) [0.6870] 0.0113127 (0.168275) [0.9464] -0.0383724 (0.187525) [0.8379] 0.00826400 (0.188436) [0.9650]

ν1 0.168222 (0.17277) [0.3302] 0.126296 (0.127923) [0.3235] -0.0799536 (0.271261) [0.7682] 0.174054 (0.236872) [0.4625] 0.00720544 (0.245441) [0.9766] -0.0840347 0.219478) [0.7018]

ν2 0.188584 (0.22181) [0.3952] -0.318576 (0.141847) [0.0247**] 0.156419 (0.358553) [0.6627] 0.135552 (0.296688) [0.6478] 0.173227 (0.374967) [0.6441] 0.171380 0.360970) [0.6349]

161

ν4 0.0997146 (0.198414) [0.6153] -0.0596804 (0.158566) [0.7066 ] 0.0966971 (0.277149) [0.7272] 0.0892056 (0.278415) [0.7487] 0.160380 (0.276801) [0.5623] 0.0658735 0.283167) [0.8160]

ν5 -0.10076 (0.18702) [0.5900] -0.292120 (0.122670) [0.0172**] -0.306418 (0.299758) [0.3067] -0.155335 (0.219552) [0.4792] 0.127108 (0.265154) [0.6317] 0.00389301 0.248533) [0.9875]

FTSE 100

Hang Seng

Nasdaq 100 Nikkei 225

OSEAX

S&P TSX Composite Standard & Poor's Straits Times SSMI

TAIEX

0.0251352 (0.134414) [0.8517] 0.104723 (0.176249) [0.5524] -0.0732849 (0.146824) [0.6177] 0.231315 (0.154421) [0.1341] -0.0868262 (0.167132) [0.6034] -0.176455 (0.07477) [0.0183**] -0.0481409 (0.123343 [0.6963] 0.180433 (0.085670) [0.0352**] -0.12999 (0.090833) [0.2135] 0.179270 (0.140792) [0.2029]

0.0455005 (0.168334) [0.7869] 0.190971 (0.277384) [0.4912] -0.0456796 (0.169046) [0.7870] -0.219734 (0.206983) [0.2884] 0.0768428 (0.208162) [0.7120] 0.153245 (0.112762) [0.1741] -0.0409121 (0.147554 [0.7816] 0.0448178 (0.121795) [0.7129] 0.0498034 (0.124468) [0.6891] 0.00245523 (0.234657) [0.9917]

0.123995 (0.226670) [0.5844] -0.310712 (0.303084) [0.3053] 0.251059 (0.283806) [0.3764] -0.450391 (0.280074) [0.1078] 0.459701 (0.289283) [0.1120] 0.479664 (0.166563) [0.004***] 0.230775 (0.242846 [0.3420] -0.331768 (0.138955) [0.0170**] 0.304655 (0.187383) [0.1040] 0.462692 (0.226193) [0.0408**]

-0.0669032 (0.213619) [0.7541] -0.307724 (0.263576) [0.2430] 0.176123 (0.231170) [0.4461] -0.147757 (0.246798) [0.5494] 0.0391907 (0.252344) [0.8766] 0.209477 (0.123576) [0.0901*] 0.165012 (0.226507 [0.4663] -0.403754 (0.134656) [0.0027***] 0.248457 (0.131974) [0.0598*] 0.154864 (0.284204) [0.5858]

-0.0473587 (0.162442) [0.7706] 0.130701 (0.223103) [0.5580] 0.172736 (0.195628) [0.3772] 0.00732893 (0.227326) [0.9743] 0.0757571 (0.260115) [0.7709] 0.140566 (0.102230) [0.1691] -0.0273488 (0.157758 [0.8624] -0.133057 (0.104887) [0.2046] 0.0997675 (0.119725) [0.4047] 0.110801 (0.181664) [0.5419]

Other conditional variance variables Index AEX General

All Ordinaries

ATX

BEL-20

CAC 40

DAX

FTSE 100

Hang Seng

Nasdaq - 100

Nikkei 225

α1 0.0439067 (0.007776) [0.0001***] 0.0289263 (0.0128317) [0.0242**] 0.0671511 (0.0283737) [0.0179**] 0.0790858 (0.0246216) [0.0013***] 0.0523974 (0.0103578) [0.0001***] 0.0431282 (0.00827872) [0.0001***] 0.0458975 (0.00843226) [0.0001***] 0.0730281 (0.0131446) [0.0001***] 0.0420197 (0.00763084) [0.0001***] 0.0722617 (0.0228655) [0.0016***]

α2 x

γ1 1.02878 (0.019222) [0.0001***] 1.47776 (0.481306) [0.0021***] 0.509659 (0.176026) [0.0038***] 0.667860 (0.212183) [0.0016***] 1.01369 (0.00754771) [0.0001***] 1.01772 (0.0103799) [0.0001***] 1.01504 (0.00795133) [0.0001***] 0.353519 (0.0898681) [0.0001***] 1.01958 (0.0140955) [0.0001***] 0.574660 (0.222813) [0.0099***]

162

γ2 x

β 0.899037 (0.01673) [0.0001***] 0.883720 (0.0190041) [0.0001***] 0.898397 (0.0314497) [0.0001***] 0.860715 (0.0274383) [0.0001***] 0.877372 (0.0217141) [0.0001***] 0.895449 (0.0183616) [0.0001***] 0.887379 (0.0192211) [0.0001***] 0.901957 (0.0177123) [0.0001***] 0.892819 (0.0166944) [0.0001***] 0.869902 (0.0215227) [0.0001***]

OSEAX

S&P TSX Composite

Standard & Poor's

Straits Times

SSMI

TAIEX

0.0709407 (0.0150306) [0.0001***] 0.0204790 (0.0121594) [0.0921*] 0.0460070 (0.00859964) [0.0001***] 0.0651887 0.0168562) [0.0001***] 0.0484465 (0.00826308) [0.0001***] 0.0591813 (0.0215096) [0.0059***]

0.0487121 (0.0258899) [0.0599*] x

0.529780 (0.132217) [0.0001***] 1.02348 (0.0118150) [0.0001***] 1.02633 (0.0126575) [0.0001***] 0.360451 (0.0894941) [0.0001***] 1.02040 (0.0168760) [0.0001***] 0.487612 (0.171944) [0.0046***]

0.0838395 (0.0497548) [0.0916*] x

0.889612 (0.0157966) [0.0001***] 0.884812 (0.0190063) [0.0001***] 0.895880 (0.0168948) [0.0001***] 0.917132 0(.0186075) [0.0001***] 0.880444 (0.0180590) [0.0001***] 0.905759 (0.0302413) [0.0001***]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 8 - GJR - GARCH conditional mean equation for emerging markets indexes: first subsample Index Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite

IPC

KLSE Composite

KOSPI

MerVal

OMXT

μ1 -0.124650 (0.0531007) [0.0189**] 0.0617362 (0.0533116) [0.2469 ] -0.0781432 (0.0932146) [0.4019] 0.170586 (0.0692384) [0.0137] 0.167014 (0.0711989) [0.0190**] 0.0656239 (0.0526915) [0.2130] -0.101013 (0.0673556) [0.1337] 0.0804551 (0.0577221) [0.1634] -0.0137552 (0.0360811) [0.7030] 0.0151799 (0.0863878) [0.8605] 0.0218198 (0.0991120) [0.8258] 0.0193603 (0.0331517) [0.5592] 0.161169 (0.0561626)

μ2 -0.0491162 (0.0529838) [0.3539] 0.118531 (0.0528773) [0.0250**] 0.0548061 (0.0900391) [0.5427] 0.0788403 (0.0612375) [0.1979] 0.0556660 (0.0667083) [0.4040] 0.0796818 (0.0481369) [0.0979*] 0.0961067 (0.0590346) [0.1035] 0.136578 (0.0603060) [0.0235**] -0.00382785 (0.0301491) [0.8990] 0.00235562 (0.0696418) [0.9730] 0.0561594 (0.0865118) [0.5162] 0.0819035 (0.0337247) [0.0152**] 0.0481942 (0.0574828)

μ3 0.0272962 (0.4795) [0.6316] 0.152402 (0.048756) [0.0018***] 0.171253 (0.0939205) [0.0682*] 0.0804323 (0.0601387) [0.1811] -0.0385334 (0.0728563) [0.5969] 0.0650210 (0.0455672) [0.1536] 0.181250 (0.0624430) [0.0037***] 0.124638 (0.0616259) [0.0431**] 0.0409280 (0.0365695) [0.2631] 0.0706150 (0.0785223) [0.3685] 0.151455 (0.0901837) [0.0931*] 0.0675682 (0.0341702) [0.0480**] 0.0589307 (0.0574290)

163

μ4 0.120085 (0.0562685) [0.0328**] 0.0978414 (0.0461737) [0.0341**] 0.0247076 (0.0982074) [0.8014] 0.174107 (0.0631244) [0.0058***] 0.100626 (0.0688408) [0.1438] 0.0722343 (0.0466311) [0.1214] 0.115435 (0.0624985) [0.0647*] 0.143806 (0.0592880) [0.0153**] 0.00707011 (0.0360224) [0.8444] 0.170977 (0.0764530) [0.0253**] 0.210751 (0.0918500) [0.0218**] 0.0857097 (0.0312644) [0.0061***] 0.200690 (0.0575984)

μ5 0.124267 (0.0496491) [0.0123**] 0.150505 (0.0484912) [0.0019***] 0.196375 (0.0803072) [0.0145**] 0.134966 (0.0666715) [0.0429**] 0.0480655 (0.0647362) [0.4578] 0.0616566 (0.0450899) [0.1715] 0.279932 (0.0609141) [0.0001***] 0.0953993 (0.0522136) [0.0677*] 0.0800758 (0.0299072) 0.0074***] 0.114755 (0.0752548) [0.1273] 0.0588398 (0.0841262) [0.4843] 0.0818093 (0.0331336) [0.0135**] 0.125966 (0.0496882)

SEMDEX

SSE Composite

TA 100

[0.0041***] 0.0234146 (0.0153544) [0.1273] -0.00110230 (0.0595221) [0.9852] 0.212063 (0.105034) [0.0435**]

[0.4018] 0.0141426 (0.0150355) [0.3469] 0.149286 (0.0391230) [0.0001***] -0.0173368 (0.0527500) [0.7424]

[0.3048] 0.0330008 (0.0159882) [0.0390**] 0.0399518 (0.0497895) [0.4223] -0.0178327 (0.0613055) [0.7711]

[0.0005***] 0.0295841 (0.0156898) [0.0594*] -0.0800717 (0.0451211) [0.0760*] 0.118978 (0.0593434) [0.0450**]

[0.0112**] 0.0526948 (0.0153986) [0.0006***] -0.00849171 (0.0451516) [0.8508] x

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 9 - GJR - GARCH conditional variance equation for emerging markets indexes: first sub-sample Day of the week variables Index Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite IPC

KLSE Composite KOSPI

MerVal

OMXT

SEMDEX

SSE

ω 0.184483 (0.15401) [0.2310] -0.017187 (0.116454) [0.8827 0.217147 (0.292247) [0.4575] 0.227722 (0.154138) [0.1396] 0.355699 (0.167571) [0.0338**] 0.0721569 (0.138093) [0.6013] 0.360355 (0.194380) [0.0638*] 0.135606 (0.0990071) [0.1708] 0.124158 (0.0489771) [0.0112**] 0.165548 (0.229069) [0.4699] 0.330504 (0.325283) [0.3096] 0.0560990 (0.0653915 [0.3910] 0.0697436 (0.123330) [0.5717] 0.110958 (0.0302207) [0.0002***] 0.483199

ν1 0.0845121 (0.20414) [0.6789] 0.328612 (0.179966) [0.0679*] 0.500373 (0.323601) [0.1220] 0.0385744 (0.200375) [0.8473] -0.372005 (0.216705) [0.0860*] 0.324140 (0.203262) [0.1108] 0.170070 (0.243876) [0.4856] 0.0272622 (0.147945) [0.8538] -0.128533 (0.0611690) [0.0356**] -0.0617593 (0.239613) [0.7966] 0.259874 (0.374279) [0.4875] -0.0053958 (0.0940359) [0.9542] 0.0423529 (0.145699) [0.7713] -0.0303218 (0.0241039) [0.2084] 0.437855

ν2 -0.12293 (0.23492) [0.6008] 0.228741 (0.220013) [0.2985 ] -0.313047 (0.464946) [0.5008] -0.375799 (0.238404) [0.1150] -0.302052 (0.269077) [0.2616] -0.0318306 (0.230716) [0.8903] -0.349778 (0.289747) [0.2274] -0.0421552 (0.163550) [0.7966] -0.176982 (0.0694633) [0.0108**] -0.345344 (0.308141) [0.2624] -0.516650 (0.636516) [0.4170] -0.0639412 (0.0997121) [0.5214] 0.0845749 (0.193244) [0.6616] -0.0400914 (0.0249661) [0.1083] -1.23670

164

ν4 -0.1430 (0.23581) [0.5442] 0.0744826 (0.181314) [0.6812] -0.0400775 (0.371483) [0.9141] -0.0628776 (0.260641) [0.8094] -0.442701 (0.276158) [0.1089] 0.180517 (0.219093) [0.4100] -0.165766 (0.297831) [0.5778] -0.128571 (0.173026) [0.4574] 0.0909103 (0.0557009) [0.1027] -0.256106 (0.409730) [0.5319] -0.395128 (0.527232) [0.4536] -0.0989721 (0.110435) [0.3701] 0.0908410 (0.201354) [0.6519] -0.0290464 (0.0279354) [0.2984] -0.404270

ν5 -0.358769 (0.17188) [0.0369**] 0.253330 (0.155149) [0.1025] -0.723147 (0.367780) [0.0493**] -0.0819548 (0.211602) [0.6985] -0.197457 (0.255499) [0.4396] 0.0278884 (0.173797) [0.8725] -0.277376 (0.230314) [0.2285] -0.292022 (0.166339) [0.0792*] -0.138849 (0.0706565) [0.0494**] 0.0496151 (0.266716) [0.8524] -0.422134 (0.455789) [0.3544] -0.0328028 (0.108236) [0.7618] -0.267399 (0.184297) [0.1468 -0.0367730 (0.0231048) [0.1115] -0.316930

Composite TA 100

(0.183315) [0.0084***] 0.341122 (0.147023) [0.0203**]

(0.323937) [0.1765] 0.335492 (0.276179) [0.2245]

(0.352987) [0.0005***] -0.932165 (0.20426) [0.0001***]

(0.336544) [0.2297] -0.201513 (0.269004) [0.4538]

(0.278272) [0.2547] x

Other conditional variance variables Index Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite

IPC

KLSE Composite

KOSPI

MerVal

OMXT

SEMDEX

SSE Composite

TA 100

α1 0.104079 (0.030645) [0.0007***] 0.390246 (0.0574123) [0.0001***] 0.0220422 (0.00607510) [0.0003***] 0.124758 (0.0243646) [0.0001***] 0.0619469 (0.0144608) [0.0001***] 0.203779 (0.0792956) [0.0102**] 0.0880075 (0.0343131) [0.0103**] 0.0647729 (0.0194441) [0.0009***] 0.0981506 (0.0579478) [0.0903*] 0.0399033 (0.0199430) [0.0454**] 0.0942423 (0.0169718) [0.0001***] 0.198619 (0.0532266) [0.0002***] 0.0951020 (0.0148611) [0.0001***] 0.576364 (0.132050) [0.0001***] 0.182950 (0.0557012) [0.0010***] 0.0788252 (0.0324123) [0.0150**]

α2 x

-0.273368 (0.0709686) [0.0001***] x

0.0916998 (0.0409716) [0.0252**] x

γ1 0.260595 (0.067758) [0.0001***] 0.194886 (0.112049) [0.0820*] 0.968402 (0.054849 ) [0.0001***] 0.362801 (0.0918808) [0.0001***] 0.257143 (0.112207) [0.0219**] -0.164579 (0.0808776) [0.0419**] 0.398331 (0.145956) [0.0064***] 0.507126 (0.119515) [0.0001***] -0.124127 (0.0719683) [0.0846*] 0.984021 (0.0215196) [0.0001***] 0.222608 (0.0633037) [0.0004***] 0.0506546 (0.0204370) [0.0132**] 0.254242 (0.0896571) 0.0046***] -0.228739 (0.0741679) [0.0020***] 0.224401 (0.0677898) [0.0009***] 0.306229 (0.162902) [0.0601*]

γ2 x

0.228700 (0.0961448) [0.0174**] x

0.228292 (0.121790) [0.0609*] x

β 0.842609 (0.047852) [0.0001***] 0.867559 (0.0619715) [0.0001***] 0.922980 (0.0271047) [0.0001***] 0.788715 (0.0370616) [0.0001***] 0.885238 (0.0216555) [0.0001***] 0.710559 (0.108483) [0.0001***] 0.764327 (0.0839018) [0.0001***] 0.888887 (0.0276038) [0.0001***] 0.894011 (0.0634279) [0.0001***] 0.899318 (0.0351897) [0.0001***] 0.879824 (0.0201464) [0.0001***] 0.832328 (0.0377430) [0.0001***] 0.858748 (0.0195196) 0.0001***] 0.0967157 (0.0346091) [0.0052***] 0.761419 (0.0598452) [0.0001***] 0.835340 (0.0820009) [0.0001***]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively

165

Table 10. GJR- GARCH conditional mean equation for emerging markets indexes: second sub-sample Index Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite

IPC

KLSE Composite

KOSPI

MerVal

OMXT

SEMDEX

SSE Composite

TA 100

μ1 -0.271912 (0.0975980) [0.0053***] -0.129960 (0.076394) [0.0889 *] 0.0121202 (0.0847223) [0.8862] 0.0115869 (0.0790990) [0.8835] -0.00120307 (0.0852512) [0.9887] -0.265705 (0.0525838) [0.0001***] -0.0284996 (0.0734586) [0.6980] 0.110366 (0.0600480) [0.0661*] -0.0001688 (0.0451861) [0.9970] -0.0594856 (0.0727538) [0.4136] 0.000900761 (0.101350) [0.9929] -0.128825 (0.0605006) [0.0332**] 0.00712210 (0.0678791) [0.9164] -0.0661893 (0.0264205) [0.0122**] 0.192124 (0.117297) [0.1014] 0.0893025 (0.106690) [0.4026]

μ2 -0.135823 (0.106226) [0.2010] -0.0807418 (0.0679077) [0.2344] -0.0470852 (0.101406) [0.6424] 0.0917477 (0.121324) [0.4495] -0.0897011 (0.0847159) [0.2897] -0.0636285 (0.0536227) [0.2354] 0.122663 (0.0688393) [0.0748*] -0.0671275 (0.0661109) [0.3099] 0.0662186 (0.0349022) [0.0578*] 0.00232102 (0.0589869) [0.9686] 0.0252420 (0.0964758) [0.7936] -0.0421612 (0.0595410) [0.4789] -0.0979148 (0.0682125) [0.1512] -0.002094 (0.0253749) [0.9342] -0.0977652 (0.0876406) [0.2646] 0.0284323 (0.06402) [0.6570]

μ3 0.0738800 (0.0921946) [0.4229] 0.0522272 (0.0642144) [0.4160] 0.0486121 (0.0898602) [0.5885] 0.0220690 (0.0706942) [0.7549] 0.0221549 (0.0805930) [0.7834] 0.0960594 (0.0533120) [0.0716*] 0.226459 (0.069304) [0.0011***] 0.0858926 (0.0595861) [0.1494] 0.0970672 (0.0379239) [0.0105**] 0.0962986 (0.0675418) [0.1539] 0.193599 (0.0764287) [0.0113**] 0.0536126 (0.0484965) [0.2689] 0.135969 (0.0649496) [0.0363**] 0.0129429 (0.0305844) [0.6722] 0.0632809 (0.0938420) [0.5001] 0.117337 (0.07167) [0.1016]

μ4 -0.0581420 (0.0929195) [0.5315] 0.0923277 (0.0668125) [0.1670] 0.0365851 (0.0852854) [0.6679] -0.0163387 (0.0713767) [0.8189] -0.0859577 (0.0760934) [0.2586] 0.0562492 (0.0471270) [0.2326] 0.0865944 (0.0674238) [0.1990] 0.0526721 (0.0507405) [0.2992] 0.0735054 (0.0360355) [0.0414**] 0.0618686 (0.071298) [0.3855] 0.0153923 (0.0881444) [0.8614] -0.0224543 (0.0519274) [0.6654] -0.0367208 (0.0691632) [0.5955] 0.00600948 (0.0248812) [0.8091] -0.0861354 (0.0846607) [0.3090] -0.0337701 (0.0599409) [0.5732]

μ5 0.132957 (0.0851906) [0.1186] 0.188367 (0.0638602) [0.0032***] 0.0464125 (0.079884) [0.5612] 0.0634090 (0.126805) [0.6170] 0.0239887 (0.0861747) [0.7807] 0.134675 (0.0461246) [0.0035***] 0.174906 (0.0671185) [0.0092***] 0.0496451 (0.0558366) [0.3739] 0.0883412 (0.0351702) [0.0120**] 0.0248066 (0.0761519) [0.7446] 0.103877 (0.0727339) [0.1532] 0.0960759 (0.0528979) [0.0693*] 0.0153903 (0.068136) [0.8213] 0.0564874 (0.023132) [0.0146**] 0.102332 (0.0743509) [0.1687] 0.0459268 (0.07632) [0.5473]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively Table 11 - GJR - GARCH conditional variance equation for emerging markets indexes: second sub-sample Day of the week variables 166

Index Athex Composite Share BET-C

Bovespa

BSE 30

BUX

CROBEX

IDX Composite IPC

KLSE Composite KOSPI

MerVal

OMXT

SEMDEX

SSE Composite TA 100

ω -0.70948 (0.33104) [0.0321**] -0.048467 (0.164286) [0.7680] -0.158273 (0.224914) [0.4816] 0.241072 (0.404899) [0.5516] 0.0524111 (0.222611) [0.8139] 0.0484317 (0.0975308) [0.6195] 0.255580 (0.166776) [0.1254 -0.0679870 (0.105419) [0.5190] 0.114915 (0.0798989) [0.1504] 0.273026 (0.114255) [0.0169**] -0.294361 (0.332848) [0.3765] -0.207958 (0.149723) [0.1648] 0.0219779 (0.135025) [0.8707] 0.123090 (0.0634068) [0.0522*] 0.130702 (0.231231) [0.5719] -0.0828191 (0.0667726) [0.2149]

ν1 1.16439 (0.465883) [0.0124**] 0.527912 (0.222805) [0.0178**] 0.279844 (0.335054) [0.4036] -0.212904 (0.969580) [0.8262] -0.0626724 (0.318108) [0.8438] 0.164144 (0.178574) [0.3580] 0.140655 (0.232096) [0.5445 0.241915 (0.148378) [0.1030] 0.0906616 (0.0925893) [0.3275] -0.242561 (0.172378) [0.1594] 1.21610 (0.450005) [0.0069***] 0.575371 (0.247652) [0.0202**] 0.0179886 (0.181896) [0.9212] -0.0576658 (0.0492140) [0.2413] 0.468668 (0.355610) [0.1875] 0.758071 (0.0785422) [0.0001***]

ν2 1.52021 (0.642969) [0.0181**] -0.049947 (0.350144) [0.8866] 0.623337 (0.362470) [0.0855*] -0.727474 (0.661998) [0.2718] 0.0312995 (0.352697) [0.9293] -0.102346 (0.149660) [0.4941] -0.360884 (0.249311) [0.1478 0.101468 (0.182722) [0.5787] -0.133645 (0.113936) [0.2408] -0.579115 (0.206330) [0.0050***] 0.470952 (0.519128) [0.3643] 0.266292 (0.295461) [0.3674 0.100432 (0.242338) [0.6786] -0.0643370 (0.0683285) [0.3464] -0.440635 (0.345214) [0.2018] -0.496967 (0.135232) [0.0002***]

ν4 0.78225 (0.448849) [0.0814*] 0.282060 (0.263561) [0.2845] 0.207060 (0.375471) [0.5813] -0.150383 (0.372171) [0.6862] -0.132712 (0.407681) [0.7448] -0.0931211 (0.172532) [0.5894] -0.195675 (0.283555) [0.4901 -0.0781436 (0.162456) [0.6305] -0.108611 (0.106478) [0.3077] -0.136426 (0.228498) [0.5505] 0.772515 (0.579288) [0.1823] 0.364028 (0.212580) [0.0868*] 0.0853103 (0.222628) [0.7016] -0.146310 (0.0579367) [0.0116**] -0.361733 (0.474638) [0.4460] 0.275656 (0.107751) [0.0105**]

ν5 0.581959 (0.430533) [0.1765] -0.072963 (0.216509) [0.7361] 0.0452774 (0.290304) [0.8761] 0.150030 (0.182962) [0.4122] 0.213927 (0.309138) [0.4889] -0.120889 (0.125403) [0.3350] -0.105504 (0.244748) [0.6664 0.156489 (0.150863) [0.2996] 0.00821924 (0.0952105) [0.9312] -0.144025 (0.162496) [0.3754] -0.0783283 (0.449992) [0.8618 ] 0.163546 (0.192961) [0.3967 -0.0470677 (0.188512) [0.8028] -0.0957100 (0.0573707) [0.0953*] -0.182143 (0.357691) [0.6106] 0.206715 (0.129141) [0.1094]

Other conditional variance variables Index Athex Composite Share BET-C

Bovespa

α1 0.121571 (0.0189677) [0.0001***] 0.261956 (0.0543404) [0.0001***] 0.0590878

α2 x

-0.140327 (0.0586892) [0.0168**] x

γ1 0.172749 (0.0625657) [0.0058***] 0.218263 (0.0973720) [0.0250**] 0.619012

167

γ2 x

-0.188392 (0.0884440) [0.0332**] x

β 0.859862 (0.0202896) [0.0001***] 0.868292 (0.0230347) [0.0001***] 0.895973

BSE 30

BUX

CROBEX

IDX Composite

IPC

KLSE Composite

KOSPI

MerVal

OMXT

SEMDEX

SSE Composite

TA 100

(0.0200976) [0.0033***] 0.0694722 (0.0146853) [0.0001***] 0.101276 (0.0246544) [0.0001***] 0.0964529 (0.0271008) [0.0004***] 0.135833 (0.0363724) [0.0002***] 0.0341845 (0.0158726) [0.0313**] 0.0388799 (0.0172558) [0.0242**] 0.0362009 (0.0148925) [0.0151**] 0.130114 (0.0313601) [0.0001***] 0.172179 (0.0566040) [0.0024***] 0.132491 (0.0234456) [0.0001***] 0.598606 (0.238969) [0.0122**] 0.134050 (0.0497006) [0.0070***] 0.0602547 (0.0146969) [0.0001***]

0.0584439 (0.0337227) [0.0831*] x

(0.201297) [0.0021***] 0.543793 (0.194587) [0.0052***] 0.272977 (0.0704770) [0.0001***] 0.165297 (0.0610617) [0.0068***] 0.389331 (0.114635) [0.0007***] 0.127792 (0.0271572) [0.0001***] 0.220187 (0.0729673) [0.0025***] 1.00923 (0.00659752) [0.0001***] 0.201293 (0.0821764) [0.0143**] 0.117645 (0.0558468) [0.0352**] 0.160412 (0.0576846) [0.0054***] 0.159287 (0.091909) [0.0655*] 0.0475152 (0.0286597) [0.0973*] 0.446569 (0.149146) [0.0028***]

0.132805 (0.0636295) [0.0369**] x

(0.0281731) [0.0001***] 0.893300 (0.0272159) [0.0001***] 0.877639 (0.0297007) [0.0001***] 0.897070 (0.0251165) [0.0001***] 0.775995 (0.0737159) [0.0001***] 0.924336 (0.0180237) [0.0001***] 0.676888 (0.0829656) [0.0001***] 0.864559 (0.0317880) [0.0001***] 0.824001 (0.0427067) [0.0001***] 0.814076 (.0557115) [0.0001***] 0.846052 (0.0245922) [0.0001***] 0.525315 (0.160344) [0.0011***] 0.961951 (0.0301153) [0.0001***] 0.889283 (0.0247238) [0.0001***]

Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively

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Table 12 - Results of ARCH LM tests for residuals of GJR - GARCH models Index AEX General All Ordinaries ATX BEL-20 CAC 40 DAX FTSE 100 Hang Seng Nasdaq - 100 Nikkei 225 OSEAX S&P TSX Composite Standard & Poor's Straits Times SSMI TAIEX

Advanced Markets First subsample 3.82442 (0.5749) 5.79642 (0.7601) 4.69548 (0.6971) 4.65513 (0.7937) 4.55634 (0.8711) 4.71099 (0.5814) 5.03728 (0.6554) 3.65111 (0.7237) 5.31084 (0.8064) 5.29606 (0.8705) 3.54891 (0.6160) 2.76026 (0.7368) 5.80689 (0.8312) 3.97698 (0.7824) 4.3547 (0.6287) 3.92782 (0.8635)

Second subsample 8.16378 (0.2263) 7.01345 (0.5351) 11.6598 (0.3084) 2.34918 (0.8849) 11.6779 (0.4719) 7.20135 (0.2060) 7.5501 (0.5801) 12.2059 (0.5108) 6.34414 (0.3857) 9.19298 (0.4196) 6.6219 (0.4692) 8.50659 (0.2901) 6.17705 (0.2893) 12.8984 (0.5345) 9.24011 (0.5094) 11.6764 (0.3884)

Emerging Markets First subsample Athex Composite 4.2315 Share (0.7527) BET-C 6.52508 (0.6864) Bovespa 8.84215 (0.6364) BSE 30 3.3976 (0.7575) BUX 9.96961 (0.6964) CROBEX 3.25728 (0.8602) IDX Composite 6.46223 (0.7750) IPC 4.78851 (0.7799) KLSE Composite 9.96271 (0.6192) KOSPI 4.75869 (0.78302) MerVal 3.37442 (0.7605) OMXT 4.21014 (0.7552) PX 9.92352 (0.6226) SEMDEX 8.88502 (0.6325) SSE Composite 6.40792 (0.7799) TA 100 3.69551 (0.8834) Index

Notes: p-values are within brackets

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Second subsample 9.56303 (0.7933) 5.76374 (0.6736) 8.93558 (0.6278) 6.29409 (0.7101) 3.94477 (0.7861) 8.89959 (0.7114) 6.4898 (0.7725) 3.33323 (0.76600 7.34715 (0.6923) 9.04092 (0.7698) 6.35409 (0.2732) 8.09781 (0.7774) 7.35218 (0.7698) 9.42561 (0.8028) 6.86153 (0.3338) 7.16281 (0.5191)

BUSINESS CYCLES AND FINANCIAL INSTABILITY Cristian Ionescu Academy of Economic Studies, Romania

ABSTRACT: Given the growing importance of business cycles’ financial aspects, this paper aims to analyze the concept of financial cycles from a financial instability perspective, considering the following dimensions: trend versus cycle, the relationships between nominal variables and the real variables, business cycle correlations, the correlation and / or causality between cycles and the development of the financial System, the financial mechanisms of amplification. Keywords: financial instability, business cycles, trends, financial system, financial amplification, financial cycles

1. TIME SERIES MOVEMENTS MODELING It is important to study the structural model of the monetary transmission mechanism, and to analyze the manner it can be used with the purpose of policy analysis and forecasting. Therefore, it is necessary to describe the meaning of “permanent” and “temporary” shocks and the notions of “trend” and “cycle”. 1.1 Trends and cycles The time series is modeled as a sum of two components: the trend and the cycle:

where represents the vector of time series of interest at time , represents the nonstationary or permanent components of , represents the trends, represents the loading matrix (the way each trend affects the variables in the long run), represents the stationary or temporary components of , represents the vector of white noise disturbances that generate dynamic or cyclical effects through the distributed lag matrix , where is the lag operator ( ). So represents the stationary distributed lag of current and past disturbances or equivalently 1.2 Stochastic trends and permanent shocks In addition to the deterministic growth, trends may also have a stochastic component or a random component, which includes a sequence of small and random disturbances, which have a permanent effect on every variable; thus, perturbations are seen as “permanent shocks”.

or 170

where represents the deterministic growth, represents the permanent shocks. Therefore, the stochastic trends are a vector of random walks, while “the stochastic part of the trend is the sum of the current and past permanent shocks to hit the economy”1. Due to the fact that trends are stochastic, permanent shocks determine trends to have cyclical effects, which are dynamic effects that are different from the long-run effects. Thus, the vector includes both permanent shocks and temporary shocks:

where represents the purely temporary shocks, which has no long-run impact on and which is not component of the stochastic trends. Therefore, the general trend-cycle model for may be determined in terms of permanent shocks and temporary shocks, as following:

where represents a n x k matrix, system.

represents the number of permanent shocks that drive the

1.3 Alternative ways of modeling the trends There are several other variants of modeling the non-stationary components. One alternative is to model the trends as “simple linear deterministic trends”2, where the shocks influence only the cyclical movements of every variable and which are independent regarding the systematic forces that drive the trends. Another alternative is to model the trends as a “sequence of one-off deterministic regime shifts”3:

where represents the vector of impact dummy variables, represents the vector of one-zero step-dummies. The non-stationarity of results from many infrequent regime shifts, instead of many small and random changes. This is important for identifying several trends, especially for inflation, nominal anchor and financial liberalization.

Shamik Dhar, Darren Pain, Ryland Thomas, A small structural empirical model of the UK monetary transmission mechanism, Bank of England, 2000 2 ibidem 3 ibidem 1

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1.4 Estimating a common trends model The estimation of a common trend model implies that this type of model is an inverse representation of a VAR model:

where

Thus, the structural shocks are only a transformation of the VAR residuals . Also, the VAR residuals are equivalent to the economic shocks ( ). The number of permanent shocks is dependent on the data’s co-integrating properties. Some non-stationary variables co-integrate if the existing linear combination between them is stationary. Therefore, the variables’ non-stationary components or trend components move together over time in similar proportion, so the linear combination between these variables defines the long-run equilibrium relationship. This means that the variables’ non-stationary components are influenced by common stochastic trends, so that the number of stochastic trends or permanent shocks is lower than the number of endogenous variables. Thus, the number of columns in the matrix is F = k < n. 1.5. Common trends and cycles – the Beveridge-Nelson approach It is important to understand the meaning of the concepts “trend” and “cycle”. Using the Beveridge-Nelson (1981) approach, the time series are decomposed into the trend element and its cycle. The formal representation is as following:

where represents the (n x 1) vector of variables (the financial instability variable), represents the white noise error term. The first term for each variable includes a linear combination of random walks (stochastic trends); the second term is a combination of stationary moving average processes (cycles). The stationary series have no trend, while series that are pure random walks have no cyclical component. In order to better illustrate common cycles and trends, it is useful to represent the system by using a finite VAR or vector auto-regression by inverting the previous equation, leading to:

where , represents the required lag length in order to make the residuals white noise. The auto-regressive time series of order can be determined in terms of first difference, one lag level and lag differences, leading to:

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where

If the series are co-integrated, A(1) has the rank and it may be decomposed into a product of two matrices or rank : and . The matrix is the ( ) matrix of co-integrating vectors, while is the ( ) factor loading matrix. If the vector of co-integrating combinations is defined as following:

then the equation of

can be written as following:

where describes the long run relationship between the variables. But the short-run dynamic behavior of the variables may be related. These variables are reflected by the coefficients of first difference given by the components of the polynomial matrix . In fact, this is what the common cycle analysis tries to identify. The codependence vector represents the linear combination of the variables that does not cycle, so which is not serially correlated. A cycle is common if the linear combination of the first differences is un-forecast-able. This requires the search for linear combinations, that remove the dependence on the variables’ past observations. A co-dependence vector exists if it meets the following condition:

where

represents the information set that contains the relevant information at time . A linear combination between a trend and a cycle will never be solely a trend or solely a cycle. Therefore, the existence of co-integrating and co-dependence vectors restricts the representation of trends and cycles, by inverting back to the vector moving average representation, where . Therefore, the common trends can by measured as following:

while the common cycles can by measured as following:

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2. RELATIONSHIPS BETWEEN NOMINAL VARIABLES AND REAL VARIABLES It is important to analyze the capability of the monetary transmission mechanism to match the relationships between nominal variables and real variables. There can be included four types of agents: households, firms, banks and a monetary authority. At the period’s beginning, the households have all the money in the economy, , deciding how much to spend , to hold (for consumption goods buying) and to deposit in the banks; they aim to maximize the present discounted value of the current and the expected future utility, while having to pay the cost of adjusting the financial portfolios relative to the previous period. The banks lend money to the firms, while the firms pay wages. The firms have to decide of how much labor to employ, how much output to produce and how much capital to purchase, taking into consideration the fact that firms aim to maximize the utilityweighted present discounted value of their profit. Since firms borrow in order to finance the working capital, the firms’ demand for labor and for loans is a diminishing function of the nominal interest rate. The money that the banks lend to the firms are composed by the households’ deposits and the new reserves originated from the monetary authority, , which the central bank injects into the economy through the open market operations. In an interest rate framework, the demand for new reserves is influenced by the demand for loans. Over this period the households buy goods by paying with their retained money and with their received wages . represents the nominal wage, while represents the total number of worked hours. At the period’s end, the firms pay interest to the banks and dividends to the households. The banks pay interest on the households’ deposits and send their profits, to the households. Therefore, the households are the ones that have all the money at the period’s end. The funds flows are illustrated in figures 1 and 2.

Figure 1. Beginning-of-period flows of funds

Figure 2. End-of-period of funds 174

2.1 Cyclical facts Regarding the relationship between prices, money aggregates and the real economy, studies have concluded that: i) aggregate money do not predict output; ii) the relationship between any money aggregate and output / inflation is different across business cycles; iii) during a business cycle, the connection between money and output is different along across monetary aggregates. 2.2 Business cycle correlations “The relationship between money and activity is unstable across business cycles and between different money aggregates”4, due to the fact that the economy is affected by different shocks, having differential effects on the monetary aggregates, and so the monetary policy provides different responses in each case. Regarding the non-constancy of the moneyoutput relationship, is has been proven that the time variation in the money aggregates’ behavior across business cycles is large, and so different aggregates are better predicting indicators at different times. Although the money-output and money-inflation relationships are very unstable in forecasting, the money aggregates behave differently due to the fact that the shocks that affect the economy are very various. Therefore, in order for the monetary authority to better understand the monetary transmission mechanism, it has to use structural models in order to identify the proper shocks. Variances and lag correlations are very different when the shock process is conditioned. For example, when the model includes only the technology shocks, as in the case of real business cycles, it reproduces the real variables’ relative variances, while having no impact on the nominal variables, except for inflation and equity prices, due to the fact that the loan demand variations caused by technology shocks are small and may be satisfied by small injections of new reserves into the banking system; thus, it is not necessary for the interest rates to change by much in order for the prices to clear the money market. As a result, the technology shocks influence all sectors approximately equally: firms’ labor demand changes, while wages changes ensure that the labor supply changes by the same amount; firms’ investment demand changes, while the households savings supply also changes. But the above is not available in the situation of monetary policy shocks, which disproportionately affects firms. In the situation of money demand shocks, these are small: money demand shocks primarily affect the money market. Investment is now more volatile (relative to output) due to the fact that a higher working capital loans (wages) demand implies smaller funds available for investment. Since prices and investment are now more volatile relative to output, equity prices and nominal interest rates are also becoming very volatile, while the absolute interest rate volatility is relatively small. Monetary policy shocks and money supply shocks determine a high degree of volatility, leading to a large increase of the absolute volatility. Inflation is also very volatile. The monetary policy shocks firstly disproportionately affects firms, due to the fact that they must absorb the bulk of all the short-term changes in liquidity. Monetary policy reflects the nominal variables’ behavior (except for prices), while the technology shocks reflects the real variables’ behavior. When both the monetary policy shocks and technology shocks

Shamik Dhar, Stephen P Millard, How well does a limited participation model of the monetary transmission mechanism match UK data?, Bank of England, 2000 4

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simultaneously affect the economy, the correlation between nominal and real variables is deteriorated. Money demand shocks or monetary policy shocks make the monetary data a much better and more timely inflation predictor than the productivity shocks (when the correlation between money and prices is negative). In the situation of a monetary policy shock, M4 lags prices, due to the nominal persistence determined by the inter-period portfolio frictions, so that prices react instantaneously, even if it takes time for the entire shock in order to affect the money data. 3. CYCLES AND THE FINANCIAL SYSTEM The liberalization of financial systems has developed the sector of financial services and also the financial resources allocation. But, in the same time, liberalization has also led to larger and more volatile financial cycles, which also has amplified the macroeconomic cycles, which often have ended in banking system crises that involved high costs. Both industrialized countries and emerging market economies have faced the financial instability phenomena; its negative effects have been higher for the emerging market economies. One major cause of financial cycles has been the optimistic behavior of the financial units, created by the real economy’s favorable developments, which has led to risk underestimation, credit overextension, high asset prices increases, physical capital overinvestment, excessive optimistic consumer expenditures. The appearance of the realistic expectations calms down the imbalances generated by the boom, often disrupting the financial system from the real economy. Supervisory authorities and central banks should carefully analyze the problems involved by the financial cycles. They have to increase the economy’s robustness to financial cycles and to manage the emerging financial imbalances. But this is a difficult task, since it involves many problems related to conceptual and implementation aspects. But solving these problems will definitely ensure financial stability and will maintain the benefits of the liberalized financial systems. 3.1 Financial cycles Financial factors are very important in influencing business cycles. The liberalization of international capital flows and domestic financial systems has increased their importance. Credit developments and asset markets may influence the dynamics of the business cycle, and may increase the probability and frequency of banking system crises. Highly regulated financial systems and controlling the monetary and the credit aggregates central banks have reduced the possible damage induced by the financial cycles, since a quick monetary expansion has been followed by more constraining direct controls on bank lending or by interest rates increases. These actions have lowered the raise of leverage and have diminished the exposure of regulated financial institutions to imbalances created in the asset markets. Even if highly regulated financial systems have led to credit misallocation, they haven’t been very sensitive to the large cyclical swings, as in highly liberalized financial systems. Financial liberalization leads to: i) higher private sector financial balance sheets deepening; ii) higher levels of debt relative to gross domestic product; iii) higher holdings of financial assets that are market-linked; iv) a more sensitive credit growth to the economic conditions and risk perceptions; v) more powerful links between asset markets and credit growth; vi) higher private sector spending; vii) higher sensitivity of the private sector

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spending to asset prices movements. Therefore, the macroeconomic health and the health of the financial system are much more correlated. Since “financial liberalization influence the banking stability and therefore the financial stability through several channels of transmission”5, financial stability has to be taken into consideration by the policymakers, considering that financial instability episodes originate from poor macroeconomic policy, such as high inflation and inadequate risk management by financial institutions. But financial imbalances may also develop in the context of low-inflation, since sustained low inflation, especially if central bank enjoys a high credibility and if the economic growth is robust, creates high optimism that increases the credit booms and asset prices. Thus, the business cycle advancement may be accompanied by the credit markets overextension and by excessive capital accumulation, while the business cycle descension may be accompanied by the credit markets under-extension and by low capital accumulation. Credit and asset prices Credit cycles and asset prices cycles usually appear in the same time. The rise of asset prices stimulates the economic activity and by increasing the collateral value it diminishes the borrowing cost and increases the finance availability for households and firms. High economic growth and high borrowing levels lead to higher asset prices. The game between credit and asset markets is amplified if the asset prices are dropping while the economic conditions are getting worse. The prices drops diminishes the collateral value of the financial institutions, generating large losses for these institutions and a severe reduction in the credit supply. The property prices movements, especially commercial property prices, have been one of the main cause of several severe financial cycles, due to the fact that properties are an important collateral for bank loans. The commercial property market is extremely sensitive to large swings in prices and new construction activity. The residential property markets developments have been also influenced financial cycles, even if they do not usually represent the direct cause of financial instability. Rather, the drop of residential property prices have generated financial turbulences that have cushioned the consumer spending, and so delaying the recovery from economic declines. The ascendant trend in the indebtedness of household has raised the probability of similar future turbulences. There is a strong causality between high rates of credit growth and larger commercial property prices, especially in the case of industrialized countries. It may be the case where the financial cycles are generated by the backed lending by residential mortgages that have quickly grown and large prices. Credit cycles are often associated with equity prices cycles, even if the links between them are often weaker then the links between credit cycles and property prices. The ascending financial cycle have increased in the past the equity prices, especially in the technology sector and in the communications one. For a while, gains have been self-reinforcing, so that higher equity prices have led to more powerful economic growth, higher confidence regarding the future and an increased banking credit loans, mainly to firms that have been activating in the sectors with quick increasing equity prices.

Cristian Ionescu, Financial stability between liberalization and regulation, article presented at the “Conceptual framework of the post-crisis economy” Symposium, Academy of Economic Studies – Faculty of Economics, Bucharest, 2012 177

The banks’ exposure to the equity market has constantly increased over time, arising from higher proprietary trading operations, the advancement of an expansion households lending in order to finance equities acquisitions, an increased confidence in fee-based income in the asset management activities and broking businesses. Households are very sensitive to equity price movements, affecting the contribution pension schemes, modifying the wealth effect. Cyclical behavior of institutions and markets Financial cycles also include: i) cycles in risk appetite risk; ii) cycles in pricing and risk assessment by financial institutions and markets. During strong economic growth periods, the risk appetite increases along the optimism about the future, leading to lending standards relaxation, less rigorous covenants and less tighten collateral requirements. High-risk borrowers also had easier access to capital markets and to bank-intermediated finance. The credit risk price moves pro-cyclically, collapsing during economic booms and increasing during recessions. The cyclical movement in the price of credit risk is also illustrated by the bond spreads evolution, since credit spreads slims during strong growth periods and extends during recessions. It is essential to emphasize that one important factor that generates these patterns is the fact that bank profits increase during economic booms and decrease during economic downturns. A low profitability during downturns also lowers the risk tolerance and the credit supply, while banks redirect their portfolios towards safer assets or impose higher lending margins. The most important factor of bank profitability cyclical pattern is the cyclical nature of aggregate loan losses, especially the cyclical nature of losses provisioning. Provisioning increases after a severe reduction of credit quality, meaning that usually provisions increase during economic downturns and often only for a short period of time. 3.2 Mechanisms of financial amplification Since financial system is often excessively pro-cyclical, the responses of financial market participants changes in risk over time are inappropriate, and they arise from various sources, including the following: i) the method of risk assessment; ii) the individuals’ incentives to a specific assessment; iii) the regulatory framework. The assessment of risk over time Financial cycles are often generated by the favorable developments of the supply side, which include the following: i) economic liberalization; ii) new resources discovery; iii) new technologies development, that stimulates economic growth and generates high levels of optimism, which is often strengthen by the fact that these developments leads not to speedingup of the economic activity, but also to an inflation reduction and to a raise in the share of national income that are canalized to profits. Such favorable conjunctures are accompanied by high asset prices increases, which also depends on the expectations regarding an uncertain future. During business cycle expansions, expectations become over-optimistic, while risk is being underestimated, so that asset prices are bid-up to unsustainable levels, while credit growth surpasses the nominal gross domestic product growth. But if growth is slowed down by the financial imbalances or by the profitability decline (due to strong competition and quicker wage growth), the over-optimism can suddenly change, which can be followed by a pessimism wave.

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Another reason for risk underestimation during booms periods is the disposition of the risk measurement approaches to extrapolate present conditions into the future. For example, methodologies that measure credit risk relied on equity prices present lower risk of corporate defaults during booms, as equity prices are increasing while volatility is dropping. In addition, the internal rating systems that banks use in order to measure the risks reflect a risk reduction when current default rates are low, which partially reflects the short horizons over which risk is measured. Also, external credit ratings are usually adjusted after the adverse events materialization, and not during the risk building-up. The current conditions extrapolation may be adequate if macroeconomic conditions are very pertinacious. In this situation, the economy’s current state provides the best, although imprecise, guide related to the future. Therefore, the risk might not raise during an economic boom since there is no expectation to that, since the economy has traveled a strong growth period, and since the probability of a future downturn is higher. But if the causes that generate the boom lead to downturn, then during the boom the risks start to build up. The defaults increases during the downturn are a materialization of risk building-up during the boom period, and not an increase in risk during the downturn. But it is hard to identify when and if risks actually starts to increase during booms. But, historically speaking, periods of fast credit growth, strong asset prices gains, slim lending spreads and high investment levels are usually followed by stressed periods in the financial system, which involve levels of risk that are higher than average, even if the current economic conditions may be strong. The inability to recognize risks amplifies the ascendant phase of the financial cycle. Incentives The incentives that lenders face in responding to a given assessment of risk can also affect the evolution of financial cycles. Perhaps the clearest example is the incentive for an individual bank to tighten lending standards during a downturn. While each bank might reasonably assume that the health of the economy is independent of its own actions, this leads to a fallacy of reasoning, so if every bank would have behaved in the same way, the health of the economy would surely be affected. Even if an individual bank would have recognized this fallacy, it would have the incentive to shrink lending standards during a downturn period, which might overcome through some form of coordination across institutions. Incentives can also be distorted by the existence of improperly designed financial safety nets and various forms of limited liability. These arrangements can lead to lenders giving insufficient weight, from a social perspective, to downside scenarios, due to the fact that some of the incurred losses are probably borne by other individuals, including taxpayers. Finally, remuneration arrangements that focus on short-run outcomes and relative, rather than absolute, performance may discourage a long-term perspective and an assessment of aggregate risk. Accounting and regulatory policies Although the regulation structure is not the primary cause that generate financial cycles, the accounting and regulatory rules influence the manner in which financial institutions respond to changes related to the perceived risk. Provisioning may influence the cyclicality of bank profitability. Accounting rules permit a provision only after a severe contraction in credit quality. In addition, there are several restrictions related to the tax deductibility of provisioning expenses, so that banks may face difficulties in raising provisions during economic booms, no matter the degree of certainty related to the borrowers’ future ability of repayment. Although additional profits 179

generated by the under-provisioning may be stored in the bank’s balance sheet, and not paid as dividends or used in order to finance share buybacks, this situation is not always possible, due to the existing pressures on bank management related to the return on equity maximization. The bank capital regulation structure may also affect the financial cycles’ dynamics. Although a regulatory system that uses minimum capital ratios may maintain overall financial stability, it is also possible that under particular circumstances it may aggravate economic downturns, due to the fact that widespread losses determine many banks to severely reduce lending in order to avoid reputational deterioration and costs ascension (if minimum capital ratios are violated). Any lending standards constraints and control tightening, as a response to losses, might amplify the downturn. The contraction of bank lending afferent to an economic downturn may be reduced if capital ratios would increase during the preceding ascendant phase. Current capital rules necessitate a level of capital increase during the boom (when lending is expanding), but do not necessitate a ratio of capital to assets increase. The capital requirement for a particular portfolio remains unchanged over time, along changes of the portfolio’s riskiness. Due to the under-provisioning during economic booms, the overall cushion of the banking system that compensates losses may drop. 3.3 Possible policy responses Supervisory policies, regulatory policies and monetary policies have to respond to the problems generated by the iteration of financial cycles. One main issue that policymakers face is the adequate policy response that should be implemented. One particular view is that the best participation of policymakers to financial stability and macroeconomic stability is to guarantee a low and stable inflation, and to timely manage the adverse financial events, due to the fact that cycles that have led to severe financial stress periods have often eventuated in countries characterized by high inflation, weak bank supervision and inadequate market disclosure. Therefore, it is necessary to implement a more activist policy framework. Another particular view is that although the conditions mentioned earlier are requisite in order to maintain financial stability, they are insufficient, since even countries that have low-inflation will have to manage costly financial cycles in the case of waves of excessive optimism. Therefore, in order to safeguard financial stability and macroeconomic stability, authorities should give more credits to policies that diminish the economy’s sensitivity to these cycles or that encompasses their development through discretionary changes into the supervisory and regulatory instruments. These two views that approach the desirability and feasibility of discretionary changes in policy instruments imply distinct assessments related to the financial imbalances identifying process by the policymakers. Although it is relatively easy to ex-post identify the credit booms that are not sustainable and the misalignments of asset prices, it is quite difficult to ex-ante identify them. One reason for that is that policymakers, compared to private institutions, are unable properly judge the sustainability of current trends, and so they should retain themselves from intervening in order to contain the upswing phase of the financial cycle. One counterargument is that there are cases when the policy response is not dependent on the capacity of policymakers to make judgments (compared to the private sector’); since policymakers have other responsibilities and incentives means that their responses are distinct, related to the current trends assessment. For example, policymakers are more preoccupied than the private sector with downside phase scenarios, especially if the common 180

exposures among financial institutions are high. Policymakers may also have incentives that are undistorted by the financial safety net. 4. MECHANISMS AMPLIFYING OR DAMPENING FINANCIAL CYCLES 4.1 Official mechanisms The framework that regulates the financial institutions comprises mechanisms that may smooth down financial cycles. Even if regulations are required for prudential considerations, they often imply the “supplementary benefit of slowing a market upswing or downturn”6, highlighting the role of the risk-based supervisory approach. Therefore, the forward-looking supervision may easily identify the inherent risks of the financial systems (especially related to the banking activities), triggering the risk-management mechanisms. Therefore, prudential rules require to take into account some of the difficulties that may slow down the efficiency of measures that aim to dampen the financial conditions, such as policy consistency (the consistent application of policies should provide credibility; policy rules have to undergone the peaks and pits of the financial cycle; unchanged policy rules may reflect a prudential measure in order not to create market uncertainties related to the economic agents asking if and when the policy is going to change again) and moral hazard (sometimes it is recommended that market participants should not confide in the official risk assessments, due to the signaling problem existence, which means that if the regulatory institutions do not implement (proper) countercyclical measures, the market might consider that this as a signal of a low system-wide risk, which will embolden additional risk-taking by banks and investors, instead of adopting a more cautious behavior). Regulatory requirements comprise both countercyclical and pro-cyclical elements. For example, over a recession period, supervisory institutions tend to adopt tighter regulations, higher provisions and increased capital ratios, determining credit restrictions and causing difficulties for borrowers, which also creates problems and difficulties for private firms, which will further affect banks. But to manage such a situation, there are some solutions. First, regulatory institutions may diversify the regulatory standards over time in order to reduce the amplifying effect of the supervisory rules on financial cycles. Second, the regulatory institutions have to better understand the risks of the financial system. Moreover, supervisors and banks have to implement a forward-looking approach in the process of provisioning assessing and capital requirements. Market mechanisms Market behavior is often pro-cyclical. Asset management usually exaggerates the market fluctuations when traders and investors enter the momentum trading, forgetting to take into consideration the fundamental analysis of markets and stocks. Portfolio hedging also amplifies the reactions of the market. Over a market downturn, fund managers tend to hedge their portfolios simultaneously, directing the market further down and requiring additional hedging, leading to a vicious cycle. Another example is given by the dynamic hedging behavior of currency option writers, whose strategy of buying high and selling low often lead to market swings and to market volatility increases. The advantage of the advanced financial technology is that, in the case of market downturns, allows institutions to apply for limited trading positions using the value-at-risk models, limiting the institutions’ exposure at an early stage, sneaking away from a mass exit Bank of International Settlements, Marrying the macro and micro-prudential dimensions of financial stability, Monetary and Economic Department, 2001 6

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as the market declines. This might be an useful countercyclical development that would hinder institutions from involving in excessive risked activities. One problem that remains is that institutions may severely adjust their limits in moments when market volatility raises, determining fund managers to uncoil some positions very quickly. Therefore, the inferences of such an emergence e-trading for the feedback mechanisms of the market are very important, since the e-trading platform increases market liquidity, diminishes trading costs and increases leverage. All these will worsen the pro-cyclical market behavior due to the fact that portfolios can circulate faster. The problem is more severe when financial markets face herd behavior and speculative excesses. Policymakers should carefully take into the consideration the fact that e-trading is constantly growing, so they have to better manage the arising risks from these type of developments. Of course, international cooperation is very important, since regulating e-trading surpasses national boundaries. 5. IMPACT OF THE CYCLE ON LOSSES It is important to study the impact of the business cycle state on the losses distribution on a bank’s loan portfolio (since banks are one of the most important financial units) and to study the way that this influences interest rates, capital ratios, aggregate lending, the bank failure probability. The borrowers’ ability to service their debt is correlated with the real economy’s state. It is known that the output is cycling around a trend (the potential output), which includes a predictable component; even if shocks to the output growth rate are iterative, output tends to return to its potential value over time. Figure 3 illustrates the business cycle, where the output growth comportment switches “from above average to below average growth rates (relative to potential growth)”7. It has been observed that shocks to output growth rates are persistent, but when the output is situated beyond potential, the economic reversal probability increases, meaning that bad times always follow a long period of good times, and that that good times always follow a long period of bad times. The loan portfolio losses are higher over the expansionary phase of the business cycle, due to the following: i) the higher the distance between the output and its potential, the higher the probability of contractionary phase, meaning that the borrowers will meet higher difficulties in assuring the necessary income in order to service their debts. This implies that during a contractionary phase there are both a higher probability of default and a higher loss determined by the default; ii) even if in the first stages of expansion there are many investment opportunities, the resource constraints existing in the economy (including the finance sector) impede the existing opportunities to be undertaken. Firms first undertake the high-return and low-risk projects. Over the expansion advancement and capital stock development, the remaining investment opportunities and new increases in the capital stock are increasingly marginal, so that the project financing is increasing the risks for banks; iii) during the expansionary phase of the cycle, as interest rates increases, the adverse selection problem also increases, biasing the potential clients of the banks to the banks with higher downside risk; iv) loan default rates have different time pattern, meaning that risks accumulate during the upswing stage of the business cycle, when banks issue many new loans. There can be taken into consideration the following two extreme points in the cycle: the cycle’s top point (state ); and the cycle’s bottom point (state ) (figure 3). Due to the 7

ibidem 182

assumptions related to the cycle predictability and due to the cycle implications on the loan losses, a remark can be made related to the PDF (Pre-stress Losses Pre-cast) for future losses at point and point . So, implies higher expected losses than . Moreover, the badtail loss distributions and also illustrates this remark.

b) Figure 3. The business cycle and PDF for losses Since cycles are partly predictable and since every cycle phase implies changes in the loss distribution, banks condition their expectations on the future losses considering the current cycle state, in order to adjust the prudential standards over the planning horizon. Banks may not have to accurately predict the cycle course, but they have to properly respond to the increasing probability of a business cycle downturn. 5.1 Amplification of the cycle There are some reasons why banks often deviate from rational behavior, with negative consequences on the financial system stability. The deviated banking behavior may lead to business cycle amplification, including: i) higher amplitude of the output cycles around potential; ii) higher duration of cycles. The banks’ lending decisions influence the state of the cycle, since there is a certain link between the business cycle and the loan supply: the borrowers’ health influence the willingness of banks to lend, influencing the ability of the borrowers to consume and invest, further affecting the state of the overall economy, which also influence the borrowers’ health. Therefore, there is a “circular link between all of these factors”8. Some of the reasons why banks may adopt a deviated behavior are as following: i) banks ignore the cycle; ii) excessive optimism; iii) excessive pessimism; iv) backwardlooking provisions.

ibidem 183

6. CONCLUSIONS One cause for the pro-cyclicality of the financial system lies in the information asymmetries between borrowers and lenders. Downcast economic conditions and low collateral values involve information asymmetries that mean that even borrowers that have profitable projects have difficulties in obtaining funds. Good economic conditions improve and higher collateral values involve that firms are capable to obtain external finance, stimulating the economy. This link between economic and financial cycles is known as the financial accelerator. Although the financial accelerator is important for every business cycle, it is insufficient in order to spread financial instability, which swings the economic activity. Another source of financial pro-cyclicality is the inadequate response of the financial market participants to changes in risk over time, which are caused by the difficulties encountered in measuring the time dimension of risk, but also caused by the market participants’ incentives to react to risk in socially suboptimal ways, even if they are properly measured, The measurement difficulties induce risk underestimation during booms and risk overestimation during recessions. During a boom, it excessively increases the credit growth, the collateral values, artificially reduces the lending spreads. During recessions, characterized by high risks and loan defaults, there is a reverse tendency. In some business cycles the financial developments are important amplifying factors, extending the boom and raising the severity and the length of the downturn phase. The financial cycles’ excesses might be diminished by recognizing the risk building-up during economic booms and by admitting that bad loans materialization during recessions not always involve increased risks. These measurement biases, which are related to the proper measurement of relative and absolute risks, can emanate from various sources; one of them is given by the difficulties met in the forecasting overall economic activity and by the relationship with credit losses. The difficulties in assessing the manner in which correlations of credit losses across borrowers and institutions activating on the financial system modifies over time, leading to excessively short horizons and to extrapolating current conditions into the future. The short-term preoccupation is also supported by: i) incentives that reward the shortterm performances; ii) accounting and regulatory arrangements. Good risk management necessitates to consider: i) a horizon of time that is longer than one year, in order to measure the risks; ii) the system-wide developments. These two aspects would increase the soundness of individual institutions and would diminish the financial amplification of the economic cycles. Changes related to the manner in which bank capital is regulated would raise the accurately of the measurement of the absolute level of risk changes, in order to revise the existing problems regarding the relative capital charges. These changes are an important step towards the alignment of the regulatory capital charges with the relative riskiness of the credit exposures of the banks, which would strengthen the individual institutions’ soundness. In addition, these changes would change the capital requirements of a particular portfolio over time, along the evolution of the portfolio’s assessed risk. The accuracy of the risk measurement increases the banks’ soundness and diminishes the financial system’s procyclicality. It is also necessary to improve the existing risk measurement practices and the trust on the supervisory review process. Since pro-cyclicality originates from the inadequate responses of the financial system participants to changes in risk over time, it is required the public policy response, which may be classified into four categories: i) promoting a better understanding of risk, publishing the 184

risk assessments and reviewing the risk management practices; ii) establishing supervisory rules that would better measure the risk’s time dimension and would strengthen the financial system’s robustness to risk misperceptions (by demanding longer horizons for risk measurement, by using stress tests and forward-looking provisions); iii) using supervisory instruments in an countercyclical framework in order to limit the financial imbalances’ development and consequences, “encouraging the building-up of a protective cushion in good times that can be drawn down in bad times”9; iv) using monetary policy in order to contain the financial imbalances’ developments. It has to be underlined the fact that the “collective decisions of financial institutions” are endogenous to the business cycle, so that the misperceptions of risk’s evolution over time and inadequate responses to risk’s evolution (illustrated by the lending and financial investment decisions), amplifies the economic fluctuations. It is also crucial to underline the fact that the policy option’s appropriateness do not stay fixed into this premise. The policy options should by applied even in the case when the path of the economy is entirely unaffected by the decisions in the financial sector. Risk underestimating during the downturn phase of the economic activity and its effects on the credit losses (illustrated by the lending, provisioning and capital decisions of the financial institutions) are able to generate financial instability. Policies that aim to confine financial instability have to consider this, no matter the form of the financial distress (at individual institutions or at system-wide level). The pro-cyclicality of the financial system (including the pro-cyclicality of the credit prices and of the asset prices) is one of the main causes of financial instability. Robust economic growth periods are accompanied by important increases in the ratio of credit to gross domestic product, while recessions are accompanied by important declines in this ratio. Robust credit growth periods also involve significant equity prices and property prices increases, which finally diminish as credit contracts during the downswing phase. The financial system’s overextension, reflected by the fast credit expansion and significant asset prices increases during the upswing phase of the economy, generate financial instability. Moreover, proves of pro-cyclical evidence are given by the “evolution of credit spreads on bonds traded in financial markets, credit ratings and bank provisions”10. Bond spreads are negatively correlated with the business cycle, so that the spreads between corporate securities and government securities slim during booms periods and expand during recessions. Bank provisions are extremely pro-cyclical, since they are negatively correlated with the business cycle: provisions usually increase after the slow down of the economic growth, and they often raise until the full exit of the economy from recession. Provisions describe a pro-cyclical pattern in terms of bank profitability, encouraging pro-cyclical lending practices. This type of pattern seems to be very significant in the countries that experience severe banking system problems. The pro-cyclical pattern of bank profits has increased the degree of correlation between bank equity prices and the business cycle, even if the correlation is weaker in the case of profitability, due to the forward-looking nature of the equity market. Moreover, the analysis is being hardened by the fact that the governmental support schemes influence capital ratios, so that long-run historical time series do not reflect a strong business cycle effect. There are two essential reasons why capital ratios tend to be a-cyclical: i) since provisions underestimate the expected losses during expansions periods, measured capital 9

ibidem ibidem

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ratios over-estimate true capital ratios during expansions periods; the adjustments related to the capital under-provisioning during economic booms would have illustrate that the measured capital ratios drop down during expansions periods and increases during downswings periods; ii) the countries that have faced difficulties in the first decade, have also experienced a pronounced cycle in aggregate capital ratios. REFERENCES 1. Adrian Penalver, Gregory Thwaites, Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk, Bank of England, 2006 2. Bank of International Settlements, Marrying the macro and micro-prudential dimensions of financial stability, Monetary and Economic Department, 2001 3. Claudio Borio, Craig Furfine, Philip Lowe, Pro-cyclicality of the financial system and financial stability: issues and policy options 4. Cristian Ionescu, Financial stability between liberalization and regulation, article presented at the “Conceptual framework of the post-crisis economy” Symposium, Academy of Economic Studies – Faculty of Economics, Bucharest, 2012 5. Darren Pain, Ryland Thomas, Real Interest Rate Linkages: Testing for Common Trends and Cycles, Bank of England 1997 6. Fabio Fornari, Antonio Mele, Financial Volatility and Economic Activity, 2009 7. Gert Peersman, Lorenzo Pozzi, Business cycle fluctuations and excess sensitivity of private consumption, Bank of England, 2007 8. Gianni De Nicolò, Marcella Lucchetta, Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing, IMF Working Paper, 2012 9. Luca Benati, Band-pass filtering, cointegration, and business cycle analysis, Bank of England, 2001 10. Nicholas Bloom, The Impact of Uncertainty Shocks, chapter pf PhD thesis, 2007 11. Prasanna Gai, Peter Kondor and Nicholas Vause, Procyclicality, collateral values and financial stability, Bank of England, 2006 12. Shamik Dhar, Stephen P Millard, How well does a limited participation model of the monetary transmission mechanism match UK data?, Bank of England, 2000 13. Shamik Dhar, Darren Pain, Ryland Thomas, A small structural empirical model of the UK monetary transmission mechanism, Bank of England, 2000

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LENDING AND FINANCIAL INSTABILITY Cristian Ionescu; Academy of Economic Studies, Romania

ABSTRACT: Corporate lending is one of the keys factors to financial stability. Therefore, an analysis of the situation of the corporate lending, based on the stimulation of corporate lending, on the decomposition of the demand and supply factors of corporate lending, on the credit supply constrains, on the factors that jeopardize loan recovery and on credit risk, is very important from the perspective of financial stability. This paper aims to study all these aspects, in order to better understand the current framework of banking system. Keywords: corporate lending, financial stability, risks, portfolios, credit supply

1. THE STIMULATION OF CORPORATE LENDING It is important to analyze the conventional and non-conventional types of intervention that may stimulate corporate lending. Actions that aim to increase credit demand or credit supply may stimulate banks’ corporate lending. Moreover, regarding credit supply, there may be a distinction between the ability of bank to lend and the willingness of bank to lend. The first one describes the amount that banks can lend, based on the financial strength. The second one describes how much banks intend to lend, based on the risk tolerance. The mechanisms of stimulating credit demand and credit supply (and, therefore, the banks’ lending ability and the banks’ lending willingness) are illustrated in figure 1. Figure 1. Possible tools of stimulating corporate lending

Source: Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, November 2011

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One main reason for the corporate lending decline may be a severe fall in credit supply, and a declined demand for loans as a result of economic recessions. The deterioration in the willingness of banks to take risks (to lend) may have also an important role in credit supply constraints. Thus, interventions that aim to offset the low lending willingness of banks can stimulate corporate lending; therefore, the government must bear a part of the credit risk or the entire credit risk of the corporate borrowers; for example, by using state guarantees or by direct lending by state-owned banks. The central bank may also assume direct corporate credit risk: in the developed capital markets, central banks purchase important amounts of corporate bonds. But not countries have developed capital markets; there are countries where there is a limited access to securities market due to the small size of companies and due to technical difficulties. Therefore, interventions must focus on credit supply constraints. One of the most effective mean of stimulating lending activity is a greater risk-taking state behavior. Although low willingness to lend is a critical problem, in the same time, due to sovereign debt crisis’ unfavorable effects, improving lending capacity is essential in the future; lending capacity may be improved by strengthening the banks’ capital and liquidity positions or by expanding alternative channels of corporate financing11. In a ling horizon of time, in order to reduce the dependency on bank financing, it is necessary the development of corporate bond market and securities market. It is important to emphasize that a diminishing credit demand, as a result of a slower economy, may also involve the necessity to stimulate the demand side. Means of intervention (Partial) assumption of corporate credit risks 1 (Partial) assumption of corporate credit risks 2 Tax allowance to banks that lend more General (bank) liquidity expansion (‘quantitative easing’)

Table 1. Possible means of stimulating lending Who can It has more Possibilities and limits of its intervene? influence application in the current situation on: central bank credit supply possible only in the form of security, (willingness) there are not enough corporate bonds; fiscal costs; allocation problems state-owned credit supply banks, (willingness) guarantee organizations state budget credit supply (willingness) central bank

Reduction of regulatory capital requirement authority and other prudential expectations

fiscal costs; allocation problems; its extent is limited: the state cannot take over the lending function of the banking sector fiscal costs, not targeted (those who would lend anyway also receive it)

credit supply implemented in forints; it would be (ability) possible in foreign exchange only to the account of the foreign exchange reserves; does not affect willingness of banks to take risks credit supply conflict with prudential objectives; (ability) impairs the shock absorbing capacity of the banking sector; does not affect willingness of banks to take risks

Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, November 2011 188

‘Dual interest rate central bank level’ (cheap central bank refinancing to banks) Base rate reduction central bank

Interest rate subsidy, preferential refinancing

state budget, state-owned banks

credit demand (‘cheaper credit’) credit demand (‘cheaper credit’) credit demand (‘cheaper credit’), credit supply (ability) uncertain

equivalent to state-subsidized refinancing; conflict with price stability objective; does affect credit demand and not affect willingness of banks to take risks conflict with price stability objective; does not mitigate risk-taking limits, increase credit demand fiscal costs; allocation problems; does not affect willingness of banks to take risks

Other regulatory there are no fiscal costs; not efficient; administrative authority negative externalities (e.g. the measures (e.g. strengthening of creditor’s rights strengthening of deteriorates the creditor’s rights) situation of debtors) Source: Banking and Monetary Policy Department of the National Bank of Hungary, Reporton financial stability, National Bank of Hungary, November 2011 2. DECOMPOSITION OF THE DEMAND AND SUPPLY FACTORS OF CORPORATE LENDING BY MEANS OF AN EQUILIBRIUM MODEL It is important to analyze the effects of the decline in credit demand and credit supply on contraction in corporate loans. Credit demand and credit supply must be separated, assuming two behavioral equations (demand equation and supply equation) and an equilibrium condition. Thus, this equilibrium approach assumes that the interest rate is market-clearing and the demand and supply are equal. The banks’ supply is defined by the banks’ lending ability and the banks’ willingness to lend. While the banks’ lending ability describe the capital position, the liquidity position and the financing position of the credit institutions, the banks’ willingness to lend describe the banks’ risk tolerance. The asymmetric information between the creditor and the borrower may complicate the situation, due to the fact that the creditor bank has limited information regarding the debt servicing ability of the borrower company. Therefore, the bank can’t properly screen the firms only through interest rates, even if riskier clients are more willing to pay higher interest rates (the adverse selection problem). This leads to two consequences linked to the credit supply: i) the interest rate is not always clearing the market, leading to credit rationing; ii) credit allocation is partly or entirely based on non-price conditions. These conditions influence credit supply by two channels: i) through creditors’ risk tolerance; ii) through borrowers’ creditworthiness. The first effect in the supply specification is given by the credit conditions tightening that reduce the supply. The second effect is harder to calculate, due to the fact that companies are very heterogeneous in respect of creditworthiness. The general level of creditworthiness may be approximated by the default rate (which is a proxy for credit risk). Thus, a decrease of default rate increases the credit supply by improving creditworthiness.

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Credit demand is linked to variables that describe the economic activity and to expectations regarding the future. So, the demand equation contains indicators that describe external demand and investment. It is important to compute the price elasticity of the demand curve and of the supply curve, since changes in demand and supply are derived from the price and quantity data. The dependent variable of demand and supply is the annual growth rate of corporate loans outstanding (which is adjusted for exchange rate effects); the price-type variable is represented by the volume-weighted average of two currencies’ real interest rates. Price elasticity values and price-quantity combinations define the demand and supply curves at the two dates, so it is possible to decompose the quantity reduction. In figure 2, it is considered that supply have declined in a period of growing demand, so the decline in lending was is the result of negative supply component and of a positive demand component. Figure 2. Illustration for decomposition of demand and supply

Source: Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2011 3. APPLICABLE MEASURES TO RESTRAIN THE DYNAMICS OF UNHEDGED FOREIGN CURRENCY LENDING In terms of exchange rate risk, a higher ratio of foreign currency loans within loans to nonfinancial corporations and a higher ratio of foreign currency loans within loans to households lead to larger portions of these loans, in particular loans to the small and mediumsized enterprises and to household are seen as un-hedged foreign currency loans. The possible risks may have consequences on the financial stability. Risks that are related to foreign currency lending may cause large losses to clients and to the banking sector, due to the fact that a raise in the credit risk in the case of a credible fiscal adjustment is not carried out and due to the fact that the exchange rate and the yield correction are triggered by market developments. Thus, fiscal consolidation may efficiently reduce the risks that related to foreign currency lending. If it unable to do this, the institutions that are responsible for financial stability may have some measures at their disposal in order to reduce the growth rate of foreign currency lending. Taking into consideration the role and responsibility of the institutions in safeguarding financial stability, the agreement between them is essential in order to introduce a package of measures that aim to reduce the growth rate of the un-hedged foreign currency lending (which involves high risks of instability). The authorities that have responsibilities regarding financial 190

stability may implement simultaneously packages of measures, which aim to stop the powerful increase of loan portfolio and to slow down the un-hedged foreign currency lending spreading. Table 2. Possible measures to restrain un-hedged foreign currency lending and the responsible institutions Administrative Prohibition of loans un-hedged from the aspect of exchange rate measures risk Sector-level limits or limits differentiated by banks for the ratio of un-hedged loans or for its growth rate Prudential Establishment of a category similar to the country risk provision regulation (to be deducted from the capital) for un-hedged foreign currency lending Limitation of foreign exchange maturity transformation and of relying on too short liability Determination of limits for bank open position (on balance sheet, total), position limitation Tighter loan classification and provisioning rules for foreign currency loans Higher and differentiated capital requirements Stricter non-price minimum loan conditions (e.g. loan-to-value ratio limit) Supervisory Increased risk-management requirements for foreign currency measures lending Closer supervision (more frequent off/onsite inspections) of banks with dynamic foreign currency lending or banks in a weak financial position. More stringent control of their relationship with financial enterprises. More intense communication of risks. Financial Strengthening of the retail sector’s financial culture and of improvement and consumer protection “Moral suasion” “Moral suasion” of the credit institutions Fiscal measures

Withdrawal of various government subsidies related to lending in case of un-hedged foreign currency lending Taxation on un-hedged foreign currency lending activity Monetary policy Higher minimum reserve requirements on banks’ foreign steps currency liabilities, lower interest paid on reserves Source: Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2006 4. CREDIT SUPPLY CONSTRAINS Banks have several methods of reducing the credit supply. First, banks may increase interest rates over the expected credit risk costs. Second, banks may reduce the riskiness of the loan either by excluding riskier clients from potential borrowers or by requiring additional collateral or by combining the two approaches.

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Banks tightening has two main reasons: i) the low ability to lend; ii) a reduction in willingness to take risks. Ability to lend describes the amount of credit that a bank can extend based on its liquidity and on its capital position. In the case of a low capital adequacy ratio or in the case of a liquidity constraint, when the bank is unable to raise new capital or funds, the lending capacity is limited. Willingness to take risks describes the amount of credit that a bank is intending to give and the size of risk that the bank is ready to take when selecting a portfolio. For the corporate sector, banks take into consideration the clients’ probability of default, which influence the decision of accepting or refusing a loan application. During a recession, the clients’ distribution depending that is linked to the creditworthiness moves towards right; the probability of default of loan applicants grows; the expected loss increases. Even when conditions regarding the evaluation of loan applications remain the same, the bank will loan fewer applicants. If the willingness of a bank to take risks diminishes, credit conditions will become tighter, and only the most creditworthy applicants will have access to credit. Figure 3 illustrates the shifting to the left of the “cut-off” point, which describes the condition of accepting or refusing the loan application. In most of the cases, the willingness to take risk is correlated with the economic performance, with the developments in the loan portfolio and with expectations. But the measure of the extent and of the changes in the willingness is difficult to realize. in international practice, some surveys regarding lending practices are used in order to measure it in a qualitative manner, by asking banks about the extent and reasons for tightening their credit conditions12. The financial stability approach should find out if the supply constraint is a result of the banks’ ability to lend or to their willingness to take risks. In the case where there are problems related to the ability to lend, the capital of the individual banks and their liquidity positions must strengthened in order to ease the lending activities. In order to increase the willingness to take risks, there must be implemented indirect measures, by: i) improving the economic environment; ii) reducing the expected loan losses; iii) risk sharing (through guarantee programs). Figure 3. Distribution of new loans applications according to risk

Source: Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2010 Note: The white arrow illustrates a shift to the right of the distribution (as a result of the deteriorating economic environment). The black arrow illustrates shifts to the left of the 12

Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2010 192

bank’s “cut-off” point (as a result of the higher risk aversion, which leads to tighter credit conditions). 5. FACTORS THAT JEOPARDIZE LOAN RECOVERY The negative factors that affect the loan recovery include the following: i) adverse shifts in income position; ii) risks implied in foreign currency consumer lending; iii) shortcomings of the scoring systems in place; iv) difficulties in assessing the probability of default on payment; v) time constraints on credit assessment; vi) the quality of the tripartite relationship between banks, retailers and debtors; vii) special risks implied in general purpose mortgage loans; viii) problems related to the sale of collateral. 5.1 Adverse shifts in income position The fact that behavior related to the debtors’ loan repayment depends mainly on the developments of their income, any negative shift of the income involves the risk of default on payment. Regarding overdrafts, the overdue payment are undertaken when customers either lose their jobs or change their banks. Regarding the card-based loans, due to the fact that people that have relatively low-incomes (like the minimum wage) can access this banking product, leads to additional risks. Regarding the personal loans, car purchase loans and / or general purpose mortgage, which involve higher monthly payments, the risk of default on payment comes from the failure of the customers of assessing their solvency, which leads to over-borrowing, which finally leads to failures related to the honoring the loan repayment obligations. 5.2 Risks implied in foreign currency consumer lending Banks and financial companies shift the interest risk and the exchange rate risks to their customers. The risks involved by the consumer lending that is based on the foreign currency comes mainly from the lack of households of foreign currency income, that could provide protection against the interest rate risk and exchange risk. In the case where debtors maximize the wanted loans’ amount, taking into consideration the exchange and interest rates and the adverse changes in their income, the adverse shifts in money market conditions leads to an overdue payment, and finally, to default on payment. But the exchange rate changes may not always involve material deterioration in the solvency of the customers. But the credit risks’ assessment is difficult due to the fact that the scoring system do not differentiate between the domestic currency and the foreign currency loans; thus, many banks do not apply tighter criteria in order to approve foreign currency loans. 5.3 Shortcomings of the scoring systems in place The inadequacy of the scoring systems is an important problem, since many banks use the same scoring system in order to estimate the risks involved by the personal loans and by the card-based loans, failing to entirely consider the individual characteristics of the offered products. The assessment is more difficult when banks, in the name of business confidentiality, refuse to provide information, or when banks do not know or understand the entire scoring system. 5.4 Difficulties in assessing the probability of default on payment Since banks are lending external customers, banks do not have access to the credit and current account history of the customers, so banks can only assess the probability of default on payment, without having the possibility to verify some actual data. In order to assess the 193

probability of default on payment, banks usually are based on the statistical analysis related to the repayment history of the customers. But whether default rises depends on the loan applicant. An interbank credit register that records performing customers and defaulting customers should provide more reliable information (related to the customers’ credit history and the existing repayment obligations) to the banks, reducing the uncertainty involved by the fact that the probability of default on payment can only be assessed. 5.5 Time constraints on credit assessment Because of the different nature of loans, banks try to improve the process of credit assessment and the decision making mechanism. Therefore, many banks chose not to adopt “the four-eye principle” in the case of loans that involve low contracted amounts. Therefore, the credit assessment and the decision making processes, for the fastest banks, require only 15 to 20 minutes, which diminishes the time for verification of customers’ provided data. This may lead to erroneous decisions. The risk management of these quick credit assessments and decision making processes needs a detailed and proper scoring system, which may improve the banking system. The high speed of credit assessment of the car purchase loans, which do not allow a serious documents investigation, is a high source of risks. 5.6 The quality of the tripartite relationship between banks, retailers and debtors Another channel of uncertainty comes from the tripartite relationship between banks, retailers and debtors, where shocks may reduce the performance of the administration and the temporal flow of real content information. Granting loans that transforms into bad loans, as a result of the retailers’ abuse or negligence, is another source of risks. 5.7 Special risks implied in general purpose mortgage loans 5.7.1 Lending without an analysis of income positions Many banks offer general purpose mortgage loans, where the contracted amount is based on the value of the collateral, without undertaking any analysis of the debtor’s income situation. Thus, due to the financial culture’s shortcomings, debtors may wrongly assess their payment capabilities, leading to overdue payment. 5.7.2 Abuse in connection with collateral appraisal Regarding the general purpose mortgage loans, since the results of collateral appraisal affects the access to loans and therefore the contracted amount; there have been attempts to modify the results of the collateral appraisal, especially when the property had a considerable value. 5.7.3 Lack of the regular revaluation of the collateral portfolio Although the exposure to changes in the value of property on which loans are secured may be low (for example, in the case of European Union members states, in order to stabilize the banking sector), there may be some changes, due to external natural or physical impacts, in the overall condition of the individual pieces of property that can diminish the value of the collateral. Thus, depending on the loan’s maturity, banks should revalue the collateral against the loan at least once a year. 5.7.4 Concentration in the collateral portfolio In the case of a potential default, high concentration of property on which loans are secured, taking into consideration the geographical location (for example: less developed 194

regions; areas with low property market turnover) or the property type (for example, flats in housing estates) may lead to difficulties related to an adequate collateral value assessment. 5.8 Problems related to the sale of collateral Regarding general purpose mortgage loans, the low efficiency of activities leads to difficulties. So, customers want to cooperate with banks in order not to loose their residential property. Enshrining loan and lien agreements in a public deed allows for the possibility of foreclosure on the property without litigation13. But the delays in sales, as a result of a lack of interest, may involve some risks. Regarding car purchase loans, in the case of contrasts that lease facilities, the ownership of the financed asset is transferred to the customer. Therefore, in the case of default, a bailiff can sequester the car only after the notifying the debtor. 6. CREDIT RISK In the case of pro-cyclical lending, a period of quick increase may be followed by a large restriction of credit, as a result of a high rise in the lending losses (due to a negative shock). Losses may be very significant, if the credit expansion is mainly driven by the supply side, where the credit expansion is a result of a high lending willingness and of an eased credit standards and terms, while the potential borrowers’ creditworthiness is unchanged. Although the following reasons usually lead to larger lending losses in the developed countries, banks reveal small credit losses, while credit margins may be cover these risks: i) the debtors’ and creditors’ lack of experience and the debtors’ low financial skills and low financial management, determines a higher probability that the losses are higher in the emerging countries than in developed countries; ii) unexpected private events (divorces and illness); iii) although the debt service burden of households may be low, there may be a high percentage of fixed expenses relative to income (like accommodation and food), which leads to lower flexibility for debt repayment; iv) a low level of financial savings (where debtors with low income, wealth and income expectations are the most vulnerable to a negative macroeconomic change); v) a higher level of indebtedness and higher maturity of the markets leads to an increase of financial institutions’ sensitivity to the macroeconomic and financial situation; vi) although the social sanction of non-paying debtors is not strict at all, economic sanctions may be large; vii) the information asymmetry problem is eased by the negative debtor information system, while a positive system would improve the assessment of the clients’ creditworthiness (leading to more favorable pricing and higher volumes); viii) the credits based on foreign currency involve a separate risk. The foreign exchange rates cannot be accurately forecast, so the banks can use short-term financing sources, which determine higher interest volatility. But the indirect credit risks shouldn’t be neglected. Larger and more substantial foreign currency credit portfolios determines a more vulnerable financial sector to external shocks, while collateral reduces the credit risk, due to their homogeneity. In the future, if the process of easing lending conditions continues, the danger of increased portfolios will become more and more supply driven. More and more mature markets and further growth in foreign currency lending also involve higher risks.

Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, December 2004 13

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REFERENCES 1. Aerdt Houben, Jan Kakes, and Garry Schinasi, Toward a Framework for Safeguarding Financial Stability, International Monetary Fund Working Paper, 2004 2. Andrew G. Haldane, Glenn Hoggarth, Victoria Saporta and Peter Sinclair, Financial stability and bank solvency, Paper prepared for the Federal Reserve Bank of Chicago International Conference, Chicago, Illinois, 30 September 2004 3. Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, November 2011 4. Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2011 5. Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2010 6. Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, December 2004 7. Banking and Monetary Policy Department of the National Bank of Hungary, Report on financial stability, National Bank of Hungary, April 2006 8. Dimitrios P. Tsomocos, Equilibrium Analysis, Banking and Financial Instability, Bank of England and International Financial Stability Programme, December 2001 9. Eric Rosengren, Defining Financial Stability, and Some Policy Implications of Applying the Definition, Stanford University, 2011 10. Garry Schinasi, Defining Financial stability and a framework to safeguarding it, Central Bank of Chile, 2009 11. Garry Schinasi, More than one step to financial stability, 2009 12. Michel Crouhy, Dan Galai, Rober Mark, The essentials of risk management, McGrawHill, 2006 13. Philippe Aghion, Philippe Bacchetta, Abhijit Banerjee, Capital Markets and the Instability of Open Economies, January 1999 14. Philip Davis, Towards a typology for systemic financial instability, Brunel University, 2003 15. Stefan Mittnikyand, Willi Semmlerz, The Instability of the Banking Sector and Macrodynamics: Theory and Empirics, December 27, 2010 16. Vítor Gaspar, Garry Schinasi, Financial stability and policy cooperation, Central Bank of Portugal, 2010 17. Vítor Gaspar, Garry Schinasi, Financial stability and policy cooperation

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IMPACT OF THE FOREIGN EXCHANGE RATES FLUCTUATIONS ON RETURNS AND VOLATILITY OF THE BUCHAREST STOCK EXCHANGE Razvan Stefanescu University “Dunarea de Jos” Galati Ramona Dumitriu University “Dunarea de Jos” Galati

ABSTRACT This paper explores the influence of the foreign exchange rates variation on the returns and volatility of the stock prices from the Romanian capital market for the period of time January 2000 - December 2012. This period was split in four sub-samples corresponding to different stages of the Romanian financial markets evolution. The GARCH models employed in this investigation provided different results. For the transition period January 2000 - December 2007 we found no evidence of the foreign exchange market on the Bucharest Stock Exchange. During a period of time between the Romania’s adhesion to European Union and the announcement of Lehman Brothers’ bankruptcy the results indicate a significant impact of the foreign exchange rates on the stock returns. For the period from September 2008 to February 2010 we find that foreign exchange rates influenced not only the stock returns but also their volatility. However, between March 2010 and December 2012 the impact of the foreign exchange market on the Romanian capital market was limited to the returns. We conclude that influence of the foreign exchange rates variation on the returns and volatility of the stock prices depended on the factors such as the foreign capitals inflows, the global crisis effects and the perceptions of the national economy. Key words: Romanian financial markets, Volatility, GARCH, Global crisis JEL Classification: F31, G01, G19

1. INTRODUCTION In the last decades, the globalization of the financial markets encouraged the study of the influence of foreign exchange rates on the stock prices. The knowledge about this relationship could be useful not only in building successful strategies on investment in stock markets but also in public authorities’ decisions on the monetary policy. There are two main theoretical approaches on the linkages between foreign exchange markets and stock markets. Dornbusch and Fisher (1980) model considered that foreign exchange rates led stock prices through the influence of firms’ competitiveness. The devaluation of the national currency increases the competitiveness of domestic producers causing the rise of the stock prices. By contrary, their competitiveness is eroded by a too strong national currency and that caused the decline of the stock prices. In opposition with such approach, the portfolio balance model, assigned the leading role to stock prices variation which would affect foreign exchange rates evolution through demand for the domestic financial assets (Branson, 1983; Frankel, 1983). The increase of stock prices attracts foreign capitals causing the appreciation of the national currency. Instead, a descendant trend of stock 197

prices could discourage the foreign investment, leading to the depreciation of the national currency. The 1997 Asian financial crisis and the most recent global crisis attracted the attention on the financial assets behavior in the context of turbulences. It was proved that in such circumstances the relationship between foreign exchange rates and stock prices could suffer radical changes (Granger et al., 1998). Many empirical researches highlighted the particularities of the relationship between foreign exchange rates and stock prices in the emerging markets (Abdalla, 1997). In general, the volatility in such markets is more substantial than those from advanced markets. Moreover, in the developing countries the monetary authorities usually keep a tight control over the foreign exchange rates. In this paper we approach the influence of the foreign exchange market on stock market in the case of Romania. Two major aspects have to be taken into consideration in the analysis of this relationship. First, the Bucharest Stock Exchange (BSE) is an emerging market which experienced a significant development since Romania finalized the transition to a market oriented economy. Second, the evolution of Romanian foreign exchange market was marked by the active role played by the National Bank of Romania (NBR). Our investigation covers the period of time from January 2000 to December 2012. In order to capture the effects of some processes with substantial consequences on Romanian financial markets we split this period of time into four shorter periods: - first period, from January 2000 to December 2006, corresponding to the last stage of Romania’s transition to a capitalist system; - second period, from January 2007 to September 2008, when, after the adhesion to European Union, Romania received massive flows of foreign capitals; - third period, from September 2008 to February 2010, in which, following the announcement of Lehman Brothers bankruptcy, domestic financial markets were contaminated by the decline of the international capital markets; - fourth period, from March 2010 to December 2012, when the Romanian financial markets were affected not only by the international factors but also by the problems of the national economy. In our investigation we use daily values of BET, one of the main indices of BSE, and nominal exchange rates of euro against the Romanian national currency. We employ GARCH models in order to identify the influence of exchange rates on the stock prices. The remainder of this paper is organized as it follows. In the second part we approach the specialized literature on the relationship between the foreign exchange market and the stock market, in the third part we describe the data and the methodology used in our investigation, in the fourth part we present the empirical results and in the fifth part we conclude. 2. LITERATURE REVIEW The relationship between foreign exchange markets and stock markets, in terms of returns and volatility is highly approached in the financial literature. Empirical researches found different forms of causality between foreign exchange rates and stock prices. Bahmani – Oskooee and Sohrabian (1992) investigated the relationship between the S & P index and the effective foreign exchange rates identifying bidirectional causality among the two variables. Hatemi and Irandoust (2002) found in Sweden a unidirectional causality from stocks market to foreign exchange market. Sekmen (2011) explained the negative impact of

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the foreign exchange rate volatility on United States stock prices by the increase of costs associated to covering the foreign exchange rate risk. The development of the General AutoRegressive Conditional Heteroskedasticity (GARCH) models proposed by Engle (1982) and Bollersev (1986) stimulated the research on the impact of some external factors on the financial markets volatility. Some studies revealed the volatility spillover between foreign exchange markets and stock markets (Kanas, 2000; Yang and Doong, 2004). In the last years, the increasing interest on emerging markets investment as a tool of diversifying assets portfolios stimulated the researches on the linkages between financial markets in these countries. Mishra (2007) found a bidirectional volatility spillover between the foreign exchange markets and most of the main sectors of the Indian stock market. Morales (2007) investigated the relationship between the two variables in four Eastern European markets, Czech Republic, Hungary, Poland and Slovakia finding unidirectional causality from the exchange rates to the stock prices for the first three countries. Chkili Walid (2012) analyzed the dynamic relationship between foreign exchange rate changes and stock returns for eight emerging markets (Hong Kong, Singapore, Malaysia, South Korea, Taiwan, Argentina, Brazil and Mexico) from January 1995 to March 2009. The results indicate a significant impact of stock prices returns to foreign exchange rates returns but a less consistent influence of foreign exchange market on stock market. Instead, it was found a bidirectional volatility spillover between the two markets. Olugbenga (2012) found a significant influence of foreign exchange rates on the Nigerian stock market. The paper concluded that volatility of foreign exchange market could be used as a predictor for the stock market. Several papers approached the impact of the turbulences on the linkages between financial markets. Fang and Miller (2002) analyzed the effects of the substantial depreciation of the Korean national currency on the capital market during the 1997 Asian financial crisis. They found that national currency depreciation negatively affected the stock market returns while the depreciation volatility positively affected these returns and raised the stock market return volatility. Choi et al. (2009) found that in New Zealand the volatility spillover between stock markets and foreign exchange markets passed, during the crisis, from a bidirectional form to a unidirectional relation from stock prices to foreign exchange rates. Parsva and Hooi (2011) studied the relation between stock markets and foreign exchange markets for six Middle Eastern countries (Egypt, Iran, Jordan, Kuwait, Oman, and Saudi Arabia) from January 2004 to September 2010. For a pre-crisis period they identified bidirectional causalities for Egypt, Iran, and Oman, a unidirectional causality from foreign exchange rates to stock prices for Kuwait and no relation for Jordan and Saudi Arabia. For the crisis period their results indicated a strengthening of the interactions reflected in the presence of bidirectional causalities for all the countries excepting Iran. Yoon and Kang (2012) examined the price returns and volatility linkages between the foreign exchange and stock markets in Korea from January 1990 to December 2009. They found a strong causality from stock prices returns to foreign exchange rates returns. Their results suggest also that the Asian currency crisis from 1997 stimulated a bidirectional volatility spillover between the two markets. 3. DATA AND METHODOLOGY In our investigation we employ daily closing values of BET, provided by BSE, and of the nominal exchange rates of euro against the Romanian national currency, provided by NBR. For both of the two variables the impact of the global crisis was substantial (Figure 1 and Figure 2). 199

We express the change in the exchange rates and the index returns in logarithmic forms:

ri , t  [ln( Pi , t )  ln( Pi , t 1 )] * 100 (1) where Pi,t and Pi,t-1 are the closing values of index BET or of the exchange rates on the days t and t-1, respectively. The sample of data which cover the period January 2000-December 2012 is split into four sub-samples: first sub-sample, from January 5, 2000 to December 19, 2006; second sub-sample, from January 3, 2007 to September 15, 2008; third sub-sample, from September 16, 2008 to February 26, 2010; fourth sub-sample, from March 1, 2010 to December 28, 2012. The descriptive statistics of returns, presented in the Table 1, indicate significant differences, in terms of means, standard deviations, skewness and kurtosis between the four sub-samples. For all four sub-samples, the Jarque - Bera test rejected the null hypothesis of the non normality of returns. We analyze the stationarity of the two variables returns by the Augmented Dickey – Fuller (ADF) unit root tests (Dickey and Fuller, 1979). Based on the graphical representations of the returns time series we decide to use intercept terms in the ADF regressions for both exchange rates and the index returns (Figure 3). The numbers of lags are chosen by Akaike (1973) Information Criteria. We employ ARMA (p, q) models on the returns of two variables using a Box-Jenkins methodology to determine the values of p and q. For the residuals of these regressions we employ Ljung-Box test Q and the Engle (1982) Lagrange Multiplier (LM) test for ARCH effects to investigate the presence of the autocorrelation and the heteroscedasticity. The impact of the exchange rates on BET return and volatility are to be captured by the two equations of a GARCH model: the conditional mean equation and the conditional variance equation. The conditional mean equation of the returns has the form: n

retBETt  0  1 * retNEERt   ( k * rt  k )   t

(2)

k 1

where:  retBET is the return of BET index;  μ0 is a constant term;  μ1 is a coefficient which reflects the returns of exchange rate changes effects on BET returns;  retNEER is the return of the nominal exchange rates of euro against the Romanian national currency;  ξk (k=1,..n) are coefficients associated to lagged returns of BET;  n is the number of lagged returns, calculated by the Akaike (1969) Final Prediction Error Criterion;  εt is the error term.  The conditional variance has the form: q

 t2     * retNEERt    k *  t2 k   ( l *  t2 l ) k 1

l 1

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(3)

where: -  t2 is the conditional variance of the returns of BET index; - ω is a constant term; - ν is a coefficient which reflects the effects of exchange rates returns on the volatility of the BET index; - αk (k=1, 2, …q) are coefficients associated to the squared values of the lagged values of error term from the conditional mean equation; - q is the number of lagged values of the error term, calculated by the Akaike (1973) Information Criteria; - βl (j=1, 2, …p) are coefficients associated to the lagged values of the conditional variance; - p is the number of lagged values of conditional variance, calculated by the Akaike (1973) Information Criteria. After performing the two regressions we analyze their robustness by employing Lagrange Multiplier (LM) test for ARCH effects on the residuals. 4. EMPIRICAL RESULTS The results of ADF tests, presented in the Table 2, suggested the stationarity of returns for all four sub-samples. The Table 3 reports the results of Ljung-Box Q and ARCH LM tests which suggest, for all four sub-samples, the presence of autocorrelation and the heteroscedasticity of the residuals of ARMA regressions. For the four sub-samples we used GARCH (1, 1) models. Their results are presented in the Table 4. For the first sub-sample we find no significant coefficient of retNEER for the conditional mean equation or for the conditional variance equation. On the second and fourth sub-sample the results indicate a significant negative coefficient of retNEER for the conditional mean equation but no significance of retNEER coefficient on the conditional variance equation. For the third sub-sample we find a significant negative coefficient of retNEER for the conditional mean equation and a significant positive coefficient of retNEER for the conditional variance equation. For all sub-samples the ARCH LM tests performed on the GARCH models residuals revealed no ARCH remaining effects. 5. CONCLUSIONS AND IMPLICATIONS In this paper we investigated the influence of the foreign exchange rates on the BSE stock prices. The GARCH models for the four sub-samples suggest significant changes on that relation. Between 2000 and 2006 we found no evidence of a significant impact of foreign exchange rates on the stock prices. In this period of time the presence of the foreign capitals on BSE did not play a determinant role for the stock prices evolution. From Romania’s adhesion to European Union, in January 2007, until the announcement of Lehman Brothers bankruptcy, on September 15, 2008, BSE experienced an expansive stage, generated mainly by massive inflows of the foreign capitals. In these circumstances, the Romanian stock returns became sensitive to the foreign exchange rates. The negative coefficient associated to the changes in exchange rates on the conditional mean equation indicate that, as in Dornbusch and Fisher (1980) model, a depreciation of the Romanian national currency caused the increase of stock prices.

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After September 15, 2008 and until February 2010 the foreign exchange rates affected not only stock returns but also their volatility. In this period of time there were strong perceptions, stimulated by the public authorities’ statements, that BSE decline was caused exclusively by the contagion from the international financial markets. In this context, the Romanian capital market sensitivity to the foreign exchange rates intensified. Since the end of February 2010 the symptoms of the Romanian national economy vulnerability to the global crisis became obvious. Such symptoms modified the perceptions about Romanian financial markets and receded the influence of the foreign exchange market on BSE volatility. However, the impact of foreign exchange rates on stock prices returns remained significant. The investigation of the foreign exchange rates influence on the BSE stock prices could be thoroughgoing by employing the variants of GARCH models that allow taking into consideration the asymmetrical effects of foreign exchange rates variation. It could be also extended to the future stages of the global crisis. REFERENCES 1. Abdalla, I. S. A., and V. Murinde (1997) Exchange Rate and Stock Prices Interactions in Emerging Financial Markets: Evidence on India, Korea, Pakistan and Phillipines. Applied Financial Economics 7, pp. 25-35. 2. Aggarwal R. (1981) Exchange Rates and Stock Prices: A Study of the US Capital Markets under Floating Exchange Rates, Akron Business and Economic Review, Vol. 12, pp. 7 – 12. 3. Ahmad, Rubi, Rhee, S. Ghon and Wong, Yuen Meng Jeff (2011) Foreign Exchange Market Efficiency Under Recent Crises: Asia-Pacific Focus. Journal of International Money and Finance, Vol. 31, No. 6, 2012. Available at SSRN: http://ssrn.com/abstract=1913995 or http://dx.doi.org/10.2139/ssrn.1913995 4. Ajayi, R. A., and Mougoue, M. (1996), On the Dynamic Relation Between Stock Prices and Exchange Rates. Journal of Financial Research, 19, 2, 193-207. 5. Akaike, H. (1969). Fitting autoregressive models for prediction, Annals of the Institute of Statistical Mathematics 21: pp. 243-247. 6. Akaike, H. (1973). Information theory and an extension of the maximum likelihood principle, in B. Petrov and F. Csáki (eds), 2nd International Symposium on Information Theory, Académiai Kiadó, Budapest, pp. 267-281. 7. Akaike, H. (1974). A new look at the statistical model identification, IEEE Transactions on Automatic Control AC-19: pp. 716-723. 8. Apergis, Nicholas and Anthony N. Rezitis (2001), Asymmetric Cross-Market Volatility Spillovers: Evidence from Daily Data on Equity and Foreign Exchange Markets, Manchester School, Vol. 69 (Supplement), pp. 81–96. 9. Apte, P. (2001) The Interrelationship between Stock Markets and the Foreign Exchange Market, Prajnan 30, pp. 17-29. 10. Bahmani-Oskooee, M., and A. Sohrabian (1992) Stock Prices and Effective Exchange Rate of Dollar, Applied Economics 24, pp. 459-464. 11. Bilson, John F.O. (1981), The "Speculative Efficiency" Hypothesis, NBER Working Paper No. w0474. Available at SSRN: http://ssrn.com/abstract=262696 12. Bollerslev, Tim. (1986). Generalized autoregressive conditional heteroscedasticity, Journal of Econometrics, vol. 31, 307-327.

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APPENDIX

12000

10000

BET

8000

6000

4000

2000

0 2000

2002

2004

2006

2008

2010

2012

Figure 1 - Evolution of BET index from January 2000 to December 2012 5

4.5

NEER

3.5

2.5

1.5 2000

2002

2004

2006

2008

2010

2012

Figure 2 - Evolution of RON/EUR exchange rate from January 2000 to December 2012

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retBET 15 10 5 0 -5 -10 -15 2000 retNEER 4 3 2 1 0 -1 -2 -3 -4 -5 -6 2000

Figure 3 - Returns of BET index and RON/EUR exchange rate from January 2000 to December 2012 Table 1 - Descriptive Statistics of the returns Indicator

First subsample

Mean Median Minimum Maximum Std. Dev. C.V. Skewness Ex. kurtosis Jarque-Bera test p-value of Jarque-Bera test Mean Median Minimum Maximum Std. Dev.

Third subsample

Fourth subsample

0.159634 0.126894 -11.9018 8.95773 1.48684 9.31406 -0.327517 7.82603 4705.35

Second subsample Panel A: BET returns -0.122799 -0.0450007 -7.56486 4.61086 1.67371 13.6297 -0.476291 1.26859 46.7691

0.0262851 0.182109 -13.1168 10.0907 2.74858 104.568 -0.543127 2.96170 157.152

-0.00463353 0.0462141 -8.76389 10.5645 1.43652 310.028 0.0816653 9.98171 3060.43

0.00001

Panel B: RON/EUR exchange rates returns 0.0335669 0.0153424 0.0332349 0.0000001 -0.0201946 -0.0132670 -5.10636 -2.08098 -2.54008 3.38565 2.29753 2.92724 0.575190 0.495426 0.542715

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0.0100630 -0.00242274 -1.60704 1.33006 0.269721

C.V. Skewness Ex. kurtosis Jarque-Bera test p-value of Jarque-Bera test

17.1357 0.104774 8.32075 2363.67

32.2914 0.625471 2.67077 161.636

16.3297 0.210792 6.02852 576.724

26.8032 -0.183972 4.55565 641.476

0.00001

Table 2 - Results of ADF tests for returns Returns

BET returns Number of lags 22

RON/EUR exchange rates returns

Test statistics

Number of lags 21

Test statistics

First sub-8.59735 -8.25304 sample (0.0001***) (0.0001***) Second 10 -5.01346 10 -5.3721 sub(0.0001***) (0.0001***) sample Third sub16 -3.26275 12 -6.41206 sample (0.01666**) (0.0001***) Fourth 11 -7.30334 3 -15.5401 sub(0.0001***) (0.0001***) sample Notes: p-values are within brackets ***, **, *; mean significant at 0.01, 0.05, and 0.1 levels, respectively

Table 3 - Results of Ljung-Box Q Tests and ARCH LM Tests for BET returns

Sub-sample

Ljung-Box Q Test

First sub-sample

ARCH LM Test

9.54402 254.429 (0.08924*) (0.0001***) Second sub-sample 15.2181 29.2421 (0.0550*) (0.0002***) Third sub-sample 4.14818 55.6092 (0.0417**) (0.0001***) Fourth sub-sample 8.76834 116.995 (0.0672*) (0.0001***) Notes: p-values are within brackets ***, **, *; mean significant at 0.01, 0.05, and 0.1 levels, respectively.

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Table 4 - Results of GARCH regressions Indicator

μ0

First sub-sample

Second Third subsub-sample sample Panel A: GARCH conditional mean equation 0.147211 -0.0312199 0.144008 (0.0282225) (0.0674414) (0.102556) [0.0001***] [0.6434] [0.1603]

μ1

Fourth sub-sample 0.0379250 (0.0341619) [0.2669]

-0.0231174 -0.853036 -0.973813 -0.603423 (0.0345816) (0.188896) (0.317729) (0.132620) [0.5038] [0.0001***] [0.0022***] [0.0001***] Panel B: GARCH conditional variance equation ω 0.222720 0.484944 0.267208 0.0586207 (0.0876425) (0.257943) (0.186092) (0.0366657) [0.0110**] [0.0601*] [0.1510] [0.1099] ν -0.154081 0.244970 0.963026 -0.0004201 (0.137587) (0.204757) (0.457360) (0.0015385) [0.2628] [0.2315] [0.0352**] [0.7848] α 0.367584 0.226922 0.224986 0.213090 (0.09019) (0.09232) (0.08629) (0.0892397) [0.0001***] [0.0140**] [0.0091***] [0.0169**] β 0.613022 0.599191 0.755476 0.773527 (0.0854466) (0.137706) (0.072835) (0.084991) [0.0001***] [0.0001***] [0.0001***] [0.0001***] ARCH LM tests for 258.734 18.717 64.5231 116.977 residuals of GARCH [0.0001***] [0.0091***] [0.0001***] [0.0001***] model Notes: Standard Errors are within round brackets; p-values are within squared brackets; ***, **, * mean significant at 0.01, 0.05, and 0.1 levels, respectively

209

THE INFLUENCE OF MONETARY POLICY ON BANK LENDING IN ROMANIA

Valentin Mihai Leoveanu University of Bucharest, Mihaela Cornelia Sandu University of Bucharest

ABSTRACT “Raison d'être” of banks is to grant loans in financial intermediation between economic agents with liquidity shortage and economic agents with surplus liquidity. As such, tracking how banks provide money through credit needs of businesses both in the short term to meet the needs of the operating cycle, and in the long-term to realize investments necessary to achieve business development, represents one of the central bank objectives. The authors start from the general framework for decision taking on bank lending, then presents the factors that influenced bank lending in Romania and show the theoretical and practical links between monetary policy and bank lending. The present study is a quantitative analysis which attempted to explain the influence of monetary policy instruments on the growth rate of loans in Romania for the period 2003 - 2013. In order to pursue an econometric analysis the authors has previously built a database for the period 2003 - 2013, concerning statistical information on: growth rate of loans both in Lei and Euro, growth rate of money supply, growth rate of exchange rate, monetary policy interest rate and inflation rate. Key words: lending principles, default risk, creditworthiness analysis, credit scoring models, transmission mechanism of monetary policy JEL classification: E52, E58

1. INTRODUCTION This paper tries to analyze the possible influences of monetary policy decisions of the National Bank of Romania on the bank lending, especially the impact on the evolution of non-governmental loans. The authors start from the general framework for decision taking on bank lending, then presents the factors that influenced bank lending in Romania and show the theoretical and practical links between monetary policy and bank lending. The final part of the paper focuses on the econometric analysis of the influence of monetary policy on lending activity in Romania, a study conducted over a period of ten years. The importance of the study is reflected by the results of the econometric calculations, showing the link between different monetary policy instruments, taken one by one and altogether, and the evolution of bank loans both in Lei and Euro. In the context of the postcrisis, credit evolutionary analysis on various segments of the market is even more important as developments in monetary conditions, the application of various tools of monetary policy by the central bank signals to the possible economic developments - out of recession or return to this stage.

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The methodology of research rely on a statistic database for the period 2003 - 2013 taking into account the following variables for Romania: volume of bank loans in RON and Euro, money supply, exchange rate, monetary policy interest rate and inflation rate. The relationship between monetary policy instruments and the volume of loans were measured and analyzed using a trigonometric equation for multifactor regression. After mathematical calculations performed on data series, the method requires the application of different tests on the variables used in the regression equation. 2. FRAMEWORK FOR DECISION TAKING ON BANK LENDING “Raison d'être” of banks is to grant loans in financial intermediation between economic agents with liquidity shortage and economic agents with surplus liquidity. As such, tracking how banks provide money through credit needs of businesses both in the short term to meet the needs of the operating cycle, and in the long-term to realize investments necessary to achieve business development, represents one of the central bank objectives. Lending activity does not involve only the use of the bank's own resources, but mostly the use of the attracted resources of the bank. Bank mainly uses the depositors’ money and, therefore, there is the possibility of appearance of certain risks for which bank must take all measures to prevent their occurrence. In this regard, lending is based on respect for principles such as: inclusion of lending activity into the bank's overall strategy related to both monetary policy and supervision of the central bank and the objective of profit maximization; analysis of the actual situation of clients’ creditworthiness; decentralization of decision-taking in granting bank loans; applying a system of credit accounts into the bank accounting; providing a mechanism for objective verification and enforcement of the guarantees provided by the customer (Law no. 58/1998). In general terms, the bank must achieve a trade-off between profitability and risk by decision taking process through: analysis of customer creditworthiness, methods of scoring, measures to mitigate default risk, classification of loans (Leoveanu; 2008). Default risk signifies the likelihood of late payment or default appearance due to the national or global economic climate or sectoral difficulties or deficiencies in borrower management. Banks protect themselves against this risk through the diversification of the loan portfolio for risk dispersion, by including a risk premium in interest rates charged, and by inclusion of protective clauses in the loan agreement to reduce the effects of default by the debtor (Dimitriu, Mihalașcu, Oprea; 2012). In order to reduce this risk a bank aims to carry out a comprehensive analysis of the borrower's creditworthiness in terms of: human factor (competence, morality, fairness etc.), economic factor (country economic climate, the international legal framework and professional), financial factor (financial situation, the situation existing debt repayment capacity), legal factor (legal form, legal ties with other companies). On the other hand the bank acts to divide the risk by working with other credit institutions and specialized supervisors. International banking practice takes into consideration several main criteria which evaluation results in lending decision taking. There are the so-called “the 6 C's” of credit: character, capacity, capital, collateral, conditions and control (Basno, Dardac; 2000).). Character refers to the personal traits of the company’s leaders, such as responsibility, integrity, good faith. As such, each bank sets up its customer database through researches, by information from other banks or the central bank or credit bureau. Capacity expresses the debtor’s business success as a result of the management decision and is actually the ability to generate sufficient cash flows to repay the loan. In this 211

respect, they apply a well constructed analysis of credit that allows a real capacity assessment for a company based on a system of financial indicators. Capital is the source of coverage the company's debt to the bank when reaching a situation of bankruptcy and in this regard it is important to analyze the degree of liquidity of company’s assets. Collateral takes into account assets that can be pledged to ensure the recovery of the amount advanced as a loan by creditor in the event of repayment difficulties. Collateral is subject to dispute between debtor and creditor. Thus, while a borrower wants to bring an asset as collateral in order to obtain a larger amount of money, the lender prefers as many personal and real types of collateral as their interests is to be well protected against debtor’s default. Conditions represents the functional frame in which the company operates, i.e. factors such as: evolution of the economic sector, region or economic environment of the country concerned, evolution of solvent demand, technological changes, prices evolution, adoption of new market and taxation regulations etc. Control means the ability of the company’s managers to manage business risks, to have common sense in terms of decision taking. The assessment of repayment capacity of borrowers is due concerning two aspects: qualitative and quantitative. NBR Regulation no. 5/2002 states that financial performance evaluation is done according to the internal rules of each credit institution based on the score attributed to qualitative and quantitative factors. Quantitative factors will refer to indicators such as liquidity, solvency, profitability and risk. Qualitative factors take into consideration the company’s management, quality of ownership, quality of collateral received and market conditions (Dimitriu, Mihalașcu, Oprea; 2012). Nowadays, given the explosive increase in the volume of banking operations and the development of extensive network of branches and agencies throughout a country, banking activity involves the widespread use of computing and telecommunications. Thus, using computer methods in banking activity involves quantifying and ranking of credit conditions in the scoring methods. Traditionally, scoring models were developed on the criterion of company’s entry into bankruptcy, but currently, they are guided by rules stipulated in the Basel II Accord, i.e. consider the situation of a borrower default when two conditions are fulfilled: 1) bank believes that the debtor will be unable to meet its payment obligations to the bank and 2) the debtor register more than 90 days late on any loan products of the bank (overdraft is considered to have late payment when the customer exceeded the limit) (Basel II Accord; 2005). Credit scoring is a method of assessing the creditworthiness of a loan applicant which ends by giving a grade or a score. In this respect, credit scoring established a hierarchy of applicants based on the following elements: choosing a number of variables (wealth, income level, job and residence stability, age, family responsibilities, etc.) and establishing an aggregation system allowing the transposition of variables in a common global grade. Validating a credit scoring model takes into account the power of discrimination, the scoring system stability and the calibration accuracy. 3. FACTORS THAT INFLUENCE BANK LENDING IN ROMANIA The importance of bank lending is highlighted on multiple levels, such as increasing the financial efficiency of the capital by amplifying the effect of debt leverage on the profitability and, also, favoring faster changing of drift on investments towards more profitable sectors or activities. 212

Among the general factors that influence a bank's lending policy they include: constraints derived from monetary policy in which an important role has the evolution of the monetary policy interest rate affecting the cost of interbank lending; changes in bank lending standards that are influenced by: costs related to bank’s capital position, access of a bank to market financing, bank’s liquidity position and expectation of general economic activity; demand for loans from enterprises (directed either to fixed investment, either to cover working capital) or from individuals (buying a house, funding a holiday or study) other factors such as the banks' balance sheet constraints, competition with other banks with nonbanking credit institutions or capital market, real estate market situation, trends consumer confidence in the economy, the level of savings in the economy, creditworthiness of loan applicants, business or economic sector risk (ECB; 2013). Before the financial crisis, the evolution of lending activity in Romania was influenced by several factors that cause the crisis developments in Romania (Voinea, 2009): opening the capital account too quickly, a phenomenon of overconsumption based on external short-term financing and pro-cyclicality of fiscal and budgetary policies based on flat rate and increasing wages of state employees. This situation was determined by the need to catch up with developed European countries in terms of living standards, therefore it was a logical consequence of population passage through two recessions in the nineties. At that time, banks in Romania (mostly foreign owned) brought into the country from parent banks large amounts of money to increase lending volume. During and after the crisis, money has become less, expensive and migrated to major international financial markets, strongly affected by the crisis. Banks in Romania have made less money from parent banks. Instead, they tried to attract money from the population in order to provide increased liquidity absolutely necessary for their activity, although previously they were not interested in this by giving low interest rates on deposits and charging high interest rates on loans, hence the huge profits recorded most banks. As banks in Romania were unable to draw cash from parent banks they have turned their attention to the population to increase the volume of deposits through interest rates and also some banks have restricted lending to ensure its liquidity needs. After the crisis, our country managed to avoid any potential difficulties that would have occurred in its internal and external deficit financing. Rapid response of international authorities (International Monetary Fund, World Bank and European Union through European Central Bank) to help Romania was crucial in stopping the departure of foreign capital. In addition, the so-called Bank Coordination Initiative in Vienna on 31 March 2009, the IMF initiated a dialogue between the government and foreign banks operating in Romania (having about 70% market share), dialogue whose goal was that to prevent the closing of the refinancing credit lines from parent banks to their Romanian subsidiaries. Banks had to intake during this period about 1.5 billion euro to their equity to be able to meet the criteria of solvency and liquidity regulations imposed by the National Bank of Romania and by international financial organizations. Nowadays, bank lending is trying to return to a normal path, but one of the major problems arising from the crisis and that manifests increasingly stronger is the default, the upward trend of overdue loans being one of worrisome nature. Factors that influenced the development of this phenomenon are: rising unemployment, low wages, impossibility of finding a second job to increase income, bankruptcy of businesses both small and medium type, and of large enterprises, loss of export markets. At this time, 18.2% of loans granted by banks are bad loans, which means about 10 billion euro (per total loans in lei and euro). This situation must be controlled increasingly better by the central bank and the commercial banks

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whose task falls in taking effective measures considering debtor’s refinancing, renegotiation of credit terms or extension of deadlines. 4. MONETARY POLICY AND BANK LENDING EVOLUTION IN ROMANIA In accordance with its own statute, the National Bank of Romania conducts the monetary policy in order to achieve and maintain price stability, and also to ensure financial stability. Monetary policy is used to influence the volume of money in circulation, so the central bank intervenes in achieving final objectives like price level, GDP size, the volume of loans granted or level of unemployment. The process of transition to a market economy, the accession to the European Union and, now, the process towards Economic and Monetary Union integration resulted in significant changes on monetary policy led by National Bank of Romania. Since 2005, the year of setting up the inflation targeting strategy, monetary policy was a restrictive one in an attempt to temper inflation, managed to significantly mitigate the inflation expectations and impact on prices generated by fiscal adjustment and price movements worldwide. Although interest rates have been set at a relatively high level, state-owned enterprises continued to borrow due to the stimulus grant, generating a significant volume of unpaid loans. On the other hand, private businesses were strongly affected by this trend, given that the bank loan was the only alternative of financing due to poor development of the Romanian capital market. Developments of disinflation process and increased competition on the banking market in Romania determined credit institutions to reduce interest both on active and passive operations on Lei, thus reducing the margin between them. Another sign of progress on the Romanian banking market in the period before the financial crisis was that of a significant increase in the GDP share of non-government credit which shows a positive change in bank’s attitude towards real economy and a return of credit institutions to their traditional function of financial intermediation. Banks have turned to this way of placing money in a desire to replace losses from lower yields from un-risky investments - to the central bank and in government bonds. Another reason is the evolution of interest rates and increased predictability in the economy leading to a relative decrease in perception the risk of interest, important risk in bank lending (Dimitriu, Mihalașcu, Oprea; 2012). Bank credit market dynamism is supported mostly by lending to households, so expansion of the share of retail is determined by diversification and attractive offers of credit institutions, as well as stronger demand for consumer loans and real estate loans. A study of the well known Romanian economic analyst Florin Câțu highlights some trends in Romanian economy related to monetary policy measures and the evolution of lending. In doing so, he shows a tightening of the money supply as a result of lower demand for cash in the economy, thus resulting a tightening of economic activity (Fig. 1). M3 broad money supply trend shows a decrease followed by stagnation, leading to the conclusion that commercial banks restrict lending. The second graph (Fig. 2) captures the effect of non-performing loans in 2012 (negative for credit) and credit growth in Lei and Euro. It shows a decrease in the volume of loans, and also that reducing the stock of loans in Euro is substituted by an increase in loans in Lei.

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Figure 1 Evolution of money supply M1 and M3 Source: http://florincitu.wordpress.com/2013/04/15/povestea-fara-happy-end-spusade-indicatorii-monetari/

Figure 2 Evolution of lending in Lei and Euro Source: http://florincitu.wordpress.com/2013/04/15/povestea-fara-happy-end-spusade-indicatorii-monetari/ 5. CASE STUDY ON THE INFLUENCE OF MONETARY POLICY ON BANK LENDING IN ROMANIA The present study is a quantitative analysis which attempted to explain the influence of monetary policy instruments on the volume of loans in Romania for the period 2003 - 2013. In order to pursue an econometric analysis the authors has previously built a database for the period 2003 - 2013, concerning statistical information on: volume of loans both in Lei and Euro, money supply, exchange rate, monetary policy interest rate and inflation rate. - Credit Volume (CRD_LEI and CRD_EUR) represents the value of non-governmental loans granted to the household and to companies both in Lei and Euro. It shows the

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extent to which banks are able and willing to lend private companies in terms of confidence in their ability to repay and the expectations on economic growth trends in a country. Money Supply (MSP) is the category M3 of the money supply that includes M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money (the broadest monetary aggregate) and it is used by economists to estimate the entire supply of money within an economy. Exchange Rate (EXR) is the price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. Exchange rates included in the list of the average market exchange rates are nominal and are based on the quotation of the banks licensed to perform foreign exchange transactions. The calculus is based on the change in the nominal exchange rate to assess the effects on lending. The exchange rate is expressed against euro as the main currency for trade and investment in Romania. Monetary Policy Interest Rate (MPR) is the interest rate used for the main open market operations of the central bank. Currently, these are the repos within a week performed by fixed rate tender. Inflation Rate (IFL) is defined by economists to be a general rise in the price level that is measured using an index. Some economists use the gross domestic product deflator, or the GDP deflator, to measure inflation, but the measurement of inflation in the European Union is the Consumer Price Index (CPI). The CPI measures the price of a basket of goods that a typical consumer purchases. There are a large number of studies that find a positive impact of a low inflation environment on FDI inflows.

The relationship between monetary policy instruments and the volume of loans in Lei and in Euro were measured and analyzed using a trigonometric equation for multifactor regression type. The econometric models realized by the authors are specified for both two analyses. The estimated model will be used to test the hypotheses about individual relationships of the independent variables and growth rate of loans in Romania. Built database contains statistical series of observations by constant frequency. Time series spans a period of ten years between 01/01/2003 and 31/12/2012. Data were taken from the National Bank of Romania (www.bnro.ro) and the National Institute of Economic Statistics (www.insse.ro). Processing necessary mathematical econometric analysis and estimation of coefficients that identify and quantify causal relationships were made using econometric software SPSS 19. 5.1 Analysis of loans granted in euro To build the model we opted for the prospective procedure (Forward) that involves the inclusion of the independent variables in the model step by step (in this regard, the authors take into account an article of Babucea;2009). Including a new variable in the model is based on an F Test sequence. They want the new variable entered into the model to bring a maximum contribution to the analysis. The process stops when the model cannot be extended (enhanced). In Table 1 Variables Entered / removed they can see that running procedure rejected variable 3 (exchange rate) and for building regression model stayed the other three (interest rates, money supply and inflation rate). 216

Table 2 Model Summary contains important information about the coefficient of determination (R Square) and the standard error of estimation. The coefficient of determination shows the explained percentage of the dependent variable by the independent variables. One can also notice that each new variable entered into the model explains much of the dependent variable – the granted loans. Under this factor we have 98.1% of the loans depend on money supply, 99.4% of the loans depend on the money supply and interest rate and 99.6% of the loans depend on money supply, interest rate and annual inflation.

Table 1 Variables Entered/Removeda Mode l 1

Variables Entered VAR00004

Variables Removed .

VAR00002

VAR00005

Method Forward (Criterion: Probability-of-F-toenter <= ,050) Forward (Criterion: Probability-of-F-toenter <= ,050) Forward (Criterion: Probability-of-F-toenter <= ,050)

a. Dependent Variable: VAR00001

Model 1 dimensi 2 on0 3

Table 2 Model Summary R Adjusted Std. Error of the R Square R Square Estimate a ,991 ,981 ,981 6976,51492 b ,997 ,994 ,994 3976,97308 c ,998 ,996 ,996 3156,45914

a. Predictors: (Constant), VAR00004 b. Predictors: (Constant), VAR00004, VAR00002 c. Predictors: (Constant), VAR00004, VAR00002, VAR00005

Table 3 ANOVA F statistic indicates the overall significance of the independent variables. For all three models the value of Sig. (last column) is 0.000 less than the value of α, so regression is significant overall.

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Table 3 ANOVAd Model Sum of Squares df Mean Square F 1 Regression 9,811E10 1 9,811E10 2015,829 Residual 1,850E9 38 4,867E7 Total 9,996E10 39 2 Regression 9,938E10 2 4,969E10 3141,638 Residual 5,852E8 37 1,582E7 Total 9,996E10 39 3 Regression 9,960E10 3 3,320E10 3332,412 Residual 3,587E8 36 9963234,272 Total 9,996E10 39 a. Predictors: (Constant), VAR00004 b. Predictors: (Constant), VAR00004, VAR00002 c. Predictors: (Constant), VAR00004, VAR00002, VAR00005 d. Dependent Variable: VAR00001

Sig. ,000a

,000b

,000c

Using equation coefficient values we obtain the following models: Model 1: CRD_EUR = a1 + b1 x MSP = - 29258.718 + 0.001 * MSP Model 2: CRD_EUR = a1 + b1 + c1 x MPR = - 67403.886 + 0.001 * MSP + 1947.217 * MPR Model 3: CRD_EUR = a1 + b1 x MPS + c1 x MPR + d1 x IFL CRD_EUR = - 73075.969 + 0.001 * MSP + 1164.405 * MPR + 1522.285 * IFL Since Model 3 explains most of the relationship between variables, we will keep it. It can be seen that for an increase of 1 million MSP, loans increased to 0.001 million euro (1000 euro), an increase in MPR by 1% will increase the credit volume to 1164.405 million euro credits, a 1% increase of IFL will increase with 1522.285 million euro of loans. Tabel 4 Coefficientsa Model Unstandardized Standardized Coefficients Coefficients B Std. Error Beta 1 (Constant) -29258,718 2678,940 VAR00004 ,001 ,000 ,991 2 (Constant) -67403,886 4531,494 VAR00004 ,001 ,000 1,154 VAR00002 1947,217 217,790 ,198 3 (Constant) -73075,969 3788,188 VAR00004 ,001 ,000 1,173 VAR00002 1164,405 238,394 ,118 VAR00005 1522,285 319,254 ,107 a. Dependent Variable: VAR00001

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t -10,922 44,898 -14,875 52,078 8,941 -19,290 65,047 4,884 4,768

Sig. ,000 ,000 ,000 ,000 ,000 ,000 ,000 ,000 ,000

Table 5 Excluded Variablesd Model Partial Correlation ,827 ,626 ,823 ,096 ,622 ,120

Collinearity Statistics Tolerance ,322 ,632 ,376 ,312 ,198 ,312

Beta In t Sig. a 1 VAR00002 ,198 8,941 ,000 a VAR00003 ,107 4,882 ,000 a VAR00005 ,183 8,817 ,000 b 2 VAR00003 ,013 ,580 ,566 b VAR00005 ,107 4,768 ,000 3 VAR00003 ,013c ,713 ,480 a. Predictors in the Model: (Constant), VAR00004 b. Predictors in the Model: (Constant), VAR00004, VAR00002 c. Predictors in the Model: (Constant), VAR00004, VAR00002, VAR00005 d. Dependent Variable: VAR00001

5.2 Analysis of loans granted in lei In Table 6 Variables Entered / removed you can see that running procedure rejected variable 5 (exchange rate) and stayed for building regression model other 3 (interest rates, money supply and exchange rate).

Model 1

Variables Entered VAR00002

VAR00004

VAR00003

Table 6 Variables Entered/Removeda Variables Removed Method . Forward (Criterion: Probability-of-F-toenter <= ,050) . Forward (Criterion: Probability-of-F-toenter <= ,050) . Forward (Criterion: Probability-of-F-toenter <= ,050)

a. Dependent Variable: VAR00001

Table 7 Model Summary shows that the coefficient of determination is 66.5% while loans depend on the interest rate, 88.6% when loans depend on the interest rate and money supply and 90.4% of the loans depend on the interest rate, money and exchange rate. Table 8 ANOVA F statistic indicates the overall significance of the independent variables. For all 3 models the value of Sig. (last column) is 0.000 less than the value of α, so overall regression is significant.

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Table 7 Model Summary Model Adjusted R Std. Error of Square the Estimate R R Square a 1 ,815 ,665 ,656 17181,52519 dimensio b ,886 ,785 ,773 13955,39685 n0 2 c 3 ,904 ,817 ,801 13056,01276 a. Predictors: (Constant), VAR00002 b. Predictors: (Constant), VAR00002, VAR00004 c. Predictors: (Constant), VAR00002, VAR00004, VAR00003 Table 8 ANOVAd Model Sum of Mean Squares Square df F 1 Regression 2,225E10 1 2,225E10 75,357 Residual 1,122E10 38 2,952E8 Total 3,346E10 39 2 Regression 2,626E10 2 1,313E10 67,413 Residual 7,206E9 37 1,948E8 Total 3,346E10 39 3 Regression 2,733E10 3 9,109E9 53,438 Residual 6,137E9 36 1,705E8 Total 3,346E10 39 a. Predictors: (Constant), VAR00002 b. Predictors: (Constant), VAR00002, VAR00004 c. Predictors: (Constant), VAR00002, VAR00004, VAR00003 d. Dependent Variable: VAR00001

Sig. ,000a

,000b

,000c

Using equation coefficient values we obtain the following models: Model 1: CRD_LEI = a + b x MPR = 103027,351 – 4637,446 * MPR Model 2: CRD_LEI = a + b x MPR + c x MSP = 57970,832 – 2860,403 * MPR + 0,209 * MSP Model 3: CRD_LEI = a + b x MPR + c x MSP + d x EXG CRD_LEI = 4203,992 – 3073,818 * MPR + 0,160 * MSP + 15907,146 * EXG

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Table 9 Coefficientsa Model Unstandardized Standardized Coefficients Coefficients B Std. Error Beta 1 (Constant) 103027,351 6148,498 VAR00002 -4637,446 534,217 -,815 2 (Constant) 57970,832 11112,520 VAR00002 -2860,403 584,441 -,503 VAR00004 ,209 ,046 ,466 3 (Constant) 4203,992 23851,924 VAR00002 -3073,818 553,375 -,540 VAR00004 ,160 ,047 ,357 VAR00003 15907,146 6351,089 ,200 a. Dependent Variable: VAR00001

t 16,757 -8,681 5,217 -4,894 4,539 ,176 -5,555 3,383 2,505

Sig. ,000 ,000 ,000 ,000 ,000 ,861 ,000 ,002 ,017

Table 10 Excluded Variablesd Model Partial Correlation ,528 ,598 -,271 ,385 -,142 -,122

Collinearity Statistics Tolerance ,968 ,551 ,208 ,803 ,193 ,192

Beta In t Sig. a 1 VAR00003 ,311 3,784 ,001 a VAR00004 ,466 4,539 ,000 a VAR00005 -,345 -1,715 ,095 b 2 VAR00003 ,200 2,505 ,017 b VAR00005 -,151 -,863 ,394 3 VAR00005 -,120c -,729 ,471 a. Predictors in the Model: (Constant), VAR00002 b. Predictors in the Model: (Constant), VAR00002, VAR00004 c. Predictors in the Model: (Constant), VAR00002, VAR00004, VAR00003 d. Dependent Variable: VAR00001

6. CONCLUSIONS In analysis for loans granted in Euro the Model 3 explains most of the relationship between variables and therefore it can be seen that for an increase of 1 million MSP, loans increased to 0.001 million euro (1000 euro), an increase in MPR by 1% will increase to 1164.405 million credits, a 1% increase of IFL will increase with 1522.285 million euro of loans. In analysis for loans granted in Lei the Model 3 explains most of the relationship between variables. It can be seen that for an increase of 1 million MSP, loans increased to 0.160 million euros (160.000 euro), an increase in MPR by 1% will decrease to 3073,818

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million euro and an increase of 1 million EXG will increase with 15.907,146 million euro of loans. The value of 0.00 for aggregated probability of explanatory variables shows that the possibility that credit volume are not at all influenced by changes in monetary policy instruments is extremely small. This very low zero probability certifies us a link between credit volume in Lei and Euro and monetary policy decisions; The R-squared coefficient shows the explanatory power of the equation or in other words the percentage of change in the value of bank loans due to monetary policy decisions. We consider this percentage as a realistic one as we are aware that there are many other factors that influence bank loans in Romania. The authors consider the influences identified and quantified as accurate, giving reliability to these models. Thus, these coefficients can be successfully used in the calibration of monetary policy decisions with the purpose to increase the volume of bank loans in our country. A next step in our research will be the improvement of the model by adding to the regression equation other categories of factors. Some of these factors could be from outside monetary policy influence such as fiscal policy while others could be the foreign capital flows or gross fixed capital formation. REFERENCES 1. Basel Committee on Banking Supervision, “International Convergence on Capital Measurement and Capital Standards – a revised framework”, Bank of International Settlements, Basel, November 2005 2. Basno C., Dardac N., “Produse, costuri și performanțe bancare”, Ed. Economică, București, 2000 3. BNR, “Raport asupra inflației”, mai, august, noiembrie, februarie 2012 4. Dimitriu M., Mihalașcu R., Oprea I.A., “Managementul riscului bancar”, Ed. ProUniversitaria, București, 2012 5. European Central Bank, “The Euro Area Bank Lending Survey”, 4th Quarter of 2012, 2013 6. Eurostat, “Eurostatistics - Data for short-term economic analysis” - Issue number 02/2013 7. INSSE, “Buletin Statistic Lunar” nr.1-12/2012 8. Law no. 312/2004, “Statutul Băncii Naționale a României”, BNR, București, 2004 9. Leoveanu V., “Credit și instituții de credit”, Ed. Bren, București, 2008 10. Voinea, L., “Sfârșitul economiei iluziei. Criză și anticriză. O abordare heterodoxă”, Ed. Publica, București 11. Babucea, A-G, “Financial behavior of population on loan for housing – a statistical approach”, Analele Univ. “Constantin Brancusi”, Tirgu Jiu, Seria Economie, nr. 2/2009 12. www.bnro.ro

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CIVIL LIABILITY AND PROFESSIONAL LIABILITY FOR DEFECTIVE PRODUCTS Camelia Spasici Bucharest University Anca Nicoleta Gheorghe Nicolae Titulescu University

ABSTRACT Liability, whether civil, criminal, disciplinary, material and so on, are required to bear the consequences of non-compliance with rules of conduct and obligation which rests offender contrary to these rules and always bearing the imprint of social disapproval of such conduct. In this sense, accountability is identified with the sanction. The doctrine has been argued, whether indirect liability is a sanction or that the liability and penalty are two aspects of the same social phenomenon, they are distinct, as the penalty of liability covers only one side ie society's reaction. In the second sense, accountability involves legal rights and obligations correlative, appears as a complex of rights and associated obligations in accordance with law arise as a result of committing illicit acts constituting the realization of coercion by State by legal sanctions. That in support of the above, is the legal responsibility of making the punishment. Liability is one of the most important manifestations of liability, a fundamental category, and at the same time, a complex institution of civil law. Keywords: contractual liability, tort, tort liability, professional ,consumer. 1. INTRODUCTION Civil liability is a form of legal liability, which consists of a bound report that a person is indebted to repair the injury caused by his act or, in cases stipulated by law, the damage for which it is responsible. Foundation liability is expressed by the following theories: - Theory of subjective responsibility (that can be sanctioned only culpable conduct was dominant during the time in legal doctrine) and - Strict liability theory (according to which guilt can not be proven, although innocent victim, should bear the burden of injury) and collateral theory (which alleges, in essence, the theory of subjective and objective theory based on the idea of risk that trying to find the solution only problem the author injury, whether guilty or risk that is created by omitting the victim's position unnecessarily.

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2. LIABILITY FORMS. Liability has two forms: tort and contractual liability. Under contractual liability "Everyone has the duty to observe the rules of conduct which the law or local custom requires and does not prejudice, the actions or inactions its the rights or interests of others" (art. 1349 Civil Code). Contractual liability has the foundation that every person must perform their obligations contracted. Thus, when, without justification, a contractor fails to fulfill his obligations, he shall be liable for damage caused to other parties and will be forced to fix it. Note that rules are binding contractual liability, neither party can not remove their application to opt for other rules that would be more favorable (art. 1350 para. 3 of the Civil Code). First, any person responsible for "private act" causing injury to another. So, who, with discernment, violates this duty is responsible for all damage caused, being obliged to fully compensate (art. 1357 Civil Code). In addition (in addition to liability for the acts of its own), any person will be required to repair and damage caused by the actions of others, things or animals under his watch, and the ruin of the building (art. 1349 para. 3 of the Civil Code ). a). According to the law, shall not supervise a minor or a person under interdiction responsible for injury caused by such persons. In the above case, the liability subsists even if the perpetrator, lacking discernment, not responsible for his own deed (art. 1372 para. 2 of the Civil Code). According to art. 1373 par. 1 of the Civil Code, the principal is obliged to repair the damage caused by its employees whenever they committed the offense relates to the powers or functions assigned to. The principal is the one who, by virtue of a contract or by law, exercising direction, supervision and control over one who fulfills certain functions or assignments in his interest or the other. By law, any person outside the principal, is not liable for the harmful event committed by juvenile who was a servant. As an exception, if the principal is the parent of the minor who committed the unlawful act, the victim has the right to choose the basis of liability (art. 1374 para. 2 of the Civil Code). b). Liability for damage caused by animals or things is due to the owner or the one who serves him. They respond, regardless of any fault, the damage caused by the animal, even if it is out of its security (art. 1375 Civil Code). Likewise, "Everyone is obliged to repair, regardless of any negligence, damage caused by working under his watch" (art. 1376 para. 1 of the Civil Code). Note that, guard animal or thing has owner or independent exercises control and supervision of the animal or thing and uses it for themselves. c). Responsibility for building lies ruin its owner is obliged to repair the damage caused by them or by peeling ruin parts thereof, if it is due to lack of maintenance or construction defect (art. 1378 Civil Code). The occupying a building, even without any title liable for damage caused by dropping or throwing of a working building.

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As an exception, there is no obligation for compensation when it is caused solely by the act itself victim or a third party or as a result of force majeure (art. 1380 Civil Code). 3. EXCLUSION OF LIABILITY REASONS. Note that the above liability of persons engaged in any situation. The law provides certain "exculpatory causes (removal) of responsibility" ( art. 1351-1356 Civil Code). Exclusion of liability The main reasons are: force majeure and unforeseeable circumstances and act the victim or third party. Thus, the liability is removed when damage is caused by force majeure or unforeseeable circumstances. Likewise, crime victim removes itself and third party liability offense even if no major force characteristics, but only those of unforeseeable circumstances, but only where unforeseeable circumstances not be held liable (art. 1351 and 1352 of the Civil Code) . Force majeure is any external event, unpredictable, absolutely invincible and inevitable. Fortuitous case is an event that can not be predicted nor prevented by one who had been called to answer if the event would not have occurred. To determine the relationship between force majeure and fortuitous case where the debtor is relieved of contractual liability for unforeseeable circumstances, always will be canceled in case of force majeure (art. 1351 Civil Code). In addition to the main causes Exclusion of liability, the victim may obtain compensation for the damage caused by the person who gave unselfishly help or work, animal or building he used free unless you prove intent or gross negligence of those who would be was called to respond (art. 1354 Civil Code). In conclusion listing the grounds of exemption, specify that any who cause injury through the exercise of his rights is not even required to pay compensation, except where the right is exercised abusively (art. 1353 Civil Code). The law imposes some rules on unfair contract the matters. According to art. 1355 C. civ: - Can not be excluded or limited by agreement or unilateral acts, liability for material damage caused to another by an intentional act or gross negligence; - Are valid clauses excluding liability for damage caused by simple imprudence or negligence, the victim's property; - Liability for damages or physical or mental health can not be removed or diminished by the will of the parties; - Declaration of acceptance of risk of injury is not, by itself, giving the victim the right to obtain payment of compensation. In this context, the law states that a notice excludes or limits the liability contract, whether or not brought to the public, has no effect, except that it relies on the evidence that the injured were aware of the announcement when concluding the contract (art. 1356 para. 1 of the Civil Code).

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4. DAMAGES FOR TORT LIABILITY. According to art. 1381 of the Civil Code, "Any injury shall be entitled to compensation." Right to repair the damage arises from causation day, even if this right can not be sold immediately. Where several persons are liable for an act prejudicial they are held liable to reparation to the injured party (art. 1382 Civil Code). That in cases of multiple, solid operating tort (not divisible). If in the case of plurality, repair task is divided proportionately "to the extent that each part of the damage or according to the intent or the seriousness of each fault if this participation can not be established. When you can not repair split task, each will contribute equally to compensation. (Article 1383 Civil Code). Ultimately responsible for the actions of others may turn against him who caused the injury, unless the latter is not liable for damage (art. 1384 para. 1 of the Civil Code). In the case of multiple perpetrators, who, being responsible for the act of one of them has paid compensation to return against other people who have contributed to causing the damage or, if necessary, against those responsible for them. In the above case, the regression will be limited to what lies beyond the person for whom you are responsible and compensation can not exceed what is part of each person against whom recourse is exercised. Accordingly, the carrying regress can not recover from the damages corresponding to his own contributions of the damage (art. 1384 para. 4 C. civ). Damage is compensated (art. 1385 para. 1 of the Civil Code). Compensation shall include: - Loss of the injured, - Unrealized gains and - Expenses incurred to prevent or limit damage. According to art. 1386 par. 1 of the Civil Code, reparation forms are: - In nature by restoring the previous situation and - The equivalent (payment of compensation) established by agreement or by court order. If damage has a continuing, compensation shall take the form of regular benefits. If future damages, compensation, in whatever form has been granted, may be increased, reduced or removed if, after its establishment, the damage increased, decreased or ceased (art. 1386 Civil Code aluin 4) . In case of bodily harm or health of a person, compensation shall include: - Equivalent earnings from work which the injured, - Medical expenses, - The costs of living increasing needs, - Any other damage to property (art. 1387 para. 1 of the Civil Code). According to art. 1391 par. 1 Civil Code can be granted compensation for restricting opportunities for family and social life (art. 1381 para. 1 of the Civil Code).

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In this case, the repair will be cupride and "patrimonial damage" (moral). The court may award damages ascendants, descendants, brothers, sisters and her husband tried for pain in the victim's death, and any other person who, in turn, could prove the existence of such an injury (art. 1391 para. 2 C . Civil Code). When one who has suffered bodily injury or health is a minor, compensation will be payable from the date when normally minor and would have finished training he received (art. 1389 Civil Code). Compensation for damages caused by the death of a properly "only those entitled to maintenance" of the deceased. As an exception, the court, having regard to the circumstances which may give the victim compensation and without being required by law, we routinely perform maintenance. (art. 1390 para. 2 of the Civil Code). Who made health care expenditure victim or, in case of the death of its funeral is entitled to their return to the person responsible for the act that occasioned these expenses (art. 1392 Civil Code). In all cases, the court may grant interim compensation to the injured party to cover urgent needs. Right to compensation for violations of personality rights inherent to any legal subject is, in principle transferable inter vivos. Thus it can be transferred only if it was established by a transaction or a final judgment and "do not pass to heirs" (art. 1391 para. 3 and 4 of the Civil Code). When "compensation arising from a criminal law under which prescription longer than civil, criminal liability limitation applies to claims liability law". The term prescription legal right of action is prolonged (extended - art. 1394 Civil Code). Limitation on right of action for damages caused by bodily injury or health, or the death of a person is suspended until the pension or aid that ought, in insurance, the person entitled to compensation. (art. 1395 Civil Code). 5. DELIMITATION OF CONTRACTUAL LIABILITY TORT LIABILITY. In principle between tort and contractual liability does not differ from essential. Thus, items that are the same condition: the existence of an illegal act, which violates a specific obligation is bringing thereby a subjective right touch, the guilt of committing this act, the subjective element of accountability, there is a loss of property, a causal link between the wrongful act and the injury, the legal capacity required to meet. Despite the above differences between the two forms of liability established cause significant legal consequences. Tort liability common law of tort and contractual liability is a liability with a special derogatory character. The consequence is that in our civil law, whenever we are not dealing with a contractual liability, will apply the rules on tort. Thus, the balance between the two forms is regulated by non-overlapping rule (rule prevents tort to invoke contractual liability if the conditions). A first difference between the two is that the liability violated the contractual liability obligation is a legal obligation incumbent on all of general (must not harm the rights of others by illegal acts), while if the obligation breached is a contractual liability actual obligation established by pre-existing contract ended.

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To contractual liability must preexisted a valid contract ended. Given the relativity effects of the contract, is to conclude that contractual liability can be invoked only by the contracting parties. Contract foreign third parties will not invoke contractual liability for damages that they suffered as a result of the non-ble inappropriate or execution of a contract made by other people. They will possibly seek tort to the extent that the conditions for such liability. Differences between tort and contractual liability refers to the ability of responsible, putting notice and Disclaimer conventions. Capacity is required in contract full legal capacity. Regarding capacity, in matters of tort law is not age stableşte ie held liable acted with discernment anyone, regardless of age. Through art. 43 Civil Code, indirect establish a presumption of discrimination for those over age 14. Under this age, the responsibility is engaged when evidence of the existence of discernment under art. 43 para. 3 Civil Code. If liability, one who committed the injurious act is wrongful as late, without having to make any formalities. To contractual liability, it is necessary that he who has not performed its contractual obligation is in default. If liability, conventions previously concluded Disclaimer illicit deed in principle void. If contractual liability, with certain limits Disclaimer clauses are in principle admissible. Extent of repair is higher than the contractual liability tort. In both cases, the responsibility, the responsibility is obliged to cover the actual damage (damnum emergens) and uses of unrealized (lucrum cessans). Contractual debtor liable only for damage that was provided or was foreseeable at the time of conclusion of the contract, the liability of tort liability is full, who committed the unlawful act being held for all damages, both the predictable and the the unpredictable. Joint nature of the liability, in case of plurality to commit the illegal act and character, in principle divisible, the obligation to pay damages (if contractual liability) is another criterion of distinction. In matters of tort, the principle author's fault damage must be proven by the injured party. Liability under the contract is in the spirit and terms of the contract. 6. PARTICULARITIES OF PROFESSIONAL RESPONSIBILITIES. The main provisions governing professional liability are include in Law. 240/2004 on the liability of producers for damage caused by defective products and GO no. 21/1992 on consumer protection. According to art. 1 of Law no. 240/2004 subject to regulation is: - The legal relations between producers and injured or harmed by defective products in circulation, - Civil liability arising from such products, and - Right of action for damages. According to art. 15 of law, Law no. 240/2004 does not apply: 228

- Damage caused by products put into circulation before the entry into force; - Damage resulting from nuclear accidents. According to art. 2 para. 1 letter. d of law by defective product means the product does not provide the safety which a person is entitled to expect. Defective product assessment report is made: the presentation of the product, all foreseeable uses of the product, date of circulation of the product. Note that a product can be considered defective only because then perfected a similar product was put into circulation (art. 2. 2 of the Act). According to Law no. 240/2004 manufacturer responsible for the present and for the future damage caused by defect in his product (art. 3 of the Law). Manufacturer's liability is not limited in the event that damage is caused cumulatively by the product defect and the act or omission of a third party. According to art. 2 of law 'producer' means: - The manufacturer of a finished product raw materials or parts of the product; - The person who represents the manufacturer, in that it is part of the product name, mark or other distinctive sign; - A person who imports a product into Romania for sale, rental, acquisition or other form of alienation within their own trading activity in the company; - A person who imports a product of the European Union for sale, rental, acquisition or other form of alienation within their own trading activity in society. In case of plurality of persons responsible for the damage, they are jointly liable (art. 5 of the Law). For civil liability of the manufacturer, the injured person must prove the damage, the defect and the causal relationship between defect and damage (art. 6 of the Law). Such proof shall be according to the common law (who make an endorsement in the process must prove - art. 243 Criminal Procedure. Civil Code). The damage in the sense of art. 2 para. 1 letter. c of Law. 240/2004, means: - Death or personal injury caused by corporal integrity or health of a person; - Damage or destruction of any property other than the defective product, provided that the good is normal or intended use by private consumption and have been used by the injured person for personal use or consumption and value to be greater than 200 lei; - Damage or destruction of any property other than the defective product, provided that the good is normal or intended use by private consumption and have been used by the injured person for personal use or consumption and the value is greater than equivalent of 500 euros. According to art. 7 of the Act, the manufacturer is held liable, under this law, if it proves that: - Not the one who put the product into circulation; - Depending on the circumstances, the defect which caused the damage did not exist at the time the product was put into circulation and subsequently appeared introduction of the product, for reasons not attributable to him; - The product was not manufactured to be sold, or any other form of distribution for economic purpose of the manufacturer and is not manufactured or distributed in the course of his business;

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- The defect is due to compliance with mandatory conditions imposed by regulations issued by the competent authorities; - The existing scientific and technical knowledge at the time of the release of product did not allow detection of the defect in this case; - Defect is due to failure of the consumer instructions supplied technical documents accompanying the product, demonstrated in the specialized technical expertise. In the case of the manufacturer of components disclaimer oprează if the defect is attributable acetates design proves wrong the whole it has been fitted or to the instructions given by the manufacturer of the product for the consumer (art. 7 para. 2 of the Civil Code). The manufacturer may be limited or removed by the court, if the damage is caused both by product defect, and the fault of the person injured or damaged or other persons for whom it is answerable (art. 8 of the Law). Note that the law does not exclude any person injured or damaged opportunity to claim compensation under contractual or non-contractual liability or special liability of another (art. 9 of the Law). According to art. 9 para. 2 of the law, insurance companies have right of recourse against the producer, as required by law, the amounts paid to the injured. Note that parts (professional or consumer) can not agree on reducing or eliminate liability. Thus, any contractual limitations or disclaimer of the manufacturer are null and void (art. 10 of the Law). Right of action for damages, arising from the provisions of this Law shall be prescribed within 3 years. Term starts from the date on which it was or should have become aware of the damage, the defect and the identity of the manufacturer. Action for damages may be brought after the expiry of 10 years from the date on which the producer put the product into circulation (art. 11 of the Law). Claims directed by consumer associations against operators who have harmed consumers' legitimate rights and interests are exempt from stamp duty (art. 47 of Ordinance no. 21/1992). Public Ministry can support Civil actions, involving the interests of consumers (art. 47 of the Ordinance). In the above context, we point out that the provisions of Law no. 240/2004 "without prejudice to the right of the manufacturer to promote action against third parties" (art. 4). According to art. 13 of the Act, the provisions of Law no. 240/2004 be filled with the Civil Code and the Code of Civil Procedure. Accordingly civil and civil procedural law is common law in this area. In the general context of consumer protection, show that noncompliance with governing their rights entail material, civil, administrative or criminal case (art. 49 of the Ordinance). According to art. 56 of the ordinance, with fine sanction offenses, the inspector may propose one of the following additional penalties: - Temporary closure of the unit for a period not exceeding 6 months; - Temporary closure of the unit for a period of 6 months to 12 months; - Final closure of the facility; - Suspension or withdrawal, as appropriate, permit, approval or authorization for the exercise of an activity. 230

REFERENCES

1. Albu, I. Urs, Civil liability for damages, Dacia Publishing House, Cluj-Napoca, 1979 2. M. Anghel, Fr. Deak, MF Popa, Liability, Scientific Publishing House, Bucharest, 1970 3. N. Gheorghe, C.Spasici, D.S. Arjoca, Right consumptions, Hamangiu Publishing House, Bucharest, 2012 4. M. Eliescu, Tort, Academy Publishing House, Bucharest, 1972 5. L. Pop, Civil Law. General theory of obligations, Babes-Bolyai University, Dacia Publishing House, Cluj-Napoca, 1994 6. L. Pop, Treatise of Civil Law. Obligations. Volume II. Contract, Legal Universe Publishing, Bucharest, 2009 7. C. Stătescu, C. Bîrsan, Civil Law. General theory of obligations, Hamangiu Publishing House, Bucharest, 2008 8. P. Vasilescu, Civil Law. Obligations, Hamangiu Publishing House, Bucharest, 2012 9. New Civil Code 10. Law no. 240/2004 implementing Directive no. 85/374/EEC of 25 July 1985 on the manufacturer, published in the Official Journal of the European Communities (OJEC) no. L210 of 7 august 1985, as amended by Directive no. 1.999/34/CE the European Parliament and of the Council, published in the Official Journal of the European Communities (OJEC), no. L141 4 June 1999.

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INTERNET LAW: NOTION AND PRINCIPLES Dan Cimpoeru University of Bucharest

ABSTRACT As the Internet has irreversibly changed the human society, from the perspective of the law science adapted to this new global social phenomenon, the research becomes a real challenge. Originally, the Internet was not governed by legal rules. Soon, however, the Internet has become a phenomenon which, volens nolens, affects almost all areas of the society. The Internet is more than a means of communication; the Internet has resulted in a virtual space Cyberspace -where users have a specific behavior. Over time, this „virtual” life began to interfere with the "real" one in areas such as fundamental rights and freedoms, privacy, use of personal data, contracting, etc. In this context, we are witnessing the birth of a new branch of law - Internet law - with its own features. This study is addresses to the following issues: (I) notion of Internet law, (II) principles of Internet law. The principles of the Internet law are: (1) the principle of Internet freedom, (2) the principle of privacy, (3) the principle of the modified territorial jurisdiction, (4) the principle of interstate cooperation, (5) the principle of multi-stackeholder cooperation, (6) the principle of anonymity, (7) the principle of ubiquity. Key words: Internet law, branch of law, Cyberspace, principles of Internet law, notion of Internet law 1. INTRODUCTION Originally, the Internet was not governed by legal rules. Soon, however, the Internet has become a phenomenon which, volens nolens, affects almost all areas of the society. The Internet is more than a means of communication; the Internet has resulted in a virtual space (cyberspace) where users have a specific behavior. Over time, this „virtual” life (online) began to interfere with "real" one (offline) in areas such as fundamental rights and freedoms, privacy, use of personal data, contracting and so on. Due to the necessity of regulating this new social relations created by the Internet, led to a big debate. On one hand, there are supporters of total freedom of the Internet. On the other hand, there is a tendency of over-regulating this new field. It became increasingly clear that the governments intend to extend jurisdiction over cyberspace to "regulate" and thus "parts" of this virtual space tend to become part of its territory. It is certain that a series of new binding conduct rules appeared, which regulate social relations regarding the Internet. Therefore, we can now speak of the Internet law. The knowledge of law is, by nature, fragmented into several national compartments: lawyers study the laws of their countries, inevitably ignoring foreign ones. Similarly, "even the legal science became national one" (von Makarov 1949). In this point, there are some exceptions: public and private international law, which appeared because governments have agreed to implement common rules in certain areas.

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Irrespective of their character, the national legal systems can not exist separated from the reality. Sooner or later, "we witness a process of integration of the world" (Constantinesco 1971). This is about to happen already, primarily due to the Internet. The Internet, by its universal vocation, tends to be the binder which links national legal systems. It is not surprising that the Internet currently enjoys greater attention from the legal worldwide community. Therefore, the Internet law, through rules and principles, can become a branch of law with global vocation. Generally, the law science approaches the Internet in an indirect manner; this social phenomenon is studied under the classical branches of law such as constitutional law, commercial law, criminal law etc. In this way it have emerged concepts such as ecommerce, e-democracy, e-government, cyber crime and so on. But this "classic" method has major limitations. Often, the "traditional" institutions and legal terms - by definition designed for real life (offline) - can not explain properly virtual life (online). Also, particular branches of law can not provide legal support for the "collision" between the two "worlds", offline and online. In my view, these limitations can overcome, only if the Internet is studied by law science as a branch of its own, independently. This independent approach of the Internet law, which I suggest in this article, has advantages because: (1) creates new and own legal paradigms of the Internet, (2) can explain the legal status of online social relations and their interaction with the offline environment, (3) is not limited by applying the rules of "classic" branches of law, (4) allows fast adaptation of scientific research methods to a highly dynamic area as the Internet. This study - which aims to be an argument for a new branch of law - approaches the following issues: (I) notion of the Internet law, (II) principles of the Internet law. The principles of the Internet law are: (1) the principle of Internet freedom, (2) the principle of privacy, (3) the principle of territorial modified jurisdiction; (4) the principle of interstate cooperation; (5) the principle of multi-stackeholder cooperation, (6) the principle of anonymity, (7) the principle of ubiquity.

2. LITERATURE REVIEW The issue of Internet regulation has been widely discussed in the literature since the beginning of Web 1.0.14 In 1996, David R. Johnson and David Post proposed ”treating Cyberspace as a separate ”space” , for which distinct laws should apply naturally” and so ”conceiving of Cyberspace as a distinct „place” for legal analysis, by recognizing a legally significant border

Web 1.0 was an early stage of the conceptual evolution of the World Wide Web, centered around a top-down approach to the use of the web and its user interface. Socially, users could only view webpages but not contribute to the content of the webpages. According to Cormode, G. and Krishnamurthy, B. (2008) "content creators were few in Web 1.0 with the vast majority of users simply acting as consumers of content." The term Web 2.0 was coined in 1999 to describe web sites that use technology beyond the static pages of earlier web sites. A Web 2.0 site may allow users to interact and collaborate with each other in a social media dialogue as creators of user-generated content in a virtual community, in contrast to websites where people are limited to the passive viewing of content. Examples of Web 2.0 include social networking sites, blogs, wikis, video sharing sites, hosted services, web applications, mashups and folksonomies. According to some Internet experts, Web 3.0 will enable the use of autonomous agents to perform some tasks for the user. Rather than having search engines gear towards your keywords, the search engines will gear towards the user. 233

between Cyberspace and the ”real world””. In the same way, two years earlier, David R. Johnsonn (1994) had predicted a regulatory regime for the Internet. On the other side, on 8 February 1996, Barlow "proclaimed" the independence of the Cyberspace, arguing that is a free "world", beyond the control of the governments. Nowadays, he emphasized a generalized opinion for the internet regulation. Goldman (2010) believes that the Internet novelty of perception determined the authorities to involve in “the Internet exceptionalism”: crafting Internet-specific laws that diverge from regulatory precedents in other media”. In favor of the Internet regulation were pronounced: Zittrain (2008), Geist (2008), Kohl (2007), David (2002) and Brian Holland (2008). Relating to the principles of the Internet, Uerpmann-Wittzack (2010) made a general overview. Even if the principles of the Internet are analyzed from the perspective of public international law - which in our opinion is a limitation - the author manages to systematize them. Also other authors have examined some of these principles, but from a particular perspective of other branches of law. Menthe (1998) for instance, proposed that, for jurisdictional analysis, cyberspace could be treated as a “fourth international space”. Thomas (1970) considered that ”freedom of expression, like the Internet’s topology, can be described as an interconnected network; a system of cultural and political interactions, experienced at both individual and collective levels”. Jorgensen (2006) assimilates the Internet with the communication right as a type of human right. More than that, Fred (2000) identifies some principles of privacy which, in turn, is a principle of Internet law. Laidlaw (2008) notices that the information becomes a critical product in the modern society and wonders if the parties that manage access to it, should not be responsible to the public. 3. PAPER CONTENT 3.1. Notion of Internet Law The word „law” is used in several acceptations. It derives from the Latin directus which means: law, the law, directly. But the word that corresponds to the concept of law was jus that means: right, justice, law. The term „law” has several meanings. First, the word signifies the objective law, meaning a set of legal rules for society conduct. Second, we are talking about the subjective right, meaning the right which belongs to a person (natural or legal), pursuant to legal rules. The positive law consists of all the legal rules in force, in a state. From another perspective, the word „law” means the law science: a set of ideas, notions, concepts and principles that explain the law and through which the right may be considered. Over time, the law science has known a permanent specialization which crystallized the appearance of legal branch sciences. From this perspective we speak of law branches (civil law, criminal law, constitutional law and so on). The law branches are structured according to a series of criteria: - regulation subject - the social relations regulated by legal rules; - regulation method - the practical method of influencing behavior in those social relations; - common principles – for the concerned branch of law. Finally, from the academic research perspective, we use the notion of „law” as a discipline of study.

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Certainly, among other "new" disciplines15, the Internet law is a law discipline of research, which have as a substance, parts of the law branches, from which they were separated. Characteristic to the Internet law is that it includes specific rules of law institutions and several branches of law and yet has a particular specificity. Thus, we encounter new concepts, but evoke the branch of law from which it was separated such as: legal document in electronic form, electronic signature, electronic commerce, cyber crime, electronic auctions, etc. Finally, we show that the Internet law refers to the social relations between people; the Internet law doesn’t rule the relations between people and computers! From those facts, we propose the following definition of the Internet law which, far from being infallible, just captures the specific features of this new social phenomenon mentioned above: Internet law represents all the legal rules governing in a specific way the social relations that are established through the Internet (Camper Dan 2012). 3.2. The Principles of Internet Law 3.2.1. Overview The principles of law are those ruling ideas of all the legal norms content. They have both constructive and valued role for the legal system, because they include the objective requirements of the society, requirements for specific events in the establishment of law and its implementation process (Popa Nicolae 1994). The general principles of law represents the foundation for the branch of law principles; based on general principles, the legal branch science makes a number of specific principles of civil law, criminal law, administrative law, etc. The issue of identifying specific principles for the Internet law, although relatively new, has begun to be systematically approached in the legal doctrine. Next, we examine the principles of the Internet based on the principles presented by Professor Uerpmann-Wittzack (2010) in a valuable specialized study. This author analyzes the principles of Internet law from the perspective of the International law, believing implicitly that the Internet as a social phenomenon is a research component of the International branch of law. Without removing the "international" component of the Internet, resulted from it’s own reason for being of this new social phenomenon, which among others, implies by definition an increased globalization, we can not agree with the inclusion of this new legal disciplines - Internet law - in the branch of International law; that does not undermine the scientific value of the study showed, for which we rally to the opinion of the Professor Uerpmann-Wittzack and we will retain the following fundamental principles: - the principle of Internet freedom; - the principle of privacy; - the principle of modified territorial jurisdiction; - the principle of interstate cooperation; - the principle of multi-stackeholder cooperation. In addition, I also propose two new principles: - the principle of anonymity; - the principle of ubiquity.

Examples of new legal disciplines: Insurance law, Parliamentary law, Hospital law, Property law, Pharmaceutical law, etc.. In the same way, Turcu, Ion (2011). 235

3.2.2. The principle of Internet freedom The communication Freedom on the Internet - part of the fundamental human rights is the foundation of the Internet freedom. The principle of Internet freedom is analyzed from two perspectives: freedom of the Internet communications and freedom of the Internet business. §1. Internet communication freedom The freedom of expression is essential for Internet freedom. Article 19 (2) of the International Covenant on Civil and Political Rights16 garantees the freedom of expression: „Everyone shall have the right to freedom of expression; this right shall include freedom to seek, receive and impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media of his choice.” Article 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms17 stipulates that: „1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises. 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.” In the same way, article 11 of the Charter of Fundamental Rights of the European Union18, surnamed Freedom of expression and information, stipulate: „1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. 2. The freedom and pluralism of the media shall be respected.” Even if the texts quoted do not refer explicitly to the Internet, it is clear that this freedom is protected as when the expression is through the Internet. For example, in Times Newspaper Ltd. v. United Unit case19, European Court of Human Rights ruled that the archives of the Internet in the scope of art. 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms. §2. Internet business freedom The Internet freedom is more than freedom of expression. The Internet as a communication tool depends on its infrastructure activity, meaning the economic activity 16

International Covenant on Civil and Political Rights was adopted on 16.12.1966 by the General Assembly of the United Nations. Accesed March 22, 2013. http://www.unhcr.org. 17 Convention for the Protection of Human Rights and Fundamental Freedoms signed in Rome on 11.04.1950 and entered into force on 09.03.1953. Accesed March 22, 2013. http://www.echr.coe.int. 18 European Union Charter of Fundamental Rights was proclaimed by the European Parliament, the Council and the Commission in Strasbourg on 12 December 2007 (OJEU no. C 303/14.12.2007). This repeats and adapts the Charter proclaimed on 7.12.2000 and replaces from 1.12.2009, date of entry into force of the Lisbon Treaty. Later, the book was republished in OJEU no. C 83/30.03.2010. Accesed March 22, 2013. http://eurlex.europa.eu/ro/treaties. 19 Eur. Court H.R., Times Newspapers Ltd c. United Kingdom (nos. 1 and 2), Judgment of 10 March 2009, Application 3002/03 and 23676/03, parag. 27. Accesed March 22,2013. http://hudoc.echr.coe.int. 236

known collectively as Internet providers. The internet providers must enjoy a certain freedom of trade that allows them to work in this business environment. Unlike national and EU legislation, international law does not expressly guarantee the right to choose an occupation and right to run a business. In this case, the internet providers enjoy freedom of expression under the International Covenant on Civil and Political Rights, even if their work is commercial by nature. Although the European Convention on Human Rights does not protect commercial activity as such, the internet providers can turn to art. 1 of the first Convention Protocol, when it comes to protecting property rights. The same article also protects ownership of registered domain designations (Domain Name System). 3.2.3. The principle of privacy The Internet was conceived as an open global network, by which information should interchange. However, it is necessary to find a balance between "openness" of the Internet and the protection of personal data of users. Huge amounts of data are collected from the Internet users without their being aware of it. Internet privacy is a central preoccupation, especially in specific EU legislation. Article 17 of the International Covenant on Civil and Political Rights stipulate: „1. No one shall be subjected to arbitrary or unlawful interference with his privacy, family, home or correspondence, nor to unlawful attacks on his honor and reputation. 2. Everyone has the right to the protection of the law against such interference or attacks.” Article 8 of Convention for the Protection of Human Rights and Fundamental Freedoms addresses private and family life, home and correspondence: „1. Everyone has the right to respect for his private and family life, his home and his correspondence. 2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.” It would be wrong, however, to focus exclusively on privacy. In some cases, protection of privacy comes into conflict with internet freedom. Whereas freedom of expression may be restricted in favor of the rights of others and in particular the right to privacy, any restriction must be proportionate to the aim pursued. States have to find a fair balance between privacy and internet freedom20. 3.2.4. The principle of modified territorial jurisdiction In the condition of equality sovereign among states as enshrined in art. 2 item 1 of the UN Charter, a state jurisdiction has its limits jurisdiction of other states. A state exercising jurisdiction over its territory and over its citizens. The notion of "territory" includes soil, subsoil, territorial waters and airspace of a state. The question is how it should be understood the virtual space of the internet (cyberspace) by referring to the classical notion of territory and how states exercise sovereignty over this area.

Eur. Court H.R., X and Y v. the Netherlands (note 46), para. 27; K. U. v. Finland, Judgment of 2 December 2008, Application 2827/02, para. 43. Accesed March 22, 2013. http://hudoc.echr.coe.int. 237

In this way there is a new concept to define this reality: cyber-territory and the country code domain name would give the site a cyber-territory status. For example, the country code "ro" gives the site belonging to cyber-territory of Romania. Finally, another trend that manifests itself in cyberspace is that a state exercises jurisdiction on the acts and facts of foreigners (internet providers, users) if the effects of them is produced on its territory. 3.2.5. The principle of interstate cooperation As the Internet ignores national boundaries of states, it is obvious that the problems generated by this phenomenon can not be solved only by cooperation among states. For example, computer fraud, internet crime in general can not be prevented and combated only through a joint effort of sovereign states. Within the European Union we talk about something more than mere cooperation between states, it can be argued that there is an European integration on the Internet area. Many Union rules (directives, regulations, recommendations, opinions) tend to harmonize and integrate the national regulations on the Internet and the related issues (prevention of cyber crime, privacy, copyright and so on). 3.2.6. The principle of multi-stackeholder cooperation The civil society and the private sector, traditionally plays an important role in the Internet governance. Although the development of the Internet was initially founded by the U.S. government, its structure as today was enhanced by private community (scientific, business and nonprofit). When the necessity of setting up one structure which should administrate the domain name system appeared on the internet (Domain Name System DNS), these responsibilities were not given to a government or an international organization but a non-profit organizations - The Internet Corporation for Assigned Names and Numbers (ICANN). In time, however, states influence increased in Internet governance so that cyberspace independence proclaimed by John Perry Barlow tends to be utopian. For example, at the beginning ICANN was established under the authority of the U.S. Department of Commerce, with the declared purpose that in time it should become a fully independent part. Is certain that the development and Internet governance is achieved through continuous cooperation of all "stakeholders" interested in this phenomenon, whether they come from the public or private social life. 3.2.7. The principle of anonimity The principle of anonymity is a crucial factor that contributes to encourage the freedom of expression on the Internet. The anonymization creates a relative sense of security on the Internet, based on which you can request information and messages without fear of being exposed to public reproaches, with the possibility of legal sanctioning. The Internet capacity to ensure a certain degree of anonymity stimulates courage to ask and give information. In the same time, anonymity creates a pronounced state of intimacy between the users of the Internet. The public sphere and democracy is founded on the principle of equality. On the Internet there is a presumed equality between users derived from irrelevant criteria of race, gender or social affiliation which, in turn, is based on anonymity (Orsoy 1997). As long as users do not reveal their identity, it can be said that they, somehow, have the same rights and obligations in the Cyberspace, having approximately the same risks. 238

When a user signs an e-mail or performs any operation able to provide information about his own person, anonymity disappears. This is capable to affect individual autonomy. Currently, the issue of the anonymity right in the online environment arises in the context of observing the negative phenomena of Internet traffic claim transparency and easy access to the identity of users. In support of this approach it is claimed that only those who have something to hide, in terms of illicit intentions, want to keep their anonymity in virtual space. This approach is however extremely dangerous precisely because that introduces a standard of Internet anonymity, essentially different from that applicable in the real world. For example, shopping in supermarkets is made in exchange for money, without the required identification documents of consumers. Everyday life, anonymity is so natural, that is not itself noticed (Goltzsch 2003, Kesdogan 2000). Instead, the online anonymity is created technological and perhaps this is why the right to anonymous online traffic is so controversial. 3.2.8. The principle of ubiquity The term "ubiquity" comes from the Latin word ubique and means ”omnipresence”: presence in several places or in all places, at one time. A ubiquity criterion is used mainly by criminal law. According to this criterion, the offense is committed entirely deemed within a country territory even if only part of it was made there. Thus, a person who has committed the same offense in several countries will be punished in any of those countries. This system has the advantage that it avoids positive or negative conflicts of jurisdiction over the investigation of criminal offenses. On the Internet, ubiquity is a reality: the Web enables infinite distribution of content without any special effort or infrastructure, the Web extends the reach of our apps and services as far as we're willing to let them go. The notion of ”everywhere” has changed too. It's not just about every desktop anymore. It's about every Internet-enabled device: cell phone, desktop, laptop, tablet, palmtop, PDA, Tivo, set-top box, game console, and so on. Everywhere also includes being on web sites you've never seen and in media that you may not yet understand. Referring to ”physical borders”, David R. Johnson and David Post (1996) considers the following required elements for the enforcement of legal rules: Power. Control over physical space, people and things located in the space, is a definiting attribute of sovereignty. Effects. The correspondence between physical borders and ”law space” boundaries also reflects a deeply rooted relationship between physical proximity and the effects of any particular behavior. Legitimacy. We generally accept the notion that the persons within a geographically defined border are the ultimate source of law-making authority activities within that border. Notice. Physical boundaries are also appropriate for the delineation of the ”law space” in the physical world because they can give notice that the rules change when the boundaries are crossed. The development of the global computer network is destroying the link between geographical location and: (1) the power of local governments to assert control over online behavior; (2) the effects of online behavior on individuals or things; (3) the legitimacy of local sovereign’s efforts to regulate global phenomena and (4) the ability of physical location to give notice of which sets of rules are applied. Under these conditions, ubiquity - a feature of Internet - can be an additional argument for a single legal condition of this phenomenon.

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4. CONCLUSIONS Although Internet law is a relatively new discipline, it is very dynamic. Unlike other branches of law which, Internet law has a complex composition: institutions of other branches of law (civil law, criminal law, international law, etc.) acquire special features because of the support by which they are expressed - Internet. But, as we have shown, this does not result in loss of the Internet law consistency, on the contrary it becomes more special and autonomous. Under this aspect, clarifying theoretical issues such as the definition of Internet law and its principles will lead in the future to strengthen this new branch of law. From another perspective, we totally agree that the Internet has irreversible influenced other sciences such as: economy, sociology, marketing, etc. In this case, the existence of an independent branch of law that provides a unitary and advised point of view on the Internet will be beneficial to the multidisciplinary study of this phenomenon. REFERENCES: 1. Barlow, John Perry, A Declaration of Independence of Cyberspace of 8 February 1996. Accesed March 22, 2013. http://w2.eff.org/Censorship/Internet_censorship_bills/barlow_0296.declaration; 2. Brian Holland, H. ”In Defense of Online Intermediary Immunity: Facilitating Communities of Modified Exceptionalism”, 56 University of Kansas Law Review, (2008) 369; 3. Cimpoeru Dan, Dreptul internetului, Ed. C.H. Beck, București, 2012, 9-12; 4. Cormode, G. and Krishnamurthy, B.,”Key differences between Web 1.0. and Web 2.0.” First Monday, Volume 13 Number 6, 2008; 5. Constantinesco, Leontin-Jean, Einfuhrung in die Rechtsvergleichung, vol. I, Carl Heymans-Verlag, Koln, 1971; 6. David, R. Johnson and David, Post,”Law and Borders - The Rise of Law in Cyberspace”, Stanford Law Review, volume 48, No 5, (1996), 1378-1379; 7. David, R. Johnson, ”The Internet vs. the Local Character of the Law: The Electronic Web Ties Iowa and New into One Big System”, Legal Times, Dec. 5, (1994), at. S32; 8. David, Post, ”Against “Against Cyberanarchy,” 17 Berkeley Technology Law Journal, (2002), 1365; 9. Fred H., Cate, ”Principles of Internet Privacy”, Connecticut Law Review, vol. 3 (2000), 877; 10. Geist, M. ”Is there a there there? Towards greater certainty for Internet jurisdiction.” 16 Berkeley Technology Law Journal, (2008), 1345–1406; 11. Goldman, Eric, “The Third Wave of Internet Exceptionalism”, The Next Digital Decade: Essays on the Future of the Internet, TechFreedom, Washington, (2010), 165; 12. Goltzsch, P., ”Anonymität im Internet, Bundeszentrale für politische Bildung”, Burgerrechte im Netz Schriftenreiche Band, Bonn, 2003; 13. Jorgensen, R.F., ”Human Rights in the Global Information society”, MIT Press, 2006, p. 119; 14. Kesdogan D. ”Privacy Im Internet - Vertrauenswurdige Kommunikation in offenen Umgebungen”, vieweg Verlag, 2000; 15. Kohl, U. ”Jurisdiction and the Internet: Regulatory competence over online activity.” Cambridge, England: Cambridge University Press. 2007;

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16. Laidlaw B., Emily, ”Private Power, Public Interest: An Examination of Search Engine Accountability”, International Journal of Law and Information Technology vol. 17, No 1, Oxford University Press, (2008), 113-145; 17. von Makarov N., Alexander, ”Internationales Privatrecht und Rechtvergleichung”, Tubingen, P. Siebeck, 1949; 18. Menthe, D.C., ”Jurisdiction in cyberspace: A theory of international spaces”, Michigan Telecommunications and Technology Law Review, 4, (1998), 69–103; 19. Orsoy S., ”Pornography, Hate Literature and Net Censorship”, Georgia State University, College of Law, 1997; 20. Popa, Nicolae, Teoria generală a dreptului, Ed. Actami, Bucureşti, 1994, 42-44; 21. Thomas I., Emerson, ”The System of Freedom of Expression”, New York: Random House, 1970, 10; 22. Turcu, Ion, ”Noul Cod civil. Pe cine incomodează existenţa dreptului comercial?”, (2011). Accesed March 22, 2013. www.juridice.ro; 23. Uerpmann-Wittzack, Robert, Principles of International Internet Law, 11 German Law Journal, (2010), 1245-1263; 24. Zittrain, Johnatan, The Future of the Internet—And How to Stop It. Yale University Press, New Haven & London, 2008.

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THE NEED TO SET UP A LEADERSHIP CENTRE IN THE ROMANIAN ACADEMIC ENVIRONMENT Paul Marinescu University of Bucharest; Sorin-George Toma University of Bucharest

ABSTRACT This paper aims to present the issues that led to the decision to establish the Centre for Organizational Strategy and Leadership at the University of Bucharest. Based on the analysis conducted within the University of Bucharest and the Romanian society in general, prior to the decision to establish this centre, we shall present both opportunities and challenges that this undertaking has encountered, highlighting the role this centre aims to ensure at the academic, business and civil society level through its research activities, project development, consultancy, training, communication, event management and many more. For this purpose we shall present both the organizational structure of the centre and the relationships CSOL-UB aims to establish the various other structures of society. On the one hand we are considering organizations functioning under the umbrella of the University of Bucharest (the colleges within the University of Bucharest, student organizations, etc.), partnerships with other institutions (high schools in the country, other universities), educational projects the centre can support (the SPHER-AA project) and, on the other hand, the meeting-point role that CSOL-UB may have at a higher level between the various parts of society considered as a whole (academia, business environment, public administration, civil society, pre-university education, etc.). Starting from the observation of the role the traditional leadership centres have played in other countries (United States of America, United Kingdom, France, etc.) through the catalyst function of inter-disciplinary, inter-institutional and international communication and collaboration, we believe that the experience presented within this paper can help create a network of leadership centres within the universities in the country and abroad, and, by establishing partnerships with similar organizations, can also help integrate this network into the specialised European and global one, hence facilitating the exchange experience among the parties involved and also the rapid assimilation of a system of best practice in the field given the context of accelerated globalization and interculturalism known by the world today. Key words: leadership, synergy, international collaboration, communication, benchmarking 1. INTRODUCTION The theme of leadership, or more precisely the failure or lack thereof represents today a subject of utmost interest on the public debate scene both at national and European level and also globally. Almost every issue of major concern over the last years, starting with the economic and financial crisis that hit the planet in 2008, the severe recession that followed together with the austere social problems brought by this process, continuing with the 242

revolutionary movements that affected various regions of the world and ending with the problems that various powerful companies faced in the last period, has been explained at least partially by a failure of leadership. Thus it becomes very clear that “such ability to lead people in order to accomplish common goals” is an extremely present issue on the public agenda by defining the modality in which people can be educated to lead. One of the accusations that is often brought to the academic environment is that it takes refuge in an “ivory tower” thus losing contact with “the real” world, that such environment produces graduates who are well trained in theory but do not possess the skills required by future employers. Perhaps this fact is nowhere truer than in Romania and, without trying to determine the degree of truth of these accusations (which are often very simplistic), we believe that it is still useful to also present examples that contradict such theory. Over time, leadership was the subject of countless intellectual research processes, definitions, classifications, systematizations and hierarchies. This is not surprising should we take into consideration the fact that in every stage of human evolution leaders were essential for the success or, on the contrary, the failure of any human project, be it social, military, intellectual or economic. Without trying to enterprise an exhaustive analysis of this subject (especially since such an approach does not represent the purpose of this paper) we shall provide a brief overview of these developments marking the main stages within this process and emphasizing the models which are relevant to the present paper. The theme that this paper addresses concerns several levels. The first level is represented by the analysis of the opportunity to create a leadership centre in the Romanian academic environment, based on the one hand on the observation of the importance given internationally to this kind of body (almost all prestigious universities have such centres and the organization forms and methods are obviously varying according to the local character, the tradition of the institution, etc.) and, on the other hand, on the observation of the constant need of leaders in all levels of the Romanian society. The second level includes the presentation of the process of establishing such a body within the University of Bucharest, the Centre for Organizational Strategy and Leadership, detailing its structure, main objectives, targeted development directions and the place we want it to occupy on the stage of the Romanian and foreign society. We believe that this matter is of utmost importance because it provides a possible model for other initiatives of this kind, and also because it shows overlapping areas between the following environments: academic, business, social, at the same time revealing the way how such a structure can potentiate obtaining a synergistic effect by stimulating these interactions. Based on a systemic approach of the University of Bucharest (UB), but also on a multidisciplinary view over leadership we shall demonstrate exactly how a structure as complex as the University of Bucharest offered and provided optimal conditions for such a project, thanks to the many colleges and specializations included in the university, thus gathering under the same roof specialists, teachers and experts in various fields, who are able by sharing their knowledge and capabilities to contribute to the success of such a project. We shall present some experiments within the University of Bucharest whose activities transform them into optimal partners for the Centre for Organizational Strategy and Leadership (CSOL-UB) such as: the Teamwork student organization, Business Consultancy Master's programs organized by the Faculty of Administration and Business of the University of Bucharest, the total education program names SPHERE-AA, as well as the partnerships concluded by the Faculty of Administration and Business with a number of representative high schools in the country. 243

The role of this approach is to demonstrate how the aforementioned systemic integration can be achieved, thus ensuring the best use of available financial and human resources, as well as maximizing the base from which the potential intellectual capital can be drawn, as it is most needed for the proper functioning of any organization. We shall start in our endeavour from the analysis of the literature concerning the development of comprehending the notion of leadership over time, directing all our efforts to those models that are useful in our approach, focusing on the analysis made in terms of the organization of the various existing leadership centres in the world (especially in the academic and business environment), on various relevant analysis concerning the subject matter using related concepts (project management, consultancy, training, organizational culture, etc.) and not least on the authors’ of this article previous publications regarding the mentioned topics. 2. THEORIES OF LEADERSHIP In the specialised literature there are countless views on leadership, each of them emphasizing certain aspects of this broad concept and minimizing others, just as there are countless attempts to sort the various theories in “schools” or “approaches”. Without claiming that this option is the only one correct or even the only one which is exhaustive, we shall classify theories of leadership into three categories: “school of traits”, “behavioural school” and “contingency school”. The first approach considers the leadership abilities to be essentially related to the leader’s personality, there being an amount of traits necessary or at least desirable so that the leader can be successful in his activity. From the historical point of view, such vision over leadership is rooted in antiquity, when philosophers such as Plato in “The Republic” and historians such as Plutarch in “Parallel lives” believed that certain innate traits allowed fortunate people to differentiate from the rest and to achieve superior performance. The same preponderance of personal values is later found in Thomas Carlyle’s work “On heroes, heroworship, and the heroic in history” (1841) where the author emphasizes the importance of some leaders’ “heroic” features that influenced the evolution of their people, as well as Francis Galton’s work “Hereditary Genius” (1869) where, based on an analysis (although an analysis of questionable thoroughness) he concludes that the “valuable” character traits, among which there are the leadership abilities, are acquired hereditary. Over time, these theories have been criticized on numerous occasions because of the extremely large role they insufflate on the elements that were outside the individual’s control. In essence, whether it is about predestination, heredity or exceptionality, this approach would assume that these traits cannot be imitated, taught or learned thus being out of the question for one to become a leader unless one was born a leader. In our opinion, this method of perceiving things must be in the context of the periods of time when it manifested and the socio-political features that characterized such periods. A very interesting critique of such a vision is represented by Malcolm Gladwell’s book “Outliers” where he demonstrated through practical and very well-known examples (Bill Gates, Steve Jobs, The Beatles, etc.) the fundamental role owned by the chance of happy coincidences and also the painstaking labour in the formation of “exceptional individuals”. If the aspect of nativity is obsolete, there is however a certain part of this theory that, in our opinion, remains relevant, namely the identification of some traits that are useful to a leader, the instruments that can be useful in the leader’s career, without considering that they are indispensable or sufficient, and with the purpose of finding the methods in which they can be educated and trained. In this regard, we mention the study of John W. Hunt who, based on a survey took among managers of major organizations, has defined the traits that they 244

consider to be important in identifying future leaders within their companies: the ability to work with a wide variety of people, taking overall responsibility for important tasks, the ambitious goals on personal achievement, the extensive experience in management positions as early as possible in their careers. Of course this is far from being the only study in the field. Furthermore, there is no agreement in this regard, but such an approach has significant advantages. The second school of thought focuses on leaders’ behaviour in interactions with members of their organizations emphasizing their leadership style. Based on the study of White and Lippitt (1939) in which the authors identify and describe three managerial styles (autocratic, democratic, and laissez-faire), presenting for each of the aforementioned styles both the advantages and disadvantages within the given context, this type of approach shifts the focus on how the leader succeeds to earn the trust of group members. Another interesting model which is part of this approach is represented by the one proposed by Robert Blake and Jane Mouton where they classify the leadership style based on the importance given by the manager to the process of performing the task, namely staff satisfaction. By presenting these two types of priorities and analyzing extreme cases where one of them is considered absolutely important and the other one is considered totally unimportant, this model emphasizes the dangers generated by each of these extremes (in the first case the alienation of the staff and, in the second case, the failure to perform the tasks), as well as the interdependence which exists in practice between these two types of managerial concerns. Just as in the first type of approach, the initial models suffered also in this case many transformations and adaptations, the methods to classify the management styles being basically limited only by the aspects considered essential and relevant by such an approach. However, the progress brought by this model in addressing the study of leadership is irrefutable, because by defining different leadership styles, it implicitly accepts that they can be trained and learned by anyone, provided that such thing is desirable and one is willing to invest the necessary effort. Once a leadership style can be analyzed by comparison with another leadership style in a similar situation, the effectiveness of each of these can be assessed and measured, thus determining which one is preferable. Also, this approach supports the possibility of a leader to change his leadership style the moment he understands the benefits this change would bring to his performance, thus contradicting the myth of an “innate” and therefore unchangeable style. The last category of this classification is the “circumstantial” one. According to this view, a generally valid style that can be successfully implemented in any situation that may occur in practice cannot be found. Tannenbaum and Schmidt are two important representatives of this trend. In their model, the decisions taken by a leader depend on many factors that must be taken into account (his personality, staff abilities, skills and attitudes, the appointed task and context). Each of these elements is important both in the decision making process and in choosing the leadership style, which must match that respective conjecture. The authors emphasize the importance of choosing a leadership style in the moment of the team’s evolution. In such situations, a leader commences by assigning to himself most of the decisional attributions which later on he will gradually transfer to his subordinates, as they gain abilities, commitment and maturity. Nevertheless, there are also situations when the leader can and must act unilaterally, for instance situations where problems are extremely complex, involving very high risks or exceeding and overwhelming the members’ experience, and also the responsibility of the optimal performance of tasks belongs to the leader in any time.

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This type of approach is enhancing even more the concept of leadership, further increasing its complexity by denying the existence of an optimal, generally applicable style. Another very important aspect this type of vision requires is “humanizing” the leader, compared to the models discussed above assigning him “heroic” merits or exceptional hereditary traits. The “contingency” approach inexorably links the leader’s performance to the team he leads, thus bringing the notion of leadership definition closer to the definition we used in the introduction of this paper. The study of leadership represents a vast field, there being numerous theories, models and schools of thought, and as we already mentioned, this paper does not aims to adopt an exhaustive approach of the subject, but we do believe that these three types of views are very important in designing a leadership centre, each of them offering, despite their limitations, important elements in this process. 3. THE OPPORTUNITY OF ESTABLISHING A LEADERSHIP CENTRE The many changes that the Romanian society has passed through in the last twenty years (the changing of the political and economic system, the Euro-Atlantic integration, the economic and financial crisis) have created numerous problems at all its levels, thus citizens had to adjust to other realities than those that they were used with, in a very abrupt and unexpected pace that often exceeded their power of adaptation. In such circumstances, the need for leadership was a vital one and the leading roles have been assumed by some people almost automatically. Further on, a process of selection and self-selection followed, a process through which some of them have survived based on their merits (“the traits model”), others anticipated the necessary abilities and began to create them and also improve them skills and began to create them and also improve their (“the styles model”), while others have failed and have been replaced by the more adaptable individuals. But what became clear during this period was that this need for leadership at society level is one quite real and the study of such a domain is not only necessary but also essential. By its very nature, the environment that has adapted the quickest to this type of challenge was the business environment. The reasons for such developments are numerous. From the market penetration of foreign companies that brought with them organizational cultures, professional development models and procedures adapted to market conditions, to the strong external competition which forced the Romanian companies to shift to “leapfrogging” or to disappear, to the competition between individuals to fill top positions that have led them to make efforts to accelerated self-improvement, the existent conditions in this environment have generated an adaptation to the rapid change and the development of leaders and leadership. The academic environment was also forced to adapt to these changes by synchronizing with the global educational contemporaneousness, having to update their programs and specializations based on the new realities. This thing caused at least the theory of leadership to be assimilated by the area that was related to that certain field (business, public administration, sociology, psychology, economics, etc.). Moreover, some types of specializations are by nature prone to establish contact with the business environment through the exchange of experience and cooperation. Thus we have situations where academic teachers act as trainers and consultants, as well as situations where the representatives of the business environment act as guests lecturers or even as visiting professors. An illustrative example is represented by the Business Consultancy Master's programs (in Romanian and English), organized by the Faculty of Administration and Business within the University of Bucharest where part of these courses are conducted by consultants and businessmen. 246

The real boom caused globally by the development of the IT&C technologies has greatly democratized access to information. We can state that the opportunity to gain knowledge in a particular field depends now only on the effort a person is willing to invest in such a step. What decades ago required a painstaking and sometimes difficult to perform documentation, nowadays can be performed with the help of a personal computer connected to the Internet from anywhere in the world. Of course this does not mean that there are not risks anymore, the simple information abundance and accessibility does not necessarily guarantee its quality or updated feature, but on the contrary, it can sometimes be inhibitory; it is undisputed that this revolution fundamentally changes the status quo. What is also undisputed is that young people are those who are able to adapted the quickest to new technologies and realities, thus they are the main beneficiaries of such revolutions, the first to understand how these technologies function and the first to take advantage of free access to information, although such access is not always used for constructive purposes. Since young people are the main “clients” of the academic environment and the most important resource for the future business environments, these behavioural changes should not be ignored by the two environments. On the one hand, today's students tend to be more cynical and rebellious than those of previous periods, meaning that they tend to minimize as much as possible their efforts to assimilate some notions whose practical application are not immediately seen, and, on the other hand, they are extremely interested and participative when the presented concepts are useful in their personal development, or when they offer approaches “outside the box”. From this point of view, we believe that the future is one in which the classical models of academic teaching should borrow something from training programs. To illustrate all the above, we shall refer to the SPHER-AA educational concept currently taking place at the Faculty of Administration and Business, University of Bucharest. Within this program, the total education is emphasized, in the sense that concepts learned in classical terms are supplemented by others from unusual fields (theatre, film, media education for the business environment, etc.) but useful in the students’ personal development process. The success recorded by the course of Media communication within the business environment convinced us that this type of approach is very promising; in designing and constructing the SPHERE-AA model we considered Howard Gardner's theories of multiple intelligences. Gardner starts from the observation that there are nine channels that facilitate the formation of multiple intelligences: linguistic, musical/rhythmic, naturalist, logical-mathematical, spatial and visual, bodily-kinaesthetic, intrapersonal, interpersonal, existential and each of them has certain characteristics regarding the optimal way of reception of information. We are noticing the increasing of students’ involvement in social responsibility activities. Within the activity of the student organization named Teamwork that operates within the University of Bucharest, the philanthropic projects, the volunteer activities, organising events and training programs, fundraising, are made and conducted by students working in departments. This organization was designed based on the image of a company that has an organization chart, a socio-economic environment in which it manifests and a leadership component adapted to the specific of the organization. We can state that the experiences the students of the University of Bucharest had during the association eleven years of existence constituted a veritable school of leadership. A very enlightening experience in terms of interest in such activities was represented by the Business Consultancy Master's programs (in Romanian and English). The students from these programs perform their studying activity organised in teams led by a project manager chosen based on his leadership qualities and the assessment process of their activity is mainly done based on the team performance and on their individual performance as well. This innovative working proved to have great success, its effects being downright remarkable 247

in terms of the team’s interest in accomplishing their tasks in best conditions without the need for additional motivation from teachers and in most cases it has led to the visible progress that students have made in: teamwork, networking and communication skills, leadership and use of mentoring, coaching or training The idea of designing a Centre to meet the above mentioned challenges and to become a meeting point for the academia, business environment, public administration, civil society, providing a platform common for discussion and debates and an environment where information and ideas circulate freely between their representatives emerged in a natural way, starting from the experiences described above. The tradition of other leadership centres from the great universities of the world encourages us to develop this system; the analysis we have performed on the way such centres function have revealed significant differences in their organization form and even in their goal setting. On the one hand we have schools that aim to train leaders for public administration and political environment like The John F. Kennedy School of Government of Harvard University (The United States of America), and (to some extent)the Instituts d'études politiques (France), and on the other hand, we have Universities that own independent leadership centres such as MIT Leadership Centre (USA) or Leadership Centres within the management programs such as Oxford Advanced Management and Leadership Programme, the Said Business School, Oxford University (United Kingdom). The differences between these programs and obviously natural and they can be explained as they take into consideration the differences in organising, mentality and tradition, but beyond such differences there are also a series of similarities we took into account when designing the Centre for Organizational Strategy and Leadership in Bucharest. 4. DESIGNING THE CENTRE FOR ORGANIZATIONAL STRATEGY AND LEADERSHIP OF THE UNIVERSITY OF BUCHAREST CSOL-UB is organized as an institutional structure of the University of Bucharest (UB) being composed of three departments: Department of Research and Projects (DCP), Department of Training and Consultancy (DTC), Department of Communication and Events (DCE). Through its status, CSOL-UB aims to organize: training programs and consultancy in the field of organisational strategies and leadership, research in the field of organisational strategies and leadership, collaboration with similar organizations from academia and business environment, events that are specific to the field of organisational strategies and leadership with the participation personalities from various environments (academic, business, political, social, cultural, etc.). Also, CSOL-UB intends to support the development process of interaction between the academic and business environment with the sole purpose of optimising the organisations’ leading and management methods. In a more distant time horizon, CSOL-UB aims to develop a network type of structure in Romania, given that there are 41 counties that can be counted as networks. Through a national network we aim to create an educational system in the field of organisational strategies and leadership to address pre-university, university and post-university education, as well as other socio-professional groups. Another objective of the centre consists of defining clear training directions in the field of organisational strategies and leadership. CSOL-UB aims to create a school of leadership where the following will be valued and enhanced: the potential of high school students, the knowledge of the students of the colleges within the University of Bucharest and the professionals’ experience within the business environment. Establishing a national school of leadership requires the definition of a development strategy of the abilities that are characteristic to leaders even since high school. 248

The analysis of leadership theories allows us to conclude that the leader is a combination of genetic inheritance and experiences which caused by him or by the environment. From this perspective, CSOL-UB will create contexts in which students will be able to value and emphasize their potential and to create specific leadership competences. Partnerships with high schools, workshops and internships at college level, as well as training and consultancy programs will create the prerequisites to create contexts favourable to training a generation of leaders useful within the academic, economic, social, cultural and political environment. CSOL-UB was established at the end of 2012 and the first events that point to its emergence and utility are the following: The International Conference on Leadership Issues which will take place in April 2013 in Bucharest and the Summer School with themes arguing leadership issues which will take place in the first days of June 2013 at Cumpatu-Sinai. In order to demonstrate the viability of the partnership that must be established between high schools, the academic and business environment for educating future leaders, the summer school will be attended by high school students, students, teachers and specialists from the business environment. Experiments that have been already validated in the past three years will be integrated within the recently created CSOL-UB system: the SPHERE-AA concept of Total Education, partnerships concluded with high schools in Romania, the concept of “media education for the business environment” which facilitates the creation and accumulation of skills in oratory, theatre and dance which adds abilities specific to non-verbal and gestural communication. All these are actually resulting from supporting Howard Gardner’s model regarding the multiple intelligences, a concept addressed earlier in this paper. This Centre will become creator of contexts but also a facilitator of contexts created by those who will become leaders of tomorrow’s society. 5. CONCLUSIONS Reality forced the creation at this time of a national school of leadership to respond to the needs of an increasingly dynamic market. The analysis performed in this paper demonstrates the need for such a Leadership Centre which can become a real school for training the future leaders in fields such as: education, economic, cultural, social and political. In developing the CSOL-UB system, we seek to solve the problems created by resistance to change which is specific to the group dynamics. Within the initiatives that will facilitate the development of the Centre we aim to involve experts in economics, sociology, psychology, pedagogy and business. An important component of the experiment development considers the knowledge of legislation regulating the activities of such centres and launching initiatives to facilitate their activity. An international network of such centres would define a coherent and consistent method of circulation of the specific information, experiences, and best practices at the level of each node from the network. Knowledge management, learning management, information management, eLearnig will be catalysts for development of the system contributing to its consolidation and development compared to the needs of future society. Because tomorrow’s reality represents the continuation of today’s virtuality, it is essential to create research programs to generate new organizational strategies and new development models.

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REFERENCES 1. 2. 3. 4.

Chemers, Martin, An Integrative Theory of Leadership, Psychology Press, 1997. Ferrari, G. R. F., ed. Plato: The Republic, Cambridge University Press, 2000. Duff, Tim, Plutarch's Lives: exploring virtue and vice, Oxford University Press, 1999. Carlyle, Thomas, On heroes, hero-worship, and the heroic in history, Vol. 1. University of California Press, 1993. 5. Galton, Francis, Hereditary genius, Macmillan and Company, 1869. 6. Gladwell, Malcolm, Outliers: the story of success, New York: Little, Brown and Co., 2008. 7. Hunt, J. W. and Laing, B., Leadership: the Role of the Exemplar. Business Strategy Review, 8: 31–42. doi: 10.1111/1467-8616.00005, 1997. 8. Lewin, Kurt, Ronald Lippitt, and Ralph K. White, Patterns of Aggressive Behavior in Experimentally Created Social Climates, The Journal of Social Psychology 10, no. 2 (1939): 269-299. 9. Blake, Robert Rogers, and Jane Srygley Mouton, The Managerial Grid; Key Orientations for Achieving Production through People, 1968. 10. Tannenbaum, Robert, and Warren H. Schmidt, How To Choose a Leadership Pattern, Harvard Business Review, 1973. 11. Brezis, Elise S., Paul R. Krugman, and Daniel Tsiddon, Leapfrogging in international competition: A theory of cycles in national technological leadership, The American Economic Review: 1211-1219, 1993. 12. Gardner, Howard, Intelligence reframed: Multiple intelligences for the 21st century, Basic Books (AZ), 1999

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EMPIRICAL INVESTIGATION OF THE RELATIONSHIP BETWEEN EMPLOYEES’ PARTICIPATION IN STRATEGIC PLANNING AND ORGANISATIONAL PERFORMANCE

Olu Ojo Department of Business Administration College of Management and Social Sciences OSUN State University, Nigeria

ABSTRACT This study examines the relationship between employee participation in strategic planning and organisational performance. The study used survey research design technique with the administration of questionnaire as research instrument. Our respondents comprised top level employees, the middle level employees, and the lower level employees of manufacturing organisations. The data collected were analysed using Statistical Package for Social Sciences (SPSS) while Pearson correlation was used in testing the research hypotheses. The findings revealed that there is a significant relationship between quality circle and improved quality of organisational goods and/or services. It was also discovered that there is a positive relationship between employee participation in strategic planning and organisational performance and that the extent to which organisations allow their employees to participate in strategic planning process is a major determinant for both employee’s performance and the achievement of organisational goals. Key words: Employee Participation, Employee Involvement, Quality Circles, Strategic Planning, Organisational Performance, Strategic Plan. 1. INTRODUCTION Since its birth in the early 1950s, the field of strategic planning has grown into a major and accepted part of the territory of management. Today, strategic planning is increasingly regarded as indispensable in all human endeavours both at micro and macro levels. Yet, up till today most organisations have not recognised the impact of employee participation in strategic planning on organisational performance. To most organisations, they believed that strategic planning is the task of the top management only and that involving the middle and lower level management is of no use because they don’t have a say in strategic issues and this is where the problem lies. Most managers have failed to recognise that every business operates in a dynamic, uncertain and complex environment and that heightened competition, ever accelerating technological demands and of key technical and management skills in a pervading climate of economic uncertainty and world recession. These changes in organisation mean that they must become more maneuverable in the marketplace (Kanter, 1989; Peters and Waterman, 1982; Peters, 1992). In order to be able to withstand the forces in the environment, new activities have entered into the management lexicon as organisations restructure, downsize, delayer, outplace and subcontract their satellite activities. However, employee participation has become more crucial to every organisation that wants to succeed. With the rapid increase in technology and stiff competition among growing firms, the organisation environment has become highly unstable and unpredictable. Indeed for 251

organisations to survive as well as achieve their goals and objectives, they must take time to strategically draw out procedures of operations and activities to be carried out. The poor performance of organisation in terms of not achieving its goals and objectives as a result of not encouraging employee participation in strategic planning, will force such organisation out of business. This therefore shows why an organisation must of a necessity, plan for the future, anticipate what the future holds as well as incorporate employees in their planning process to compensate for any potential negative impact. Subsequently, the consideration of this challenge in the present study is viewed as a significant issue that holds implication for future research as well as for planning practices. This study re-evaluates employee participation in strategic planning as it relates to organisational performance and systematic discovery of the relationship between employee participation in strategic planning and organisational performance in Nigerian. The following research questions are employed to guide this study: 1) Is there any relationship between quality circles and quality of organisational goods and services? 2) What is the relationship between employee (non management staff) involvement in strategic planning and organisational performance? A review of academic literature on the subject of employee participation in strategic planning and organisational performance reveals that there is a dearth of literature on it in the developing countries including Nigeria. Thus, it is hoped that this study will fill the existing gap in the literature especially in the less developed countries in general and Nigeria in particular. In addition, this study has a lot to offer to the management team, the board of directors of companies, and the members of the organisation in their attempt to encourage participation in the decision making process and improve organisational performance. 2. LITERATURE REVIEW The purpose of this section is to provide a review of the literature on employee participation and to develop conceptual as well as theoretical framework for this study. Following a review of the research that has examined the impact of employee participation in strategic planning on organisational performance; the concept of employee participation as used by previous researchers are reviewed. 2.1 Conceptual Framework The term employee participation first began to appear in management literature in the late 1970’s. Since the late 1970’s, lots of companies have implemented some form of employee participation programme designed to improve workplace policies and effect operational changes advantageous to both management and workers. There is no clear consensus as to the definition of employee participation. It is a process that involves employees in the sharing of information and/or making of decisions. Employee participation refers to the process whereby workers have a share in the reaching of managerial decisions in the enterprise. In their recent study, Schwochau, Delaney, Jarley, and Fiorito, (1997) divides the definitions of employee participation into three categories. First, employees are allowed to take part in decision making. ''Any process whereby workers have a share in the reaching of managerial decisions in the enterprise'' (Clarke, 1972) ''Those at the bottom of the enterprise hierarchy take part in the authority and managerial function of the enterprise'' (Walker, 1975). Second, employees influence managerial actions. ''Influence in decision making exerted through a process of interaction between workers and managers and based upon information sharing.'' Considerable variety of interpersonal and structural arrangements which link organisational decision making to the interests and influence of 252

employees at various levels (Heller, Pusic, Strauss and Wilpert, 1998). ''Equal power to determine the outcome of decisions'' (Patemen 1983); and third, control over decision making. ''Any process through which a person or group of persons determines what another person or group of persons will do'' (Guest, 1991). ''Individuals or groups may influence, control, be involved in, exercise power within, or be able to intervene in decision making within organization’s” (Brannen, 1983). 2.2 Methods of Employee Participation Participation may be direct or indirect. Direct participation involves the employees themselves, whereas indirect participation takes place through an intermediary of employee representative bodies, such as works councils or trade unions (EPOC, 1997). Two main forms of direct participation include consultative participation and delegative participation (Geary and Sisson, 1994). Consultative participation refers to practices where management encourages employees to share their opinions regarding work-related concerns, yet retains the right to make all final decisions. Delegative participation, on the other hand, gives employees increased responsibility and autonomy to organise and perform their jobs as they see fit. Employees participate directly in work decisions (Cotton, Vollrath, Froggatt, Lengnick-Hall and Jennings, 1988). Forms of delegative participation include scheduling of work, improving work processes and attendance and absence control. Also, the direct method allows individual employee or workgroup to involve in the decision making process such as briefing groups and quality circles. Direct method is more about involvement. On the other hand, indirect method affects mass of employees where Works Council and/or collective bargaining represent their role and discuss the issues with management. This one is about participation. 2.3 Determinants of Employee Participation There has been a considerable amount of research regarding employee participation. Most of the studies have focused on the outcomes of participative management. Evidence of this comes from the number of meta-analyses that have been conducted in order to summarise the findings of participation’s effects on outcomes such as satisfaction and performance (Doucouliagos, 1995; Miller and Monge, 1986; Wagner, 1994). In general, the results suggest that employee involvement has a small yet consistent effect on satisfaction and performance (Wagner, 1994). Despite this plethora of studies, there is little known as to which factors determine the level of employee involvement that an organisation will likely adopt. Here our goal is to explore the determinants rather than the effects of the adoption of employee participation practices. Employee participation may be determined by a number of different factors. We focus on the following potential determinants. 2.4 National Cultures National cultures are a powerful force in explaining organisational behaviour (Boyacigiller and Adler, 1991; Child, 1981). Hofstede (1980) argues that 50 percent of the differences in employee’s attitudes and behaviours could be explained by national cultures. There are two specific dimensions of national cultures that may explain differences in use of employee participation: power distance and uncertainty avoidance. Power distance is the extent to which the members of a society accept that power is distributed unequally. In high power distance countries employees show a great deal of respect for those in authority. They are afraid to express disagreement with their managers and tend to prefer bosses with autocratic decision-making styles. In small power distance countries subordinates have limited dependence on their boss and there is a preference for consultation (Hofstede, 1991). 253

2.5 Competition The increasingly competitive environment faced by organisations has caused them to re-evaluate their structures and employee relations. This has been one of the main influences on the rise of participative management (Hyman and Mason, 1995). Clearly companies that operate in highly competitive environments must maximise their productivity and recent meta-analyses have shown that employee participation is positively related to productivity (Doucouliagos, 1995; Miller and Monge, 1986). 2.6 Union Membership Trade unions have historically been suspicious of participative management practices. They feared that increased employee involvement would draw employees away from the union and thus weaken their power (Eaton and Voos, 1992). Employee involvement blurs formerly demarcated management/union roles. Given that the traditional role of unions has been adversarial, they have resisted the acceptance of common objectives and co-operation required of employee involvement programmes. Some unionists view participative management as a negative initiative wherein employees take on more responsibility and more work for the same pay (Heller et al., 1998; Hyman and Mason, 1995). 2.7 Sector Heller et al. (1998) attribute the spread of participation in part to the growth of the service in manufacturing employees, are “an essential part of the ‘product’ they provide”. Given that participation has been shown to be positively related to satisfaction, one would expect higher levels of participation to lead to better service quality. A number of companies have, in fact, discovered that employee satisfaction is related to customer satisfaction (Yeung and Berman, 1997). Hyman and Mason (1995) observe that managers in the service sector, in contrast to the manufacturing sector, must “gain more than mere compliance from their subordinates”. Thus, there seems to be agreement that the motivational impact of employee involvement is more important for success in the service sector than in the manufacturing sector. 2.8 Organisational Size Although it has been argued that the effect of size on levels of employee participation is unclear (Heller et al., 1998). Most findings show that larger organisations adopt more participative management practices than do smaller organisations. Lawler et al. (1995) conduct longitudinal survey of employee involvement and found a significant positive relationship between organisational size and employee participation practices. Likewise, the aggregate result of surveys conducted in the United Kingdom between 1985 and 1991 showed a positive linear relationship between organisational size and number of involvement initiatives (Hyman and Mason, 1995). This may be due to the fact that larger organisations are more likely to adopt innovative practices and/or because they have greater motivational problems that they try to resolve through participative management. 2.9 Strategy Strategy represents an organisation’s ultimate goal and determines its objectives. Contingency theories have shown that the effectiveness of different organisational structures and practices depends on business strategy (Doty, Glick and Huber, 1993; Miles and Snow,

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1978). Hence, we propose that an organisation’s business strategy will be related to the amount of participation that it adopts. 2.10 Approaches to Employee Participation Whilst collective participative practice varies in structure, scope and responsibilities from country to country, three main categories can be identified in the form of work councils, board-level worker representation and collective financial participation. 2.11 Work Councils Though considerable diversity in structure and range of responsibilities is apparent, conceptually, a work council in a representative body composed of employees (and possibly containing employer representative as well) which enjoys certain right from the employer. In general, the principal right laid down for works council are (a) a right to receive information on key aspects of company activity and (b) a right to be consulted on issues prior to their implementation by management. 2.12 Board Representation Unlike the Bullock proposals which advocated a unitary board of directors representing shareholder and employee interests, most countries which legislate or provide for employee board membership do so through a two-tier structure, where employee representation is applied at higher “supervisory” board which meets infrequently to formulate and monitor overall policy, strategy and progress. Supervisory board decisions passed for implementation to an active management board of senior executives where employee representation is either lacking or offered on a minority basis. 2.13 Collective Employee Share Schemes One of the economic and social inequalities faced by employees in their relation with employers is the imbalance of wealth and property ownership. For this reason, labour movement in a number of countries have advocated wealth accumulation schemes based on collective ownership and administration of company shares, which would offer institutional influence to union shareholders similar to that enjoyed by pension funds and other collective bodies (Hyman and Mason, 1995). 2.14 The Quality Circles The need for public and private businesses to improve quality of services is no longer an option but a necessity. Since the early 1960’s organisations across the globe have been searching for ways to improve overall operational efficiency. This trend has been more heightened with the onset of free open trade and customers demanding so much more for their money. Some organisations have successfully implemented the use of quality circles as part of an ongoing improvement programme. Others have experimented with quality circles with the best intentions and faced several obstacles, but what is true is that this type of participatory management brings several benefits to all concerned. In organisations, most of the employees have the ability to handle the situations. They tackle and solve a wider range of problems at work in an imaginable and creative way. Quality circles have this basic assumption stated above that most of the people are intelligent enough to do work in a different productive manner. This concept assumes that people have brains as well and it is important to give them the opportunity to use their mental abilities in a constructive way.

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The concept of quality circle has been interpreted in many ways in different parts of the world. The most commonly accepted definition keeping the essence of the philosophy that was prevalent in Japan; is as follows: "Quality Circle is a small group of employees who work in same work area or doing a similar type of work, who voluntarily meet regularly for about an hour every week to identify, analyse and resolve work related problems, leading to improvement, in their total performance, and enrichment of their work life" (Adams Jr., 1991). Quality circles can recommend and implement improvement strategies and be a useful reservoir for the generation of new ideas. Normally, members of a quality circle face and share similar problems in their daily work lives and create a programme to tap human creative energy that is capable of generating handsome rewards (Talib and Ali, 2003). Keeping the above definition in mind, following important conclusions can be drawn that:  Most people have the ability to tackle a wide range of problems at work in an imaginative and creative way.  The ability of the average person at work is used partly.  The QC concept assumes that once members are trained, they will be able to organise themselves to use their time effectively and there will be no need of outsiders to tell them what to do.  If everyone is given a chance to use his talents to solve work related problems collectively, the results will be extremely positive.  Problems at work place are best solved by the people most affected. 2.15 Success Factors for Quality Circles The success of any type of quality circles is dependent on several factors, but the most critical influences are strong management commitment and support. Like all business processes, quality circles have to be managed and a prerequisite should include a document endorsed by management setting out the purpose, policy and objectives of the quality circle. The basic philosophy of quality circles must be known to everyone before the programme is started. Employees and managers of all levels must be aware of the roles they have to play whether they are participants, facilitators or agents for change. Employees must be willing to participate and contribute to discussions to generate recommendations to improve the working lives for all members of the organisation. Individual desires and preferences should not be ignored, but settled within the context of organisational objectives to give recognition to the desire for circle achievement. The importance of management commitment and support cannot be emphasised enough. Management has to accept the principles of participatory management and be receptive to the recommendations made by the quality circle. It makes sense that the person doing a job on a daily basis is in a very good position to anlayse it and recommends ways to improve it. 2.16 Strategic Planning There is however no single definition of strategic planning that is broadly accepted. Let’s take a look at a few. Strategic planning has been defined by Kotler as “the managerial process of developing and maintaining a viable relationship between the organisation and its environment, through the development of corporate purpose, objectives and goals, growth strategies and business portfolio plans for company wide operations”. Allison and Kaye (2005) define strategic planning as making choices. It is a process designed to support leaders in being intentional about their goals and methods. Simply stated, strategic planning is a management tool, and like any management tool, it is used for one purpose only-- to help organisation do better job. Hence strategic planning is a systematic process through which an 256

organisation agrees on-and builds commitment among key stakeholders to priorities that are essential to it and are responsive to the environment. Bryson (2004) argues that strategic planning is a disciplined effort to produce fundamental decisions and actions that shape and guide what an organisation is, what it does, and why it does it, with a focus on the future. In short, strategic planning is a tool for finding the best future for your organisation and the best path to reach that destination. 2.17 Strategic Planning Process In the 1970's, many large firms adopted a formalised top-down strategic planning model. Under this model, strategic planning became a deliberate process in which top executives periodically would formulate the firm's strategy, and then communicate it down the organisation for implementation. The following is a flowchart model of this process. Figure 1: Strategic Management Process

Environmental Scanning

Situational Analysis

Vision, Mission and Objectives

Strategy formulation

Strategy implementation

Evaluation and control

Source: Internet Centre for Management and Business Administration

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This process is most applicable to strategic management at the business unit level of the organisation. For large corporations, strategy at the corporate level is more concerned with managing a portfolio of businesses. For example, corporate level strategy involves decisions about which business units to grow, resource allocation among the business units, taking advantage of synergies among the business units, and mergers and acquisitions. In the process outlined here, "company" or "firm" will be used to denote a single-business firm or a single business unit of a diversified firm. Strategic planning comprises of some processes which are distinct but most highly interdependent. Present day organisations must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. 3. METHODOLOGY For the purpose of this study, survey research design is adopted. The research design chosen is perceived as a good method because it helps identify changes in corporate performance due to employee participation. It also entails that sample variables were studied or observed as they are without making any attempt to manipulate or control them ( Ojo, 2003). The staff of manufacturing organisations in Osun State, Nigeria, constitutes the study population. However, our sample size consists of management and non management staff that have been with the organisations for minimum of five years were used for this study. Our sampled elements were 50 in number and they were selected using purposive sampling method. The data used for this study were gathered from primary source only through a wellstructured questionnaire that used 5 points summated rating scale developed by Likert (1967). Descriptive statistics was used in the analysis of data while Pearson correlation analysis was used to test our hypotheses and determine the existence of relationships between employee participation in strategic planning and organisational performance. 4. PAPER CONTENT Hypothesis 1 Ho: There is no significant relationship between quality circle and improved quality of organizational goods and /or services.

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Table 1: Pearson Correlation Between Quality Circle and Improved Quality of Organisational Goods and/Services. Improved Quality

Quality of

Circle

Goods

Quality Circle Pearson

Correlation

.620(**)

Sig. (2-tailed)

.000

N Improved

Pearson

Quality of

Correlation

.620(**)

Goods Sig. (2-tailed)

.000

Source: SPSS Printout, 2012. The coefficient of determination (C.O.D.) is given by the formula: C.O.D = r2 × 100 where r =Pearson correlation= 0.620 2 = (0.620) × 100 ** Correlation is significant at the 0.01 level (2-tailed). =0.3844 × 100 =38.44% The correlation of r =0.620 means 34.44% shared variance between quality circle and improved quality of goods and/or services. This implies that quality circle helps to explain 38.44% of the variance in the respondent’s scores on improved quality of organizational goods and/or services. The relationship between improved quality of organisational goods and/or services and quality circle was investigated using Pearson’s correlation coefficient. There is a positive relationship between the two variables (r = 0.620**, n =50, p>0.6) The correlation (r= 0.620**) between the quality circles (participation programme) and improved quality of organisational goods and/or services is significant at 0.01 level, thus we reject the null hypothesis (H0). This implies that there is a significant relationship between quality circle and improved quality of oganisational goods and/or services. Hypothesis 2 Ho: There is no significance relationship between employee participation in strategic planning and organisational performance.

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Table 2: Pearson Correlation Between Employee Participation in Strategic Planning and Organisational Performance. Employee Organisational Participation Employee

Pearson

Particpation

Correlation

Sig. (2-tailed)

Pearson

Performance

Correlation

.529(**) .000

N Organisational

Performance

.529(**)

Sig. (2-tailed)

.000

Source: SPSS Printout, 2012. The coefficient of determination (C.O.D.) is given by the formula C.O.D = r2 × 100 where r = Pearson correlation = 0.529 = (0.529)2 × 100 ** Correlation is significant at the 0.01 level (2-tailed). = 0.279842 × 100 = 27.98% The correlation of r = 0.529 means that 27.98% shared variance between employee participation in strategic planning and organisational performance. The relationship between organisational performance and employee participation in strategic management was investigated using Pearson’s correlation coefficient. There is a positive relationship between the two variables (r = 0.529**, n= 50, p>0.5) The correlation(r=0.529**) between employee participation in strategic planning and organisational performance is significant at the 0.01 level, thus we reject the null hypothesis (H0). This implies that the performance of the organisation is positively related to employee participation in strategic planning. From the first hypothesis, it was revealed that there is a positive relationship between quality circle and improved quality with a directional correlation relationship of 0.625**, this is therefore in support of what Yeung and Berman (1997) said that given that participation has been shown to be positively related to satisfaction, one could expect that higher level of participation to lead to better quality. It is also discovered from the analysed data that 86% of the respondents strongly agree that the establishment of quality circles in the organisation increases productivity and profitability and that 92% of the respondents strongly agree that employee participation has a high positive impact on quality and productivity. From the second hypothesis, it was revealed that employee involvement in strategic planning is positively related to employee performance with a directional correlation relationship of 0.529. This therefore supports what Anthony (1978), Frost, Wakely and Ruh (1974) and Miller and Monge (1986), said that employee involvement increases the flow of information in organisations and when employees performing unimportant task have access to valuable information as well as higher level managers through participative management practices, this will therefore lead to higher level of employee performance. Also from our

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analysed data 90% of the respondents strongly agree that employee involvement in team should be created in the organisation. This result is also supported by the data we analysed in which 94% of the respondents agree that allowing employees to have a say in strategic planning enhances employee performance and job satisfaction. Based on the data analysis, the empirical findings are explored as follows: Majority of the respondents agree to the fact that employees should have a chance to suggest objectives or steps to accomplish objectives in the organisation and this constitutes a total of 52% of the population, while 32% strongly agree, and this makes up a total of 84% of the respondents It can therefore be deduced that the respondents are in support of the fact that employees should have a chance to suggest objectives or steps to accomplish objectives in the organisation. 44% of the respondents strongly agree to the fact that the middle and lower level management should be allowed to fully participate in strategic planning. Also, 42% of the respondents agreed and this makes up a total of 86% of the respondents who are in support of the fact that the middle and lower level management should be allowed to fully participate in strategic planning. 50% of the respondents strongly agree that employee participation has positive effect on organisational performance. 42% of the respondents agree. The above response means that the respondents are in support of the fact that employee participation has positive effect on organisational performance. About 52% of the respondents strongly agree that employee participation has a impact on the achievement of organisational objectives. And 36% agree. This therefore shows that 88% of the respondents are in support of the fact that employee participation has a high impact on the achievement of organisational objectives. Almost all the respondents strongly agree that employee participation has a high positive impact on quality and productivity. Therefore, employee participation has a high positive impact on quality and productivity. Majority of the employee strongly agree and agree that allowing employee to have a say in strategic planning enhances employee performance and job satisfaction. It can therefore be deducted that allowing employee to have a say in strategic planning enhances employee performance and job satisfaction. About 54% of the respondents agree that employee participation in strategic planning process enhances organisational performance and 40% strongly agree. Therefore it can be concluded that there is a strong relationship between employee participation in strategic planning process and organisational performance. It was observed that 52% of the respondents agree that the organisation has a forum where employee’s proposal and ideas concerning workplace can be presented. 20% of the respondents strongly agree, 10% and 18% disagree and were undecided respectively. This means that majority of the respondents supports the fact that the organisation has a forum where employees’ proposal and ideas concerning workplace can be presented. It was also observed that very little percentage (36%) consented to the fact that the organisation has a joint consultation committee which participates in strategic planning. This therefore means that a large percentage of the respondents are not in support of this fact. Majority of the respondents were in support of the fact that employee involvement team should be created in the organisation. This majority constitutes 40% of respondents who strongly agree and 50% who agree. This above response therefore supports the fact that employee involvement team should be created in the organisation. It was observed that 46% of the respondents agree that the organisation has briefing groups which allows for free flow of information between managers and employees. Also 261

22% of the respondents strongly agree. This means that only a fair percentage of the respondent supports the fact that the organisation has a briefing group which allows for free flow of information between managers and employees. Majority of the respondent strongly agree and agree that the establishment of quality circles in organisation leads to increased productivity and profitability. This therefore means that the establishment of quality circles in organisation leads to increased productivity. Based on the first hypothesis, it was discovered that there is a positive relationship that exist between quality circle and improved organisation quality. Based on the second hypothesis, it was discovered that there is a positive relationship between employee involvement team and employee performance. CONCLUSION AND IMPLICATIONS Based on the findings from the study the following recommendations are made. 1) Having discovered that employee participation in strategic planning enhances organisational performance, organisations should ensure that they incorporate employees especially the middle and lower level employees into the organization’s strategic planning process. Reason being that these employees has a lot to offer and also they are the ones who will transform the written plan into action. Therefore being a part of the entire planning process makes the implementation very easy and well understood. 2) Also, employees who participate in organisations strategic decisions making experience greater psychological benefits in form of increased influence in work- related decisions and improved attitudes. It is recommended that organisations need to evaluate which aspects of participation best suit their environment since there is no management model that is effective in all situations. 3) Finally, the success of participative management depends on a number of considerations. These include the need for good management skills; training of managers and staff in the participative model; recognising that not all decisions require participation; supporting the decision of employees who choose not to be involved in the decision-making process; and most importantly, using participation with sincerity and not as vehicle to disperse responsibility. The literature agrees that, if used correctly, the participative management model offers great benefits to organisation. The benefits derived include increased productivity and efficiency, improved communication, greater employee satisfaction, improved quality and more informed decision-making. The participative model is useful in addressing the complexities and challenges that technological changes and demands cause on organisations. Judging from the various computation analysis and findings, the results revealed that there is a significant relationship between employee participation in strategic planning and organisational performance. Considering the high percentage in favour of the two hypotheses tested, it can be reasonably concluded that at 95% confidence, that there is a positive relationship between employee participation in strategic planning and organisational performance. REFERENCES 1. Adams Jr., E., Quality Circle Performance, Journal of Management, 1(1991): 25-39. 2. Allison, M., and Kaye, J., Strategic Planning for Non-Profit Organizations: A Practical Guide and Workbook. Boston: Wiley Publishers, 2005.

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3. Anthony, W. P., Strategic Human Resource Management. Fort Worth: The Dryden Press, 1978 4. Boyacigiller, N. and Adler, N. J. (1991). The Parochial Dinosaur: Organizational Science in a Global Context. Academy of Management Review, 16(2): 262-290. 5. Brannen, P. (1983). Authority and Participation in Industry. London: Batsford. 6. Bryson, J. M. (2005). Strategic Planning for Public and Non-Profit Organizatiosn. Cambridge: Jossey-Bass Publishers. 7. Child, J. (1981). Culture, Contingency and Capitalism in the Cross-National Study of Organizations in Research in Organisational Behaviour, L.L. Cummings and B.M. Staw, (Eds.). Greenwich, CT: JAI Press 8. Clarke, O. (1972). Conclusions: Towards a Synthesis of International and Comparative Experience of Nine Countries. New York: McGraw-Hill. 9. Cotton, J. L., Vollrath, D. A., Froggatt, K. L., Lengnick-Hall, M. L. and Jennings, K. R. (1988). Employee Participation: Diverse Forms and Different Outcomes. Academy of Management Review, 13: pp.8-12. 10. Doty, D. H., Glick, W. H. and Huber, G. P. (1993). Fit, Equifinality and Organisational Effectiveness: A Test of Two Configurational Theories. Academy of Management Journal, 36 (6):1196-1250. 11. Doucouliagos, C. (1995). Worker participation and productivity in labor-managed and participatory capitalist firms: A meta-analysis. Industrial and Labor Relations Review, 49(1): 58-77. 12. Eaton, A. and Voos, P. (1992). Unions and Contemporary Innovations in Work Organisation, Compensation and Employee Participation in Unions and Competitiveness. L. Mishel and P. Voos, (eds). Armonk, NY: M.E. Sharpe. 13. EPOC (1997). New Forms of Work Organization: Can Europe Realise Its Potential? Dublin: European Foundation for the Improvement of Living and Working Conditions. 14. Frost, C. H., Wakely, J. H. and Ruh, R. A. (1974). The Scanlon Plan for Organisational Development: Identity, Participation, and Equity. East Lansing: Michigan State University Press. 15. Geary, J. and Sisson, K. (1994). Conceptualising Direct Participation in Organisational Change. Luxembourg: The EPOC Project. 16. Guest, D. E. (1991). Personnel Management: The End of Orthodoxy British. Journal of Industrial Relations, 29(2): pp. 149-175. 17. Heller, F., Pusic, E., Strauss, G. and Wilpert, B. (1998). Organisational Participation: Myth and Reality. Oxford: Oxford University Press. 18. Hofstede, G. (1980). Motivation, Leadership and Organisation: Do American Theories Apply Abroad? Organisational Dynamics, Summer, pp. 42-63. 19. Hofstede, G. (1991). Cultures and Organizations: Software of the Mind. London: McGraw-Hill International. 20. Hyman, J. and Mason, B. (1995). Managing Employee Involvement and Participation, London: Sage. 21. Kanter, R. M. (1989). The Change Masters. London: McGraw-Hill International. 22. Lawler, E. E., Mohrman, S. A. and Ledford, G. E. (1995). Creating High Performance Organizations. San Francisco: Jossey-Bass. 23. Likert, R. (1967). The Human Organization. New York: McGraw-Hill. 24. Miles, R. E., and Snow, C. C. (1978). Organisational Strategy, Structure and Process. New York: McGraw-Hill.

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25. Miller, K. I. and Monge, R. P. (1986) Participation, Satisfaction and Productivity:Meta-Analytic Review. Academy of Management Journal (29): pp. 723727. 26. Ojo, O. (2003). Fundamentals of Research Methods, Lagos: Standard Publications. 27. Pateman, C. (1983). Some Reflections on Participation and Democratic Theory. Chichester: Wiley. 28. Peters, T. J. (1992). Liberation in Management. New York: Knopf. 29. Peters, T. J. and Waterman, R. H. (1982). In Search of Excellence. New York: Herper and Row. 30. Schwochau, S., Delaney, J., Jarley, P. and Fiorito, J. (1997). Employee Participation and Assessments of Support for Organizational Policy Changes. Journal of Labour Research.18 (3): pp. 279-401. 31. Talib, F. and Ali, M. (2003). Impact of Quality Circle: a Case Study, Journal of the Institute of engineers, Vol. 84, pp. 10- 13. 32. Wagner, J. A. (1994). Participation’s Effects on Performance and Satisfaction: A Reconsideration of Research Evidence. Academy of Management Review, 19 (2):312330. 33. Walker, J. W. (1975). Human Resource Strategy. New York: McGraw-Hill. 34. Yeung, A. K. and Berman, B. (1997). Adding Value Through Human Resources: 35. Reorienting Human Resource Measurement to Drive Business Performance, Human Resource Management, 36 (3): 321-335.

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ENTREPRENEURSHIP IN TIMES OF ECONOMIC CRISIS

Ana-Maria Grigore University of Bucharest, Romania

Vladimir-Codrin Ionescu University of Bucharest, Romania

Motto: “Prosperity teaches much; adversity, even more.” William Hazlitt(1778-1830) ABSTRACT: This paper presents issues regarding the impact of the economic and the financial crisis upon the entrepreneurs and the SMEs. Entrepreneurship is a natural rival to job scarcity. Entrepreneurs have the agility, flexibility, and grit to make change happen. Innovation is the chief tool available for the entrepreneur. This paper aims an X-ray of the SME sector in EU and how its members copped with the various challenges raised by this crisis. The last chapter describes how this economic ordeal hits the Romanian SMEs and entrepreneurs. Keywords: entrepreneur, entrepreneurship, crisis, SMEs. 1. INTRODUCTION In 2008, when world economy has started to fall-rather abruptly, our beliefs have been shattered. Long established convictions, about the science of economy and about our heroes have also started to fall abruptly (Stiglitz, 2010). Any temptation to infringe the economic laws is punished, sooner or later, through such “curative” crises, designed to sanitize an economic structure that has been artificially deformed through the “capital” issued by the real and virtual printing presses of the central banks. In full consumerist fever, stimulated through almost negligible interest rates, (some even negative), “the market” just responded to the stimuli, exacerbating consumption and debt, at the expense of saving and of healthy accumulation of capital (Marinescu et al., 2011). The world leaders have always had to face a certain degree of risk and uncertainty, taking safety measures in order to mitigate the damage any time they had the chance. Nowadays, however, the swiftness of change and the magnitude of the shocks are bigger than ever. Such things were not normal in the past. This is the new normality. It reaches beyond the disruptive innovation, also including major shocks. But even when normality returns to economy, it doesn’t return to each and every field, or market, or individual company. Even without a global financial crisis times may be 265

agitated for certain industries and organizations. The entrepreneurs and managers have always had to come to terms with the idea of certain degrees of turbulence in their business activities. This is only natural and it is part and parcel of a normal economy. And in the economy of the past, the ample fluctuations with a duration of a few years were an essential characteristic. The economy of today, with its increased turbulence, is strikingly different. Both nowadays and in the predictable future, the economy of the new reality means more than having normal ascending and descending fluctuating periods, which, after all, have granted the activities at a macroeconomic level a certain degree of predictability. Nowadays we may expect more great shocks and more dramatic disturbances, resulting in greater general risk and uncertainty levels, both for the macro- and the microeconomics. Beyond the day to day difficulties due to functioning on a perpetually competitive market which is also subject to common economic cycles, the leaders in the business world must detect an intensified series of major and minor disturbances which is coming to defy the planning of activity (Kotler and Casione, 2009). When he was talking about the turbulence during the deep recession at the beginning of the 90’s, Peter Drucker stated that “In turbulent times, the management of an enterprise needs to consider both the company’s ability to support sudden strikes and the ability to take advantage of the opportunities emerging unexpectedly. This means that, in the context of turbulence, the fundamental principles must be managed, and managed well, at that.” Although turbulence in business cannot be avoided, the companies may definitely choose the way to face it. They may sail through the vortices or they may get swallowed. This paper covers the behaviour and importance of entrepreneurs and entrepreneurship in times of economic crises. Knowing that entrepreneurs have the agility, flexibility, and grit to make change happen and that entrepreneurship is a natural rival to job scarcity we consider this topic of first rate interest nowadays. In crises times, a society as a whole behaves chaotically and ends usually in very dangerous waters and eventually crumbles. Who fiercely fight the tidal wave? We know by now, we already have history and statistics of that: the entrepreneurs! The history is made by individuals, we have to ascertain that, once for all. In Romania we finish this year the first halve of the European funds due to a new entrant. We have a clear, undisputable image: although it is a certain that Romania is situated on the far from honourable last position in absorbing the EU money, the part of it with SMEs destination it is practically 100% absorbed. This it is a vivid example of the indomitable force of entrepreneurship, which confronted with innumerable bureaucratic and financial obstacles, finally overcomes all the enmities against all the odds, and produces. It produces aided-value, jobs, pays taxes, raises the GDP and fulfil the society fundamental needs. To enlighten some of this aspects we processed data extracted from the statistics of the White Paper of Romania SMEs 2012 and from Eurostat 2012.

2. ENTREPRENEURS, ENTREPRENEURSHIP AND SMEs Entrepreneurship is a creative human process, one which mobilizes resources from one level of productivity to another, superior one. Entrepreneurship implies the individual’s will of taking on responsibilities and the mental ability of carrying out the task from idea to finalization. Another component of the entrepreneurship consists in finding opportunities where other people find only chaos, contradictions, confusion. The essence of the 266

entrepreneurship is in walking against time with wisdom and maturity, and in serving as an agent for change. More than 40 years ago, Baumol (1968) was writing: “trying to understand entrepreneurship without understanding the entrepreneurs is just like trying to understand Shakespeare without taking Hamlet into consideration.” In the last 30 years, the term entrepreneur has taken on a heroic resonance. The entrepreneurs have become super-heroes which singlehandedly and with great courage fight opportunities, assembling resources they don’t have, finding compliant suppliers and customers, and sometimes against all odds, they manage to become millionaires (Burns, 2011). The fact that the entrepreneurs embody fairytale qualities that everybody would wish for: freedom of mind, creativity, vision, ambition –is true. And more than anything else they have the courage of turning their dreams into reality. Ever since the first writings about entrepreneurship, no agreement was reached upon the definition of the concept. In some ways the entrepreneur intrigued the social science researchers in the same way the elementary particles challenged the physicians (Rogoff, 1996). The effect has been noticed, but the thing in itself is ephemeral and invisible. Just like the physicians who study the traces of the particle action on the screen of the electronic microscope, the researchers of the entrepreneurial phenomenon have examined the economic activity resulting from entrepreneurship: new enterprises and new working places, new invented products and new services provided. But when it comes to specifying what created these phenomena few experts reach an agreement. Gilder (1980) considered that the entrepreneur is a superman who knows the hidden laws of economy and who contributes to progress. He fights against poverty by creating new jobs. The key to understand how a particular small firm goes about management and why and how decisions are made is to understand the personality of the entrepreneur. Their personality and their behavioural characteristics will strongly influence this. More than large firms, small firms are social entities that revolve around personal relationships. They approach risk and uncertainty in a particular way that sometimes seems far from rational, which may explain why they are so little understood by economists (Burns, 2011). It is important to realize that the small enterprise sector is far from homogeneous. Consider issues of size and age of business, sector, location, growth and decline, economic and market conditions. What is more, the people that manage them are many and varied. Generalisations about small firms and the people that manage them are therefore just that – vast generalisations that are supposed to cover what makes up some 95 per cent of firms in most countries (Burns, 2011). Small firms are not homogeneous but, notwithstanding this, let us try to paint a broad picture of their evolution in tough times. 3. THE CRISIS’ EFFECT ON SMEs It is a painful reality that small businesses are most affected by the economic crisis. Battered by contracting markets and frozen credit, many businesses today are fighting for survival. Indeed, the current global financial crisis provides a mandate for restructuring. But survival is not the end goal, says Harvard Business School professor Lynda M. Applegate. Think of the economic crisis as a disrupter to the status quo and look for areas of pain. In fact, cost cutting and restructuring are simply the first steps in repositioning and leading your company and industry through the crisis and in defining how business will be conducted in the future (Applegate, 2009). 267

In these turbulent financial times, SMEs need to spend as much time as they can focusing on what really matters: boosting their turnover and reducing their overheads. SMEs, considered the most sensitive and the most affected by the economic climate, were among the first to be hit by the effects of the world financial crisis. The financial crisis adversely impacts most of the SMEs, reducing the development rate and increasing the number of bankruptcies. Start-ups in particular are most vulnerable, lacking the resources to survive the downturn. Nevertheless, for a small number of SME`s, i.e. those that identify the changes in the market and react promptly, this period may prove favourable. In times of crisis, some SMEs, unlike the big companies, have the advantage of greater flexibility, being able to implement new services and launch new products more easily. Not bound by strategies devised at higher echelons and by the need to get approvals, SMEs can make decisions more easily and thus become much more efficient based on prompt action and solutions adjusted to market circumstances (Hodorogel, 2009). In today’s worsening economy, one of the most important roles governments, business leaders, and civic organizations can play is to take action to fuel entrepreneurship. In order to have a lasting impact on the job market, it's crucial to focus not only on creating more entrepreneurs, but better and more capable entrepreneurs. Entrepreneurship is a natural rival to job scarcity. The Kauffman Foundation reports that "firms in their first year of existence add an average of 3 million jobs per year" and concludes that start-up firms are "responsible for all net job creation during most years." Further, entrepreneurs are characteristically ambitious, creative individuals, capable of surviving - and often thriving - in less than ideal economic climates. Ultimately, entrepreneurs create more than jobs - they are the innovation leaders of every community, and their actionbased personas make their local (and national) presence a force to be reckoned with that leaves a lasting impact. (Topalian, 2013) 4. SMEs IN THE EU ECONOMY IN TIMES OF CRISIS Annual report on small and medium-sized enterprises in the EU, 2011/2012 states that Small and Medium-sized Enterprises form the backbone of the EU economy – accounting for 99.8 per cent of non-financial enterprises in 2012, which equates to 20.7 million businesses. The overwhelming majority (92.2 per cent) are micro-enterprises, defined as those with fewer than ten employees. Some 6.5 per cent of SMEs in the EU are classified as small enterprises (employing between 10 and 49 people) and 1.1 per cent are medium-sized (50-249 employees). Large businesses, with more than 250 employees, account for just 0.2 per cent of the enterprises in the EU’s nonfinancial sector. The performance of SMEs across the EU is measured with the help of three main indicators: the number of enterprises, their output via their gross value added (GVA) and the number of employees on their payroll. These three indicators reveal a mixed picture. Clearly SMEs were hit hard by the economic and financial crisis up until 2009, with yearly deteriorations across all three indicators, although large enterprises fared even less well (Wymenga et.al, 2012).

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Source: Eurostat/National Statistics Offices of Member States/Cambridge Econometrics/Ecorys Figure 1.1 Number of SMEs, employment in SMEs and value added of SMEs (2005=100)

The figure illustrates that GVA clearly increased from 2009 for all sizes of SMEs classes, revealing a recovery from the recession of 2008-2009. This is not the case for employment. The performance of SMEs across Member States can be assessed according to this question: have the countries reached, or exceeded their pre-crisis (2008) level of SME real value added and employment? SMEs in the EU are operating their businesses in a difficult macroeconomic environment and continue to struggle to recover to pre-crisis levels of value added and employment. There are diverging trends of SME performance among Member States. In 2011 only Austria, Germany and Malta exceeded their 2008 levels of real value added and employment in their SMEs. Belgium, Finland, France and Luxembourg have experienced a flat SME performance since 2008. In the remaining EU countries, SMEs have not recovered to their pre-crisis levels of real value added and employment (Wymenga et.al, 2012). This “red-light” position of Romania`s SMEs it is not surprising: the mortality rate is roughly 20% per year, and the total number of employees decreased from 2957274 in 2008, having a steep fall to 2563933 in 2009, to 2483506 in 2010(White Paper of Romania SMEs, 2012). It is also necessary to observe the very probable fact that statistics are not completely accurate: it is known for a fact that quite a number of SME`s, facing terrible financial adversity, shifted in the grey or even in the black zone, disappearing from the official evidence.

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Source: Eurostat/National Statistics Offices of Member States/Cambridge Econometrics/Ecorys Figure 1.2. Real value added and employment in the SME sector in 2011, EU 27 Member States, Index (2008=100)

Europe not only has a Euro crisis, it also has a growth crisis. This is because of its chronic failure to encourage ambitious entrepreneurs.(The Economist, 2012) Data show that continental Europe has a problem with creating new businesses destined for growth. According to the Global Entrepreneurship Monitor, which compiles comparable data across countries, in 2010 “early-stage” entrepreneurs made up just 2.3% of Italy’s adult population, 4.2% of Germany’s, and 5.8% of France’s. European countries are below—in many cases well below—America’s 7.6%, let alone China’s 14% and Brazil’s 17%. Europe produces plenty of corner shops, hairdressers and so on, says the same article. What it doesn’t produce enough of is innovative companies that grow quickly and end up big. In 2003, analyzing Europe’s entrepreneurial gap, the European Commission cited a study which showed that during the 1990s, 19% of mid-sized firms in America were classified as fast-growers, compared with an average of just 4% in six European Union countries. The Kauffman Foundation, which promotes entrepreneurship around the world, argues convincingly that one reason America has outstripped Europe in providing new jobs is its ability to produce new, fast-growing companies such as Amazon, an online retailer, or eBay, an online auctioneer. And in terms of jobs, new small firms have an added advantage. They are less likely than existing giants to outsource a lot of their labour to cheap providers in Asia. (The Economist, 2012) If Europe were more entrepreneurial, it would not have been such a poor producer of big businesses. And it would have produced more successful new technology firms. Entrepreneurship doesn’t have to be channelled through the tubes of the internet, but over the past few decades a great deal of it has been. That an economy so copiously provided with the technically educated as Germany’s has not produced a single globally important business-toconsumer internet company suggests a big problem with entrepreneurship. (The Economist, 2012)

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5. THE CHALLENGES FOR THE ROMANIAN SMEs The main challenges most SMEs in Romania have to cope with as a result of the economic-financial crisis are the sudden rises in the prices of raw materials, energy and food, problems with liquidity and credit, a marked decline in the demand for products and services, considerable variations in the exchange rate, and inflation. This phenomenon is spreading quite rapidly to a growing number of companies. The adverse effects of the financial crisis are visible particularly in the case of SMEs in sectors like commerce, constructions and real estate.(Hodorogel, 2009). Declining markets, diminished investment, the liquidity blockage and lack of flexibility are the main effects of the financial crisis, with repercussions on companies. A study conducted by the Romanian National Council of Private Small and Medium Sized Enterprises on a sample of 1716 Romanian SMEs from all branches of activity and age categories, give us some useful information regarding the statistics of the influence of internal and external factors on the companies’ economic results. The overall status of the Romanian economic environment during 2012 has been appreciated as discouraging the development in 54.45% companies, neutral in 33.74% SMEs and favourable to business in 11.81% organizations. The comparative analysis of these aspects with data from the previous year (in 2011 the environment was appreciated as being favourable in 7.73% enterprises and unfavourable in 69.61% companies), one can discover an improvement in the perceptions the entrepreneurs / managers have regarding the environment in which they do business. By analyzing the psychological effect the economic recession has had on the entrepreneurs, the survey has revealed that 47.30% entrepreneurs are considerably affected by the current economic context, 24.90% among the SMEs decision makers are threatened in a smaller or insignificant proportion by the unfavourable world and macro-economic context, 13.40% among the business people are experiencing the economic decline at a high level, 10.25% among the decision makers in companies are impacted to a great extent by the economical negative context, and 4.15% people are not afraid of recession. The analysis of the main business opportunities the SMEs have had for 2012 outlines the following aspects: the most frequently indicated has been the growth in sales on the internal market (for 64.34% companies), revealing that, in spite of the difficult economical situation in Romania, the entrepreneurs are still betting on the people’s purchasing power and on the internal economical agents. The other important opportunities underlined with regard to SMEs are the assimilation of new products (signalled in 45.16% enterprises), the penetration of new markets (44.95%), the creation of a business partnership (30.89%) the implementation of new technologies (30.01%, winning a grant (12.65%) and increasing the efforts (11.77%). Trying to evaluate the general situation of Romanian SMEs in the second semester of 2012, The Romanian National Council of SMEs calculated an “entrepreneurial” index pondering 3 indices: the business environment index, the index of SMEs evolution and the index of the entrepreneurs’ opinion regarding the situation of their own companies. This new index shows a very dissatisfactory situation of the business environment for SMEs compared to the same period in 2008, and even a worse situation than to the same period in 2011.

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6. CONCLUSIONS We agree with Tom Hayes and Michael Malone (2009) in their belief that "Entrepreneurs Can Lead Us Out of the Crisis”. They notice “Only entrepreneurs have the flexibility, the freedom and the risk-everything ambition to find the path back to prosperity in a rapidly changing, technology-driven global economy” and “These are the people who gave us everything - from Wal-Mart to iPhones, from microprocessors to Twitter - that is still strong in our economy. Without entrepreneurs, we will never get out of our current predicament”. Entrepreneurs have the agility, flexibility, and grit to make change happen. Innovation is the chief tool of the entrepreneur. At the same time, they now need to develop their abilities, systems, processes and the necessary disciplines that will allow them to rapidly detect and predict the turbulence within their environment, as well as to identify the vulnerabilities and the profitable occasions that the resulting chaos brings about. As far as the crisis impact is concerned, as it has been perceived in the Romanian business community, we can notice certain characteristics that are considerably different from the world complex in its economic and psychological dimensions. In Romania, according to the normal predictive standards, the crisis caused by bad financial products that threw the New York Stock Exchange off balance shouldn’t have occurred. Our crisis is a systemic one, one due to mentality and to incomplete transition. It is also due to the indecision to chose the way to progress, whether a social or a radical one. The bright side – because there is a bright side – is that the crisis that broke out after the naive euphoria of the real estate bubble may have a purging effect that may contribute to the healing of the economic metabolism. The fundamental entrepreneurial mission is to create value added. Outside this paradigm there are the cardboard business people, who unfortunately have distorted both the economic climate and the value scale. This effect is so harmful on medium and long term that any surgical attempt is salutary. However, the reluctance of the banking system to get involved in a partnership with the SMEs has become extremely dangerous. How this huge obstacle will ever be overcome still remains to be seen. REFERENCES 1. Applegate, L.M, (2009), Building business in turbulent times, Working Knowledge, Harvard Business School, April 27 2. Baumol, W., (1968), Entrepreneurship in economic theory, American Economic Review Papers and Proceedings, p. 64-71. 3. Burns, P., (2011), Entrepreneurship and small business, Palgreve Macmillan 4. Gilder, G., (1980), Lespirit d`enterprise, Fayard, Paris 5. Hayes, T., Malone M., (2009), Entrepreneurs Can Lead Us Out of the Crisis, The Wall Street Journal, February 24 6. Hodorogel, R., (2009), The Economic Crisis and its Effects on SMEs, Theoretical and Applied Economics, vol. 05(534), issue 05(534), p. 79-88 7. Kotler, P., Casione, J.(2009).Chaotics – Management si marketing in era turbulentelor, Editura Publica

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8. Marinescu, C., B., Glăvan, B., Enache, G., Staicu, (2011), Criza economică şi capitalismul, Centrul pentru Economie şi Libertate, , http://www.ecol.ro/files/pdf/Criza-economica.ECOL.pdf 9. Nicolescu, O. (coord), (2012), White Paper of Romanian SME`s in 2012, Sigma Publishing, Bucharest 10. Pohoata, I., (2009), About Crisis. A Short and Joyless Description, Theoretical and Applied Economics, vol. 05(534), issue 05(534), p. 3-20 11. Rogoff, E. G., M-S. Lee, (1996), Does firm origin matter? An empirical examination of types of small business owners and entrepreneurs, Academy of Entrepreneurship Journal, Vol. 1, Number 2, Fall, p.1-17 12. Stiglitz, J., (2010), In cadere libera, America, Piata libera si Prabusirea economiei mondiale, Editura Publica 13. Topalian, C., (2013), Solving the Jobs Crisis Begins With Empowering One Another, Startup Magazine, Jan. 14. 14. Wymenga, P., V. Spanikova, A. Barker, J. Konings, E. Canton, (2012), Annual report on small and medium-sized enterprises in the EU, 2011/2012 , Rotterdam, September 15. The Economist, Les misérables, European entrepreneurs, 2012 available at: http://www.economist.com/node/21559618

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THE IMPACT OF ENTREPRENEURIAL CULTURE IN THE VIEW OF POLITICAL LEADERS WITHIN THE EUROPEAN UNION

Eleonora Gabriela Baban The Bucharest Academy of Economic Studies

ABSTRACT Entrepreneurship is an organizational process based on the orientation towards change and innovation, which mainly focuses on attracting and maintaining current and potential customers. Political parties operate in a dynamic environment, and therefore implementing strategies and entrepreneurial vision is a fundamental step towards achieving the objectives established in the start of elective actions. The main objectives of this study are: 1). presentation of the concepts of entrepreneurship, innovation and leadership in the contemporary context; 2). analysis of political leader image and emphasizing main characteristics that influence his/her attitude regarding innovation and knowledge; 3).analysis of the main statements of politicians in the European Union regarding the impact of entrepreneurial culture in the contemporary context. The paper is based on a case study regarding the analysis of the concept of entrepreneurship in the view of political leaders in the European Union. The case study is focused on the main statements of political leaders regarding the actions in the field of entrepreneurship. Manifestation of entrepreneurial spirit in the view of political leaders is influenced by organizational climate, as well as their attitude regarding change and value creation. Political leaders, who encourage the entrepreneurs, have a great success in politics. Also, those leaders who have a keen sense of entrepreneurship will obtain beneficial results in the actions they undertake and that lead to the mission of their parties. In my opinion, implementing an entrepreneurial vision as well as practicing an entrepreneurial leadership style in political organizations is the key to electoral success. Key words: entrepreneurship, leadership, political marketing, innovation, entrepreneurial culture

1. INTRODUCTION This paper presents the concepts of entrepreneurship and leadership in the contemporary context and it emphasizes main characteristics that influence political leader attitude regarding innovation and knowledge. Furthermore, statements of political leaders from the European Union are set forth, highlighting the role that entrepreneurial culture has on business innovation. In the contemporary context, when major changes are recorded in society in all sectors of activity both nationally and internationally the encouragement and promotion of entrepreneurs represents a prerequisite in gaining competitive advantage at an organizational level. The contemporary business environment is a changing environment, innovation, creativity and entrepreneurial practices contributing to the economic development of a country. 274

This study is important because it reflects the need to exhibit entrepreneurial spirit among political leaders, who gain the sympathy of voters by supporting and encouraging entrepreneurs and entrepreneurial practices. In order to highlight the impact of entrepreneurial culture in contemporary context two statements of the President of the European Commission, José Manuel Durão Barroso and Antonio Tajani, Vice President of The European Commission, Commissioner for Industry and Entrepreneurship are analyzed. José Manuel Durão Barroso stated in his statement that, over time, successful entrepreneurs have tried to find the most appropriate solutions to meet the needs and desires of consumers achieving this through social innovation. Also, Antonio Tajani, Vice President of the European Commission and the Government representative for Industry and Entrepreneurship stated that the construction sector is a viable opportunity for investors, who by implementing business practices and effective strategies can transform the sector in the engine of sustainable development. In order to define the concepts of innovation, entrepreneurship and leadership a review of literature is performed. Also, in order to place these concepts in a contemporary context, essential ideas reflecting the role that political leaders play in supporting and promoting entrepreneurial practices are selected. The analyses of two statements belonging to political leaders suggest that innovation plays a key role in implementing entrepreneurial culture, also contributing to the welfare of the entire country. Promoting an entrepreneurial culture is the key to success and a fundamental condition in increasing competitiveness through innovation. Effective leaders must think creatively, promote innovative ideas and communicate constructively with their subordinates, all these considerations representing the basis for promoting a successful entrepreneurial culture. 2. PRESENTATION OF THE CONCEPTS OF ENTREPRENEURSHIP, INNOVATION AND LEADERSHIP IN THE CONTEMPORARY CONTEXT Entrepreneurship is defined as an organizational process that includes activities that lead to the identification of opportunities and anticipation of risks in the contemporary competitive environment characterized by change and innovation. Todorovic and McNaughton (2007) consider that “many nations recognize the economic impact of entrepreneurs and promote entrepreneurial activity; entrepreneurial activity promotes knowledge, beliefs and practices that aid economic development” (Todorovic, Ž. W., McNaughton, R. B., 2007, pp. 386). According to Rahman and Fatima (2011) “entrepreneurship is an important determinant of economic growth” (Rahman M., Fatima, N., 2011, pp.623). Also, Stanley and Narver (1995) consider that “entrepreneurial culture is often characterized as valuing traits, such as high tolerance for risk, proactiveness, receptivity to innovation and active resistance to bureaucracy” (Slater, S.F., Narver, J. C.,1995, pp.68). Innovation and proactiveness are the success key for any organisation in gaining the competitive advantage. According to O’Cass and Weerawardena (2009) “the international marketing literature suggests that entrepreneurship gives rise to certain processes and practices intended to maximise organisational success in new markets” (O'Cass, A., Weerawardena, J., 2009, pp. 1332). Zhao (2005) considers that “entrepreneurship represents organisational behavior” and “the key elements of entrepreneurship include risk taking, proactivity, and innovation” (Zhao, F., 2005, pp.26).According to Schumpeter “innovation is… the process of industrial mutation... that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Popescu, G., 2009, 275

pp.896). Moreover, “innovation is the specific tool of entrepreneurship by which entrepreneurs exploit change as an opportunity for a different business or service” (Zhao, F., 2005, pp.28). In the contemporary economic context, innovation implies certain behaviour of the entrepreneur who acts promptly and in accordance with the sudden changes that affect the business environment. Innovations lead to productivity growth, while being a means leading to the fulfilment of entrepreneurial actions that are influenced by the social and economic factors as well as by the business environment. According to Crumpton (2012) “entrepreneurship demonstrates the innovation by putting the idea or concept into practical use with the infusion of resources, be it capital or support of institutional Leadership” (Crumpton, M. A., 2012, pp.100). Herbig, Golden and Dunphy (1994) consider that “in the long run, technologically creative societies are both inventive and innovative. Without invention, innovation will eventually slow down and grind to a half, and static will result. Without innovation, inventors will lack focus and have little economic incentive to pursue new ideas” (Herbig, P., Golden, J.E., Dunphy, S., 1994, pp. 39). The entrepreneur’s involvement in actions aimed at achieving benefic results leads to the accomplishment of the mission of the organization in which he/she operates, and therefore his/her ability to implement innovative ideas represents the key to organizational success. Moreover, “entrepreneurship and innovation are positively related to each other and interact to help an organisation to flourish” (Zhao, F., 2005, pp.39). According to Brenkert (2009) “entrepreneurship is more than being innovative or creative in coming up with new ideas for products or services. Entrepreneurs must also either create an organization or work through an organization to develop the new opportunities and values they envision” (Brenkert, G.G., 2009, pp. 450). This implies taking risks but also facing obstacles in their way to success; entrepreneurs must deal with various obstacles in order to create value (Brenkert, G.G., 2009, pp. 450). Machan (1999) consider that “in a society of just human relationships, there must be a consistent and constant hospitality to entrepreneurship because without this, an important moral dimension of human life would be suppressed or at least seriously distorted” (Machan, T.R., 1999, pp. 608). Moreover, “without such a welcome, public policy and law will yield to more widely accepted but sadly misguided moral sentiments, for example, the call for greater and greater state power to regiment or re-engineer society instead of making it safe for natural human initiative” (Machan, T.R., 1999, pp. 608). According to Zhao (2005) “meeting and exceeding the changing needs of customers and an emphasis on marketing and the development of new markets should be the key management and entrepreneurial strategies. Moreover, in the current turbulent economic environment, developing organisational capacity to acquire, create, accumulate, and exploit knowledge should be an essential strategy in gaining a competitive advantage through innovation” (Zhao, F., 2005, pp.37). According to Lakshman (2009) “leadership constitutes a process of facilitating individual, group, and organizational efforts to learn, manage knowledge, and accomplish shared goals in organizations” (Lakshman, C., 2009, pp.341). Thus, “knowledge” becomes a key element that is a component of leadership, and those leaders that support the whole process of organizing knowledge and information at the level of the organization, can significantly influence the effectiveness of activities carried out by members of an organization. Leadership is an organizational process involving actions aimed at achieving performance both individually and collectively. In a knowledge-based society, when intense 276

competition within the business environment increases continuously, the leadership’s role is to solve problems that may arise, in a competitive manner, leading to the achievement of organizational performance. It is very important to mention that “one should not forget the efficiency of leadership is not obtained by strict formulas, applicable to any situation”, being “natural to be permanently preoccupied with promoting a high leadership and, of course, with discovering and valorizing the determinants of this type of leadership” (Cornescu, V., Mihăilescu, I, Stanciu, S., 2003, pp. 223). Leadership is also a managerial process that occurs in relationships between managers and employees. Managers characterized by integrity, ambition and responsibility, with a capacity to resolve and settle disputes that arise between employees and who have an effective leadership style can obtain the performances expected. Nica and Iftimescu (2008) consider that “leadership inspires, motivates and guides the activity of other individuals in order to achieve the objectives of the group or organization (Nica, P., Iftimescu, A., 2008, pp. 320). 3. ANALYSIS OF POLITICAL LEADER IMAGE AND MAIN CHARACTERISTICS THAT INFLUENCE HIS/HER ATTITUDE REGARDING INNOVATION AND KNOWLEDGE In the field of classical marketing the following definition of positioning can be drawn “as a dimension of consumer behaviour, positioning is the result of how goods / services or companies are perceived by potential customers” (Cătoiu, I., Teodorescu, N., 2004, pp. 24). On the other hand, there are several categories of images thus distinguishing: “the desired image - the image that the candidate would like to have among the electorate (...); the transmitted image (broadcast) - the image that the candidate transmits, most often through an advertising agency (...), the received image - the image that each person belonging to the target group builds-up on the candidate (. ..); the actual image - (...) is a regrouping, a synthesis of images received at the individual level, and processes at a social level” (Zaharia, R., 2001, pp. 217). According to Henneberg and O’shaughnessy (2007) “the political “product” (better: exchange offering) is an amalgam of the elements of policy, party impression and its received, publicly understood history. However, leader image can perhaps be seen as the central and unifying core to this idea. The leader has to be attractive and also credible; strong and caring; leading but also following” (Henneberg, S.C., O'shaughnessy, J., 2007, pp.20) Specifically, the candidate’s image reflects how the candidate is perceived by voters being at the same time a result of some “cognitive, affective and conative aspects” (Coman, C., 2010, pp. 42). The cognitive dimension refers to information that voters have with respect to the candidate’s age, hobby, experience, etc.., the affective dimension implies the favourable or unfavourable attitude that voters have with respect to a candidate and the conative dimension involves the voters’ decision to vote or not vote for a certain candidate. Milca (2007) presents the following features characteristic to successful political leaders: physical traits – activism, energy, age, physical aspect (including height, weight); social status – studies, social position, social mobility; intelligence and training – intelligence, ability to make decisions, knowledge, fluency in speaking; personality characteristics– ability to adapt, accommodate, complying with norms, aggressiveness, the will to stand out, liveliness, authority, dominance, ascendency, emotional balance, selfcontrol, enthusiasm, optimism, independence, objectiveness, determination, originality, 277

creativity, integrity, ethical behavior, resourceful, self confidence, persuasiveness, stress resilience; characteristics related to task fulfillment – willingness to achieve goals, initiative, perseverance, responsibility and competence, task-orientation; social characteristics – the ability to cooperate and to obtain cooperation, organizational and leadership skills, attractiveness, educational skills, tact, diplomacy, popularity, prestige, sociability, ability to establish interpersonal relationships, social engagement, belief in God, patriotism” (Milca, V., 2007, p. 217-218). The more features are found in a political leader’s conduct, the more he can be mobilized in the political competition, thus creating a possible personality model of efficient and successful political leaders (Milca, V., 2007, pp.218). The ability to make the right decisions in certain ambiguous situations, as well as the balance and self-control of a good leader highlight a political competence profile, characterized by the following essential features: assertiveness, self-fulfillment, respect, empathy and efficient communication interpersonal relationships with those in his subordination, adaptability, flexibility, stress resilience, optimism. One can ascertain the fact that these factors conceptually define the “emotional intelligence”, and that “optimism, perseverance and the ability to delay satisfaction” are the main aspects that define emotional intelligence (Milca, V., 2007, p. 223-224). Voters have certain expectations from the candidates they support in election campaigns, and therefore the process sustained by future political leaders in an electoral campaign influence the final vote of the electorate. Therefore, messages transmitted through television broadcasts, media and the candidate's presence in public places, thus facilitating direct contact with voters, represent a bridge between the candidate and the electorate. Milca (2007) believes that “the political image brand is represented by the ensemble of personality signs and characteristics that the media induces in political audience, relative to a person who has constant political activity” (Milca, V., 2007, pp. 87). Moreover, “when the public, the electorate invests – with the help of media that permanently refers to the actions of the politician – in the respective politician a series of dominant personality traits, we can say he enclosed the respective personality in a definitive image brand”, and thus the image of politicians, strongly positioned in the conscience of a country’s electorate, can hardly be changed (Milca, V., 2007, pp. 87-88). Depending on the candidate’s speech, gestures and mimic, potential voters analyze and decide in advance whom to vote in an election campaign. Thus, if in the mind of potential voters there is a clear picture of a person with certain qualities, for example, fairness, responsibility and entrepreneurial spirit he/she will not hesitate to give a casting vote in support of the political leader wanted. A good leader must show empathy towards under his leadership. Milca (2007) mentions that politically, the leader’s role and influence are determined both by his authority and his power, that can be perceived by his behavior and personality (Milca, V., 2007, p.107108). Also, Milca (2007) believes that “any leader should be a strong influential personality, should be able to coordinate, plan, direct, supervise and control the activity of the group (collectivity or organization), but he should care for human and relational aspects as well (...)” (Milca, V., 2007, p. 105). According to the same author, the main characteristics of a good political leader are the following: promoting new ideas and practices, representing the group, affiliating and integrating members, organizing and acknowledging credits” (Milca, V., 2007, p.108). According to Henneberg and O’shaughnessy (2007) leadership attributes and their halo-effect on other offering aspects have arguably a great impact on political marketing management performance (Henneberg, S.C., O'shaughnessy, J., 2007, pp. 21).

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Goleman, Boyatzis and McKee (2007) present the main leadership styles that create resonance and have a strong impact on the organizational climate. Thus, these authors identify the following leading styles tightly connected to the leader’s personality: the leading style characteristic to the “visionary leader” – a visionary leader motivates his team to accomplish common tasks and goals (the impact of this leading style on the organizational climate is positive, and if necessary, a new vision and a clear orientation being recommended; the leading style characteristic to “the coaching leader” – a coaching leader manages to create a tight connection between the subordinates’ desires and the objectives of the organization (the impact of this leading style on the organizational climate is “extremely positive”, being recommended to employees who want to improve their performance and to attain long term constructive abilities); the leading style characteristic to “the affiliative leader” – a affiliative leader creates harmonious connections between employees (the impact of this leading style on the organizational climate is positive, being recommended in order to consolidate communication between employees in stressful periods); the leading style characteristic to “the democratic leader” – a democratic leader has the ability to valorize the efforts of the team he coordinates thus gaining their attachment (the impact of this leading style on the organizational climate is positive, being recommended to permanently motivate employees to make great efforts in order to obtain positive results); the leading style characteristic to the “promoter leader” – a promoter leader proposes to his subordinates challenging objectives (the impact of this leading style on the organizational climate is often “very negative”, when it’s improperly applied and it is recommended only when efficient results from the motivated teams are expected to be obtained); the leading style characteristic to the ”commanding leader” – a commanding leader has the role of offering the team he leads clear directions in certain unexpected situations, reducing anxiety in certain emergency situation (the impact of this leading style on the organizational climate is “extremely negative”, because it is often misused, but it is recommended, if is properly applied, in crisis situations, in order to generate a change) (Goleman, Boyatzis and McKee, 2007, p.82-83). Figure number 1: Leadership styles tightly connected to the leader’s personality and leader’s role according to these Leadership styles tightly connected to the Leader’s role leader’s personality •visionary leader  motivates his team to accomplish common tasks and goals •coaching leader  manages to create a tight connection between the subordinates’ desires and the objectives of the organization •affiliative leader  creates harmonious connections between employees •democratic leader  has the ability to valorize the efforts of the team he coordinates thus gaining their attachment •promoter leader  proposes to his subordinates challenging objectives •commanding leader  has the role of offering the team he leads clear directions in certain unexpected situations, reducing anxiety in certain emergency situation Source: Goleman, Boyatzis and McKee, 2007, p.82-83. 279

According to Zhao (2005) “organisational culture and management style are crucial factors affecting the development of entrepreneurial and innovation behaviour in organizations” (Zhao, F., 2005, pp.39). 4. CASE STUDY – POLITICIANS’ MAIN STATEMENTS REGARDING THE IMPACT OF ENTREPRENEURIAL CULTURE IN THE CONTEMPORARY CONTEXT José Manuel Durão Barroso, President of the European Commission, stated: “Europe has a long and strong tradition of social innovation: from the workplace to hospices, and from the cooperative movement to microfinance. We have always been a continent of creative social entrepreneurs who have designed systems to enhance education, health, social inclusion and the well-being of citizens. By nature social innovation is an ever-evolving field to keep pace with fast-changing challenges in society. But what concretely do we mean by social innovation? I think it is important to recognise that this concept is not yet fully accepted in the political debate. I think social innovation is about meeting the unmet social needs and improving social outcomes. It is about tapping into the creativity of charities, associations and social entrepreneurs to find new ways of meeting pressing social needs, which are not adequately met by the market or the public sector and are directed towards vulnerable groups in society”. Through his statement José Manuel Durão Barroso sets out that in today's society, characterized by innovation and change, entrepreneurs are trying to find the best way to meet the needs of the members of the society, needs that are continuously diversifying. Therefore, investors with a strong entrepreneurial spirit must find optimal solutions to achieve the expected results, and also take immediate action to achieve the established goals, although as José Manuel Barroso Durão mentioned in his statement, the concept of social innovation "is not yet fully accepted in the political debate." But the society is constantly developing and in the future, innovation will play a decisive role in the implementation of entrepreneurial culture, because innovation (...) means rapid response and flexibility (...)” (Boier, R. A., 1997, pp.22) The European Commission Vice President Antonio Tajani, Commissioner for Industry and Entrepreneurship, stated: “In the current severe economic and social crisis, low energy buildings are safe and viable investments for society and private investors. The construction sector should see this as an opportunity to innovate and attract new talent. New technologies offer major potential, not only for new houses, but also for renovating millions of existing buildings to make them highly energy efficient in line with the EU 2020 objectives. Let's not miss this opportunity. The construction sector can become a driver of sustainable growth”. Also, to support the statement of the President of the European Commission, Antonio Tajani, Vice President of the European Commission and the government representative for Industry and Entrepreneurship, sets out that in the context of the economic crisis that manifests itself globally, the construction sector still represents a viable opportunity for investors who need to implement innovative strategies in order to obtain profit and beneficial results. The entrepreneurial spirit and risk taking are fundamental in supporting the construction sector, which, with little effort, can become the engine of economic growth and development at a global level. If we go back in time, Margaret Thatcher, “the only person who won three successive General elections in Britain in the twentieth century” and “the longest-serving Prime Minister of the century”, supported investments and innovation by practicing a modern leadership style, encouraging managers to establish their objectives whose achievement led to the welfare and prosperity of the country (Blundell, J., 2012, pp.199). Marketing concept has 280

played a significant role in implementing effective electoral strategies during election under Lady Thatcher’s leadership (Wring, D., 1996, pp.107). A country’s political attitude on entrepreneurial culture can influence the activity of the organizations by rules and regulations imposed at a specific moment. Also, the influence of the political environment in a country and the activities of political leaders to support national and international economy are important considerations that can directly influence organizational performance. Countries with a developed economy support investments in engineering and technology, and companies operating in these countries are working towards implementing effective strategies that lead to achieving global advantages. Therefore, the development of entrepreneurial culture and the implementation of strategies aimed at achieving competitive advantage represent the objectives of successful entrepreneurs who wish to obtain performance through innovation and risk taking. According to Herbig, Golden and Dunphy (1994) “structure of a society, a locale or a country has tremendous influence on that region’s propensity to produce entrepreneurs, small ventures, and hence innovation” (Herbig, P., Golden, J.E., Dunphy, S., 1994, pp.47). It is important to mention that for a “society to be technologically creative”, “economic and social institution” need to stimulate and encourage potential innovators by creating favorable opportunities for their own improvement (Herbig, P., Golden, J.E., Dumpty, S., 1994, pp.40). 5. CONCLUSIONS AND IMPLICATIONS The ability to innovate, the existence of the entrepreneurial spirit and practicing an effective leadership style are key factors that lead to the beneficial results within organizations. The entrepreneurs’ openness towards innovation, implementation of effective strategies and risk taking represent primary considerations in achieving performance. By analyzing the statements presented in the paper, important aspects regarding the concept of social innovation are highlighted, a concept that should be taken into account by entrepreneurs when choosing their action strategies. Economic competitiveness can be achieved by encouraging innovation through manifestation of entrepreneurial spirit as well as technological development. The skills of successful entrepreneurs (flexibility, adaptability, confidence) lead to awareness of the need for change, and thus, the capitalization of innovation and entrepreneurial culture implies organizational success. In conclusion, entrepreneurial culture promotes change, entrepreneurship being considered, in a constantly changing society, a source of creativity and innovation. Practicing an effective leadership style and displaying the entrepreneurial spirit stimulates competitiveness on a global level. Author’ Biographical Notes Eleonora Gabriela Baban Teaching assistant –University of Bucharest, Department of Economic and Administrative Science, Faculty of Business and Administration and, also, Ph.D student - The Bucharest Academy of Economic Studies.

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REFERENCES 1. Boier, R. A. (1997), Inovare şi succes. Strategii de marketing pentru produse noi, Editura SEDCOM LIBRIS, Iaşi. 2. Blundell, J. (2012), Margaret Thatcher. Portretul Doamnei de Fier, Editura Curtea Veche, Bucureşti. 3. Brenkert, G.G. (2009), Innovation, rule breaking and the ethics of entrepreneurship, Journal of Business Venturing 24,pp. 448–464. 4. Cătoiu, I., Teodorescu, N. (2004), Comportamentul consumatorului. Ediţia a II- a, revăzută şi adăugită, Editura Uranus, Bucureşti. 5. Coman, C. (2010), Sfera publică şi imaginea politică, Editura C.H. Beck, Bucureşti. 6. Cornescu, V., Mihăilescu, I, Stanciu, S. (2003), Managementul organizaţiei, Editura All Beck, Bucureşti. 7. Crumpton, M. A. (2012), Innovation and entrepreneurship, The Bottom Line: Managing Library Finances, Vol. 25, Iss: 3 pp. 98 – 101. 8. Goleman, D., Boyatzis, R., McKee, A. (2007), Inteligenţă emoţională în leadership, Editura Curtea Veche, Bucureşti. 9. Henneberg, S.C., O'shaughnessy, N. J. (2007), Theory and Concept Development in Political Marketing, Journal of Political Marketing, 6:2-3, pp. 5-31. 10. Herbig, P., Golden, J.E., Dunphy, S. (1994), The Relationship of Structure to Entrepreneurial and Innovative Success, Marketing Intelligence & Planning, Vol. 12, Iss: 9 pp. 37 – 48. 11. Lakshman, C. (2009), Organizational knowledge leadership: An empirical examination of knowledge management by top executive leaders, Leadership & Organization Development Journal, Vol. 30, Iss: 4, pp. 338 – 364. 12. Machan, T. R. (1999), Entrepreneurship and ethics, International Journal of Social Economics, Vol. 26, Iss: 5, pp. 596 – 609. 13. Milca, V. (2007), Personalitate şi politică, Editura Economică, Bucureşti. 14. Nica, P., Iftimescu, A. (2008), Management. Concepte şi aplicaţii, Editura Sedcom Libris, Iaşi. 15. O'Cass, A., Weerawardena, J., (2009), Examining the role of international entrepreneurship, innovation and international market performance in SME internationalisation, European Journal of Marketing, Vol. 43, Iss: 11, pp. 1332. 16. Popescu, Ghe. (2009), Evoluţia gândirii economice. Ediţia a IV-a, Editura C.H. Beck, Bucureşti. 17. Rahman, M., Fatima, N. (2011), Entrepreneurship and urban growth: dimensions and empirical models, Journal of Small Business and Enterprise Development, Vol. 18, Iss: 3, pp. 608 – 626. 18. Slater, S. F, Narver, J. C. (1995), Market orientation and the learning organization, Journal of Marketing; 59, 3; ABI/INFORM Global, pp.68. 19. Todorovic, Ž. W., McNaughton, R. B. (2007), The effect of culture, resources and quality of entrepreneurship on economic development: a conceptual framework, Int. J. Entrepreneurship and Small Business, Vol. 4, No. 4, pp. 386. 20. Wring, D. (1996), Political marketing and party development in Britain: a “secret” history, European Journal of Marketing, 30, 10/11, pp.117. 21. Zaharia, R. (2001), Marketing social-politic, Editura Uranus, Bucureşti.

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22. Zhao, F. (2005), Exploring the synergy between entrepreneurship and innovation, International Journal of Entrepreneurial Behaviour & Research, Vol. 11, Iss: 1, pp. 25 – 41. 23. http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/190&format=H TML&aged=0&language=EN&guiLanguage=en 24. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/869&format=HTML& aged=0&language=EN&guiLanguage=en

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POLLUTION MANAGEMENT FOR A SUSTAINABLE DEVELOPMENT Marius Bulearca Center for Industry and Services’ Economics of the Romanian Academy Constantin Ghiga University of Bucharest

ABSTRACT The extractive industry is unanimously acknowledged as being a vital sector of any country endowed with workable natural resources. The experts claim that this industry is a source of foreign income, of direct foreign investments and it is also the main and sometimes the only energy provider of a country. Given that ecological research has begun to study environmental phenomena and interpret data and information on economic and social relations taking into account environmental restrictions, as to draw conclusions about the effects that such restrictions have on economic and social life, this paper intends to determine the extent to which costs provide maximum benefits for quality of life in general and human in particular. Keywords: environment, extractive industry, models, taxes on pollution. sustainable development 1. INTRODUCTION The extractive industry activities are widely recognized as having a significant impact upon the population, both from the financial and from the social, cultural and environmental point of view. More and more it has been emphasised the need for minimising negative impacts and promoting positive elements that could control the external threats while also developing the competences of those involved in the process of minimising the unwanted impact. Ecological research, lately intensified, highlighted the systemic nature of planetary lifetime, the close interdependence between environment and human activities and the causes underlying the emergence of imbalances in the whole system, with negative effects for life in general and human in particular. Moreover, economic research has begun to study environmental phenomena and interpret data and information on economic and social relations taking into account environmental restrictions, to draw conclusions about the effects that such restrictions have on economic and social life, including quality of life, and human effects on improving environmental conditions. Following observations and empirical studies, it was found that there are relations of dependence between the degree of reduction of pollutant residues, on one hand, and cost and the benefits to be achieved by total control and actions to reduce pollution, on the other hand. It has been demonstrated, for example, that the cost of pollution abatement in total activity describes the degree of pollution as an exponential curve. The first steps to reduce the concentration of waste without polluting brings the most important effects; then additional measures to reduce waste with the same beneficial effects 284

on life quality, requires spending more. Also it has been found that the evolution of positive effects on life quality for achieving different levels of pollution describes, roughly, logarithmic or semi-logarithmic curve form. Therefore, the problem requires continuously determining the extent to which costs provide maximum benefits for quality of life. 2. MODELS FOR DETERMINING TAXES ON POLLUTION From the economic point of view, the environmental protection expenditure maximum level that can be made to is the point where total cost equals the total positive effects. But careful analysis reveals that a zero difference between the benefits and costs would be reached in the foreseeable future, unless they would remain the same or industrial technologies would grow slower than the pace of deterioration in the environment. Reality demonstrates that the progress on improving or introducing new technologies in the last three decades are more pronounced towards the elimination of pollution, clean recovery of new resources or substitution of polluting resources with other clean or cleaner resources. The unsatisfactory situation reached regarding the advanced status of pollution in some countries and regions is due not to the lack of technological solutions, but especially to the long time neglect of such important issues as a result of either ignorance of their scale phenomena or negative failure consequences, or insufficient economic mechanisms put in the service of immediate interests, without taking into account the perspective of life quality of individuals and entire communities. In order to have a better management of natural resources, on one hand, and to reduce environmental pollution, on the other hand, the use of instruments for this destination is detailed below. In the beginning we have to understand the various costs involved in pollution control. Regardless of the original way for financing this remediation action, the population has to bear a burden on the following four ways: 1) as tax payers, when bearing high taxes because there are grants awarded to companies that install pollution control installations and equipments; 2) through increased products prices, because as long as subsidies cover only a fraction of the remediation equipment cost, the other part having to be supported by companies that have installed them, operators “passes” some of this burden to the public; 3) through additional payments in the future, because at the companies’ already paid level for pollution control equipments and lower investment in other equipments, increase in productivity and production is reduced. 4) through loss of jobs, due to the fact that pollution control standards determine closing plants, and although the highest costs public occur, even those who live near large pollution prefer pollutants than job loss. Thus, in one way or another cost control pollution affects us all. Because is so expensive to control pollution the cheapest methods have been chosen (see fig. 1). First we must understand why government intervention is essential. Why government facilitates private market? Why we can not count on the "invisible hand" of Adam Smith in limiting pollution? Good’s marginal cost to society, pointed by the long arrow MCS, includes both internal marginal cost of producing company (filled arrow), and the marginal external cost of producing company (shaded arrow).

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M arginal cost

MCS MC

M arginal external cost M C E (downdside of pollution) at the internal (private) m arginal stock of M C (production cost)

M C S , m arginal cost for the society,as a whole

Production

Fig. 1. With pollution, private and social costs differ Pollution: an external cost. When there is pollution, private and social costs differ. To understand why, let’s consider a pulp and paper mill located on a river. Paper cost for the society includes not only company’s private or internal production cost, but the cost of downstream companies that have to face water discharges made by upstram companies. While the factory has to pay for the cost of domestic production, any downstream cost is external to such operations, since the cost must be borne by the others. Internal or private costs are costs incurred by those who actually produce or consume the good. External costs, also known as neighbor costs or spillover costs are costs incurred by the others. Pollution is such an example. Let’s consider a simple case. Suppose that each unit is treated with a quantity of fluid which is then released as waste in the water. Assume also that each unit of this fluid causes constant damage downstream. As such, each unit of output produced requires a constant external pollution cost, shown in figure 1 by the short shaded arrow. When is added to internal cost borne by the producers (filled arrow MC), the result is the long arrow MCS, which is the marginal cost to the society of this good. MCS is constantly higher than MC because of the assumption on constant external cost per unit of output produced. Pollution control: the simple case. When we have such an external cost, even in a perfectly competitive market economy it results a poor allocation of resources as seen in fig. 2. Before applying antipollution tax, industry supply is S1, which reflects only the private internal costs of producers facing the sellers. This supply equals the demand in point E1 through an output Q1. This production is inefficient because the marginal social cost exceeds the benefit for all productions between Q2 and Q1. For example, last unit Q1 does not deserve to be produced; its benefit, as shown by the shaded arrow below the demand curve is less than the costs to society (also the shaded arrow plus the filled arrow below curve MCS). Loss of efficiency is the sum of these filled arrows that is the shaded triangle.

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After apllying tax r, producers are forced to face both internal cost and external one, so their supply curve shifts upward from S1 to S2. D and S2 now have a balance in t2, through the output Q2. This is efficient because the marginal cost and benefit are equal. Efficiency gained by reducing output from Q1 to Q2 is the elimination of shaded triangle. In fig. 2, MC and MCS are reproduced from fig. 1, and the demand D is the marginal benefit of this both private and social good. S1 shows that firms are willing to offer. This curve measures the internal private costs – the only costs firms face in their decision to offer. With the demand D and supply S1, perfectly competitive equilibrium is reached in E1.

P ric e, c o sts D

(M arg in a l so cia l c ost)

(M a rgin al b en efit)

M CS

G E2

(M argin al p riv ate c ost)

r S1 Q3

Q u an tity

Fig. 2. Loss of free market efficiency when there is an external cost For the society, E1 is not an efficient income because it only equalizes the marginal benefit and marginal private cost. An effective solution requires that the marginal benefit equals to the marginal social cost MCS. This happens in E2, at a lower production Q2. We conclude that in a free market, competitive firms produce too much of a pollutant good Q as compared to effectively quantity Q2. Is in the interest of society to decrease the production of these goods and use resources to produce something else. To confirm that Q1 is an inefficient production, worth noting that the benefit of the last unit produced is shown by the shaded arrow below the demand curve. However, its cost is even higher, since they include both private costs (the same shaded arrow) and its external costs (indicated by the filled arrow). So, this filled arrow represents the net loss in producing the last product unit Q1. As long as there is a similar loss in producing of each unit "in excess" between Q2 and Q1, the total loss of efficiency is measured by the shaded triangle. In this case, there is one possible way to solve the situation: the manufacturer imposing a uniform tax equal to marginal external cost shown by the filled arrow. Thus, the tax "internalize” the externality: the manufacturer is forced to face both external costs and internal cost. As a result of this tax, supply curve shifts upward from S2 to S1: for confirmation, we have to remember that the offer reflects the marginal cost, and he stood by the size of the tax to be paid. The new equilibrium is in E2, where the demand and new supply S2 intersect. This new production Q2 is efficient because marginal benefit equalizes the social marginal cost. Finally, the gain in efficiency of this taxation policy is the shaded triangle, the loss of efficiency at the beginning, which has now been removed. In short, as a result of this tax, the company receives a benefit that otherwise the market would not offer: pure water. There have been suggested several ways to reduce pollution. One is setting a limit on the production of polluting companies; another is the introduction of property rights. Such a limit may or may not solve the problem; in fact, is better than to do nothing. For example, 287

suppose that production is limited to Q3. Considering the situation shown in fig. 1, one can demonstrate that producing too little, a loss for society will occur, that is triangle FE2G. As long as the loss will exceed the initial loss, in this case the improvement will be worse than in the original case. It may be noted also that a greater restriction of production will lead to a higher loss in efficiency. Thus, an arbitrary limit of production may be an ineffective policy. A better approach - if pollution costs can be estimated - is to impose taxes on these amounts. Then, the correct degree of pressure will be applied on the market to push back from production from the initial Q1 to efficient production Q2. Pollution control: the complex case. In practice, policy makers must deal with situations more complicated than those shown so far. First, pollution is not from one polluting industry. Second, pollution and production are not only linked to a situation similar to that already presented, in which each additional unit of production generate an equal amount of pollutants; in most cases the latter varies. A good can be produced with large amounts of pollutants that are discharged without any restrictions in water or air. However, if the waste is treated, or when using pollutant fuels, this situation will result in a lower amount of pollutants. Consider a company that treats its waste, and use cleaner fuel but more expensive. This company reduce pollution, but at a certain cost. This cost to reduce pollution for all companies in an area shown in fig. 3 as curve MCR (where R is to reduce pollution).

P o llu tio n

re d u c tio n c o st

M C R , m a rg in a l c o st fo r p o llu ti o n red u c tio n , th a t is th e c o s t fo r sh iftin g to th e left to w a rd a s m a ller p o llu ta n t q u a n tity

P o llu ta n t e lim in a tio n c o s t P o llu ta n t e lim in a tio n c o s t Q 2 Q2 P o llu tio n ta x

Q1 Q4

P o llu ta n ts q u a n tity

Fig. 3. The cost of reducing pollution and the effect of a tax Q1 is the amount of pollutants that might occur in the absence of control measures. By shifting us back to the left of MCR, we notice the cost of reducing pollution for an additional unit - for example, by installing pollution control equipment. So, if pollution was restricted on the way back to Q4, any greater reduction would involve very expensive antipollution measures, implying a cost showed by the high filled arrow. If a pollution tax T is applied, companies voluntarily reduce their pollution, shifting from Q1 to Q3. As long as they are still at the right side of Q3, they will continue to reduce pollution because its cost (e.g., short filled arrow) is less than the cost to pay the tax. However, they will not shift to the left of Q3. In this side, it costs more to reduce pollution (high filled arrow) rather than continuing to pollute and pay the tax T. 288

Through Q1, has been designated the amount of pollutants that occur when no restriction is imposed. As it reduces pollution, firms shift to the left on curve MCR. At first, remediation costs are lower. For example, the quantity Q2 of pollutants can be removed at a lower cost pointed by the short filled arrow. However, further reducing pollution, the lower curve becomes higher as companies shift to the left. 3. TAXES ON POLLUTION – A MAJOR GOAL FOR ENVIRONMENTAL PURPOSES Until a few decades ago there were few restrictions on pollution. Therefore, companies preferred to discharge pollutants instead of treating them. The result was the amount of pollutants Q 1. To prevent this situation, the government wants to dramatically reduce pollution. Suppose they want to reduce by half, from Q3 to Q1. Policies are as follows: Option 1: Pollution tax. Suppose the government imposes a tax on emission – ie, a tax on each unit of pollutant discharged in the environment. Specifically, in figure 3 suppose that T is the tax payable per unit of pollutant. Then, businesses eliminate pollution in the right side of curve MCR, where costs are lower to curb pollution (e.g. small filled arrow), rather than continuing to pollute and pay the tax T. However, pollution is reduced simply to the Q3 where curve MCR intersects the line of tax. Left to this point, the cost of reducing pollution is high, as illustrated by the large filled arrow. Indeed, the cost is higher than the tax T. So in this area, companies can be encouraged to pay taxes and continue to pollute. Although “taxes on emissions" have been much supported by economists, still they are not often used. However, in a similar approach, there are some cases in which comanies are required to pay pollution - even if payment is not directly related to each unit of pollutant. For example, EPA (US Environmental Protection Agency) Superfund, a multibillion dollars program for random chemical waste cleanup, was initially financed by imposing taxes on companies that pollute heavily. Option 2: A physical limit imposed on the pollution level of each company. A question may arise: Why to have so many problems with setting a tax on pollution, as in figure 3, as long as the pollution can be reduced by the same amount through a simple and direct control, ie by asking each company to reduce pollution by half? The answer is that, even if this approach would lead to the same abatement level of pollution, this situation would involve higher costs of remediation (cleaning), as will be further explained. Not all companies face the same pollution abatement costs by applying a tax, pollution is reduced by companies that can achieve this at the lowest cost, ie firms at the right of Q3. Companies from the left of Q3 will continue to pollute. However, if all companies would be required to reduce pollution by half, companies from the left of Q3 should in this case, to participate, even at the cost indicated by the filled long arrow. As such, the advantage of a tax is that "it lets the market to go". For companies that respond at applying the tax, pollution is reduced by those companies that will do this in the cheapest possible way. Thus, the company devotes fewer resources for cleaning. Gains can be substantial. Wallace Oates of the University of Maryland assumed that the pollution tax would cost the company 75-80% less than a policy of demand (taxation) of all companies to reduce pollution by the same percentage. Which of these two policies have been adopted by governments? The answer is surprising: rather than let the market work by the existence of several taxes on pollution, governments have relied primarily on regulatory controls. Physical limits imposed by the

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pollution were introduced for certain companies - a policy, as shown, involving undue additional costs. There are recent encouraging signs that governments are moving towards a third solution, a compromise that allows individuals to set limits on pollution, but at the same time, to let the market work and, as such, to avoid undue additional costs. Option 3: Physical limits imposed on the contracting of the pollution permits on pollution emissions. The third option is that the authorities set a specific limit on the amount of pollutants allowed to each company. For example, each company is allowed to pollute only half the level of pollution in its past. So far, the situation is similar to that of Option 2. At this time intervenes the turning to let the market work: companies are allowed to buy and sell "pollution” permits. It can be shown that in a perfectly competitive market, permits will be sold at the right price T. Companies at the right of Q3 gain by selling their permits at the price T and by remediation actions at a lower cost shown by the short filled arrow. For the companies at to the left of Q3 is cheaper to buy permits at price T to continue to pollute than to spend more on remediation, costs represented by the large filled arrow. Thus, pollution is lower only for the companies at the right of Q3, which may realize it at the lowest costs. So, in Option 3 as it can (easy) sell permits on the market, pollution can be reduced at the same low cost as in Option 1 that involves a pollution tax. Therefore, the effects of Option 1 and 3 are higher than those of Option 2. Only in Option 2 – where all companies are required to reduce pollution with a fixed unit - the high cost of remediation is taken only by the companies at the left of Q3. In these circumstances, the general principle is: Pollution can be reduced to lower costs if the government gives way to market forces. He can change the incentives by imposing a tax or applying permits sold on the market and then allowing businesses to operate and respond to the new conditions created. Companies are the only one the most aware of their cost levels and thus are best able to choose the path that will minimize these costs. Basic conclusion is: as Option 2 does not use market principles, is more expensive than Option 1 or 3. But comparing Option 1 to 3, which is preferable? A comparison between Option 1 and 3. These two choices differ by an important issue. In Option 1 companies are penalized. If they cease to pollute, they have to pay the cost of remediation. In any case they are inversely affected by the applying of pollution tax. However, in Option 3, through the permits sold on the market, companies do not neccessarely have to lose. Indeed, those with lower costs for remediation actually gain. They can sell pollution rights for a price T that is greater than the total cost for remediation. While companies with high costs for remediation are affected in the opposite direction, they do not lose as much as they would lose by imposing a tax like the one in Option 1. Why? In Option 1, they have to pay tax T for all pollutant emissions. In Option 3, they do not bear a cost for some of their pollution – that is the pollution which is covered by free permits which they were secured. The fact that polluting companies prefer applying Option 3 makes the application a much more attractive option for the government. Productive activity does not influence too much on it and can assimilate easily into the legal framework. Thus, pollution can be controlled without interminable delays. However, even Option 3 poses a problem. Why even activities that have polluted in the past are entitled to permits and some may even sell them? In other words, some companies may benefit from pollution done in the past? This suggests that, on an equal basis, Option 1 is preferable because it penalizes the old pollution instead of rewarding it.

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Therefore, it was assumed that the government has set as a goal to reduce pollution by half, to Q3. Why not by third or three quarters or other percentage? Below is shown how objectives can be prefixed. How much pollution can be reduced? In fig. 4, MCR is reproduced from fig. 3. Moreover, we have here MCP, which is the ecological cost of additional units of pollutants. The best goal is to restrict pollution to Q3, where MCR equals MCP. The two curves, MCR and MCP should not be confused. MCR is the cost of reducing pollution - for example, the cost of pollution control equipment. On the other hand, MCR is the cost of allowing pollution. As long as there is only a small amount of pollutants - Q4, say the marginal cost to allow pollution (MCP height) is small. First wastes that are discharged in a flow are generally absorbed by the environment. As pollution increases, emissions increase and become more dangerous; that means we move to the right, and the MCP curve increases.

C osts, p ollution tax

M C R (m a rgin al cost of reducin g pollution m easured at the left of Q 1 )

Q3 Q2

MCP

P ollutan ts qu antity

Fig. 4. Loss of efficiency by allowing pollution uncontrolled With these two curves, the best goal is to reduce pollution by Q3, where MCP equals MCR. Any other quantity is not desired, as can be illustrated by the case in which pollution is left completely open and eventually reaches Q1. For all quantities of pollutants at the right of Q3, MCP is higher than MCR, so it's a mistake to allow pollution any further. To assess the social cost of this mistake we may consider such a quantity, say Q2. The cost of eliminating this quantity of pollutants is the height of curve MCR, shown by the empty arrow. This is less than the cost of allowing further pollution (the height of curve MCR that is both arrows). Therefore, the net cost of allowing such pollution is the filled arrow. If we sum up the costs of all quantities that are similar between Q3 and Q1, the result is the shaded triangle that is the loss to society by allowing pollution to exist further to unchecked Q1 instead of limiting it to Q3. On the other hand, a policy to reduce pollution at the left of Q3 causes a loss also. For example, if pollution is reduced to Q4, the cost of the last quantity is the height of curve MCP above of Q4. However, this last unit of pollution exceeds the cost of disposal (the height of curve MCR). Removal is a mistake. In conclusion, it seems that the best objective, Q3, can be found only by taking into account both the cost of allowing pollution, MCP, and the cost of removing it, MCR.

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Unfortunately, in practice is not so easy to estimate the objective Q3 due to the difficulties in estimating MCP and MCR. For example, in an attempt to estimate the marginal cost of pollution MCP, we do not know precisely how dangerous pollutants are actually. Moreover, there are many pollutants and the damage it produces each may depend on the presence of the others. 4. CONCLUSIONS AND IMPLICATIONS On the background of the general characteristics and of the content of the dimensions of sustainable development at global, regional and national level in the extractive industry, this development acquires specific connotations stemming especially from the depletion and the non-regeneration of mineral resources that ensure the basis-of-existence for the two industries. The attempt to decipher these particularities and to highlight the economic implications upon the respective industries allowed shaping of the following relevant aspects: 1. The depletion of some of the natural resources imposes their rational exploitation, at a pace that should guarantee their preservation for as long a period as possible. 2. The pressure upon natural resources could be reduced significantly through a superior valuation of the national capital of such resources. From the sustainable development perspective, although the extraction of the mineral resources has significant polluting effects upon the environment in the extractive unit areas, they can nevertheless be significantly reduced by the appropriate organisation of activity and extra-care granted to the environment. A requirement in understanding sustainable development is that the future generations should be compensated for the damages that our present activities produce. According to Pearce and others such a thing is successfully achieved if we let to future generations a capital stock as important as the one we have today at our disposal, a stock that allows them to achieve a welfare similar to ours. Other natural resource related economists, as Repetto and others, modified national income statistics of a selection of countries by allowing the depletion of their natural capital for certain resources, e.g. oil deposits or forest stocks. It is obvious that there was a practical reason for such kind of approaching the assessment of national income, but first of all it should be considered some other fundamental issues: the actual national accounting system should be maintained or completed only?; the selling of metal and fossil combustibles deposits should be considered as an income or as a capital selling?; finally, where should be drawn the line between defense expenditures and other kind of expenditures? Anyhow, all these questions and others are subject for further discussions and will be considered in one of our future papers. REFERENCES 1. Bulearca, M., Popescu, C. Ghiga, C., The Exploitation of Primary Energetic Resources and their Impact upon the Environment (Petroleum Gas University of Ploieşti Bulletin, Economic Sciences Series, Volume LXII, Nr.5B/2010), pp.124-129. 2. Bulearca, M., Badileanu, M., Popescu, C., Muscalu, M-S., Ghiga, C., Sustainable development and the need to manage taxes on pollution (WSEAS Transactions on Environment and Development, Issue 2, Volume 7, February 2011), pp.41-54. 3. Dersochers, P., Did the Invisible Hand Need a Regulatory Glove to Develop a Green Thumb? (Environ Resource Econ, 41:519–539, 2008). 292

4. Fiorino, J.D., The New Envionmental Regulation (The MIT Press, Massachusetts Institute of Technology, Cambridge, 2006). 5. Gerlagh, R, Kverndokk, S., Rosendahl, K. E., Optimal timing of environmental policy (Interaction between environmental taxes and innovation externalities (Statistics Norway, Research Department, Discussion Papers 493, 2007). 6. Grimaud, A, Rouge L., Polluting non-renewable resources, tradeable permits and endogenous growth (Int J Global Environ Issues, 4:38–57, 2004). 7. Grimaud, A, Rouge, L., Polluting non-renewable resources, innovation and growth: welfare and environmental policy (Resources Energy Econ, 27(2):109–129, 2005). 8. Grimaud, A., Rouge L., Environment, Directed Technical Change and Economic Policy (Environ Resource Econ, 41:439-463, 2008). 9. Schou, P., Polluting non-renewable resources and growth (Environ Resource Econ, 16:211–227, 2000). 10. Schou, P., When environmental policy is superfluous: growth and polluting resources (Scand J Econ, 104:605–620, 2002). 11. Schumacher, I., Zou, B., Pollution perception: A challenge for intergenerational equity (Journal of Environmental Economics and Management 55, 236–309, 2008). 12. Tahvonen, O, Salo, S., Economic growth and transition between renewable and nonrenewable energy resources (Eur Econ Rev, 45:1379-1398, 2001).

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A REVIEW ON QUALITY MANAGEMENT AND INNOVATION IN THE IRANIAN CONSTRUCTION INDUSTRY Shabnam Yazdani Mehr Abdelnaser Omran School of Housing, Building and Planning, Universiti Sains Malaysia

ABSTRACT This paper attempts to review the quality management and innovation in the construction industry. The main aim is to look into improving quality in the construction industry with develop a comprehensive and efficient rules and regulations and in accordance with technical requirements, economic, social, cultural, environmental and climate and then commitment to comply with them. Previous studies on quality management and practices have been used to support this review. The paper concludes that quality management in Iran is going forward the integration of quality management and innovation however, the future of this sector in Iran is not predictable due to some political matters such as sanction that will led to lack of expertise, lack of materials, shortage of budget, increase in prices, lack of labor, bankruptcy and etc. In this situation, there will be a possibility of return to its first situation. Keywords: Quality management, Construction Industry, Practice, Innovation, Iran. 1. INTRODUCTION Quality management is important to all organizations. Crosby (1980) defines quality as compliance to requirements. Quality management seeks to combine all organizational tasks to focus on meeting customer’s need and organizational objectives (Hashmi, 2000-2004). Innovation generates financial profits and that is reason innovation is important function for business profitability and survivability. Research studies explain that innovation in a modern business framework is about organization’s ability to provide the maximum quality that will distinguish a product or service through newness and originality (Zairi, 1999). Quality and innovation management have had strong similarities in their development. These two functions support each other and both of them seek customer’s satisfaction. Rafiei (2012)(CEO of Housing and Civil Development) mentioned: Today, in developed countries and the developing world, construction industry not only defined as a settlement but, the industry is involved in whole economy and has led to the construction industry in these countries will be introduced as an active economy in area of innovation and creativity. Rafiei (2012) said: unfortunately in Iran for various reasons this issue has not been used and housing is introduced and defined as the settlement and also pointed out that “unfortunately, due to high demand, creativity and innovation is also missing. However, in recent years, the construction industry of Iran has been successful due to an increase in national and international investment to the extent that it is now the largest in the Middle East region.

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2. PROBLEM STATEMENT In Iran, because of livelihood situation of people, they are looking for cheap accommodation and they do not attention to quality of construction. This condition led to lot of economic and criminal damages in construction especially in earthquake. Scientific study of earthquakes in Iran shows that 30% of building destroyed is because of non-standard building materials and 70% consist other factors including, poor supervision engineering. Most manufacturers because of political, economical, cultural and geographical reasons use available materials regardless to quality. According to En. Bolboli, member of engineering board in Tehran, building’s useful life is 30 years in Iran. In the past, people usually do not attention to quality and innovation in construction industry and this lead to a lot of damage in construction especially in earthquakes. 3. THE MAIN AIM Nowadays, move the country toward industrialization and the development of knowledge-based led to the attention to quality and innovation more and more. To achieve this, attention to quality management is effective in two categories of planning and implementing. Fundamental precondition for improving quality in the construction industry is to develop a comprehensive and efficient rules and regulations and in accordance with technical requirements, economic, social, cultural, environmental and climate and then commitment to comply with them. Mohsen Moharamy yeganeh said: using new technologies in the construction industry is one of the requirements that have many advantages. Speed up construction, reduce time, saving energy and reducing waste are important benefits of using new technology. The high quality of construction and resistance to natural disasters are the benefits of being involved in new technology in construction industry. In Iran, the most important factors that affect quality of construction are: site conditions, design, quality of materials, serve the implementation and maintenance of buildings. Rafiei( CEO of Housing and Civil Development) stated using innovation and creativity in the construction industry, create attractive and productivity, durability, beauty and efficiency in this area is well represented and we will have beautiful and strong and stable buildings”. 4. FINDINGS AND ANALYSIS In this situation, all parties involved in construction industry tried to achieve best quality while brought innovation and creativity for their customer. As a result, they constructed Mehr Housing Development. In this paper, Iran construction industry with the focus on Mehr Housing Development is analyzed based on six (6) quality management practices: Design, Planning, System, Goal, Positioning and Interaction that support the management of innovation.

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Table 1. Six quality management practices in Iranian Construction Industry Items Design Practice

Planning Practice

System Practice

Goal Practice

Positioning Practice

Interaction Practice

six (6) quality management practices Iran Construction Industry  provided new technology, acquire necessary information, effective regulations and rules, put quality aside the innovation and creativity, Government support in case of create sustainable buildings.  Sometimes companies face failure in the system because this process is time consuming and they encounter with shortage of experts or they cannot spend more time and money in this phase.  implement technical phase of innovation and quality, spend a lot of budget and time in this phase, use modern and new technologies, use durable materials, employ professions in this field to supervise the constructing processes, project management and cost accounting and plan-do-check-act to ensure that quality and innovation are processed in the right way and on time.  Organizations that cannot do this phase often face with failure and this failure cause a lot of economical and criminal damages in construction and demolished buildings after a while.  There is systematic view on quality, use coordination, monitoring and documentation systems to assure and evaluate quality in each phase of construction, there are lots of expertise which supervise and control the project, Iran Engineering Organization must approve the project.  In this practice, Iran Construction Industry has not major problem because there are lots of educated people in this field and organizations focus on implementing innovation and quality in procedures.  Every sustainable idea can be developed and implemented, evaluate the outcome of innovation and quality processes, in Mehr Housing Development, quality and innovation are integrated. And they focus on continues improvement of products and services.  In this practice, they face no major problem.  Organizations try to attract customers and compete with competitors, integrate innovation and quality with the reasonable cost and this policy attract lots of customers in market place, Sustainability and price are customer’s demand which Mehr Housing Development could to satisfy their customer in compete with their competitors.  In this practice, they face no major problem.  Companies seek customers and employee’s satisfaction and creating synergy between organization and environment, empowerment, internal cooperation, interdepartmental cooperation, stakeholder management, visionary leadership.

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5. CONCLUSION Construction Industry in Iran is going forward the integration of quality management and innovation. Mehr Housing Development is one of the most important projects that is constructing in Iran. This organization introduced high quality and innovation to people who were seeking proper settlement. They use all six quality practices. However the organizations more focus on design, planning, systems and positioning but all these factors are used in this project. This organization does not sacrifice quality for quantity. However the project addresses are low-income people, but they try to bring quality and innovation for them to meet customer’s satisfaction. Iran construction industry as a big organization needs to use skilled labor, expertise, proper materials with high quality, effective supervision to gain both of high quality and innovation in their projects and meet customer’s satisfaction. All authorities hope to increase the world standard in all of projects in Iran construction industry. However, the future of this sector in Iran is not predictable due to some political matters such as sanction that will led to lack of expertise, lack of materials, shortage of budget, increase in prices, lack of labor, bankruptcy and etc. In this situation, there will be a possibility of return to its first situation. 6. REFERENCES 1. En. Bolboli (2012). The Useful Life of Construction In Iran, World Wide Web http://www.asriran.com/fa/news [ 20/10/2012]. 2. Rafiei the CEO of Housing and Civil Development in Avan Pooya Co. (2011). Identification the best of the construction industry in terms of innovation, World WideWeb http://www.anboohsazanisf.ir/visitorpages/show.aspx?isdetaillist=true&itemid=854,1 [12/11/2012]. 3. Mohsen Moharamy yeganeh the Head of Planning and Economy Department of Housing and Urban Development (2011). Construction Quality Improvement with Industrialization, World Wide Web http://www.shasa.ir/newsdetail-124037-fa.html [15/03/2012]. 4. Crosby (1980). Quality is Free, Mentor, London. 5. Hashmi, K. (2000-2004), “Introduction and implementation of total quality management (TQM)”, available at: www.isixsigma.com/library/content/c031008a.asp (accessed March 3, 2004). 6. Mehr Housing (2011). World Wide Web 7. http://tavoni-maskan.ir/fa/tabid/61/articleType/ArticleVi%20ew/articleId/77/-----.aspx [23/10/2012]. 8. Zairi, M. (199b), "Managing excellence: leadership", The TQM Magazine, Vol. 11 No. 4, pp. 215-20.

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QUALITY AND COMPETITIVENESS WITHIN ORGANIZATIONS

Vladimir-Codrin Ionescu University of Bucharest Ana-Maria Grigore University of Bucharest

ABSTRACT In a competitive market economy, organizations must demonstrate an ongoing concern in terms of meeting the growing demands of society by providing new or upgraded products and services at a higher quality and at competitive prices. This paper deals with the quality of products and services as a key factor of competitiveness of enterprises and presents relevant aspects regarding quality management, both from the organizational perspective and from the perspective of international quality standards. In the final part of the paper the quality costs are highlighted, and also a number of ways in which an organization can improve the quality of its products and processes. Key words: organization, products quality, processes quality, quality standards,

competitiveness.

1. INTRODUCTION Quality of products and services is a key factor of competitiveness of organizations in a business environment ever more complex and dynamic. Currently, managers and entrepreneurs realize that it is only by the provision of quality products and services that the organizations they run can achieve sustainable competitive advantages against competitors. Quality issues are on the agenda of both managers and entrepreneurs, and also in the attention of a growing number of professionals among whom there are management professors, researchers, consultants, sociologists, etc. Thus, a U.S. study on a sample of 1200 firms on the relationship among quality, market share and return on investment, showed that for the same market share, the share capital recovery increases with the level of products quality (Oprean and Ţîţu, 2008). Also, a series of published studies and articles in the specialized literature grasp the relation between knowledge based management and the quality of the organization’s products and services, as well as the important role of the quality culture in a company’s success (Waddell and Stewart, 2008). These researches emphasize the impact that the achievement and then the dissemination of knowledge in a company have over the quality of the products and services delivered on the market (Yang, 2008), (Lyons et al., 2008). In the context of knowledge based economy, an adequate policy regarding quality represents a tool by which an organization could improve its performances, obtaining competitive advantages compared to the competitors. The propelling role in this sort of

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economy is played by knowledge, together with the other production neo-factors, comprising the new information and communications technologies, as well as modern management methods and techniques. Knowledge, along with the other production neo-factors and with classic production factors represent the basis for intensive economic development, ensuring the increase of labor productivity, as well as the qualitative and assortments related diversification of products and services, in line with the exigencies of the demanders. On the products and services level, the new economic growth model, the knowledge based economy is characterized by:  reduction of the products’ and services’ life cycle duration;  harmonization of the “quality-price-functionality” trinomial;  expansion in the use of products comprising intelligent technology (mobile communication systems, multimedia systems, micro-processors etc);  occurrence of products and services between which informational flows are established (integrated in the informational networks). The concerns of the European Union in the field of products and services quality are reflected by the European Quality Charter. This document, signed by the representatives of some important organizations activating in the quality domain aims to harmonize the approaches regarding products and services quality. The European Quality Charter provides that in a global economy quality represents the key for European companies’ competitiveness and it statutes the signatory parties’ obligation of acting in order to achieve the common objective regarding the promotion of quality in the European Union member states. The main provisions of the European Quality Charter are as it follows:  quality has become the key to competitiveness in a global economy dominated by competition;  quality represents an objective because in order to be efficient companies should meet their customers’ needs and expectations;  quality involves motivating the human resources in the company and achieving their responsibility;  quality determines a company’s success compared to its competitors;  quality is a methodology and a way of promoting active participation for all the company’s employees;  quality is a priority for any company;  quality represents a measure of economic and social efficiency, by cutting down costs, by promoting innovation, by stimulating each employee’s initiative, as well as by creating an organizational climate that is favorable to achieving operational excellence. This paper deals with the quality of products and services as a key factor of competitiveness of enterprises and presents relevant aspects regarding quality management, both from the organizational perspective and from the perspective of international quality standards. In the final part of the paper the quality costs are highlighted, and also a number of ways in which an organization can improve the quality of its products and processes. 2. CONCEPTUAL HIGHLIGHTS IN THE QUALITY FIELD ISO Standard 9000:2000 defines quality as “the set of features of an entity, which provide such with the aptitude of meeting expressed or implicit needs”. From this definition it results that:  quality is not defined by only one feature, but by a set of features; 299

 quality is not self sufficient, it only exists in relation to customers’ needs;  quality is a continuous variable;  by quality both expressed and implicit needs should be satisfied. Quality is a complex concept, dynamic and difficult to quantify. An objective approach to quality involves the analysis of the functions and features of a product. It is well known that a product has a main function (the one for which it is designed, executed and subsequently bought by customers), auxiliary functions (arising from use of the product and necessary to achieve the main function) and sales functions (facilitating buyer’s choice) (Băloiu et al., 2008). The characteristics of a product may be grouped in four categories:  technical (the design, nature and structure of materials, product gauge, precision and reliability, operational convenience, etc.);  economic (yields and specific consumption, production capacity, degree of automation and cybernetization, maintenance costs);  social (usefulness of the product, product use effects on the environment);  psycho-sensorial and esthetical (appearance, finishing, compliance with fashion, comfort in use). It is essential to point out that an essential prerequisite to quality products and services is the quality of the processes carried out within an organization. Products and services are results of processes. To obtain quality products and services, it is necessary to conduct processes on quality coordinates. Within enterprises, the production quality concept is also frequently used, having a broader coverage than the quality of a product or service. Production quality assurance processes reside in the performance of works for checking the products in terms of quantity, quality, dimension and function and compliance of products and processes with the provisions contained in the technical documentation (product quality control processes, processes for the performance of making and testing samples, receiving raw materials and subassemblies that initiate the production process and so on). Thus, the production quality refers both to the quality characteristics of the products and to those related to the quality of the organization of the production process, starting from product design work, continuing with the manufacturing process, technical quality control, etc. After the design of the new or modernized products, the company’s management has to pay particular attention to the two main sides of quality, namely quality assurance and quality management (Bărbulescu, 2002). In the quality assurance activity, the management has to ensure the set of control means which could allow for the product to be verified in view of quality standards, throughout all the execution and delivery phases. Quality management represents a concept regarding the organization and assurance of products’ quality, which implies identifying, analyzing and interpreting all gaps existent in the quality assurance process, for the purpose of initiating correction actions. Also, quality management refers to integrating the concept of quality in the design and production process. The concept of quality management is closely connected to the total quality concept, which aims to generate responsibility from all human resources by participative measures in relation to obtaining the quality requested by the demanders.

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3. QUALITY MANAGEMENT ISO 9004:2009, “Managing for the sustained success of an organization – A quality management approach”, is the third edition of the standard first published in 1987 and provides guidance to organizations to support the achievement of sustained success by a quality management approach. It is applicable to any organization, regardless of size, type and activity, by a quality management approach (International Organization for Standardization, 2009). Bob Alisic, leader of the task group responsible for the ISO 9004:2009, appreciated that: "While the goal is initially to ensure the production of good products and services, leading to the achievement of customer satisfaction, the longer-term purpose is to ensure the economic survival of the organization. The new edition gives guidance on how an organization should adopt a systematic approach to achieve this." ISO 9004:2009 provides guidance for the continual improvement of an organization's overall performance, efficiency and effectiveness based on a process-based approach. It focuses on meeting the needs and expectations of customers and other relevant parties, over the long term, and in a balanced way. Compared to ISO 9001:2008 which ensures quality management of products and services, while enhancing customer satisfaction, ISO 9004:2009 provides a broader perspective of quality management, particularly for performance improvement. It will prove useful to organizations whose top management wishes to move beyond ISO 9001, in pursuit of ongoing improvement, measured through the satisfaction of customers and other stakeholders. ISO 9004:2009 allows organizations to enhance the quality of product and service delivery to their customers by promoting self-assessment as an important tool to enable organizations to:  benchmark their level of maturity, covering leadership, strategy, management system, resources and processes;  identify their strengths and weaknesses;  identify opportunities for either improvements or innovation, or both. The self-assessment tool may become a key element during the strategic planning processes in any organization. ISO 9004:2009 replaces ISO 9004:2000. It makes substantial changes to its structure and contents of the earlier edition based on eight years’ experience of implementing the standard worldwide and introduces changes intended to improve consistency with ISO 9001 and other management system standards. An example of an important (maybe the most important one) change in the structure of ISO 9004 is that the “body” of the standard starts with the chapter giving guidance on how to manage an organization aiming for sustained success and not how to build a quality management system. Although ISO 9004:2009 complements ISO 9001:2008 (and vice versa), it can also be used independently. It is not intended for third-party certification, regulatory, or contractual use, nor as a guide to the implementation of ISO 9001:2008. To help users get the best out of the standard, an annex gives a clause-by-clause correspondence between ISO 9001:2008 and ISO 9004:2009. It is important to mention that quality management represents a process with a methodology that can be applied both in the enterprises manufacturing material goods, and in those providing services. Such process comprises more activities, listed in their natural order:  planning quality related activities;  organizing activities regarding products and service’s quality; 301

  

coordinating quality focused activities; involving human resources in achieving quality objectives; control and assessment of quality related activities. Throughout the mentioned activities, there must be permanently kept in mind the quality assurance and permanent quality improvement. Quality assurance reunites a set of activities of preventive nature, by means of which it is pursued the efficiency of the five activities defining the content of the quality management process. Quality improvement refers to increasing the performances obtained by the organization throughout all implementation phases of the quality management system. 4. EXPENSES REGARDING QUALITY. COMPETITIVENESS THROUGH QUALITY An organization becomes competitive by offering quality products and services, valued by customers. Nevertheless, quality requires some expenses that each organization must undertake in order to remain within the competitiveness area. Thus, a number of studies show that currently costs involved in correcting non-quality and those appropriate for its prevention and evaluation represent on average 25% of the turnover of an undertaking. These costs are an important instrument to capitalize quality, an important source of organization profit maximization. Through these costs it is possible to identify inefficient activities, critical points in the development of processes. Making quality products and services involves the performance of a set of expenses, grouped in the following categories (Juran, 2010):  market study expenses;  research & development expenses;  design expenses;  product manufacturing planning expenses;  expenses incurred with maintaining the equipment working precision;  human resources expenses;  product promotion expenses;  product evaluation expenses;  expenses incurred with the prevention of defects;  waste expenses;  expenses incurred with informing the personnel on the product quality level. Juran believes that the first three categories of expenses relate to the definition and design of products "suitable for use", and that the others relate mainly to the assurance of product compliance, according to specifications. Also, Juran believes that, in order to achieve a product and make money, an organization must bear the first seven categories of expenditure, while the last four categories of expenditure are, to some extent, avoidable. In the practice of organizations, the abovementioned expenses are usually grouped in four categories:  prevention expenses – expenses incurred with preventing defects;  evaluation and control expenses – expenses incurred with trial activities, inspections and examinations, to establish whether the specified requirements are appropriate;  internal defect expenses - expenses incurred with the correction of all elements which are not in compliance with the quality standards, identified prior to the delivery of products to the beneficiary;

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 external defect expenses - expenses incurred with the correction of all elements which are not in compliance with the quality standards, subsequently to the delivery of products. The quality of the product is determined first of all by its constructive and technologic design, by the extent in which designers and technologists have considered modern constructive criteria and design solutions. Using advanced technological proceedings for manufacturing new products, as well as improving manufacturing technologies for products that are already under being manufactured has a substantial contribution to improving quality. An essential condition for increasing products quality based on modern design is the compliance with the provisions of the technical documentation. Improving the quality of production and of the products is manly achieved by:  continuous improvement of the products’ constructive and technological design;  using high quality raw materials and resources;  maintaining the equipments upon normal functioning parameters;  increasing the qualification level of the human resources;  material and moral-spiritual co-interest of the employees;  using modern production organizing methods, enhancing specialization and cooperation in the production process;  increasing the efficiency in the activity of the quality control department. 5. CONCLUSIONS Adopting a quality management system represents a strategic decision for the organization’s managerial team. The design and implementation of a quality management system in a company are influenced by various needs, by forecasted objectives, by the delivered products and services, by the involved processes, as well as by the organization’s size and structure. An essential prerequisite to quality products and services is the quality of the processes carried out within an organization. Products and services are results of processes. To obtain quality products and services, it is necessary to conduct processes on quality coordinates. Within enterprises, the production quality concept is also frequently used, having a broader coverage than the quality of a product or service. Production quality assurance processes reside in the performance of works for checking the products in terms of quantity, quality, dimension and function and compliance of products and processes with the provisions contained in the technical documentation. Quality management represents a process with a methodology that can be applied both in the enterprises manufacturing material goods, and in those providing services. Such process comprises more activities, listed in their natural order: planning quality related activities; organizing activities regarding products and service’s quality; coordinating quality focused activities; involving human resources in achieving quality objectives; control and assessment of quality related activities. Throughout the mentioned activities, there must be permanently kept in mind the quality assurance and permanent quality improvement. Quality assurance reunites a set of activities of preventive nature, by means of which it is pursued the efficiency of the five activities defining the content of the quality management process. Quality improvement refers to increasing the performances obtained by the organization throughout all implementation phases of the quality management system. In order to have performances in a certain activity segment or in more activity segments, a company should implement an integrated quality management system, and in the 303

same time it should develop an evolving organizational culture focused on quality. By providing quality products and services, a company can enforce its strategic market orientation and it can thus obtain long term competitive advantages compared to its competitors.

REFERENCES 1. Băloiu, L.M., Frăsineanu, C., Frăsineanu, I. (2008), “Management inovaţional”, Editura ASE, Bucureşti. 2. Bărbulescu, C. (2002), “Diagnosticarea întreprinderilor în dificultate economică. Strategii de redresare şi dinamizare a activităţii”, Editura Economică, Bucureşti. 3. Garvin, David A. (1984), "What Does 'Product Quality' Really Mean?" MIT Sloan Management Review 26, no.1. 4. Juran, J.M., Defeo, J. (2010), “Juran's Quality Handbook, Sixth Edition: The Complete Guide to Performance Excellence”, McGraw Hill, New York. 5. Oprean, C., Ţîţu, M. (2008), “Managementul calităţii în economia şi organizaţia bazate pe cunoştinţe”, Editura AGIR, Bucureşti. 6. Paraschivescu, A. (2007), “Managementul calităţii”, Editura Tehnopress, Iaşi. 7. Suciu, O., Oprean, C. (2007), “Calitatea globală concurenţială”, Editura AGIR, Bucureşti. 8. Waddell, D., Stewart, D. (2008), “Knowledge management as perceived by quality practitioners”, The TQM Journal, Vol.20, No.1. 9. Yang, J. (2008), “Managing knowledge for quality assurance: an empirical study”, International Journal of Quality & Reliability Management, Vol.25, No.2. 10. Lyons, K., Acsente, D., Van Waesberghe, M (2008), “Integrating knowledge management and quality management to sustain knowledge enabled excellence in performance”, The Journal of Information and Knowledge Management Systems, Vol.38, No.2. 11. International Organization for Standardization (2005), “Quality management systems - Guidelines for the application of ISO 9001:2000 in local government”, Geneva. 12. International Organization for Standardization (2009), ISO 9004:2009, “Managing for the sustained success of an organization – A quality management approach”, Geneva.

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LANDMARKS IN THE HISTORY OF MANAGEMENT THEORIES AND PRACTICES

Vladimir-Codrin Ionescu University of Bucharest, Romania

Cornelia Nistor University of Bucharest, Romania

ABSTRACT It is now widely recognized that management is one of the main vectors governing human activities in the economic, social, political, cultural and other fields. Starting from the premise that achieving long-term competitive advantage, efficiency and effectiveness of an organization depend crucially on the managers’ ability to understand and implement the principles, methods and techniques offered by the management science, the paper proposes an overview of the most representative theories and approaches that have marked the evolution of managerial theory and practice. The paper highlighted the main contributions of the representatives of the four main management currents, namely classical, behavioral, quantitative and modern. Key words: organization, classic current, behavioral current, quantitative current,

modern current, competitiveness.

1. INTRODUCTION As human society developed, concerns in the field of managerial theory and practice intensified and management started to be considered a specific form of intellectual activity, with a well-defined function based on an important background of scientific knowledge. However, it was only in the early nineteenth century that management was defined as a distinct activity, carried out at different hierarchical levels, and the first works exclusively devoted to this issue appeared in the early twentieth century. Management knowledge has become indispensable, whether we talk about small- or medium-size enterprises or multinational companies (Nica and Iftimescu, 2008). Referring to the special importance of mastering management knowledge and training of competent managers in developing countries, the renowned specialist Philip W. Shay stated: “For these countries to progress in freedom and human dignity, the management has to be the primary development resource, and the managers have to act as main catalysts”. In the paper entitled “Advances in International Comparative Management”, the famous American Professor Rirchard N. Farmer found that “management is one of the key factors that explain why a country is rich or poor” (Farmer, 1984). This statement was validated by reality in time, and one of the most eloquent examples in this regard is the case of Japan. A country really poor in natural resources, but which, through good management at both the macroeconomic and microeconomic level (the sector of small- and medium-size 305

enterprises has always had an important role in the economic development of this country, representing the key to the achievement of the so-called “Japanese miracle”), has established itself as one of the world’s great economic powers. Peter Drucker, also known as “the father of modern management”, believed that management was “the bloodstream of an organization”, while Joseph A. Schumpeter found that managers were the “engine of growth”. It is now widely recognized that management is one of the main vectors governing human activities in the economic, social, political, cultural and other fields. Management is an inexhaustible development resource, forming, together with technology and the intelligent use of human resources, the three great forces of progress of all organizations and national economies as a whole (Dumitrescu, 1997). Organization (company) management is the best known, the best developed and the most important component of the management science. There are at least three important arguments in this regard (Nicolescu and Verboncu, 2008):  the company is the basic agent of any national economy, the main generator of added value and use value;  most of the employed population in each country, regardless of the country’s development level, carry out their activity within companies;  the first crystallizations of the management science had as their object the company, which was maintained over time as one of the most fertile grounds in terms of innovation in the field of managerial theory and practice. Consequently, organization management is the center of gravity of economic management, as the company is the basic unit of any competitive market economy. Essentially, organization management consists of designing, developing and operationalizing specific methods, techniques and procedures, in order to enter the organization on the path of economic and social efficiency. Starting from the premise that achieving long-term competitive advantage, efficiency and effectiveness of an organization depend crucially on the managers’ ability to understand and implement the principles, methods and techniques offered by the management science, the paper proposes an overview of the most representative theories and approaches that have marked the evolution of managerial theory and practice. The paper highlighted the main contributions of the representatives of the four main management currents, namely classical, behavioral, quantitative and modern. In the end of these introductory considerations, it is necessary to remark that managers and entrepreneurs should not have blind faith in models and methods offered by the management science, but if they prove their effectiveness, then it means that they are valuable tools. In other words, each managerial model is and will remain an instrument which, combined with the experience and theoretical knowledge held by managers and entrepreneurs, can help organizations identify viable solutions to the problems they are facing in the context of the current business environment (ten Have et al., 2008). 2. THE CLASSIC MANAGEMENT CURRENT The oldest thinking school accepted by management’s practitioners is known under the name of “classic management current”. Such approach of management was manifested in the period between 1885 and 1950 and attempted to provide a reasonable and scientific basis for the management of enterprises. Its origins is in the industrial revolution, period when people started to work together in factories, opposite to the manufacturing system, in which the activity was carried out in small workshops or at home. Industrialization created the need for planning, organizing and controlling all work related activities. 306

The classic management current has two fundamental sides: scientific management and general administrative management. Scientific management refers to modalities of improving productivity, whilst the administrative management theory regards enterprises as entities and considers the aspect of making them efficient. During the last years, we have been facing a rethinking of the classic management theory, as a method for reducing costs and increasing productivity and organizational efficiency. 2.1. Scientific Management In Scotland, Robert Owen, considered as the father of modern personnel management, tested the improvement of labor conditions in factories. In the same time, he suggested that company shops should be created that could provide necessary goods for the employees, and attempted to improve the living conditions of the community by building houses and streets (Ivancevich, et al., 1994). In his book on labor division, entitled “About Machines’ and Manufactures’ Economy”, published in 1832, Charles Babbage considered that between employees and factories’ owners mutual interests existed. Babbage fervently supported the profit distribution system, by means of which workers could benefit of their productivity (Ivancevich, et al., 1994). Henry Varnum Poor, editor with “American Railroad Journal” designed a managerial system with a clearly stable structure, in which employees had well delimited responsibilities. The system also comprised a communication side, by which reports were provided from the top of the managerial pyramid to its basis. The beginning of the 20th century brought productivity back in the center of the attention. Businesses were growing, but the labor force was insufficient. Researches in the field of management aimed to identify methods for efficiency improvement. Frederick W. Taylor, with Midvale Steel Company, recognized the need for cooperation between employees and managers, as well as the need for cost control and working methods analysis. He understood the principle of increased production obtained with the help of the employee, and named such principle “systematic service”. In essence, he suggested to the Midvale management that they should study what represented “a good day’s labor”. His differential accord labor plan used the conclusions of contemporary researches and provided high salaries for performances over the standards and low salaries for productivity bellow the referral point established by the company. Until Taylor’s later programs, no promise existed for the basic salary, currently known as minimum wage. Taylor’s whole theory was grounded on the idea that fundamental interests of management and employees are the same. If the management’s objective is to obtain low production costs, then the employees’ desiderate of having higher salaries could be easy to achieve because their work was considered as measurable. Taylor also considered the fact that if the employees understood the great advantage of scientific management, then they would immediately develop a better mental attitude towards the management and the other employees, by this eliminating the need for criticism and constructive complaints (Taylor, 1911). Henry L. Gantt, a colleague of Taylor at Bethlehem Steel Works, implemented a salary related stimulation program considered as superior to the one designed by Taylor. Gantt’s salary system provided bonuses for workers who achieved their tasks in a period shorter than the standard one. He also initiated a bonuses plan for the activities’ coordinators. Among Gantt’s contributions to the field of management the version he proposed in respect with improving the tasks and bonuses system stands forward. The main purpose of such system was to complete a certain work quantity during a given time. Gantt designed planning and control techniques by using a simple graph in which on an axis there were 307

represented the relations between planned and fulfilled work, and on the other axis there was illustrated the time. Frank and Lilian Gilbreth made important achievements in production and operation management. Grounded on researches regarding time and motion, they development the “movement economy laws”, comprising 22 principles regarding the use of human body, the design of workplaces and of tools and equipments.

2.2. General Administrative Management Unlike scientific management which focused on the employees and on their tasks, the general administrative management theory approached the complete organization of the enterprise. At the end of the 19th century, the French Henri Fayol introduced the “systematic management theory”. Executive manager and mining engineer, Fayol marked an important moment in the history of management. In his vision, the main functions of every manager are planning, organizing, command, coordination and control (Fayol, 1949). Fayol considered that all activities involved by industrial projects can be classified into six categories: technical (referring to production), commercial (referring to purchase, sale and exchange), financial (referring to attracting and optimally using the capital), security related (providing protection to goods and persons), accountancy (statistical analysis) and managerial (including planning, organizing, command, coordination and control). Fayol developed the management process beyond the basic hierarchical model of Taylor. In Fayol’s system, the command function operated efficiently by means of a set of methods for coordination and control. In order to improve the activity of coordinating the organizational operations, he recommended that department chiefs should organize regulate meetings. Max Weber, the father of bureaucratic management, created a system in which the individual was designated a series of primary tasks and responsibilities within the office. Each office was responsible before the immediately superior one, according to a systematic labor division in which organizational objectives were pursued. The selection of employees was made upon qualification, whilst their responsibilities were decided on hiring. Weber considered that promoting was destined to reward skills and accomplishments of the employees and should not be affected by political moves. In the same time, it is necessary for the employees to operate a distinction between their personal businesses and official responsibilities (Weber, 1947). Chester I. Barnard approached scientific management in connection with the human relations, and defined enterprise as a set of individual activities and of intelligently coordinated forces. Barnard suggested a theory regarding the accepting of authority upon free will and external constraints. According to this theory, the employees evaluate the validity of the orders received from a superior and after that decide consciously if they would accept such or not. A directive can be accepted by an employee if he understands it, if he is capable to undertake it and in his opinion he deems it as adequate to the organizational purposes. To formal organization there is always associated informal organization, focused on communication and inter-human relations. Informal groups play an essential role because they establish attitudes, habits and standards. Barnard considered that interactions or informal contacts occurred repeatedly without a precise general purpose. This stand point differs from the one in modern theory, according to which a major function in informal organization is represented by achieving those common objectives of the groups that could not be achieved by formal organization. Further developing the works of Henri Fayol, Lugher Gulick considered that management’s functions are universal (Shafritz and Ott, 1992). The acronym he created, 308

POSDCORB is a familiar term in practice management. POSDCORB designates activities of planning, organizing, personnel, directing, coordinating, informing and budget allocation. Gulick supported the approaches of Frederick Taylor and Max Weber and introduced the concept of control area, referring to factors that limit the number of persons that a manager can supervise. Also, he recommended the command unity, considering that employees should exactly know to whom they answer. The central idea of Gulick’s work and also the cornerstone of his major contribution in terms of organizational departments’ distribution is that an enterprise should not combine distinct activities (Shafritz and Ott, 1992). Lyndall Urwick synthesized a series of previous papers and researches regarding management’s structure and the function of the administrative system. Moreover, he promoted a modern conception on the functions of planning, organizing and control and as Fayol before him set out a list of ten general principles for increasing managerial efficiency. James Mooney identified three basic management principles: coordination principle, scalar principle and functional principle. The coordination principle, viewed as the most important, referred to the employees’ performing activities for the purpose of achieving a common goal. The scalar principle was described as a classification of the duties of the organization’s members, according to the authority and responsibility level, and the functional principle defined the differences between types of duties. In conclusion, the main contributions of the classic management current are: application of science in the management practice, placing the foundation for further management developments, identifying managerial functions, making classifications of relevant management procedures and abilities, recognized even today as essential concepts, design and application of formal management’s particular principles, as well as focusing the attention on management, as subject of scientific research (Hellriegel and Slocum Jr., 1992). The limits of the classic management current arise from the assumption that each employee is a economic type of individual, who would work more in order to have more money, the applicability of laws in simple and relatively stable organizations (whilst most organizations nowadays are complex and dynamic), not taking into account the rapports between the enterprise and its environment, as well as treating employees as instruments for achieving organizational objectives (Bateman and Zeithaml, 1993). 3. BEHAVIORAL MANAGEMENT CURRENT In the period between 1920 and 1930 a series of researchers asserted that scientific management ignored the human aspects of the business organization. The behavioral management current represents an approach of management focused on human psychology, on motivation and leadership, which are distinct from simple mechanic efficiency. This current studies the employee’s behavior in the enterprise and includes human relations and modern behaviorism. Hugo Münsterberg, the father of industrial or applied psychology noticed the connection between scientific management and human behavior, considering that both play an important part in increasing efficiency by scientific labor analysis (Ivancevich, et al., 1994). One of the first researchers who approached the organization from the stand point of individual and group behavior was Mary Parker Follet. Her papers focused on matters such as organizational conflict, motivation, cooperation, authority and have a particular importance in the modern evolution of organizing (Fry, 1989). In one of her first works, she studied conflict management. The researcher did not depicted conflict as a prejudice, but as a process in which important disagreements occur, but the settlement of which could constructively lead to achieving organizational objectives. 309

In 1943 Abraham Maslow designed a tri-party needs hierarchy. In his view, individuals are motivated by certain needs, and motivation represents the wish of making increased efforts in order to achieve objectives. The needs were subsequently placed in a hierarchy, from the physiological ones, of the lowest rank, to the superior ones, of selffulfillment. The physiological needs have absolute priority because if they are not satisfied the other needs do not attract the motivation of a new behavior (Maslow, 1943). Grounded on the results of Maslow, Frederick Herzberg designed a theory on labor satisfaction, focused on redefining and improving the employees’ positions in order to increase motivation and involvement. The support of motivation and implicitly of obtaining good activity performances includes two categories of elements. In the first category there are included payment and labor conditions, which represent prerequisites for maintaining a minimum satisfaction level of the employees. The elements in the second category refer to challenge, accomplishment, recognition, responsibility, promotion and personal development and provide human resources with a complex motivation. In the paper entitled “Administrative behavior”, published in 1947, Herbert A. Simon criticized the main approach of management, ascertaining that such is often inconsistent and inapplicable (Simon, 1976). Simon promoted a systemic approach of management, based on the process of decision making and reached the conclusion that reasonability of an action does not implicitly represent a source in situation optimization. His researches in the field of organizational decisions created a bridge between management science and behavioral approaches. At the end of the 50s, Douglas McGregor underlined the importance of understanding the rapport between motivation and human nature. He appreciated that managers attempted to motivate the employees by two basic methods, known as X theory and Y theory. X theory developed the traditional vision over management and depicted a negative side, suggesting that managers should constraint and control their employees in order to motivate them. On the contrary, Y theory has a positive nature and according to such employees benefit of credit from their managers in respect with their actions’ responsibility. By studying the theories of Herzberg, McGregor asserted that fundamental needs are usually satisfied for most employees in the industrial enterprises and therefore they are no longer motivating (McGregor, 1960). Since in the first line there occurred the higher level needs, namely the social ones, regarding self-esteem and self-fulfillment, the work framework should be reorganized so that to help the employees to satisfy such needs. McGregor considered that when work becomes a pleasant activity, employees will manifest responsibility and total involvement in the company’s objectives. Chris Argyris designed an organizational theory of open system, grounded on organizational behavior. The open system placed a particular stress on the human persons as individuals, their actions being performed in an open and honest manner, as per Y theory. This lead to the occurrence of precise information and communication, such that decisions regarding the individual future could be adopted freely and knowledge based. In 1959, Charles A. Lindblom published an essay in which he criticized the reasonable models for decision making, asserting that such are not really valid (Shafritz and Hyde, 1992). After the needs hierarchy suggested by Maslow, McClelland advanced the idea according to which some needs – achievement, power and affiliation – are learned or socially induced by the individual consequent to his interaction with the environment. The equity theory designed by J. Stacey Adams supported that employees compared their tasks and activity results with those of other employees, and inequity influenced their level of effort. Equity refers to the employees’ perceiving the equal treatment and has a major impact over performances. 310

The major contributions of the behavioral management representatives arises from understanding the concepts of motivation, group dynamics and interpersonal processes taking place within the organization, as well as in considering the employees as valuable resources (Robbins, 1991). The main limits of this managerial current refer to the difficulties manifesting in terms of foreseeing the human behavior, due to its complexity, of the managers’ implementing complex behavioral models and of applying the research results in the management practical area. 4. QUANTITATIVE MANAGEMENT CURRENT The quantitative management current is focused on adapting mathematical models and processes to concrete situations in the managerial activity and includes three research directions: management science, operations management and management information systems. Management science considers the development of mathematical models to be used in the organizational decision making process, operations management mainly focuses on applying management science in enterprises, whilst the management information systems represent complex communication tools aiming to provide managers with information. Quantitative management occurred consequent to the development of mathematical and statistical solutions in solving military problems during the Second World War. The British mathematicians used quantitative techniques both in order to design optimal allocation models aiming to ensure maximum air forces capacity, as well as to determine the efficiency of the airplanes. After the Second World War many of the quantitative techniques used in military actions were adapted such to respond to the business activity specific, as the industrial organization became aware of the important role such techniques would play in solving production management related issues. Quantitative management includes statistical applications, optimization and information models, as well as computerized simulations. Thus, managers can use the linear programming method in order to improve resources allocation decisions, and the use of critical analysis represents a source for increasing planning projects efficiency (Robbins, 1991). The quantitative approach of management is positively reflected by the grounding and making of decisions, moreover when referring to forecasting and control functions. Organizational planning lead to the development of a new science, referred to as strategic planning in the 40s. Such evaluates the effects of management strategies over the planning processes. The first strategic planning theories were designed consequent to studying the impact of “game theory” over the decisional methodology. Game theory designed by Von Neumann is a type of mathematical analysis undertaking abstract models in the conflict situations. The results of such situations depend both on the players’ collective action and on the “chance” aspect. Amongst the major contributions of the quantitative management representatives, we mention: the development of complex quantitative techniques for grounding and making decisions, the use of mathematical models in order to obtain in depth knowledge of the processes and situations regarding organizations, implementing organizational planning and control, as well as recognition of the computers’ importance in decision making. Quantitative management also has some limits, such as the impossibility of entirely explaining the human behavior in the organization, the risk of scarifying managerial abilities for the purpose of obtaining complex mathematical models and launching less grounded hypothesis in creating such.

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5. MODERN MANAGEMENT CURRENT The currently developing modern current represents a synthesis of the most representative theories and concepts previously designed, to which new visions specific to contemporary economy are added. Modern management integrates into a synergic system process related approach, systemic approach, contingency approach, strategic management, Japanese style management approach and excellence method.

Process related approach In year 1961, Koontz published an article asserting that at that moment a “jungle of managerial theories” existed”, meaning that each management current provided important elements to the managerial theory and practice (Koontz, 1961). Subsequently, Koontz demonstrated that the process related approach can comprise the differences existent between the managerial theories. Such approach, initially suggested by Fayol, deemed management as a process for fulfilling activities with and by individuals working in organized groups. Managers perform plans, they organize, lead and control, and the managerial process is essentially a decisional and informational activity that can be represented as a closed circuit or as a loop. Systemic approach Two main types of systems exist: closed and open. The closed systems are not influenced and do not react to environmental mutations, whilst the open ones react t the surrounding environment. Frederick Taylor’s vision over people and enterprises was essentially a closed system. The closed system includes the scientific management promoted by Taylor, the bureaucratic theory of Weber and the administrative or principles school initiated by Gulick. Ever since 1930, Barnard asserted that enterprises were open systems interacting with the environment. The open model comprises the human relations school and the organizational development, as companies are treated as units within the environment. Both systems types refer to the production and efficiency functions. One of the most important system theoreticians, Von Bertalanffy, described system as formed of inter-connected parts comprising a whole, within which synergy is created by the coordinated and combined effect of its sub-systems (Bertalanffy, 1972) . The systems theory regards the internal and external behavior of organizations. From an internal stand point, this theory emphasizes how and why employees in an enterprise fulfill their individual and group tasks, and on an external level such integrates the company’s transactions with the other organizations and institutions (Higgins, 1991). In systems theory, organization, comprising more inter-dependent elements, takes the resources existent in the environment, processes them and returns them to the environment in a changed form. Contingency method Contingency theory is a method for approaching organizational issues which considers all factors involved in a certain situation. It has been recently used in order to replace the simplistic management principles with more complex ones. In time, the practical activity and the scientific research emphasized that within a company complex situations can occur which call for a more vast approach. By using concepts of other methods, Lawrence, Lorsch and Schein discovered that the techniques’ efficiency is relative, namely that it depends on the specific coordinates of a 312

particular situation. Organizations and their sub-systems are unique, which calls for managerial approaches particular to each of them. In the contingency management the importance is underlined of analyzing and assessing the organizational environment. The analysis and assessment aim to determine the working characteristics, technologies, personnel and organizational structures that must be adapted to the concrete situations. Three main interconnected sets of hypothesis exist. The first set implies the existence of an agreement between the company and the extra-organizational environment, the second set implies an appropriate model of relationships for all organizations, whilst the third one regards the most efficient contingency plan. The contingency method promotes organizational efficiency, concretely establishing the actions to be undertaken by the company in order to achieve the predicted objectives. Strategic Management Strategic management is focused on decision grounding and aims long term organizational performance. The business policy regards the efficient use of internal resources and designs general guidelines that could help the company to achieve its objective. Therefore strategic management represents an integrate system ensuring unity of the “strategy-business policy-environment” trinomial (Dess and Miller, 1993). The fundamental coordinates of any strategy are vision, mission, competitive advantage, objectives, critical success factors, organizational culture and focusing on action. The strategic managerial process implies the fulfillment of four stages: assessing the environment, designing the strategy, implementing the strategy, evaluation and control (Griffin, 1990). Von Neumann and Morgenstern defined strategy as a set of actions performed by a company, on which it has been decided depending on a particular situation. In the paper entitled “Management Practice” published in 1954, P.F. Drucker asserted that strategy represented a method of analyzing the present situation and of modifying such when necessary (Drucker, 1954). Drucker also included in the strategy the activity of identifying the existent or necessary resources. In the 60s a major mutation occurred in the area of management, concretized in the shift from the focus on business policy to strategic orientation. Chandler launched a series of ideas on company strategy grounded on the history of four American corporations. His concepts were developed along with his analysis of the corporations’ reaction to the changing economic environment. Chandler considered that strategy consisted in adopting action modalities and allocating necessary resources in order to achieve the organization’s long term objectives. Ansoff described a more reasonable approach in the paper “Corporate Strategy” published in 1965 regarding strategy from a programmatic and analytical stand point (Ansoff, 1965). He underlined the importance of diversification, considering that strategy represented a procedure for making decisions that are determined by the product and by the market, by the growth vector, by the competitive advantage and by synergy. The period of the 70s came with a real avalanche of papers placing organization in the middle of certain industries. The researchers of that time recommended that a particular attention should be paid to the organization’s external environment, as well as to implementing long term plans aiming to forecast change and to make companies obtain competitive advantages. Such aspects are exemplified in the well known paper of Michael Porter, entitled „Competitive Strategy” (Porter, 1980). In year 1978 Hofer and Schendel published a comparative study over the various opinions on the economic strategy concept. They identified three main disagreement areas, namely: the area of economic strategy concept, the component elements of strategy and the 313

capacity of integrating the strategic formulation process. Without examining the currents mixing together in these concepts, Hofer and Schendel defined strategy as a method for the organization to orientate such that to achieve its objectives and react both to the environmental opportunities, and to the dangers arising from such. In “The Structuring of Organizations”, Mintzberg asserted that strategy represented a mediating force between the organization and its external environment, in the same time identifying that constant models existed in the decision making process which ensured their adapting to the environment (Mintzberg, 1979) The attention on organizational culture originates in the strategic management of late 70s. The analysts were preoccupied in identifying modalities for defining the strategic culture in which change would be regarded as a normal fact. One of the main approaches regarding corporate culture was designed by McKinsey & Company, a managerial consultancy company. Such approach was published in 1981 by Pascale and Athos in the paper “The Art of Japanese Management” and made popular by Peters and Waterman, who asserted that strategy tended to focus on the material side of the organization. The components of such part are structure, strategy and systems. Pascale and Athos considered that in order to obtain success other elements should be also regarded. McKinesey’s model provides a framework for relating with the corporate culture. Japanese style management method In 1950, Deming introduced a thorough management system which represents the model for the Japanese management style or for total quality management (T.Q.M.) (Deming, 1982). T.Q.M. uses statistics in order to analyze the variability of the production processes and in order to ensure continuous improvement in the production quality. The needs of the clients are continuously changing, and the solution in order to define quality in the client’s terms is the permanent attention paid to studying the customers’ preferences. Deming’s philosophy on quality is that productivity improves whilst variability decreases (Walton, 1986). Variations call for statistic methods of quality control. Also, Deming asserted that management was responsible for 94% of the quality related problems, as it helps the employees to work more intelligently and not more. Juran focused its researches on aspects regarding quality management. He considered that organizations had failed to understand how quality was obtained and identified three components of this process: yearly structured improvements, continuous human resources training programs and good coordination on the top management level. Juran considered that less than 20% of the quality problems were caused by employees, whilst the rest originated in managerial activity. Managers should specialize on quality, in order to be able to coordinate qualitative improvement projects (Juran, 1988). Crosby is best known for his concept entitled “zero defect”. In his vision, quality is the compliance with the demand manifested on the market and can be measured by the nonconformity cost alone. Crosby recommended that organizations should regard three aspects when attempting to prevent non-conformity: determination, education and implementation. At the beginning of the 80s Ouchi studied a series of American companies and discovered numerous characteristics that used to be normally associated with successful Japanese companies (Ouchi, 1981). Ouchi used the term of “Z theory” in order to describe different management practices. These companies promoted initiation and maintenance of close rapports with their employees, team spirit, group decision making and employees’ jobs rotation.

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Excellence method The basis of this approach is the improvement of the management for the purpose of obtaining and maintaining excellence in a corporation. The excellence method appeared at the end of the 80s along with Peters and Waterman’s publishing the paper named “In Search of Excellence”. The authors performed researches on organizations considered efficient and identified management methods and techniques that were common to all of them. The excellence method underlines that efficient companies permanently try to improve their activity. Peters and Waterman were preoccupied both on the business environment, marked by frequent and deep mutations, and by the need of making changes within organizations.

6. CONCLUSIONS Organization management is the center of gravity of economic management, as the company is the basic unit of any competitive market economy. Essentially, organization management consists of designing, developing and operationalizing specific methods, techniques and procedures, in order to enter the organization on the path of economic and social efficiency. The contemporary management theory represents a synthesis of more visions and approach modalities. The in depth knowledge of the fundamental concepts in the management science represents an assertion for efficient management of enterprises in a permanently changing economical-social environment. Nowadays it is unanimously accepted the fact that management represents a combination between science, practice and art. The complex dimension of the activities carried out within a company implies setting out multi-disciplinary teams comprising specialists in the economical, technical, juridical, social, communication sciences and informatics areas. The companies in the current economy represent open, complex, dynamic and synergic systems comprising more inter-connected components: managers with strategic vision, human resources with multiple competencies, flexible managerial system, material and financial resources, high performance technologies and organizational culture focused on change. Managers should have an integrated vision over the companies and by applying the principles, methods and techniques provided by the management science, they should establish the obtaining of long term advantage and implicitly, the maintenance of the enterprises they run on the level of economical and social efficiency. Managers and entrepreneurs should not have blind faith in models and methods offered by the management science, but if they prove their effectiveness, then it means that they are valuable tools. In other words, each managerial model is and will remain an instrument which, combined with the experience and theoretical knowledge held by managers and entrepreneurs, can help organizations identify viable solutions to the problems they are facing in the context of the current business environment.

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REFERENCES 1. Ansoff, H.I., “Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion”, McGraw-Hill, New York, NY, 1965. 2. Bateman, T.S., Zeithaml, C.P. (1993), “Management: Function and Strategy”, Richard D. Irwin, Boston, 1993. 3. Deming, W.E. (1982), “Out of Crisis”, MIT Center for Advanced Engineering Study, Cambridge. 4. Dess, G.G., Miller, A. (1993), “Strategic Management”, McGraw-Hill, New York. 5. Drucker, P.F. (1954), “The Practice of Management”, Harper & Row, New York. 6. Dumitrescu, M. (1997), “Management performant”, Editura Fundaţiei “România de Mâine”, Bucureşti. 7. Farmer, R.N. (ed.) (1984), “Advances in International Comparative Management”, vol. 1. Greenwich, Connecticut, JAI Press. 8. Fayol, H. (1949), “General and Industrial Management”, Pitman and Sons, London. 9. Fry, B.R. (1989), “Mastering Public Administration from Max Weber to Dwight Waldo”, ChathamHouse, Chatham. 10. Griffin, R.W. (1990), “Management”, 3rd ed., Houghton Mifflin, Boston. 11. Hellriegel, D., Slocum, J.W. Jr. (1992), “Management”, 6th ed., Addison-Wesley, Reading, MA. 12. Higgins, J.M. (1991), “The Management Challenge: An Introduction to Management”, Macmillan, New York, 1991. 13. Ionescu, V. (2004), “Managementul firmelor mici şi mijlocii”, Editura Economică, Bucureşti. 14. Ivancevich, J.M., Lorenzi, P.and Skinner, S.J. (1994), “Management: Quality and Competitiveness”, Richard D. Irwin, Boston. 15. Juran, J.M. (1988), “Juran on Planning for Quality”, The Free Press, New York. 16. Koontz, H., (1961), “The management theory jungle”, Journal of the Academy of Management, December. 17. Maslow, A. (1943), “A theory of motivation”, Psychological Review, Vol. 50, 1943. 18. McGregor, D. (1960), “The Human Side of Enterprise”, McGraw-Hill, New York. 19. Mintzberg, H. (1979), “The Structuring of Organizations: A Synthesis of the Research”, Prentice- Hall, Englewood Cliffs, 1979. 20. Nica, P.C., Iftimescu, A. (2008), “Management. Concepte şi aplicaţii”, Editura Sedcom Libris, Iaşi. 21. Nicolescu, O., Verboncu, I. (2008), “Fundamentele managementului organizaţiei”, Editura Universitară, Bucureşti. 22. Ouchi, W.G. (1981), “Theory Z”, Addison-Wesley, New York. 23. Pascale, R.T., Athos, A.G. (1981), “The Art of Japanese Management”, Warner Books, New York. 24. Peters, T.J., Waterman, R.H. Jr. (1982) “In Search of Excellence: Lessons from America’s Best Run Companies”, Harper & Row, New York. 25. Porter, M.E., “Competitive Strategy”, Free Press, New York, NY, 1980. 26. Robbins, S.P.(1991), “Management”, 3rd ed., Prentice-Hall, Englewood Cliffs. 27. Shafritz, J.M., Hyde, A.C. (Eds.) (1992), “Classics of Public Administration”, 3rd ed., Pacific Grove. 28. Shafritz, J.M., Ott, J.S. (Eds.) (1992), “Classics of Organization Theory”, 3rd ed., Brooks/Cole, Pacific Grove. 316

29. Simon, H.A. (1976), “Administrative Behavior”, 3rd ed., Free Press, New York. 30. Taylor, F.W. (1911), “Principles of Scientific Management”, Harper and Brothers, New York. 31. ten Have, S., ten Have, W., Stevens, F. (2008), “Modele de succes în managementul firmelor”, Editura Andreco Educational Grup, Bucureşti. 32. Von Bertalanffy, L. (1972), “The history and status of general systems theory”, Academy of Management Journal, Vol. 15, December. 33. Walton, M. (1986), “The Deming Management Method”, The Putnam Publishing Group, New York. 34. Weber, M. (1947) “The Theory of Social and Economic Organization”, trans. by A.M. Henderson and T. Parsons, Free Press, New York.

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STRATEGY AND CREATIVITY

Sorin-George Toma University of Bucharest Paul Marinescu University of Bucharest

ABSTRACT: The concepts of strategy and creativity are often discussed in the business and academic environments, but poorly understood. During the time, the two concepts have increasingly become major subjects in the business literature. Since the emergence of big corporations, strategy and creativity have been described through multi-faceted approaches in order to be fully implemented within organizations. The aims of our paper are to render in brief the concepts of strategy and creativity, and to highlight the relationship between them. Our research is based on a literature review. Our paper has demonstrated that strategy and creativity are two interrelated concepts and that the design, development and implementation of a creative strategy represent a key asset of a prosperous company in a highly competitive environment. Also, it contributes to a better understanding of the relationship between the two concepts and provides a platform on which to build further studies on the same subject. Keywords: strategy, creativity, organization, Cirque du Soleil 1. INTRODUCTION The concepts of strategy and creativity are often discussed in the business and academic environments, but poorly understood. During the time, the two concepts have increasingly become major subjects in the business literature. Since the emergence of big corporations, strategy and creativity have been described through multi-faceted approaches in order to be fully implemented within organizations. On the one hand, strategy represents “the keystone that coordinates and makes the organization create in concert” (Bilton and Cummings, 2010, pp. 4-5), and, on the other hand, creativity is mentioned as “a source of competitive strength within organizations that face discontinuous or chaotic environments or where there is little or nothing to differentiate the product or service from competitors” (Cook, 1998, p. 179). During the time, the study of creativity has become very important for individuals, groups and organizations (Treffinger, Isaksen and Dorval, 2000). The main reason is the fact that “creativity is needed, it is insisted, to meet the challenge of accelerating changes of an unprecedented magnitude; and the key areas of both change and challenge are those of scientific discovery, technical invention, commercial competition and military rivalry” (Pope, 2005, p. 19). Creativity is observable and learnable, is team or community or organization based and has become economically valuable (McWilliam and Haukka, 2008). As a key factor of any successful organization, it has been and continues to be “our intangible asset to create something new, innovative and valuable” (Hui, 2005, p. 26). That is why strategy and creativity are not separated or fundamentally different, but integral to each other. In other words, creativity should be at the heart of strategy and strategy should be at the heart of 318

creativity (Bilton and Cummings, 2010). The fourth edition of IBM’s biennial Global CEO Study series, led by the IBM Institute for Business Value and IBM Strategy & Change in 2010, emphasized that creativity constitutes one of the most important leadership features and “creative leaders expect to make deeper business model changes to realize their strategies” (IBM, 2010, p. 8). The aims of our paper are to render in brief the concepts of strategy and creativity, and to highlight the relationship between them. Our research is based on a literature review. The paper is structured as follows. In section two we present some definitions of strategy and creativity. The third part of the paper deals with the connection between the two concepts and exemplifies the case of Cirque du Soleil. This is followed by conclusions. 2. DEFINING STRATEGY AND CREATIVITY While the importance of these two concepts is generally accepted, there are as many definitions of them as there are organizations. The term „strategy” derives from the Greek word “strategia”, meaning generalship. The first treatise on strategy was Sun Tzu’s classic “The Art of War”. In his famous book, the Chinese strategist and philosopher analysed the nature of war and showed how victory can be assured. In his opinion, “what is of supreme importance in war is to attack the enemy’s strategy” (Sun Tzu, 1998, p. 25). The strategy concept emerged in the business world in the 1960s, as a consequence of two main factors. Firstly, a series of events took place and gave an impetus to strategic thinking (e.g., the business policy teaching at Harvard Business School, the development of the management education, etc.). Secondly, three American writers, K. R. Andrews, A. D. Chandler Jr. and H. I. Ansoff, were “principally responsible for moving and shaping much of what has happened since because they were the first formally to delimit the area of strategy in terms of concepts, definitions, and methodologies” (Moore, 2001, p. 1). K. R. Andrews considered corporate strategy as an organizational process, in many ways inseparable from the organizational structure, behaviour and culture. In his view, “corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities” (Foss, 2003, p. 52). The matching of external opportunity and corporate resources lead to the development of an economic strategy (Fig. 1). Andrews identified the four following components of a strategy:  market opportunity,  corporate competence and resources,  personal values and aspirations,  obligations to stakeholders, other than shareholders. He insisted on the uniqueness of the strategy by declaring that “in each company, the way in which distinctive competence, organizational resources, and organizational values are combined is or should be unique” (Foss, 2003, p. 59). For A. D. Chandler Jr. strategy includes both means and ends. In his opinion, “strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1990, p. 13). Starting from the point that “the thesis that different organizational forms result from different types of growth can be stated more

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precisely if the planning and carrying out of such growth is considered strategy, and the organization devised to administer these enlarged activities and Environmental conditions and trends  Economic  Technical  Physical  Political  Social   

Distinctive competence Capability  Financial  Managerial  Functional  Organizational Reputation History

Community Nation World

Opportunities and risks  Identification  Inquiry  Assessment of risk

Consideration of all combinations

Corporate resources As extending or constraining opportunity Identification of strengths and weaknesses Programs for increasing capability

Evaluation to determine best match of opportunity and resources

Choice of products and markets Economic strategy

Fig. 1. The stages of the development of an economic strategy. Source: Foss, 2003, p. 58

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resources, a structure” (Chandler, 1990, p. 13), he asserted that structure must always follow strategy. As the design of organization, structure includes:  the lines of authority and communication between the administrative offices and officers;  the information and data that flow through these lines. By analysing the structure of the large decentralized company, Chandler identifies four different levels from top to down as follows: the general office, the divisional central office, the departmental headquarters, and the field unity. In order to search for an appropriate methodology in which companies may determine their corporate strategy, H. I. Ansoff turned to „the decision models that had been developed in capital investment theory and portfolio selection” (Shrapnel, 2000, p.17). By considering corporate strategy as a problem to be solved, he believed that in order to find a solution for this problem corporate management has to take three types of decisions: strategic, administrative, and operating. Strategic decisions help corporate management to select the product-market mix that would optimize the corporation’s return on investment potential. On his turn, Ansoff named the four following components of a strategy:  product-market scope,  growth vector,  competitive advantage,  synergy. In spite of the fact that the business literature on strategy is so voluminous, there is no universal accepted definition of the strategy concept. However, most of the definitions were provided by American authors as follows:  “In its broadest sense, strategy is the means by which individuals or organizations achieve their objectives.” (Grant, 2013, p. 15)  “Strategy is about the firm’s relationship with the environment and developing the resources and capabilities to enable it to prosper.” (Fitzroy, Hulbert and Ghobadian, 2012, p. 11)  “Strategies are means to ends, and these ends concern the purpose and objectives of the organization. They are the things that businesses do, the paths they follow, and the decisions they take, in order to reach certain points and levels of success.” (Thompson and Martin, 2010, p. 11)  “A. strategy is the coordinated means by which an organization pursues its goals and objectives.” (Carpenter and Sanders, 2009, p. 10)  “Strategy is a firm’s theory about how to compete successfully.” (Peng, 2009, p. 10)  “…strategy is concerned with the match between a company’s capabilities and its external environment.” (Dobson, Starkey and Richards, 2004, p. 1)  “By strategy, managers mean their large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives.” (Pearce II and Robinson Jr, 2000, p. 4). The above mentioned definitions show that the strategy concept has several meanings for different people. However, these definitions lead to the following features of the strategy concept:  Strategy is a multidimensional and complex concept.  Strategy represents a coherent and integrative pattern of decisions.  Strategy is the means by which an organization can achieve its goals.

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

Strategy deals with the organization’s relationships with its internal and external environment.  Planning constitutes an important element of strategy. Creativity is central to human activity in general and to organizational activity in particular. “Unlocking creative potential is seen as key to economic and societal growth” (Adobe, 2012, p. 4) and, therefore, creativity represents “a topic of wide scope that is important at both the individual and societal levels for a wide range of task domains” (Sternberg and Lubart, 1999, p. 3). The concept of creativity is paradoxically and complex. It has increasingly become a main subject in the literature and also, a fundamental leadership competency for enterprises since the late 19th century and the early 20th century. The first study of creativity was realized by F. Galton in his book “Hereditary Genius: An Inquiry into Its Laws and Consequences” published in 1869. By analysing the variation in human ability, he was convinced that success was due to superior qualities which are inherited. As a consequence, “though Galton includes as geniuses many varieties of eminent persons who would not generally be considered either geniuses or creative persons, a long series of studies on genius and heredity and on creativity and heredity have followed his work” (Rothenberg and Hausman, p. 42). At the turn of the past century, creativity began to be studied in a systematically manner. Researchers have identified four major traditions as follows (Craft, 2011, p. 5):  “the psychoanalytic tradition (including Freud’s discussion of creativity as the sublimation of drives and Winnicott’s work on development which makes creativity central and intrinsic to human nature);  the cognitive tradition (stemming from Galton’s work and including Mednick’s exploration of the associative process and Guilford’s exploration of divergent production of ideas and products);  the behaviourist tradition (including Skinner’s discussion of chance mutation in the repertoire of behaviours);  the humanistic tradition (including Rogers, May and Maslow whose discussions focused on the self-realising person acting in harmony with their inner needs and potentialities).” In the 1920s, the British social scientist G. Wallas designed the four stages model of the creative thinking process which he defined as:  Preparation- the problem is examined systematically.  Incubation- the problem is internalized into the unconscious mind.  Illumination/Insight- a new idea emerges. A creative idea appears after a ‘flash’ of inspiration.  Verification- the idea is validated and then implemented (Wallas, 1926). His model provides a balance between the creative elements from the Incubation and Illumination stages and the critical elements from the Preparation and Verification stages. In 1931, J. Rossman also proposed a seven-step model: perceiving the need, analyzing the need, surveying all available information, formulating all objective solutions, analyzing critically all these solutions, emerging of a new idea, and testing the most promising solution. He emphasized that insight and innovation were the main characteristics of the creative process. One of the best methods for improving creativity, Creative Problem Solving (CPS), was designed in the late 1940s and implemented in the early 1950s by S. J. Parnes and A. F. Osborn. CPS comprises the following six steps: objective finding, data finding, problem finding, idea finding, solution finding and acceptance finding. Within each step, one using

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CPS employs different techniques as divergent thinking, brainstorming, or convergent thinking. Later, Osborn launched a seven-step creative process model as follows: orientation, preparation, analysis, hypothesis, incubation, synthesis, and evaluation (Osborn, 1953). He also invented and developed the brainstorming technique in which the brain uses imagination in order to storm a problem. The 1950s represented a rich period of research in creativity. Work on personality, cognition and stimulation of creativity was the three major lines of development. J. P. Guilford considered that creativity is a mental process. He believed that divergent thinking was the basis for creativity. It is rather difficult to find a comprehensive definition that encompasses all the various dimensions of creativity. In the literature there are major differences regarding the way the concept of creativity has been studied. During the time, distinctions have been made between high creativity and ordinary creativity, and between creativity within specific domains (Craft, 2011). Also, one could study creativity from a multi-level perspective (Morgeson and Hofmann, 1999). As the strategy concept, creativity has been defined in many ways by different researchers as follows:  Creativity in organizations is “the process through which new ideas that make innovation possible are developed”. (Parjanen, 2012, p. 111)  Creativity is ”viewed as the production of new and useful ideas or solutions by one or more individuals within a work environment”. (Klijn and Tomic, 2010, p. 323)  “Creativity is the use of ideas to produce new ideas.” (UNCTAD, 2010, p. 4)  “According to the multi-level analytic perspective, individual creativity is understood as a function of previous conditions (past personal history, biographical variables, etc.), skills and cognitive style (divergent thiking, flow of ideas, etc.), personal elements (self-esteem, control, etc.), relevant knowledge, motivation, social influences (benefits, social rewards, etc.), and contextual influences (physical environment, task and time constraints, etc.).” (Borghini, 2005, p. 20)  “Creativity is the application of knowledge and skills in new ways to achieve a valued goal. To achieve this, learners must have four key qualities: - the ability to identify new problems, rather than depending on others to define them; - the ability to transfer knowledge gained in one context to another in order to solve a problem; - a belief in learning as an incremental process, in which repeated attempts will eventually lead to success; - the capacity to focus attention in the pursuit of a goal, or set of goals.” (Seltzer and Bentley, 1999, p. 10)  “Creativity is the ability to produce work that is both novel (i.e. original, unexpected) and appropriate (i.e. adaptive concerning task constraints).” (Sternberg, 1999, p. 3)  Creativity is “the ability or quality displayed when solving hitherto unsolved problems, when developing novel solutions to problems others have solved differently, or when developing original and novel (at least to the originator) products”. (Parkhurst, 1999, p. 18)  High creativity is “the achievement of something remarkable and new, something which transforms and changes a field of endeavor in a significant way…” (Feldman, Csikszentmihalyi and Gardner, 1994, p. 1).

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Creativity has been a topic of high interest since researchers have increasingly focused on the factors which promote or limit individual’s and/or organization’s creativity. The above mentioned definitions lead to the following features of the creativity concept:  Creativity represents a multidimensional concept which is difficult to define.  As a complex concept, creativity is linked with knowledge and skills.  Creativity constitutes a necessary and an extremely vital part of our social life (e.g. education, culture, science, etc.).  Many definitions refer to creativity as producing something new, novel or different.  Creativity helps people and/or organizations to identify solutions to their problems. In sum, the concepts of strategy and creativity are multidimensional and complex. These concepts are strongly connected, especially in the business world. 3. STRATEGY AND CREATIVITY: TWO INTERRELATED CONCEPTS In today’s economy creativity has become a major driver of economic growth. There are many faces of creativity such as scientific creativity or economic creativity. Economic creativity is “a dynamic process leading towards innovation in technology, business practices, marketing, etc., and is closely linked to gaining competitive advantages in the economy” (UNCTAD, 2010, p. 3). That is why creativity constitutes a key input for the organizational strategy in order to ensure an effective response to external and internal challenges. A successful business organization carefully searches for, measures and analyses any competitive advantage. As a strategic capability, creativity should always represent a fundamental element of competitive advantage. In order to design, implement and develop a strategy, managers have to go through a strategic reasoning process by engaging in cognitive/strategic thinking activities. A strategic reasoning process consists of two major categories of cognitive activities, respectively cognitive activities directed towards defining a strategic problem and cognitive activities directed at solving a strategic problem (De Wit and Meyer, 2010). These two categories constitute the four elements of a strategic reasoning process: identifying, diagnosing, conceiving and realizing (Fig. 2). This means that a strategic reasoning process requires both logical thinking and creative thinking. Based on formal rules, rational processes and solid arguments, logical thinking represents a rigorous way of thinking that helps to avoid outdated habits and routines. On the contrary, based on irrational or unconscious forces, creative thinking gives birth to new understandings without paying too much attention to sound explanation or supporting evidence. However, critical and creative thinking are both achievements of thought because “creativity masters a process of making or producing, criticality a process of assessing or judging” (Paul and Elder, 2008, p. 4). Consequently, the mind has to “simultaneously produce and assess, both generate and judge the products it fabricates” (Paul and Elder, 2008, p. 4) within the thinking process. That is why strategic thinking implies not only logical thinking that brings rigor, discipline and analysis, but also creative thinking that involves imagination, mental jumps and liberty. Taking into account the above assumptions, a conclusion emerges: strategy and creativity are not different or opposite. In fact, they are “more similar than different, they are both integrating processes” and “all creativity is potentially strategic; and all strategy should be creative” (Bilton and Cummings, 2010, p. 8). An organization’s ability to achieve its strategic goals is often dependent on how quickly it can bring creativity into play (Carnevale, Gianer, and Meltzer, 1990). In this respect, Cirque du Soleil (Circus of the Sun) represents a valuable example. 324

Diagnosing Analysing Reflecting (‘What is the nature of the problem?’)

Identifying Recognizing Sense-making (‘What is a problem?’)

Defining …………………………………………………………………………………………….. Solving Realizing Implementing Acting (‘What actions should be taken?’)

Conceiving Formulating Imagining (‘How should the problem be addressed?’)

Fig. 2. The four elements of a strategic reasoning process. Source: De Wit and Meyer, 2010, p. 29 Located in Montreal, Cirque du Soleil is a Canadian entertainment company, established in 1984 by two former street performers, G. Laliberté and G. Ste-Croix. After performing a successful tour in the same year, Le Grand Tour du Cirque du Soleil, and securing the needed financial resources, Laliberté hired G. Caron to re-create the company. In fact, the company has changed from a traditional circus to a contemporary circus. Firstly, Laliberté and his team used only human performers without animals. Secondly, they created their shows around different storylines. Thirdly, they succeeded in combining music, theater, circus and dance in a highly creative manner. After a series of successes and failures in the late 1980s, the Canadian company developed rapidly in the last decade of the past century and attained an impressive repertoire comprising 19 shows, performed in all major cities of the world. Confronted with an increasing complexity of the business due to its ambitious expansion, Cirque du Soleil implemented the Whole Brain Thinking model in its activity. This model has helped the company to achieve a better understanding of the thinking style each employee brings in the organization. D. Bienvenue, a consultant who worked with the Canadian company, designed and developed a creative method to introduce the Whole Brain Thinking model within the company. In order to draw four characters illustrating various aspects of thinking styles, she hired a cartoonist (Table 1). Bienvenue conducted an exercise where the participants could choose “four activities in a diversity game” and “each activity happened to coincide with a preferred thinking style and related quadrant of the brain” (Hermann International, 2012, p. 4). As a result, people made quick connections between thinking styles and preferred 325

activities. That result has facilitated them the understanding of a diversity of thinking styles employee meet wherever they perform in the world. On the other hand, “armed with an understanding of Whole Brain Thinking, the managers realized they had put together teams that work so well by covering the Whole Brain Thinking approach” (Hermann International, 2012, p. 6). Table 1. The four quadrants of the brain. A- Upper Left D- Upper Right  Logical  Holistic  Analytical  Intuitive  Fact Based  Integrating  Quantitative  Synthesizing B- Lower Left C- Lower Right  Organized  Interpersonal  Sequential  Feeling based  Planned  Kinesthetic  Detailed  Emotional Source: Hermann International, 2012, p. 4 By continuously pushing the boundaries of where live performance and visual imagery can go, Cirque du Soleil has become a leader in creativity and innovation. That is why the UCLA School of Theater, Film and Television, one of the world’s most prominent academic institutions for entertainment and performing arts education, established a multiyear alliance with the Canadian entertainment company. Ranked as one of the top elite entertainment institutions in the global higher education system, the UCLA School of Theater, Film and Television provides its graduate students the opportunity to collaborate with one another at Cirque du Soleil’s resident shows in Las Vegas, and to actively participate in the highly creative process of its shows. In this respect, the students have to work under the supervision of a mentor at Cirque du Soleil and a faculty advisor. In short, creativity has always been at the heart of Cirque’s business strategy. This statement is based on the following main factors:  The founders of the company, especially Laliberté, unleashed their creativity and launched a successful new business.  The founders followed their creative vision in spite of taking the risks and provoking uncertainty and doubts.  By challenging the status quo of the circus, the company promoted change in the circus domain and gained high audience by the creative incorporation of unanticipated elements such as theater.  Each new show launched by Cirque du Soleil has its own Creative Director because organization’s creativity has to be continuously nurtured.  By developing new products (e.g. shows) and reviewing them continually, the company has kept them fresh.  Cultural diversity and multidisciplinary approach have been the key drivers of Cirque’s creativity. As a flat organization that avoids the hierarchical approach to management and emphasizes the importance of the individualistic values, the Cirque has unceasingly promoted creativity and innovation in its activity. By considering creativity as an organizational goal, the Canadian company has built and developed a successful creative strategy. 326

4. CONCLUSIONS In general it can be concluded that there has been done a great deal of research on organizational strategy and creativity. However, there are no simple pathways to fully understanding the essence of the concepts of strategy and creativity. There are many different views to as to what these concepts are. On one hand, strategy constitutes a fundamental element in pursuit of competitive advantage. On the other hand, creativity is highly valued because it can be beneficial both for individual, groups and organizations as it can deliver significant advantages and opportunities. In spite of the fact that logical and creative thinking often seem to be opposite forms of thought, when people have a true and deep understand of them they recognize their inseparability and integration. In other words, sound thinking involves both rationality and creativity. Despite the fact that specialists speak of the ‘paradox of logic and creativity’ a blend between the two is needed within the strategic thinking process. Our paper has demonstrated that strategy and creativity are two interrelated concepts and that the design, development and implementation of a creative strategy represent a key asset of a prosperous company in a highly competitive environment. Also, our paper contributes to a better understanding of the relationship between the two concepts and provides a platform on which to build further studies on the same subject.

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EFFECTS OF MAGICAL THINKING AND SUPERSTITIOUS BELIEFS ON CONSUMER BEHAVIOR Adela Coman University of Bucharest

ABSTRACT This article provides an exposition of peculiar beliefs and their potential impact on decision making outside of consumers’ awareness. I start by defining magical thinking and superstitions as types of peculiar beliefs. Next, I discuss the impact of magical thinking and superstitions in situations when consumers are forced to choose or are subject to contextual factors influencing their preference construction. Given that peculiar beliefs are both culturally and personality-bound, advertising induces consumers to believe in magic by appealing to their feelings and emotions, to their rituals and meanings attached to a specific product. The concluding remarks focus on the need to explore new domains in consumer psychology and build theoretical bridges to consumer cultures so that marketers and customers alike may better understand how “magic” works as a system of beliefs revolving around consumer goods. Key-words: magical thinking, superstitions, forced choice, response mode, task complexity. 1. INTRODUCTION The idea of rationality is a very basic element in our concept of what it means to be a human being. And yet, modern advertising is based on a particular kind of irrational thinking known as “magical thinking” (Holt, 2002). The tendency toward this kind of thinking is observed across a wide range of cultures, including modern western societies and is considered to be a universal trait of human thought. Magical thinking is characterized by the belief that small efforts may bring great results. However, educated adults in Europe and the United States show the same degree of magical beliefs as uneducated people living in “magic tolerant” cultures (Subbotsky, Quinteros, 2002). For instance, in one experiment, British students who all denied that magic could happen in real life were asked to imagine that a woman at dusk on an empty street approached them, introducing herself as a witch and offering to cast a magic spell on the future life of the participant. In one condition, this spell was intended to make the participant rich and happy, while in the other it was intended to make the participant miserable. While in the first condition most participants said they would go for the spell, none agreed to do so in the second condition (Subbotsky, 2005). In her book, “Decoding advertisements: Ideology and meaning in advertising”, Judith Williamson argues that most of modern advertising follows the logic of a magical spell, as it promises us great results: beauty, love, success, security, etc., from a minimal action: buying the advertised product. Products appear in advertising as miraculous containers of ideas, feelings, auras, people and meanings. Advertising suggests that by performing the right spell (choosing the advertised brand), we should be able to release the magical power contained in 330

the product. Each advertisement presents the product as the key to the whole scene of happiness or joy it depicts: the little detail which produces great results (Williamson, 1981, p 149). This article proceeds as follows: part 1 describes the conceptual framework of magical thinking and superstition. Part 2 focuses on the asymmetric impact of peculiar beliefs in situations when consumers are forced to choose as compared to when they are free to defer choice. Next, I discuss some contextual factors influencing preference construction in predicting the impact of peculiar beliefs on consumer psychology. I argue that differences in the nature of the options under consideration, the response mode and task complexity do not affect all consumers alike in their decision-making, as they are both personality-bound and culturally-bound processes. Finally, the concluding remarks highlight the idea that more research is needed in the field of interaction and synergistic effects that may arise between “magical” products and consumers’ “magical thinking”. 2. A CONCEPTUAL FRAMEWORK 2.1. Magical thinking Magical thinking was broadly defined by Meehl (1964) as “belief, quasi-belief or semiserious entertainment of the possibility that events which, according to the causal concepts of this culture, cannot have a causal relation with each other, might somehow nevertheless do so” (as cited by Berenbaum et al., 2009). For example, Subbotsky (2004) found that adults seem to exhibit magical thinking when making irrational causation judgments, showing that people are reluctant to stick their hands into an empty box when the suggestion was made that this may cause some harm to their hands. In addition, Pronin, Wegner, McCarthy and Rodriguez (2006) demonstrated that participants who were instructed to have evil thoughts about a confederate victim felt more responsible for the victim’s later reported physical pain. This erroneous judgment of cause and effect is quite common, with people assuming responsibility or guilt due to the cooccurrence of an ill-wish and a conceptually related negative event. 2.2. Superstitions The terms “superstition”, “superstitious beliefs” and “superstitious behavior” have been used to describe a broad range of phenomena, including beliefs in astrology and magic (Vyse, 1997). In this paper, superstitions are defined more narrowly as peculiar beliefs – socially shared or idiosyncratic – that actions or objects can be invoked to control both good luck and bad luck. As such, superstitious beliefs and behavior are instances of consumers’ tendency to subjectively believe they have an influence over outcomes where no such objective influence exists. For example, individuals who choose their own lottery ticket are significantly less willing to exchange their ticket for another compared to those who are handed a lottery ticket by the experimenter, even when the change does not impact their objective chances of winning (Langer, 1975). Interestingly, research has also found that the degree to which individuals believe that their luck is a stable quality that they possess and control versus just random and beyond their control is a measurable individual trait (Darke, 1993; Darke and Freedman, 1997). Common socially shared superstitions include the beliefs that black cats bring bad luck and that Friday the 13th is an unlucky day. Superstitious behaviors include knocking on wood or crossing one’s fingers for good luck. Examples of personal superstitions or rituals relevant to marketers include consumers’ buying and wearing lucky accessories like charm bracelets, lockets, pens of cufflinks. 331

Consumption rituals also include using a particular product before important events that are associated either with high likelihood of failure or a high level of uncertainty (Case, Fitness, Cairns and Stevenson, 2004) such as sporting events where superstitious beliefs are quite pervasive. Nearly everyone has an anecdote of a friend who indulge peculiar beliefs by turning off or deliberately not watching the last few moments of a game so as not to jinx their team; or wearing the same clothing to each team event; or watching the game in the same venue, with the same friends and ordering the same beer so as to replicate the winning victory of the last game. Common wisdom and a vast body of anthropological and sociological studies suggest that people are more likely to engage in superstitious behavior in uncertain situations (Keinan, 2002; Malinowski, 1954). For example, Padgett and Jorgenson (1982) reported an increase in superstitious behavior in times of economic uncertainty, such as the Great Depression. Similarly, Keinan (2001) found that Israeli residents living in areas more likely to be exposed to Scud missile attacks during the Gulf War were more superstitious than those living in safer zones. More recently, US soldiers driving tanks in the Iraq war refused to eat apricots believing they brought bad luck (Phillips, 2003). However, far fewer studies have specifically explored increased use of peculiar beliefs in a context of consumer uncertainty. In one stream of work, Schindler and colleagues study the effects of superstitious beliefs for insurance decision-making (Schindler, Conlin and Kronberger, 2007). Finally, Kramer and Block (2008) showed that superstitious beliefs related to Friday the 13th had a greater impact on consumer choice in relatively more uncertain gambles. Although peculiar beliefs are generally considered a universal aspect of human thought, there are many examples of magical thinking and superstition whose particular expressions are culture-bound. As an example of distinct cultural contagion beliefs, Rozin and Nemeroff (2002) cite that Japanese family members often share their bath water whereas Western cultures find such a practice disgusting, ostensibly succumbing to the law of contagion. Examples of distinct cultural superstitious beliefs impacting consumer behavior include the number 8 bringing good luck and the number 4 bringing bad luck in Chinese cultures (Simmons and Schindler, 2003), whereas the numbers 7 and 13 are associated with good luck and bad luck, respectively, in the United States and other Western cultures. Furthermore, superstitious beliefs and magical thinking may both be based on rational assumptions of how the world works such as, for example, contamination by germs. A common superstition is that bad luck comes to a person who places shoes on a table or that mashed potatoes will be permanently contaminated once touched by a cockroach. At the core of these peculiar beliefs is the notion that germs can cause illness. However, many other beliefs that have been documented in the literature related to superstitions (e.g. paying 2.4 million yuan for the telephone number 8888888, Rozin et al., 1990; a brand new boxed feminine hygiene product contaminating another product in a supermarket basket, Morales and Fitzsimons, 2007; educated Americans refusing to eat chocolate shaped into realisticlooking dog feces, Rozin et al., 1986) are irrational and not based on scientific principles or empirical evidence. Recent research demonstrates that peculiar beliefs work on a nonconscious level. In a series of studies, Kramer and Block (2008) provide the first empirical evidence for a nonconscious component to the process of superstitious beliefs on consumer behavior. Using a process dissociation technique set forth in Jacoby (1991) and advanced by Fitzsimons and Williams (2000), Kramer and Block separated the effect of superstition on decision-making into its distinct conscious and nonconscious components. These researchers found that the nonconscious component was greater than the conscious one by a factor of three. The relative 332

magnitude of the nonconscious to the conscious component demonstrates the significant effect that specific peculiar beliefs can have on consumer behavior. Support for the nonconscious nature of processing stems from the conceptually similar work on the processing of stereotypes. Like stereotypes, peculiar beliefs represent a set of cultural associations that are learned through socialization processes and are socially transmitted (Devine, 1989). Research show that these sets of associations are automatically or unintentionally activated by the presence of a cue in the environment (Devine, 1989), but can be adjusted through conscious thought. Similarly, when faced with a superstitious cue, like the Friday 13th calendar date or a magical belief like negative contagion from clothing previously worn by an AIDS patient, peculiar beliefs are likely to be automatically activated but can subsequently be controlled consciously. In sum, studies suggest that the influence of stimuli that activate peculiar beliefs on behavior functions via a combination of conscious and nonconscious processes. Demonstrating this, Block and Kramer (2009) explored the effect of superstitious beliefs on purchase likelihood of consumer products across people with varying levels of cognizance of the superstitious meaning of the stimuli. For participants for whom the stimulus did not activate superstitious meaning, purchase likelihood followed rational beliefs. However, those who interpreted the stimuli as lucky were more likely to purchase the “lucky” products – even when the purchase ran counter to rational economic theory. For example, Taiwanese consumers were more likely to purchase and willing to pay more for a package containing eight (which is a lucky number) tennis balls than a package containing ten tennis balls. Similarly, imagine that a consumer must choose between taking a flight on Thursday the 12th or Friday the 13th. The potential for bad luck will not be activated in memory for consumers who do not have culturally based superstitious beliefs concerning Friday the 13th and, for them, attributes other than the date of the flight will influence their choice. On the other hand, for other consumers, Friday the 13th will make the potential for bad luck accessible. Believers are likely to consciously decide not to take the flight on the unlucky day. Non-believers are likely consciously to reject the irrationality associated with the unlucky date, yet still become less likely to choose the flight on Friday the 13th without being at least partially aware that their choice is driven by the peculiar belief. There are many decisions that may be impacted by peculiar beliefs outside of consumers’ awareness that heretofore have not received attention in the literature. Although reliance on peculiar beliefs in choice is likely to involve a conscious component, I expect the proposed effects to be primarily driven by nonconscious processes. Further, although “luck” may develop idiosyncratically in consumer objects (e.g. a pair of sneakers that one was wearing during a successful exam is worn to subsequent exams in the belief that they will keep bringing luck), in our examples we focus on lucky attributes (numbers, colors, etc.) more directly under the control of marketers. Below, we start by examining the asymmetric impact of peculiar beliefs in situations when consumers are forced to choose as compared to when they are free to defer choice. We then focus on contextual factors influencing preference construction, namely, differences in the nature of the options under consideration, response or evaluation mode and task complexity in predicting the impact of peculiar beliefs on consumer psychology. 3. PECULIAR BELIEFS IN ACTION 3.1. Free versus forced choice Although consumers are often free to delay making a purchase, at times they are forced to choose one of the options under consideration (Dhar and Simonson, 2003). For 333

example, consumers may defer purchase of a bag of chips but have to choose one of the available pain medications because of a severe headache. Research has shown that the impact of the no-choice option is not proportional (symmetric) across all options under consideration. Instead, the option not to choose has a disproportionate impact on those options that consumers select when uncertain about their preferences (Dhar and Simonson, 2003). Choosing not to choose is especially likely when the options under consideration are similarly attractive such that trade-offs among their attributes elicits conflict and discomfort (Tversky and Shafir, 1992). Thus, when choosing freely, consumers can solve their choice conflict by selecting the non-choice option. Given that the option not to choose is not available when they are forced to choose, consumers need to find an alternative way to resolve the choice conflict such as by relying on their magical thinking and superstitions. In addition, one can argue that individuals will act on their peculiar beliefs as a way to establish or exert control, especially in situations when their option to choose freely is eliminated (Brehm, 1996). The relationship between an individual’s illusion of control and peculiar beliefs is well established in the literature (Rudski and Edwards, 2007). For example, Keinan (2002) found that individuals with a relatively higher desire for control were more likely to knock on wood to establish control in uncertain situations. Therefore, the lucky red color of a car should have a greater impact when Romanian or South American consumers are forced to choose between a red car and a brown car as compared when they choose between a red car, a brown car or deferring the purchase altogether. Similarly, the fact that a blouse on display previously has been touched by an unattractive consumer will have a greater impact when choosing between that blouse and an untouched one, as compared to when deciding among those two blouses and going to another store. 3.2. Nature of the options Options that consumers consider for purchase can be broadly classified based on their conventional versus unconventional properties and, in particular, their level of risk, position in the choice set or their utilitarian properties (Catoiu, Teodorescu, 2004; Simonson, Kramer and Young, 2004). Specifically, in choices between gambles that differ in their level of risk, individuals tend to select the lower-risk option by default, consistent with the notion that safe or lower-risk options are perceived as more conventional choices (Simonson et al., 2004). Furthermore, asymmetrically dominating versus dominated options tend to be chosen by default, making them the conventional choice (Huber et al., 1982). Finally, utilitarian versus vice options are more likely to be perceived as conventional choices because they tend to satisfy lower-level needs (Maslow, 1970) and evoke less guilt (Kivetz and Simonson, 2002). Status quo options can also be considered to be conventional choices since consumers tend to prefer options that cause no change to their world (Ritov and Baron, 1992). That is, in choice, consumers are biased towards default options. For example, employees tend to stay with their initially chosen investments rather than switch to alternative funds (Samuelson and Zeckhauser, 1988). The status quo bias is also apparent in differences between opt-in and optout decisions. For example, Johnson and Goldstein (2003) show that willingness to become an organ donor increases from 42% when having to opt in to 82% when having to opt out. Overall, based on research showing a greater reliance on superstition in uncertain or risky situations, I assert that peculiar beliefs are likely to differentially impact choices of unconventional versus conventional options. In particular, since choices of unconventional options go against norms and are associated with greater risk and uncertainty, peculiar beliefs should also have a relatively greater impact in their choice. Conversely, conventional choices given that they tend to be the default options that normatively should be chosen are relatively 334

less likely to be impacted by peculiar beliefs. For example, lucky versus neutral product colors or numbers should have a greater impact on choices of extreme, risky, asymmetrically dominated or non-status quo options than on compromise, safe, asymmetrically dominating, utilitarian or status-quo options. 3.3. Response mode All consumer judgments and choices are made in one of two basic evaluation modes: namely, jointly or separately (Hsee, Blount, Loewenstein and Bazerman, 1999). For example, in choice, consumers evaluate options in their consideration set jointly and then choose one of them. Conversely, in judgment tasks, consumers evaluate the options separately and in isolation. Contrary to economic theory suggesting that preferences are stable giving rise to procedure invariance, much research has shown that preference elicitation task or response mode often impact the preferences expressed (Novalis and Simonson, 1997; Tversky et al., 1988). I expect that the impact of peculiar beliefs on choice is likely to be influenced by the response mode. That is, consumers are likely to compare and make trade-offs between the options under consideration, focusing on the given attributes and attribute values. Evaluating options separately versus jointly lends itself more to memory-based processing rather than stimulus-based processing (Lynch and Srull, 1982). In this case, peculiar beliefs may be an additional piece of information in deciding whether to choose a particular option. For example, when choosing between a 120 square meters, 500 euros per month apartment on the 13th floor and a 86 square meters, 400 euros per month apartment on the 10th floor, the fact that the former is located on an unlucky floor is likely to have less of an impact compared to when evaluating the two apartments separately. Similarly, consumers will be more likely to choose an apartment previously lived in by an attractive person when evaluating it in isolation, as compared to evaluating it with other apartment options. 3.4. Task complexity There are several important properties in a decision task that impact how difficult it is for consumers to make a choice, including the number of alternatives from which to choose, time pressure and the ease with which considered options can be compared. In general, the more complex or difficult the task of choosing, the more likely consumers are to rely on simplifying heuristics in arriving at a decision (Payne, Bettman and Johnson, 1993; Catoiu, Teodorescu, 2004). For example, consumers may use a mental shortcut such as: “Never buy a coat that has been tried on” or “Never choose a product whose price ends with a 13” when there is high task complexity. Therefore, particular beliefs should have a greater impact under high as compared to low, task complexity. In particular, uncertainty inherent in the decision task increases as the number of alternatives from which to choose or the number of attributes for each alternative increases. This increase in complexity following the greater amount of information to be processed is also associated with shifts in decision strategies employed by consumers who tend to move away from compensatory to non-compensatory strategies (Payne, 1982). Given that it will be more difficult to choose the optimal option from larger consideration sets, consumers are increasingly likely to use heuristics such as accessible peculiar beliefs. For example, the fact that one of the bike helmets considered for purchase comes in lucky color red will have a greater impact when consumers choose among 23 helmets as compared to 3 helmets. Similarly, knowing that a bike helmet was previously owned and worn by a champion cyclist will have a greater impact on its evaluation or purchase likelihood when it is 1 of 10 rather than 1 of 2 helmets to choose among. 335

In addition to the number of alternatives or attributes, task complexity is also impacted by the amount of time consumers have to make a decision. Severe time pressure has been found to be in its impact on consumer choice as other types of stress (Svenson and Edland, 1987). Yet, even under relatively moderate time constraints, consumers tend to shift to simplifying heuristics. Thus, given the impact of superstition in stressful situations and their use as a decision shortcut, the effect of peculiar beliefs should be greater when consumers are under relatively greater time pressure. For example, consumers will be more likely to choose a lucky day (e.g., 09/09/09) to get married when having only seconds as compared to days, to decide on a date. Finally, task complexity is also impacted by the ease with which alternatives can be compared. Specifically, consumers often choose not only from among products within a specific category but also among options from different product categories (Johnson, 1984) such as when shopping for items for a new home (Bettman and Sujan, 1987). Such noncomparable alternatives only have few, if any, attributes in common which increases the difficulty of evaluation and choice. I suggest that peculiar beliefs associated with product attributes will have a greater impact in such situations compared to when the product options are comparable. For example, the perceived unluckiness of the price of a box of chocolates (13 $) will have a greater impact when choosing between the chocolates and a t-shirt as compared to choosing between two boxes of chocolate. Furthermore, the unattractive shape of a piece of chocolate will have greater impact when choosing between the chocolate and a tshirt than when choosing between two pieces of chocolate. 4. DISCUSSION Although I examined the general impact of peculiar beliefs in decision-making, their effects clearly will not be the same for all consumers alike. Two important individual difference variables likely to impact the reliance on peculiar beliefs are: a consumer’s level of self-efficacy and level of competitive tendencies. Self-efficacy describes one’s perceived ability to perform a task (Bandura, 1982; Hu, Huhmann and Hyman, 2007), such that individuals low in self-efficacy tend to be less motivated to perform a particular task because they believe their current skills are not sufficient to achieve the desired outcome (Noe and Wilk, 1993). For exemple, Srivastava, Strutton and Pelton (2001) found that the greater salespeople’s self-efficacy, the greater their sales effort. This literature suggests that consumers low in self-efficacy might be more likely to resort to peculiar beliefs because of their perceived inability to perform a particular task. In addition to self-efficacy, reliance on peculiar beliefs should also be greater for individuals who chronically focus on winning or being the best, namely, those with greater competitive tendencies. Much research has demonstrated that athletes are a highly superstitious group. Further, Langer (1975) showed that competition increased the illusion of control. Competitiveness as a trait has received only scant attention in the marketing literature (e.g., Mowen, 2004; Puri, 1996). However, greater consumer competitiveness should be associated with a greater impact of peculiar beliefs. For example, consumers high versus low in competitive tendencies might be more likely to knot on a lucky date to guarantee a good marriage. Important extensions of the effects of peculiar beliefs on consumer behavior can potentially be derived from studying the literature on automatic brand effects. Fitzsimons, Chartrand and Fitzsimons (2008) presented seminal work documenting the translation of social priming effects to the consumer brand context. Specifically, they demonstrate the existence of brand priming effects on behavior such that consumers behave in line with the 336

characteristics of the brand and that they do so without conscious awareness of the brand’s influence. However, these automatic effects are limited to goal-relevant brands that evoke goal-directed behavior. Similar motivational processes underlie the automatic or nonconscious effects of peculiar beliefs on behavior. For superstitious behaviors, for example, the need to control or reduce uncertainty might emulate goal-directed motivation. Interestingly, there is no research specifically linking superstitions or other peculiar beliefs to goal activation or fulfillment. The intersection between these two as of yet disparate literatures might reveal valuable brand and product specific effects on peculiar beliefs. 5. CONCLUDING REMARKS If magical thinking is an almost universal aspect of human thinking, superstitions are peculiar beliefs that actions or objects can be invoked to control good-luck and bad-luck as well. Both are primarily driven by nonconscious processes and have an impact on consumer behavior in situations of free versus forced choice, in status-quo versus non-status-quo options, when we evaluate options jointly or separately or when we face high or low task complexity in our everyday choices. According to modern advertising, products/brands are miraculous, containing ideas, feelings, auras, people and meanings. Despite the irrational perception of products/brands as having magical powers – they promise us beauty, love and success – particular expressions of magical thinking and superstitions are culture-bound and (more directly) under the control of the marketers. In other words, peculiar beliefs may be automatically activated but, in the same time, they may be subsequently controlled consciously. Magical thinking and superstitions are also personality-bound: a consumer’s high level of self-efficacy and competitiveness are associated with a greater impact of peculiar beliefs. “Two-system” explanations of behavior (e.g., Chaiken and Trope, 1999; Evans, 2007; Kahneman, 2003) suggest that individuals may be capable of logical reasoning and, at the same time, be affected by intuitions and feelings. Thus, individuals may rationally understand that their actions cannot affect the probability of an outcome, whether desired or not, while at the same time, having a strong gut feeling that they indeed can. This gut feeling may be based on a set of (cultural) associations that are stored by the intuitive system and individuals may not even be fully aware that these “magical” thoughts are connected to their personality. Moreover, they are unaware that this kind of thinking is influencing their intuitions and choices. Therefore, it is hardly surprising that advertising tends to promise, mostly vaguely and implicitly, that products will have great, miraculous effects, especially in the most important spheres of our lives. Just like advertising recipients, people who believe in magic tend to interpret ambiguous events and even disconfirming evidence in accordance with their beliefs and tend to attach occasional success to (owning) certain products and brands. Future research should explore the existing connections between the advertising claims regarding “magical” products and the core beliefs they rely on. It should also explore the interaction or synergistic effects of various forms of peculiar beliefs since understanding consumer cultures and consumer psychology are the underpinning of marketing success. It is important for consumer researchers to acknowledge personality traits and document their effects on consumer attitudes and decision behaviors in order to better support marketing practitioners and consumers as well.

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EFFECTIVE INFORMATION TECHNOLOGY GOVERNANCE DETERMINANTS: A STUDY OF INVOLVEMENT OF TOP MANAGEMENT IN IT AND INTERNAL CONTROL Samuel David Lee Accounting Department, Faculty of Economics, Gunadarma University Aris Budi Setiawan Accounting Department, Faculty of Economics, Gunadarma University

ABSTRACT In recent year, organizations are increasingly dependent on information technology to remain competitive. Within the framework of corporate governance, IT governance becomes the primary and integral part of successful implementation of corporate governance overall. IT governance ensures the efficient an effective measure to increase the company’s business process Obtaining the sample data by using questionnaire of 13 banks with 70 respondents, this research examined the influences of two proposed IT governance mechanisms, which are involvement of top management in IT and Internal Control on the overall effectiveness of IT governance. Using Multiple Regression techniques, this research found significant influence between effectiveness of IT governance and IT governance mechanisms: involvement of top management in IT and found not significant influence which is internal control. Key words: IT Governance, Top Management, Banking Sector, Internal Control.

1. INTRODUCTION In recent year, organizations are increasingly dependent on information technology to remain competitive. Thus, it is crucial for organizations to establish good governance in IT to obtain more effective use of IT. Wulandari (2010) declare effective governance strategies require planning, implementation of targeted and appropriate control and monitoring. Therefore, organizations with ineffective IT governance, by contrast, suffer due to inaccurate information quality, inefficient operating cost, runaway IT project costs (e.g., being over budget and under specification), loss of competitiveness, the demise of IT departments, or the organization itself (Ali and Green, 2012). So, IT plays an important part in determining the quality and accessibility of services. To achieve effective IT governance, an organization needs to employ well-designed, wellunderstood, and transparent governance mechanism. However, corporate governance can be defined as the establishment of structures and processes, with appropriate checks and balances that enable directors to discharge their legal responsibilities (Institute of Directors Southern Africa, 2009). 342

Within the framework of corporate governance, IT governance becomes the primary and integral part of successful implementation of corporate governance overall. IT governance ensures the efficient an effective measure to increase the company’s business process. Effective IT governance is crucial for an organization to achieve its corporate performance goals (Ali and Green, 2012). Implementation is quite difficult due to the implementation of IT is like the restructuring of an organization as a whole. The company must change the structure (e.g., company must have IT department), to change the way to work for each person and in group and change the culture of the company also. Despite the increasing importance of IT governance, evidence shows that many organizations have failed in their quest to obtain benefits from IT. So, this research aim to examined the factors that influence the effectiveness of IT governance and the hypothesis are: H1: Involvement of top management in IT influence the effectiveness of IT governance H2: Internal control influence the effectiveness of IT governance

2. LITERATURE REVIEW Agency Theory Agency theory explains the behavior of people in organizations as acting in their own economic self-interest, if not monitored and controlled to minimize this behavior. There are agency costs to discourage management from benefiting at the expense of shareholders. Director need to be elected by the shareholders to act as stewards of their interests. Management researcher, Rutherford and Buchholtz (2007) used survey methodology to test the relationship between board characteristic and board information asymmetric, and found that consistent with agency theory, an increase in the proportion of independent directors on the board reduced information asymmetries. In a later study, Rutherford et al. (2007) used the same survey instrument for measuring board information asymmetries to examine management monitoring and CEO incentives. An interesting finding in this study is that, as boards take actions to increase their information (reduce board information asymmetries); they increase their control over the CEO in the form of incentive alignment. This suggests that boards take actions on situational agency conflict, which is supported in recent accounting research. Information Technology Governance According to IT Governance Institute (2011), IT governance is the responsibility of the board of directors and executives, and consists of leadership, organizational structures, and processes which ensure that the enterprise's IT sustains and extends the organizations strategies and objectives. IT governance is a subset discipline of Corporate Governance focused on information and IT assets (Weill and Ross, 2004). IT governance specifies the decision rights and accountability framework to encourage desirable behavior in the use of IT (Weill and Ross, 2004). IT governance also includes the foundational mechanisms in the form of the leadership, and organizational structures and processes that ensure that the organization's IT sustains and extends the organization's strategies and objectives (IT Governance Institute, 2011). A number of supporting mechanisms guide the implementation of IT governance in organizations. The Control Objectives for Information and related Technology (COBIT) is an 343

approach to standardize good information technology security and control practices. COBIT provides tools to assess and measure the performance of 34 IT processes of an organization (IT Governance Institute, 2011). Involvement of Top Management in IT IT-related capability of top management commitment suggests that successful use of IT requires top executives to act as business visionaries. Top management must support and articulate the need for IT and communicate its functionality within the context of the organization's strategy, structure and systems. Top management commitment for IT-related initiatives enhances IT success by making IT resources available, supporting and guiding the IS functions. This commitment also helps integrate IT with business strategies and processes, and ensuring continuity in IT investments over time. The lack of such support may see IS resources having little effect on performance, even when substantial investments are made to acquire or develop the IS resources. In this study top management means the CEO and the level of management directly below that of the CEO. The involvement of top management appears to lead to effective IS planning. A lack of top management involvement has been shown to lead to unfavorable outcomes in IS planning, and even failure to plan for IS. Internal Control Controls are defined by The Institute of Internal Auditors is: “..... Any action taken by management to increase the likelihood of achieving objectives and targets set. Internal control system includes organizational structure, methods and measures that are coordinated to maintain the wealth of the organization, check the accuracy and reliability of accounting data, promote efficiency and encourage compliance to the management policies (Mulyadi, 1997). Internal controls that defined by COSO (1992) are: “Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Reliability of financial reporting, (2) Effectiveness and efficiency of operations, and (3) Compliance to applicable laws and regulations.” Committee of Sponsoring Organizations of the Treatway Commission (COSO) introduced the five components of internal control which includes Environmental Control, Risk Assessment, Control Procedure, Monitoring, and Information and Communications. According to Bodnar and Hopwood (2005), internal control consists of five main components, i.e.: (1) Control Environment, (2) Risk Assessment, (3) Control Activities, (4) Information and Communication, and (5) Monitoring. 3. RESEARCH METHODS Types of data used are primary data through questionnaires. The questionnaire is a data collection technique is done by giving a set of questions or a written statement to the respondent to answer. The population of this research is all the commercial banks in Indonesia and the commercial banks as a sample only 13 commercial banks. The variables used in this study consisted of the dependent variable and independent variables. The dependent variable is the effectiveness of IT governance and the independent variable is IT steering committee and internal control.

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Hyppothesis test and data analysis technique using multiple linear regression using SPSS 18.0. The steps are performed in hypothesis testing, including: Test of validity and reliability, Test Descriptive Statistics, Test Assumptions Classical, Tests of Hypotheses (t test and F test). 4. RESULT AND ANALYSIS Normality Test Test of normality used to determine whether the data has a normal distribution. To test the normality of data can use Kolmogorov-Smirnov Test or Normal Probability Graph. The normal probability graph shows the plots spread coincide around the diagonal line and follow the direction of diagonal line, this shows that the residuals were normally distributed.

Figure 1. Normality Test Multicollinearity Test Test of multicollinearity is used to determine whether the regression models found a correlation between independent variables. If there is a correlation, then there is a problem called Multicolinearity. Table 1. Multicollinearity Test Variables

Tolerance

VIF

Conclusion

0.609

1.641

Free

0.766

1.306

Free

Heteroscedasticity Test Test of heteroscedastity used to determine whether the model regression has the same variance (homoscedastity) from one residual to others. If these assumptions are not meet, then there is heteroscedastity.

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Figure 2. Heteroscedasticity Test

Simultaneously Test Simultaneously test use one way anova or F test to know relationship between independent variables with dependent variable. Beside that, this test to know the goodness of fit of the research. Table 2 present the result of simultaneously hypothesis testing with regression model. Table 2. Simultaneously Test Model

Sig.

Regression

23.812

0.000

From Table 2 shows that those two variables as together can support the effectiveness of IT governance. Partially Test From the previous simultaneously test, the result show that in simultaneously all independent variables of the research significance influence the dependent variable. So, next test is to see relationship between each independent variable to dependent variable use T test. Table 3. Partially Test Variable

Sig. t

2.044

0.045

1.553

0.126

The results for partial hypothesis testing show that involvement of top management in IT has significance influence to effectiveness of IT governance with significance value 0.045.

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According to Trautman and Price (2011) to be successful, IT governance requires enterprise commitment at the very top on an effective IT governance framework. It is consistent with research conducted by This result consistent with research conducted by Vaswani (2003), Ali and Green (2005), Hoffman, et al. (2007), Ali and Green (2009), Wulandari (2010), Ali, Green and Parent (2009), Ali, Green and Robb (2011), and Ali, Green and Robb (2012). Therefore internal control has not significance to effectiveness of IT governance. This may be caused by information systems does not include method and note to show, record and access all the valid information and data, so it will effect effectiveness of IT governance in banking sector. 5. DISCUSSION Effective use in IT governance indicates the systems were integrated and it would be increase the quality of information so it will be related towards the value of the companies. Moreover, it can help to processing all transactions in one time so it timeless. Computer system also has various analysis tools to help management for assess the performance and manage operational of companies. Availability of those tools can increase the assurance of all accounting system so it certifiable for auditor. According to Tunggal (2000) Effectiveness of IT governance is the process of collecting and evaluating evidence to determine whether a computer system safeguards assets, maintains data integrity, achieves organizational goals effectively, and consumes resources efficiently. From the above studies shows that IT governance mechanisms affect the effective use of IT governance at the top and middle level in the organizational structure on banking sector. With the support of top management, middle level in the organization feel more obliged to master a system that has been developed. Security of information and data can be an advantages or disadvantages of effective use in IT governance. It consists of management about access to data, information and any other transaction. It can be advantages if limiting access to data or information for the employees so it can reduce any fraud and changed the data and information especially records the transaction, financial data and important information. It can be disadvantages if control to access records the transaction, financial data or important information is freely to all employees, so all employees can changed the data freely and that is fraud. In Indonesia, human resources in IT dominated by well-grounded foreign employee, particularly in banking sector, so it affects the quality of IT management in a company (Wulandari 2010). While on IT risk management, for instance is Business Continuity Planning (BCP). Business continuity planning (BCP) identifies an organization's exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention and recovery for the organization, while maintaining competitive advantage and value system integrity (Elliot, et al., 1999). In general, distinguishing between developed and developing countries not only from economic sector therefore also the ability of science and technology. Information technology becomes one of key point for developing countries if the countries want to get ahead in global competition (Wulandari, 2010). In this globalization era, control information is not enough merely to overbearing therefore speed and accuracy required for the development of science and technology of which very fast and unlimited, one way to build appropriate mechanisms in IT governance.

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6. CONCLUSIONS AND IMPLICATIONS This study advanced our understanding about the role of IT governance mechanisms and their impact on top, middle level and the overall effectiveness of IT governance in banking sector by examining the influences of the following IT governance mechanisms: involvement of top management in IT and internal control. This research found significant influence between effectiveness of IT governance and IT governance mechanisms: involvement of top management in IT and found not significant influence which is internal control. IT Governance is essential part of the companies’ value added. This research stated 2 (two) variables had built by COBIT (Control Objectives of Information and Related Technology) framework is applicable as part of the process of collecting and evaluating evidence to determine whether a computer system safeguards assets, maintains data integrity, achieves organizational goals effectively, and consumes resources efficiently which is part of management audit and could be used as the companies’ performance measurement systems. The results will turn out the effectiveness of it Governance by its synergic systems. The recommendations that can be given for the next research are: (1) should increase the sample and respondent so the result can actual and be more generalized and (2) adding identity of the sample and respondent so it can be more answered the problem of the research. REFERENCES 1. Ali, Syaiful and Peter Green, “Effective Information Technology Governance Mechanisms in Public Sectors: An Australian Case,” Pacific Asia Conference on Information Systems 2006 Proceedings. 2. Trautman, Lawrence J. and Kara Altenbaumer-Price, “The Board’s Responsibility for Information Technology Governance,” International Law Journal on Information Technology Vol. XXVIII, No. 3, Spring 2011. 3. Ali, Syaiful and Peter Green, “Determinants of Effective Information Technology Governance: A Study of IT Intensity,” Proceedings of International IT Governance Conference, Auckland, New Zealand, 2005. 4. Ali, Syaiful and Peter Green., “Effective Information Technology Governance Mechanisms in Public Sectors: An Australian Cas,” Pacific Asia Conference on Information Systems 2006 Proceedings. 5. Ali, Syaiful, Peter Green and Alastair Robb, “The Influence of Top Managements’ Absorptive Capacity of IT Governance Knowledge on Business-IT Alignment: an Empirical Analysis,” AMCIS 2012 Proceedings. 6. Ali, Syaiful, Peter Green and Michael Parent, “The Role of a Culture of Compliance in Information Technology Governance,” Proceedings of GRCIS 2009. 7. Ali, Syaiful and Peter Green, “Effective Information Technology (IT) Governance Mechanisms: An IT Outsourcing Perspective,” Information System Frontier (2012) 14: 179-193. 8. Information Technology Governance. 2011. Board Briefing on IT Governance. 9. Rutherford, M. and Buchholtz, A, “Investigating the relationship between board characteristics and board informatio,” Corporate Governance, Vol. 15 (2007), No. 4, pp.576–584. 10. Rutherford, M., Buchholtz, A. and Brown, J, “Examining relationships between monitoring and incentives in corporate governance,” The Journal of Management Studies, Vol. 44 (2007), No. 3, pp.414–430. 348

11. Vaswani, R, “Determinants of Effective Information Technology (IT) Governance,” (Magister Thesis School of Business, University of Queensland, 2003). 12. Wulandari, Pandam Rukmi, “Effectiveness of IT Governance Determinants: Empirical Study in The Companies of DKI Jakarta,” (Undergradute Thesis, Gunadarma University, 2010). 13. Hoffman, Francisco Gonzales-Meza and Peter Weill, “Banknorth: Designing IT Governance for a Growth-Oriented Business Environment,” CISR Working Paper, 2007. 14. Tunggal, Amin Widjaja. 2000. Audit Manajemen Kontemporer. Jakarta: Harvarindo. 15. Mulyadi 1997. Sistem Akuntansi, 3th edn. The Publisher STIE YKPN, Yogyakarta.

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ESSENTIAL INGREDIENTS OF A SUCCESSFUL MANAGER Marius Bulearca Center for Industry and Services’ Economics of the Romanian Academy Daniel Tamarjan Freedom Healthnet Ltd., Bournemouth, United Kingdom

ABSTRACT In this paper we are trying to critically evaluate the view that the only essential ingredient of a successful manager is the ability to handle people and relate in a caring and meaningful way to the individuals being managed. Therefore, this paper will focus on determining the ingredients that define a successful manager and on demonstrating that there is not just one essential element that characterizes success in management. Keyworsds: human resources, management ingredients, organisational behaviour, skills and abilities, successful manager 1. INTRODUCTION Watson (2002, p.438) defines managers as “those people who are formally employed to help direct an organisation as a whole towards its long-term survival” and Ramey (2007) strengthens this affirmation through “managers and executives are constantly challenged to demonstrate, document, and communicate the contribution they make to the success and bottom line of their organisation”. Both authors create a mutual relationship between the success of the manager and the success and evolution of the organisation they run. Therefore, the organisations’ high level of performance can be related to the success-leading characteristics of their managers. Hence, what does the term ‘success’ mean related to a manager? Watson (2002) indicates that large number of attempts have been made to discover through research how successful managers differ from less successful ones, but in each of these ‘success’ was defined in various ways, from high managerial reputation to high speed of managerial promotion. These studies identified traits and skills that could describe a successful manager, yet they are often related to the type of organisation and situation that are being managed. However, there are several general characteristics that, if taken into consideration, can enhance the difference between a successful manager and an ordinary one. The subsequent part will emphasize the importance of the ability of handling people and relating to them in a caring and meaningful way by looking into both past approaches to management and contemporary elements that have a high significance in the relations between managers and employees. Even if this capability is not the only essential ingredient of a successful manager, as I will argue in the second part of the essay, it is one of the most important skills that a manger should have.

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2. THE ABILITY TO HANDLE PEOPLE Cecilia Weckstrom (Weckstrom, 2006), director of experience and innovation at LEGO, describes the LEGO Group’s CEO, Jorgen Vig Knudstorp, elected Danish Manager of the Year 2006 by Ledernes Hovedorganisation, a Danish management organisation, as a person with “ humble style and openness, coupled with a desire to communicate (…) with all layers of the company”. She relates the principles of Knudstorp’s management style with the ones of (Weckstrom, 2006) “airman-ship that all pilots are taught: Aviate, Navigate and Communicate”. Firstly, managers need to know how to ‘fly’ their organisations because (Weckstrom, 2006) “business climate can suddenly change, there is a lot of information to keep track of and in financial terms you have to keep the company solvent in terms of working capital and cash flow”. Also a successful manager has to be a good navigator. There are situations in which appropriate measures have to be taken in a short time for redressing the path that the organisation follows in achieving its objectives. The latter principle, that every pilot is taught, is (Weckstrom, 2006) “to keep crew, passengers and the watchtower informed of what is happening in order to make it to his destination”. A good communication through all levels of organisation’s hierarchy is a key factor for creating a complete situational awareness in which the manager knows continuously where the organisation stands in its way to success. Almost every book of contemporary management regards people as the central resource of an organisation, therefore, (Mullins, 2007, p.429) “management has become more about managing people than managing operations (…) and social and human skills which reflect the ability to get along with other people are increasingly important attributes at all levels of management”, but this was not always the same as Mullins states. Taylor, the father of scientific management, a ‘sub-grouping’ of the classical approach, (Leat, 2001, p.43) “assumed that the nature of man’s motivation was essential instrumental, that man could and would be motivated by the prospect of earning more”. He believed (Mullins, 2007, p.43) “that all work processes could be analysed into discrete tasks and that by scientific method it was possible to find the ‘one best way’ to perform each task”. By implementing these beliefs in many factories around different countries the managers’ power increased and they would not only give orders and maintain discipline through their employees but also they could gain control of the actual process of work (Mullins, 2007) “by removing from them” (employees) ”any decisions about the manner in which their work was to be carried out”. Thus, the relationships between workers and managers became similar to the masters and slaves’ rapports; however, the main difference was that workers were paid and after a day of work they would become ‘free’ people again. Employees’ criticisms determined by the monotonous and de-motivating work and by the general deskilling process of the workers triggered the abandon of these practices, although, even today, remains of Taylor’s theory can be seen in various working places such as mass-production and industrial companies. Scientific management was not orientated towards people and the managers did not understand that a healthy relationship with their subordinates would bring higher economic advantages in the long-term, than a short-term increase in the production efficiency. Another approach to management which is in contrast with Taylorism is the human relations approach. The Hawthorne experiments at the Western Electric Company in America (1924-1932) revealed the importance of the behaviour of managers in the relationships with their subordinates regarding the vital aspect of motivation and improved performance. These are also sustained by Mullins (2007, p. 53) who believes that “the classical approach adopted more of a managerial perspective, while the human relations approach stove for a greater 351

understanding of people’s psychological and social needs at work as well as improving the process of management”. These are just two approaches to management that are very important for sustaining why the ability to handle people and to relate to them in a caring and meaningful way is so vital for the success of a manager. As Bulearca & Bulearca (2008) sustained, the first one underlines the serious long-term disadvantages of a rational approach in relating to people, and the latter raises awareness of the need of knowing and understanding the human behaviour in working situations. Nowadays there is not one perfect approach to management that can be used with success in any organisation, thus good managers should search in the past theories for features that, combined with their own personal views, may lead them to the most suitable policy that can be applied in the relations with the people they manage. In addition to this, every manager has to be aware of the two sides of the organisation, the formal one that is defined by Schein (1988, cited in Mullins, 2007, p.77) as “the planned co-ordination of the activities of a number of people for the achievement of some common, explicit purpose or goal, through division of labour and function, and through a hierarchy of authority and responsibility” and the informal one which (Mullins, 2007, p. 91) “arises from the interaction of people working in the organisation, their psychological and social needs, and the development of groups with their own relationships and norms of behaviour, irrespective of those defined within the formal organisation”. The formal organisation exists and functions in every company independently of its particular members, following a set of rules, regulations, policy manuals and job descriptions that are deep implemented in the organisation and cannot be changed by managers so easily; therefore the informal organisation is the one towards which managers should direct their attention for the reason that it is flexible and loosely structured and can be easily influenced by the relationships between employees. An element of the informal organisation is the effective relationship between managers and subordinates, above any set of rules or regulations that defines the working relations. Therefore, in the process of ‘handling’ people, managers should appreciate that their success is more or less directly linked to the way in which employees judge them as good or bad managers. Another essential element of the unseen face of the organisational iceberg is the existence of the informal leaders that are people trusted by the employees and regarded as leaders because of their personality traits. Managers have to identify with these people or, if it is not possible, they have to use a strategic approach in handling this type of subordinates due to their role in the informal groups that they represent. A paramount aspect of both the informal organisation and the relationship between the individual and the management process is the concept of psychological contract. This is not a written document but (Mullins, 2007, p.13) “implies a series of mutual expectations and satisfaction of needs arising from the people-organisation relationship”. This contract is permanently evolving and transforming because of the dynamic environment in which organisations operate, hence the expectations of employees have changed from ‘a fair day’s work for a fair day’s pay’ to much complex ones where job satisfaction, promotion opportunities or caring for individuals are just a few of the aspects that can improve the attitude towards work which leads to a more efficient business. Managers need to foresee these expectations and to make their subordinates aware of the organisation’s expectations of individuals for maintaining a harmonious and healthy working environment. Herriot and Pemberton (1995 cited in Arnold et al, 2005, p.533) consider that the psychological contract can be a relational or a transactional contract. “The former refers to a long-term relationship based on trust and mutual respect“, while the other “is much more like 352

a short-term economic exchange”. In their opinion the relational contract starts to fade in today’s business environment because of the global competition and the dynamic development in technology whilst the transactional contract is adopted by an increasing number of employers who no longer keep their side of the bargain and they just offer “high pay, rewards for high performance and, simply, a job.” Conversely, we assume that it is highly unlikely for managers that accept the latter to be among the successful ones, especially during the 21st century’s people-oriented management, therefore transactional contracts are regarded nowadays in many situations more as imposed contracts than as agreed ones. A case study that emphasizes the consequences of violating the psychological contract is the downsizing of British Telecom (BT) (Doherty et al, 1996). During the period between 1992-96 BT made redundant more than 120,000 employees due to its downsizing caused by the innovation in technology, globalisation and the re-engineering of the business process. This enormous operation had serious effects on the remaining employees and on the company. The breach in the psychological contract was produced due to the lack of communication between the managers and the subordinates. During the downsizing, the employees did not know what to expect from their superiors or how long the process will take and how many other people will be made redundant. Remaining survivors had decreasing confidence in their future in this organisation, their level of motivation, loyalty and security became very low and the only increase was in the level of stress and the amount of work. The managers did not anticipate these important changes in their subordinates’ work behaviour and did not know how to handle them, resulting in inability to achieve planned productivity gains. The organisation’s situation clearly highlights what happens when managers do not consider the elements of the psychological contract when making important decisions regarding their employees. A good manager should judge not only by relating to the formal organisation but also by taking into account the informal elements that determine the efficiency and the quality of work as well as understanding and using them in an intelligent way to support their decisions. As it can be seen from the example above, one of the most important effects of a breach in the psychological contract is stress. But what is stress? There are as many definitions as the number of people who experienced stress. Therefore it can be regarded as a personal problem that manifests differently from one individual to another. The Health and Safety Executive (cited in Mullins, 2007, p.102) defines stress as “the adverse reaction people have to excess pressure”. Stress is a another very discussed problem in today’s society because it is estimated that half a million people in the UK experience work-related stress “at a level which makes them ill and the estimated cost to society is £3.7 billion” (Croft, 2005 cited in Pilbeam & Corbridge, 2006, p. 377). The main problem with stress is its continual increase and the effects of stress are influencing organisations in a greater way then in the past. For that reason managers have to be aware of the damages that stress can have to their subordinates, among which: suppressed motivation, sub-optimum performance and productivity, less effective professional and personal relationships (Pilbeam & Corbridge, 2006). One of the main causes of stress is the relationship between employees and managers. Often, because of the lack of support from managers and co-workers or because of the deficit of communication and consultation, employees can suffer from increased pressure which is translated into stress. Personal experience in an insurance company showed us how it was possible to work in a healthy and non-stressful environment. Our manager, who coordinated the Bucharest area, understood the importance of both keeping a healthy relationship with his subordinates and using all kinds of measures to ‘kill’ stress-related factors. Consequently he often 353

supported and encouraged the brokers, even when things went wrong and he also promoted a healthy work-life balance by empathizing with the employees’ personal problems and by endorsing them to socialise during the training courses held once a month. The manager and the whole company sustained a flexible work schedule and understood that everyone is different, thus tasks were allocated so that everybody could work in the way that made him/her more efficient. The manager was aware of the relationship that he had to build with his subordinates in order to help the organisation to develop and evolve; therefore he supported a relational contract between the company and the employees by making every effort possible to maintain the best level of pressure among the brokers from which the company, as well as its people, had many things to gain. In this first part of the paper we have concentrated on arguing why the ability to handle people and relate to them in a caring and meaningful way is so important for a manager and why this skill is one of the main factors that determine the success of managers along with the success of the organisation that they manage. However, this ability of a manager is not the only one that makes him/her a successful one as it shall be revealed in the second part of the paper. 3. OTHER IMPORTANT ABILITIES OF A SUCCESSFUL MANAGER Katz (1974, cited in George, 2000, p.8) considers that whatever the role of the manager or whether in the private or public sector, managers need three principal kinds of skills for performing “their organizational functions and roles effectively: technical, conceptual, and human skills.” Technical competence relates to the knowledge, methods and techniques that are applied to discrete tasks. These are strictly related to the organisation type the manager is in and to his or her position in the organisation’s hierarchy. For example a successful manager of a restaurant needs to have some cooking skills to fill in for an absent cook, accounting skills to keep track of receipts and costs, and artistic skills to keep the restaurant looking attractive for the customers. “As the manager advances through the organisational hierarchy, greater emphasis is likely to be placed on conceptual ability, and proportionately less on technical competence.” (Mullins, 2007, p.428) Conceptual ability is required (Mullins, 2007, p.429) “in order to view the complexities of the operations of the organisation as a whole, including environmental influences” and it allows “a manager to analyse and diagnose a situation and to distinguish between cause and effect” (George, 2000, p.8). Because of the fast changing global environment, successful managers have to recognize and deal with all the forces that have an impact on their organisations. George (2002) states that “if managers are slow to respond to competitive, economic, political, global, and other forces, the organization will lag behind its competitors and its effectiveness will be compromised.” Managers need to be able to sort and make use of the information received and gathered through the use of conceptual schemes and theories which might enable them to understand the trends and the patterns of today’s organisational environment. Furthermore, because many companies have recently became international and others already have a world wide presence, managers nowadays are required to be open-minded towards understanding and managing multicultural organisations. One example that illustrates different managerial behaviours in different cultures is given by Thomson (2002). While for UK managers it is common to work after office hours and this is often seen as a sign of dedication and commitment, Scandinavian managers are used to ending their work around 4:30 pm and the people who stay beyond that time are seen as inefficient or incompetent. 354

George (2000, p.15) strengthens Thomson’s example by stating “that people in different countries may have different values and views not only of their work settings but also of the world in general”. Evidence illustrates that Americans and English people have an individualistic orientation towards work while Japanese and Indians have a more collectivist orientation. These and many others individual orientations and aspects of national cultures affect people’s behaviour in groups, their loyalty and commitment to the organisation, and their motivation towards performance. Competent managers should realize the importance of understanding the differences in attitude and values of workforces and they must tailor their leadership styles to suit these differences. Another paramount aspect that can enhance or destroy the success of a manager (if misinterpreted) is the ethical issue. Jackhall (cited in Watson, 2002, p.458) considers that “managers have little choice other than to ‘bracket’ or leave their private moralities ‘at home’ and to pursue corporate interests ruthlessly and amorally. “ Conversely other research suggests that “managers continuously draw upon, and mix together, criteria of expedience (what will ‘work’) and moral principle (what is ‘right’) in their day-to-day work.” (Watson, 2002, p.458). Therefore, there are many views related to the way in which a manager should handle ethical issues, but in today’s organisational world, which is oriented towards human as a complex being, successful managers need to have a “consistent moral approach”, rather than “making clear distinctions between right and wrong” (Thomson, 2002, p.9). They should “take a lead in promoting ethical behaviour and developing a business ethics policy” (Pilbeam & Corbridge, 2006, p.28). The latter category of skills that every competent manager must have is the social and human skills which were already covered in the first part of the essay. It combines a series of personal, cognitive and interpersonal skills which are directly related to the formal and informal exchanges that take place between managers and employees. 3. CONCLUSIONS AND IMPLICATIONS Irrespective of the type of psychological contract, the decision-making process has to be based on the manager’s knowledge regarding the elements of this deal. Underestimating the significance of this informal agreement could lead to serious consequences that affect the management process and the activity of the organisation. There are numerous ingredients contributing to the birth of a successful manager which are continuously transforming and evolving together with the changes that take place every day in the world we are living in. We learnt to adapt to these changes without even realising it and this has become one of every individuals’ capacities. Every manager has the adapting capability but only the successful ones have the ability to foresee these transformations and use this skill along all others to make their organisation as effective and efficient as possible in the contemporary competitive world. In our future papers researches will focus on how core competencies represent a pragmatic strategic concept that can help organisations achieve long term competitive advantage. Determining and understanding the core competencies of a firm is not enough for a company to achieve sustainable competitive advantage, because the resource-based view only offers information about the internal resources and capabilities of an organisation using an inside-out approach. In conclusion, our future works will attempt to demonstrate that, as any strategic concept, core competencies, although viable, are difficult to implement in reality and should 355

be complemented by other concepts such as Porter’s five forces outside-in approach. However, companies that actually understand this notion and are able to apply it in real business life can become very successful and achieve sustainable competitive advantage, as it will subsequently be illustrated in various case studies.

REFERENCES 1. Bulearca, M., Bulearca, Suzana, Key-abilities for successful managers in competitive economies (I) (Journal of Industrial Economics, Centre for Industrial Economics and Services, Romanian Academy, vol. 6(1) , March, 2008), pp. 92-98; 2. Bulearca, M., Bulearca, Suzana, Key-abilities for successful managers in competitive economies (I) (Journal of Industrial Economics, Centre for Industrial Economics and Services, Romanian Academy, vol. 6(2) , June, 2008), pp. 45-49; 3. Doherty, N., Bank, J., Vinnicombe, S., Managing Survivors. The experience of survivors in British Telecom and the British financial services sector (Journal of Managerial Psychology, 11 (7), 1996), accessed 14 November 2007, http://www.emeraldinsight.com/; 4. George, J., Jones, G., Essentials of managing. Organizational Behaviour (New Jersey: Prentice-Hall Inc, 2000); 5. Herriot, P and Pemberton, C., New Deals (Chichester: John Wiley, 1995), cited in Arnold, J., Sivester, J., Patterson, F., Robertson, I., Cooper, C., Burnes, B., Work Psychology, 4th edition, (Harlow: Pearson Education Ltd, 2005); 6. Leat, M., Exploring Employee Relations, (Oxford: Butterworth- Heinemann, 2001); 7. Mullins, L., Management and Organisational Behaviour, 8th edition (Harlow: Pearson Education Ltd, 2007); 8. Pilbeam, S., Corbridge, M., People Resourcing. Cotemporary HRM in practice, 3rd edition (Harlow: Pearson Education Ltd, 2006); 9. Ramey, D., Strategies of Becoming a More Successful Manager, accessed: 27th October 2007, http://www.chally.com/enews/buildcareer_mgr_ramey.html; 10. Schein, E. H., Organizational Psychology 3rd edition, (Prentice-Hall, 1988), p. 15, cited in Mullins, L., Management and Organisational Behaviour, 8th edition, (Harlow: Pearson Education Ltd, 2007); 11. Thomson, R., Managing People 3rd edition (Oxford: Butterworth-Heinemann, 2002); 12. Watson, T.J., Organising and Managing Work (Harlow: Pearson Education Ltd, 2002); 13. Weckstrom, C., 3 Secrets of Successful Management’, Digital Digressions, 11 November, accessed: 27th October 2007, http://www.digitaldigressions.net/blog/2006/11/ 3_secrets_of_su.html .

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MARKETING COMMUNICATION CHANNELS USED BY LOCAL GOVERNMENTS VS. TOURISTS` EXPECTATIONS Hernik Joanna; West Pomeranian University of Technology Faculty of Economics, Szczecin, Poland Smalec Agnieszka; University Szczecin, Faculty of Management and Economic Services Szczecin, Poland

ABSTRACT Marketing communication specialists in local governments have at their disposal a number of communication instruments. Significant that the most commonly they use printed materials, brochures and leaflets, web sites and walking maps. The question is: if this is sufficient for modern tourists? That’s why the article presents the results of study of secondary data on the development of tourism in the West Pomeranian Province, as well as the original findings relating to the expectations of tourists coming to West Pomeranian Region and its capital - Szczecin. So, the goal of this article is to show the resources of information used by tourists coming to the region in comparison to communication channels used by local governments. Outcomes show that the most important factor determining willingness of visiting is a tourist own experience of previous stay, and an opinion shared by friends and family. So, proper information about the best attractions before arrival, and taking care about a visitor during his first visit, are very important. Unfortunately, before arrival tourists not always were able to get information about Szczecin and its milieu. The most difficult to obtain was information about water tourism and gastronomic offer, as well as an information about ongoing events in the city. And here are areas where local governments should improve the range of information and its availability. Key words: marketing communication, availability of information, tourists` needs, local government 1. INTRODUCTION Tourist market, despite the crisis and fluctuations of demand, grows rapidly and becomes more competitive. That’s why, in order to reach out customers effectively and develop a given area, tourist policy makers should know them well, by the systematic studies for example. And on this basis, they ought to prepare an appropriate marketing strategy, that will assume matching touristic products and related marketing communication to the changing preferences of more and more demanding, expecting high quality, customers. The purpose of this article is to show the resources of information used by tourists coming to the region of the West Pomeranian Province in Poland, especially to 357

its capital – Szczecin, in a term of an extent and manner in which information on tourist attractions is delivered. The empirical study is based on secondary research on tourism in West Pomeranian Province, and primary research of tourists visiting Szczecin, conducted in 2012. In the article the importance of marketing communication and the diversity of its forms used by local governments is discussed. Moreover, the way of how the current tourists acquire different types of information, and what kind of information could not be obtained before arrival, are discussed as well. Results may be an indication for developing of nontraditional channels of communication, and may broaden the scope of prepared information, which in turn may affect the length of a stay as well as a leisure activity preferred by tourists. It was also stressed that local authorities more and more often understand that they really can shape a local tourist market, and should create marketing communication that does not mean costs only, but may be a worthwhile investment, if well prepared. 2. LITERATURE REVIEW Since the early 90s in the literature it has been emphasized that communication must be the basis for successful management21, also in case of the management of government, or economic development22. As local governments is concerned, due to communication strategies they can build their reputation, but also can establish relationships with the environment, which, thanks to the interaction, will be more willing to accept government policy and actions23. The need of communication stems from the fact that both, the governments of regions or cities, are part of the market that is a subject of public observation and evaluation. So, as Inkinen says, the perception of local government’s actions influences its today’s efficiency and activity in the future24. Moreover, by communicating with the environment governments can devise development of the area, including the field of tourism25. In the literature, both issues of marketing communications and tourism development are addressed (Hernik), however, lack of comprehensive studies relating to the comparison of expectations of tourists and the forms of communication used by the local government can be observed. This article is only a kind of germ, a part of this broad issue, that should be further studied and discussed. Growing standard of living, rising of net disposable income, and ability of managing a leisure time on a one hand, and the burden of living in the modern world on the other,

Bill Quirke, “Putting communication on management's agenda”, Journal of Communication Management, Vol. 1 Iss: 1, (1996): 67 – 79. 22 Venancio Bote Gómez, “Research in Spain on tourism and economic development”, Tourism Review, Vol. 51 Iss: 1, (1996): 5 – 11. 23 David Clutterbuck, (1999) “Communication and the board”, Journal of Communication Management, Vol. 3 Iss: 4, pp.387 – 391; Joanan Hernik, “Public relations urzędu miasta na przykładzie miasta Chociwel”, Zeszyty Naukowe Uniwersytetu Ekonomicznego w Poznaniu nr 209 (2011): 369 – 379. 24 Tommi Inkinen, “Best practices of the Finnish Government Information Society Policy Programme: Technology, provision, and impact scale”, Transforming Government: People, Process and Policy, Vol. 6 Iss: 2, (2012) pp.167 – 187. 25 Karl Socher, “What are the tasks of the state in providing the framework for tourism?”, Tourism Review, Vol. 56 Iss: 1/2, (2001): 57 – 60; Marita Vos, Evelyn Westerhoudt, “Trends in government communication in The Netherlands”, Journal of Communication Management, Vol. 12 Iss: 1, (2008): 18 – 29; Leanne Glenny, “Perspectives of communication in the Australian public sector”, Journal of Communication Management, Vol. 12 Iss: 2, (2008): 152 – 168. 358

contribute to the development of tourism, as has been noted for a long time26. Tourism, as a form of meeting human needs connected with recreation and regeneration, is quite a mass and common phenomenon, but also brings problems of organizational, social, and economic nature27. As defined by the World Tourism Organization, tourism means activities of persons traveling and staying outside their usual place of living for leisure, business and other purposes - excluding earning – at least for one night, but for no longer than one year (Basic Glossary, UNWTO28). This definition turns travels related to commuting off and trips related to daily life activities, such as shopping. So, at the core of tourism movement of people lies, caused by a variety of tourist purposes, and this means that people leave temporarily and voluntarily place of permanent residence in order to achieve their goals. What is interesting, a tourist, realizing his or her objectives of the trip, incurs certain expenses, covered by the income earned in a permanent residence. After leaving the residence, a tourist consumes many goods that are offered on a given market and use of a variety of services, so he/she is a consumer shaping a condition of local economy29. Today the quality of life is determined not only by just a job, or an apartment, but also by tourism and the needs associated with the use of free time. So, tourism becomes a way of life of modern people. Thanks to this tourism economy can be an active and effective instrument for sustainable development of the region and the source of profits. So, one can say that tourism is an important "industry of the world". Because of its wide range of influence, importance to the economy and the interdisciplinary nature, tourism requires active stimuli that will create its development30. Therefore, communication of the relevant touristic attractions is important. But, it should be bear in mind, that the way of shaping the image of a given place/space is very important, since it may be verified at any time. Of course, the verification may take place at a distance and be based on what other tourists think, but also when a tourist decides to visit the place/region and has a chance to form his own opinion. And not only forms of communication, with which tourist came across before arrival will be important, but also other elements characteristic for the location, such as style of life, atmosphere, aesthetics, dynamics of the place and its friendliness, and generally elements building attractiveness of an offer. Therefore, governments must communicate its offer in a way that reaches customers effectively, and highlighting the true, i.e. really existing attractions, as – that was mentioned already – everything can be quickly verified. Classical communication process, according to Schultz and Kotler31, consists of a system of the following components (Fig. 1):

Glenny, “Perspectives of communication in the Australian public sector”, 152 – 168; Irfan Emrah Kanat, Sevgi Özkan, “Exploring citizens' perception of government to citizen services: A model based on theory of planned behaviour (TBP) ”, Transforming Government: People, Process and Policy, Vol. 3 Iss: 4, (2009): 406 – 419; Lisa M. Pytlik-Zillig, Alan J. Tomkins, Mitchel N. Herian, Joseph A. Hamm, Tarik Abdel-Monem, “Public input methods impacting confidence in government”, Transforming Government: People, Process and Policy, Vol. 6 Iss: 1, (2012): 92 – 111. 27 Mara Manente, Maria Carla Furlan, “Quality in the macroeconomic system of tourism”, Tourism Review, Vol. 53 Iss: 2, (1998): 17 – 28; Vos, Westerhoudt, “Trends in government communication in The Netherlands”, 92 – 111. 28 Understanding Tourism: Basic Glossary, UNWTO, accessed May 19, 2013, http://media.unwto.org/en/content/understanding-tourism-basic-glossary. 29 Socher, “What are the tasks of the state in providing the framework for tourism?”, 57 – 60. 30 Wieslaw Alejziak, “Tourist activity inhibitors”, International Journal of Culture, Tourism and Hospitality Research, Vol. 7 Iss: 1, (2013): 11 – 27. 31 Louise Schultz, “Toward A System Model Of Human Communication”, Kybernetes, Vol. 4 Iss: 4, (1975): 247 – 252; Kotler Philip. Marketing. Analiza, planowanie, wdrażanie, kontrola (Warszawa: Gebethner&Ska, 1994), 547. 359

       

sender (consignor) - a source of information, a participant of the communication process transferring certain message, coding - the process of transfer of suitable symbolic form (recast an abstract idea into a set of symbols), with the aim of encoding to communicate; message - a set of information addressed to a recipient, communication channels - through which a message arrives from a sender to a recipient, decoding - involves interpreting of symbols sent by the receiver and processing them into understandable information, recipient – a party receiving the message, sometimes called the audience, important matter is that the message must be clear to the recipient, interaction (feedback) – recipient’s response to the message; the stronger interaction is, the more effective communication process, interferences - independent from intentions of a sender events that occur in the environment during the process of communication, that distract customers; most often there are: physical noises and disinformation. Fig. 1. Elements of marketing communication process Sender

Coding

Transfer/ channel

Decoding

Receiver

Interferences

Feedback

Response

Source: own work based on: Schultz, “Toward A System Model Of Human Communication”, 247 – 252; Kotler, Marketing. Analiza, planowanie, wdrażanie, 547. Full and effective close to the tourist is determined by use of effective marketing communication strategy, that is a set of planned methods of realization communication goals (Rydel). Marketing communication strategy is to select the object with the appropriate segments of the market, and the selection of appropriate instruments and use them at the right time, place and form. The lack of easy to present and tangible characteristics of a touristic offer results in differences in the use of communication instruments. Despite the difficulties each message should realize, however, the tasks for which it was primarily created32:  demonstration of benefits provided by the use of the offer,  distinguish the offer amongst other competing bids,  construction of a reputation of an organization/government and creation of its brand. Schultz says, that in the marketing communication the most important thing is to define objectives and audience33, because there is a close relationship between the expectations and needs of customers and media communication that have been chosen. In terms of channels used for interaction marketing can be divided into two coupled parts: a formal communication

32 33

William J. Stanton, Fundamentals of Marketing (New York: McGraw Hill, 1981), 452. Schultz, “Toward A System Model Of Human Communication”, 247 – 252. 360

(promotion), and informal one. Both of them can be used in local government activity, but always it should be a process composed of particular stages34:  the precise purpose which local government is going to achieve through communication,  determine the purpose of communication (identifying characteristics of individuals, in the context of a competitive and promotional offers of the place),  identification of recipients of the action (on the basis of segmentation),  construction of transmission and selection of appropriate techniques and means of communication,  decision of contractors of promotional activities,  settlement of the promotional budget,  determination of control methods and measures of results. Many authors emphasize that marketing communication strategy must be coherent, agreeable and comprehensive for all marketing activities, and built on the basis of a careful analysis of the environment35. And should take into account the feedback mechanism from the market. Depending on the nature, objectives and resources of the company, the competitive structure of the market, specificity of customers, and their willingness to take risks, communication can be: 1) mass in its nature, with ATL or BTL conception; 2) personalized face-to-face contacts, 3) mixed communication. In the first approach, primarily mass media, which include television, newspapers, radio, posters, and billboards, are used. In face-to-face communication often a direct contact with a particular buyer takes place. In the third option combination of mass communication and personalized one, with a predominance of the latter, usually is organized. It is very common that the local government marketing communication does not offer a product that was created in response to market demand, but are looking for customers/visitors who are interested in a product with in advance defined and described characteristics. This does not mean that governments do not create new products36, but this is really seldom approach. Marketing communications specialists in local governments have at their disposal a number of instruments. Significant that the most commonly used here are: printed materials, brochures and leaflets, web sites and walking maps. The question is if this is enough for modern visitors? Before finalizing the set of tools communication, a local government should objectively assess their attractiveness in terms of such held values, availability of transport, infrastructure and technical services, finance resources, accommodation facilities, food and complementary gastronomy, and investment policy. So, as it can be seen, intensity and scope of communication will depend on many factors37. On the other hand, as mentioned above, any action taken by governments should be based on knowledge of the needs and behavior of their

Magdalena Florek, Podstawy marketingu terytorialnego (Poznań: Wyd. AE, 2006), 144. Davies Warnock, “Understanding strategy”, Strategy & Leadership, Vol. 28 Iss: 5, (2000): 25 – 30; Jonathan Pugh, Jay L. Bourgeois III, "“Doing” strategy", Journal of Strategy and Management, Vol. 4 Iss: 2, (2011): 172 – 179. 36 Agnieszka Smalec, “Komunikacja marketingowa jednostek samorządu terytorialnego” in Marketing. Ujęcie terytorialne, ed. Jerzy Koszałka (Gdańsk: Politechnika Gdańska, 2010), 205. 37 Joanna Hernik, “Uwarunkowania komunikacji marketingowej na przykładzie polskich organizacji pozarządowych” in Komunikacja rynkowa – ewolucja, wyzwania, szanse, ed. B. Pilarczyk, Z. Waskowski (Poznan: Wyd. Uniwersytetu Ekonomicznego w Poznaniu, 2010), 378-387. 35

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customers, as well as the strengths of the closest competitors (in this case, there will be other locations or regions). In the literature authors emphasize that a tourist is no longer a passive observer of what is happening in the market, but actively and knowingly participates in the whole process of market38. What's more, his preferences and expectations, due to different levels of economic activity, prolongation of life, changing a household structure, increasing environmental awareness, growth of requirements on comfort, are constantly changing. Therefore, selection of the appropriate composition of communication tools helping to achieve pointed objectives, adapted to the specific local government, requires a lot of expertise and skills in various fields39. 3. RESEARCH METHODOLOGY The article presents the results of both studies of secondary data on the development of tourism in the West Pomeranian Province, as well as the original findings relating to the expectations of tourists coming to Szczecin and the region. The secondary research was based on statistical yearbooks and earlier studies commissioned by the Office of the West Pomeranian Province Marshal. This part of the article primarily is developed on Investigating the domestic and international tourism in the West Pomeranian Region in 201240. Primary research was conducted as part of the research work undertaken for the City Hall of Szczecin. The research was conducted during the summer of 2012 and was based on a questionnaire interviews that were conducted among Polish tourists arriving in Szczecin. The main objective of the study was to investigate preferences of tourists visiting Szczecin, including: preferred places and forms of spending leisure time, an organization of arrival, means of transport, a preferred type of accommodation, a leisure activity, as well as perception and evaluation of tourism facilities in the city and milieu. The sample comprised 1395 people and its elements were chosen on the basis of a layer-random selection. The study was conducted using individual interviews based on a questionnaire (PAPI method) which enables the researchers direct contact with respondents. The questionnaire consisted mostly of appropriately scaled closed questions, allowing respondents to assess some of the elements and making choices. In this article only a part of the study, connected with communication, is discussed. 4. MARKETING COMMUNICATION AND THE NEEDS OF TOURISTS IN THE LIGHT OF THE RESEARCH As it was mentioned, 1395 people were asked about different communication issues connected with their travel to Szczecin and a region. Results show that for the respondents the most important source of information about Szczecin, before coming to the city, was personal experience and the earlier stay in Szczecin. Such answer was pointed by more than half of the respondents (Fig. 2; respondents could indicate up to three answers). In second place the nearest environment, i.e. family, friends, is listed - 32% of respondents indicated this option. An important source of information were also tour operators, and travel agencies or 38

Mehmet Mehmetoglu, “Tourist or traveller? A typological approach”, Tourism Review, Vol. 59 Iss: 3, (2004): 33 – 39. 39 Pogorzelski Jacek, Praktyczny marketing miast i regionów (Warszawa: Oficyna a Wolters Kluwer Business, 2012), 177. 40 Prepared by PBS company at the request of the West Pomeranian Marshal's Office, Sopot 2012, document online: http://www.turystyka.wzp.pl/wtgp/turystyka/prma-18265/badania_ruchu_turystycznego.htm 362

even companies that organized business trips (18.42% answers). 16.7% of people also received information via the website of the city, and 14% via other public sites on the Internet. It proves that each municipality, or local government, should take care of the presence in the Internet and the current offer on its website aimed at tourists. If the site is not looking too well, and will not help in finding useful information, it may discourage a visitor who may be assumed that the place/city/region does not have anything interesting to offer. Fig. 2. Sources of information before coming to Szczecin [in %]

51,18

earlier stay

31,6

immediate environment

18,42

via a tour operator

16,7

information on the website of the city

13,98

general information on the Internet city guide

11,54

information on social networks

11,04

advertising in local media

4,59

printed articles, programs on TV about the city

4,44

brochures, leaflets, folders

3,8

advertising in mass-media

3,59

tourist information in Szczecin

3,59

tourist information in a place of residence

2,65

information on mobile devices Visit Szczecin

2,15

albums, occasional publications

1,65

posters in place of residence

1,08

city presence in fairs, exhibitions

1,0

100

Note: the total sum does not equal 100, respondents could choose up to three answers Source: own study based on primary research, Szczecin 2012. As we can see, the most important factor is a visitor’s own experience of previous residence (51.18%), and an opinion of friends and family (31.6%). So, it turns out that the most important determinant of visit is, however, a human factor that is not strictly related to the city offer. The study has showed also that an increasingly important source of information are also social networking sites, such as Facebook, Twitter, that have won 11% indications of respondents. Therefore it becomes really necessary to take care of a city or region profile on social networks, especially because it is important information source for young people. So it turns that today, even in government – society communication, the importance of the Internet 363

significantly grows. People, interested in the case, talked on mailing lists, IRC and Usenet groups, which enable meeting people with similar interests and problems. Unfortunately, a common mistake in local governments` activity is to create a profile, and after some time, leaving with no control and upgrading, either because of lack of definite plan of action, or no person responsible for running the profile. The study also shows that any standard, typical forms of advertising are not so well perceived today as before, and now do not play such a vital role. We have to remember, that consumers are becoming more knowledgeable, more active in gathering information. Therefore it is appropriate to use such forms of marketing communication that would be attractive and gave a certain amount of useful information41. In our research tourists also were asked about difficulties in finding desired information before coming to the city. Almost 50% of respondents prior to the arrival obtained all information they were looking for, or they did not search for any information at all. Other respondents were not able to find information on particular water tourism and gastronomic offer. For them the difficulty was also to find information about ongoing events in the city, and cultural or sports events – it was indicated by 11% among those who lacked certain information. Respondents could not find also a chronological calendar of what will take place in Szczecin in the future. Unfortunately, this seems to be a major drawback, as the calendar of events must be located in an easily accessible place, certainly on the website, as well as in a variety of leaflets, fact sheets etc. Of course it would allow tourists to plan their arrival and stay in a given place and time. Good, detailed information may also be a causative element that will help a tourist to come specifically for an event, and by the way visit the city and its surroundings. Respondents would also like, before coming to the city, to get a communication map, which would allow them to move around Szczecin, so this map should be available at tourist information throughout the country. Respondents also pointed the lack of information about obstacles on the roads, information about tours and maps of guarded parking places. It should be noted that the increased traffic problems (accented by the respondents) were led by the fact that the study was carried out in the holidays, when several road projects were carried out and this made some difficulties for some respondents, and could have an effect on the answers. For most respondents description of restaurants and other places with food services is expected information about Szczecin (79.71% underlined such answer); next they count on a description of accommodation facilities (72.97%,), a map of Szczecin (77.06%), a calendar of events (69.25%) and a description of the most interesting places for visitors (69.03%). Very interesting fact is that respondents expect also information related to promotions or discounts that are offered in different place in the city. Therefore such information should be kept both in the accommodation establishments, as well as in tourist information. There are information that are important to tourists, because they want to know, where to sleep, what to eat and how to have fun, and save some money in the same time. Increasingly popular becomes Visit Szczecin multimedia kiosk, but unfortunately a lot of people have not heard about it, that definitely needs to be improved. And only three of ten of respondents used the information desk in Szczecin, so this lead to the conclusion that generally tourists should be well informed before their arrival to the city. In the group benefited from the tourist information, most people went to the tourist information at the Castle. This is largely due to the fact that this information is located near the main tourist attractions. 22.46% of the respondents used the tourist information office at the main train station, which should not be surprising, since some tourists come to Szczecin just by a train. 41

Agnieszka Smalec, “Rola komunikacji w rozwoju koncepcji partnerstwa w regionie” in Marketing przyszłości. Trendy. Strategie. Instrumenty, Ekonomiczne Problemy Usług nr 75, (2011): 489-502. 364

The least popular was a guide on mobile devices (Visit Szczecin), which, as mentioned above, may be caused by ignorance of the tourists or the lower availability of this tool. Respondents using any information desk in Szczecin positively assess the scope of the information - rather or definitely satisfied is 94.36% of people. So, the problem is not a quality of tourist information, but probably poor visibility of information points. Now for many people the primary source of information is the Internet. Most people who saw the website of Szczecin (16.7% of respondents) could not tell whether it was a party-official, the official city szczecin.pl or more promotional szczecin.eu. But people who saw any of the websites positively assessed its content and usefulness - Fig. 3. Fig. 3. Positive ratings (answers "rather good" and " definitely good") on chosen Szczecin website features [in %]

clarity of information

92,72

timeliness of information

92,49

reliability of information

91,83

information content

88,08

ease of navigating

84,99

color scheme in pages

83,22

100

Source: own study based on primary research, Szczecin 2012. It should be noticed that most respondents assessed the transparency, timeliness and accuracy of information very positively. Due to the fact that the Internet is an increasingly important source of information, this result is very good. Only a navigation of the page should be slightly improved, because for some people it is difficult to find relevant information. Nearly 17% of respondents rated coloring of pages not very favorably, so it turns out that aesthetics is also an issue. Definitely information about Szczecin Tourist Card – the card which provides visitors with discounts on some cultural institutions, restaurants, etc. - needs to be improved, as 64% of people have not heard about it. And it is a big failure in the city hall promotional activity. In the studied group of 1395 respondents, only 6.24% has benefited from this card. An important question is why people who have heard about the card did not decide to take advantage of it (29.39% of respondents). The reason for such a decision could be of course the lack of information about the benefits or evaluation of benefits as insufficient to convince tourists to purchase it. Summing up, people visiting Szczecin expect information on events, accommodation and gastronomy, a map of Szczecin, for example with marked trails and a description of tourist attractions, is also wanted. It turns out that the information about transport difficulties is important for tourists too. Respondents also seek information about promotions and discounts that can be get in the town. So, about such information tourist policy makers and businessmen should take care, and about greater visibility, not only in the tourist information points, but in accommodation establishments and places nearby tourist attractions. It should

365

be noted that over 80% of the respondents found Szczecin as a city attractive to tourists. Therefore yet taken actions to improve the city's image can be evaluated positively. Based on the analysis Statistical Yearbooks of Main Polish Statistical Office (GUS) it can be said that since 2010 the intensity of tourism in Western Pomerania Province gradually increases. More frequent arrivals of both domestic and foreign tourists are observed. Unfortunately, the structure of an average stay is changing, especially in the case of domestic tourists - longer trips lasting more than 9 days are not so often as they used to be. So tourists come for less, though, they want to use a variety of services, and come to rest. According to a study commissioned by PBS, managers of tourist destinations and accommodations emphasize the need of actively seeking and using a variety of tourist promotion activities, but above all emphasize the importance of word of mouth marketing, and various kinds of special events taking place. Unfortunately, only part of businessmen assess promotional activities undertaken by local governments positively. The main objection directed at local governments in Pomerania Region is an exaggerated emphasis on the presence of the Baltic sea and natural assets, primarily in support of coastal tourism, and marginalizing other types of tourism, such as cultural one. These are the opinions of entrepreneurs, while tourists are looking for the most interesting offers. And again we must conclude that the principal used by domestic tourists sources of information are websites and opinions of friends and family. But in case of foreign tourists more important than the opinion of friends are maps and atlases, probably due to the necessity of planning itinerary (Fig. 4). It is worth of mentioning that tourists arriving to Szczecin and the West Pomeranian Region are diversified in regards to nationalities - a prevailing number of guests are Germans, of course because of the Polish-German border nearness (44% of international tourists); second location is taken by guests from Denmark (19%), and next from Sweden (5.26%). Fig. 4. Sources of information for planning arrivals to the West Pomeranian Province [in %]

websites

38,7 38,8

opinions of friends, family

41,9

21,8

radio, TV

8,3

12,3 12

press

21,4

11,5

maps, atlases

23,7

10,8

tourist guides

15,1 7,8

discussion forums on the Internet 2,8

leaflets, promotional materials

12,9 domestic tourists

10,3

foreign tourists

2,2

travel agencies

14,3 1,4 2,7

information centers 0

Source: adapted from Investigating the domestic and international tourism in the West Pomeranian Region …, op. cit.

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The most important sources of information differ depending on the origin of tourists (domestic, foreign) and the place to which he goes. It is really interesting that for domestic visitors only two sources actually accounts: information from websites and opinions of friends and family. For foreign visitors some other sources are important as well: press articles, maps, tourists` guides and travel agencies may be an important source of advice and information. According the destination – for example, among the tourists visiting Drawskie Lake Region websites and leaflets were more important than for tourists visiting the seaside and the cities. Tourists from the coastline in turn sought information in the press mainly. Tourists staying in the southern part of the province primarily used information obtained from the Internet, and from family and friends. Whereas for city visitors tour guides and discussion forums on the Internet were useful. According to the study conducted by PBS, tourists often seek descriptions of places and images and galleries also. However, needs vary depending on age, for example, those aged 25-39 are slightly more likely seek reports of trips, while older people more often use maps. One can notice that over the years 2010-2012 websites popularity has increased significantly, that actually should be expected - percentage of tourists using this source of information when planning a trip to Pomeranian Region increased from 24.7% to 41.9%. Respectively, popularity of information in the press, radio and television proportionally decreased, as well as opinion of family and friends as a source used in the course of planning a trip. 5. CONCLUSIONS AND RECOMMENDATIONS The most important source of information for bulk of tourists is their own experience and earlier stays. This is a first conclusion. So from communication point of view, the most important thing is to attract visitors and make them glad from the first stay. That’s why local governments should ensure proper information about different opportunities of spending time on the one hand, and guarantee resources of information in places of residents of potential visitors on the other. Maybe this place will be in Poland, maybe in neighboring countries, like Germany and Sweden. Generally tourists would expect wider information about restaurants and other places with food services in Szczecin and its milieu, and a chronological calendar of what will take place in Szczecin in the future, that would make planning more easy. Second conclusion says that an increasingly important source of information websites (both belonging to local governments, and the public) are becoming, and social networking sites, such as Facebook and Twitter. Results of primary and secondary research discussed in this article indicate, that local governments/municipalities must be seen in the virtual space, because there is a chance for creating a kind of community around a given place or a region. Today local governments in West Pomeranian Province mainly prepare printed materials, brochures and leaflets, and less often walking maps and web sites. So, a next conclusion refers to the fact that it seems that local governments have forgotten about other channels of communication, like tour operators and social networks. Besides, when one realizes that visitors very often ask for advice friends and family, this may be a suggestion that probably some advertising in mass-media is still necessary (although indicated by respondents as less important now). This is connected with an assumption that average people, even unconsciously, remember information available in the media, and later – when asked for an advice – will share they knowledge. And finally the last conclusion proposes that local authorities should take care about information about a given location or the whole region in the places of potential visitors 367

residence. And again, it may be in Poland, but also in neighboring regions, so information in German, Swedish or Danish languages, not only in English, should be available. This will let potential visitors to decode a message and decide about future actions, that was discussed in the beginning of this article. Even the best offer, however, "will not sell itself" if the information has not been delivered to the audience. This is why marketing communications, unusual or even surprising, is so important. Therefore a high budget for marketing communication not always is a determinant of an efficient communication; the most important is an idea, and then consistency and integrated communication. REFERENCES 1. Alejziak Wieslaw, “Tourist activity inhibitors”, International Journal of Culture, Tourism and Hospitality Research, Vol. 7 Iss: 1, (2013): 11 – 27. 2. Bote Gómez Venancio, “Research in Spain on tourism and economic development”, Tourism Review, Vol. 51 Iss: 1, (1996): 5 – 11. 3. Clutterbuck David, (1999) “Communication and the board”, Journal of Communication Management, Vol. 3 Iss: 4, pp.387 – 391; 4. Emrah Irfan Sevgi Özkan Kanat,, “Exploring citizens' perception of government to citizen services: A model based on theory of planned behaviour (TBP) ”, Transforming Government: People, Process and Policy, Vol. 3 Iss: 4, (2009): 406 – 419; L 5. Florek Magdalena, Podstawy marketingu terytorialnego (Poznań: Wyd. AE, 2006), 144. 6. Glenny Leanne, “Perspectives of communication in the Australian public sector”, Journal of Communication Management, Vol. 12 Iss: 2, (2008): 152 – 168. 7. Hernik Joanna, “Public relations urzędu miasta na przykładzie miasta Chociwel”, Zeszyty Naukowe Uniwersytetu Ekonomicznego w Poznaniu nr 209 (2011): 369 – 379. 8. Hernik Joanna, “Uwarunkowania komunikacji marketingowej na przykładzie polskich organizacji pozarządowych” in Komunikacja rynkowa – ewolucja, wyzwania, szanse, ed. B. Pilarczyk, Z. Waskowski (Poznan: Wyd. Uniwersytetu Ekonomicznego w Poznaniu, 2010), 378-387. 9. Inkinen Tommi, “Best practices of the Finnish Government Information Society Policy Programme: Technology, provision, and impact scale”, Transforming Government: People, Process and Policy, Vol. 6 Iss: 2, (2012):167 – 187. 10. Kotler Philip. Marketing. Analiza, planowanie, wdrażanie, kontrola (Warszawa: Gebethner&Ska, 1994), 547. 11. Manente Mara, Furlan Maria Carla, “Quality in the macroeconomic system of tourism”, Tourism Review, Vol. 53 Iss: 2, (1998): 17 – 28; Vos, Westerhoudt, “Trends in government communication in The Netherlands”, 92 – 111. 12. Mehmetoglu Mehmet, “Tourist or traveller? A typological approach”, Tourism Review, Vol. 59 Iss: 3, (2004): 33 – 39. 13. Pogorzelski Jacek, Praktyczny marketing miast i regionów (Warszawa: Oficyna Wolters Kluwer Business, 2012), 177. 14. Pugh Jonathan, Bourgeois III Jay L., "“Doing” strategy", Journal of Strategy and Management, Vol. 4 Iss: 2, (2011): 172 – 179. 15. Pytlik-Zillig Lisa M., Tomkins Alan J., Herian Mitchel N., Hamm Joseph A., AbdelMonem Tarik, “Public input methods impacting confidence in government”, Transforming Government: People, Process and Policy, Vol. 6 Iss: 1, (2012): 92 – 111. 16. Quirke Bill, “Putting communication on management's agenda”, Journal of Communication Management, Vol. 1 Iss: 1, (1996): 67 – 79. 368

17. Schultz Louise, “Toward A System Model Of Human Communication”, Kybernetes, Vol. 4 Iss: 4, (1975): 247 – 252; 18. Smalec Agnieszka, “Komunikacja marketingowa jednostek samorządu terytorialnego” in Marketing. Ujęcie terytorialne, ed. Jerzy Koszałka (Gdańsk: Politechnika Gdańska, 2010), 205. 19. Smalec Agnieszka, “Rola komunikacji w rozwoju koncepcji partnerstwa w regionie” in Marketing przyszłości. Trendy. Strategie. Instrumenty, Ekonomiczne Problemy Usług nr 75, (2011): 489-502. 20. Socher Karl, “What are the tasks of the state in providing the framework for tourism?”, Tourism Review, Vol. 56 Iss: 1/2, (2001): 57 – 60; 21. Stanton William J., Fundamentals of Marketing (New York: McGraw Hill, 1981), 452. 22. Understanding Tourism: Basic Glossary, UNWTO, accessed May 19, 2013, http://media.unwto.org/en/content/understanding-tourism-basic-glossary. 23. Vos Marita, Westerhoudt Evelyn, “Trends in government communication in The Netherlands”, Journal of Communication Management, Vol. 12 Iss: 1, (2008): 18 – 29; 24. Warnock Davies, “Understanding strategy”, Strategy & Leadership, Vol. 28 Iss: 5, (2000): 25 – 30;

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GENERATIONS AND MARKET ECONOMY Jelev Viorica; Spiru Haret University, Bucharest, Romania ; jelevviorica@yahoo.com

ABSTRACT The article seeks to render highlighting changes within the Romanian society in the last 23 years, with the effect on people's behavior, but also the changes of the university education at the discipline I teach, International Marketing, with impact on the delivery of new information to the students of the Faculty of Marketing and International Economic Business, within Spiru Haret University. Finally, I am trying to find the answer to the question "what is the future of humanity?" what typology of man must we form to save the future of the planet. The answer is "the beautiful man", as Dan Puric called in his book. Key words: economy, communism, marketing, Generation Y, the beautiful man JEL Classification: A13, D60, I20, I30, M31, P50

1. INTRODUCTION The article covers the issues of changes in the Romanian economy, after the 1989 revolution, in the consumer’s behaviour and use of the new generation, the so-called " Y Generation " or "Millenium", of changes in economic education theory, which we teachers must take into account , and try to answer the question how the new world man we created should be, in order to save us from self destruction. The problems addressed are of the utmost importance for our adaptation as educators of the young generation, and changes in their behavior and changes we must make in our behaviour in order to effectively respond to their demands of the education received. In order to answer the questions that I have asked myself in this article, I consulted the latest information published in the specialized literature and have formulated solutions to the questions approached. I hope this article brings additional information to the existing specialized literature. 2. LITERATURE REVIEW The first work from which I have documented is of the famous professor Philip Kotler, "Marketing 3.0. From product to consumer and to the human spirit", Public Publishing, 2010, in which there is an overview of the evolution of marketing. In the latest sixty years, marketing has moved from being centered on products (marketing 1.0) to focus on customers (marketing 2.0). And now marketing is transformed again, answering the new dynamics from social environment. Companies are expanding their area of focus from products to customers and then to problems of mankind. This is marketing 3.0, the stage where companies have a humanocentric orientation and balance the profitability and corporate responsibility. Welfare, poverty, environmental concern pertaining to the human-centered 370

approach brought by the new type of marketing, which does not only propose to sell some products or services, but also to participate with the rest of the partners (distributors, buyers, co-share holder) to change the world for the better. Radu Ghitulescu in the article "How the Web 2.0 era changes the customer-company interaction", published in the Journal Market Watch, 25/09/2011, connects with the subject of my investigation. The next book studied is of the American professor, no less famous Seth Godin - "Tribes", Public Publishing, 2010, explaining consumption behaviour of individuals. A tribe is a group of people who share a common interest, a way of communicating and a leader. For millions of years, people have sought to be part of a tribe or another, be it religious, ethnic, political or musical. Now the Internet has removed geographical and financial limitations, and because of social networks and blogs, it's easier than ever for a tribe to gain more followers. In addition, due to them the number of new tribes grows. The Internet can provide many, but not leadership. Hence the importance of the question to which Seth Godin answers in Tribes: Who will lead us? The answer that he gives in this book helps us to understand what exactly is at stake and how each of us can create and lead a tribe. Next work studied belongs to the actor Dan Puric - About Beautiful Man, Ed Sophia & Supergraph, 2009, in which the author explains that the world is in a continuous process of ugly. "In the new empire of ugly beauty is just a memory that barely flickers under the triumphant march of a crippled world in full offense". The beautiful man is the last cry of salvation, the last stronghold of humanity in it's fight against the unhuman ocean that is to come. The beautiful man is the last sigh of Christ for a world in a definitve freefall. In an attempt to answer all questions that I have asked myself in the work, I researched information on the behavior the new generation that will follow us and which will ensure our pensions. This is the so-called Generation Y, which Biszok Bogdan speaks in the study "90% of Generation Y members check their e-mail and profiles on social networks before rising from bed," appeared in the magazine Capital, from 14.12.2012.Other books are: Grown Up Digital -How the Net Generation is Changing The World - Don Tapscott, Rethinking Education in the Age of Technology. The Digital Revolution and Schooling in AmericaAllan Collins and Richard Halverson, Andra Silvestru-Magazinele viitorului trebuie să țină pasul cu nevoile și cerințele consumatorilor-Revista retailului si industriei bunurilor de larg consum, 8.10.2012, Marketing direct - Wolf Hirschmann,Atentie la manipulare - Claudia Grozebach, Imaginea viitorului - Brad Dehaven, Ce doresc clientii nostri - Harry Beckwith,Jelev Viorica Marketingul serviciilor, vol. 1. 3. IS THERE A CHANGE REQUIRED IN ECONOMIC SCIENCE TODAY? We live in a market economy that does not save / make money but mainly for the most greedy people. We feel like a minority in charge forces us how to live our lives, but not for all of us to live better lives, but especially for them to live their best life. "To live well!" does not refer to all of us, but only to those that have launched the slogan, and afterwards make the laws by which they live better, at the expense of others. By advertising, propaganda and education, people are trained to accept what they are given from the top with a teaspoon, and therefore they forget what they themselves should think and feel, with their mind and soul. The effects are obvious: most are doing increasingly worse, and the ruling minority lives better Why? Because people forgot to take into account how they feel, emotions, feelings, personal experiences, and are guided by recipes, rules and laws "logical" but they no longer serve their interests, and at most urge them to guide their emotions in order to follow the 371

rulers’ logic. Then, the solution is for each man to learn on their own paths (not from government) to listen to the heart (ie to understand and follow their own emotions) and mind (ie thinking alone). If in communism indoctrination was general, and no one dared to think differently than the governors, for fear of dire punishment, now, under capitalism, not much has changed today because democracy is still a charade since the people elected do not work for us but for themselves and for the economic interests of some foreign corporations. And all laws are given after the interests and ambitions of the government, and not for the good of all. During communism, the One Party was everywhere, both in what could be seen and in what could be just guessed. And there was nothing else in Romania. And the arm of the party was ruling over everything with a cliche-ridden language. The Ceausescus were the "most beloved" in the patriotic songs written to the command of the communists and few still believed in the good offered by communism when standing in huge lines for a pound of cheese. All of us compared ourselves to rich people in the West, some listened to Western music and foreign radio stations secretly or watched movies banned on video and saw that they were poorer or more constrained to poverty and cultural and economic isolation imposed politically than the rets of the worldt while party leaders lived comfortably in villas and resorts owned by the state, but guarded by the military and security. Basically, exactly the communist leaders gave Romania the signal, by their own example, that life should be lived for enrichment, not communism. They had already forgotten the ideal of communism. They were the enriching model after 1989. Even the communists had forgotten to look for the meaning of life, and those who followed them to power after 1989, had only copied the activist leaders. After 1989, the drop of the regime was enough in order for everyone’s greed to come out without embarrassment and laws to be changed immediately to allow the most greedy get rich quick, first privatizing everything they could. Market economy wasn’t a better alternative to communism, for everyone, but the cheap and banal formula, not original at all, that allowed fast enrichment of the most greedy and enterprising, and without limits. So it was immediately adopted with cheers, and nobody objected to it because everyone was intoxicated by the new freedom. Privatization was done by former "big communists", the people within the large privatized communist institutions. Once inside, they led them intelligently into bankruptcy, then afterwards, still them and their friends purchased them cheaply piece by piece. They were helped to the max by politicians elected "democraticaly", but them too with private interests increasingly swollen. Few politicians have remained with a modest wealth and stayed true to a single political ideal. Most of them, without shame or conscience, easily migrated from one party to another, looking for the best place to catch clot. The vast majority became rich, but not from wages , but from private business "helped" by their own new laws . Quite a lot have surrounded themselves at power with relatives and friends. There were many political parties, to save appearences, each with a doctrine more empty as another, but even stronger were the interest groups. Like today. Instead of the communist slogan "No bread without labor, nor labor without bread" considered offensive or exceeded, they put the slogan "Advertising is the soul of commerce" bonton considered of Western. In place of industry and agriculture, systematically destroyed soon after 1989, great part of the population started trading, with bag, suitcase, with van, with wagon, etc.. Instead of only 2-3 hours of TV program full of Ceausescus, there were countless hours, innumerable entertainment and gossiping for sleeping consciousness, interspersed with ads 372

again without number, without number, but paid by consumers at each purchase made... Prices increased continuously fueled by the idea that would increase demand, which in fact was also artificially stimulated by advertising, so that people would consume (purchase) as much as possible, not that they needed to buy, but rather what merchants needed to sell. Many loaned from banks because of the advertising and their own foolishness, happy that they were given money to buy what they did not need, only to get indebted to the banks a few years later. Clear laws of communism were replaced by a thicket of changing laws, which made justice so helpless to do right. We joined the EU and NATO only for politicians and greedy businessmen to be left alone to enrich unrestricted, just as in the rest of the EU and NATO. We have reinstated the church, only for the new greedy regime to have more authority in the eyes of the crowd. Communist morality has been thrown away, as being compromised and obsolete, and the orthodox moral remained just faint because many cross and declare themselves Christians, but few love their neighbor or even know what Jesus meant. And in many places there are more churches than banks or hospitals, even more ATMs than schools or doctors. The state which ought to take care of the progress of the country, became just a tool for enriching 10% of people by depleting the remaining 90%. Church in order to recover its medieval treasures joined without a trace of regret those who plunder the state. Therefore, the state itself collapsed because the governors have wasted diligently budgets in order to fund their own businesses, so the banks and business leaders have become more powerful than the state itself, and the governors are spun on the fingers of anyone who has more money, despite their endeavor to appear that they still have some power left. If it were not so, the situation in Romania would be good for most, we would not be indebted to the IMF and there would not be as many poor and desperate people. But as this crisis deepens, the premise to create a new generation of revolutionaries grows. Greed and the irresponsibility of a generation awakens consciousness to another. Then we'll be able to speak of a revolution and that certainly will be neither communist nor capitalist. Communism can not return to Romania, it has already been consumed. Market economy (capitalism) returned, apparently, but it sees itself being consumed, more rapidly. I grew up under communism. I'm a baby-boomer (Tab.1). I was educated under communism. I even believed in communism before learning to think with my mind. Then I noticed that the world is bigger and the human thinking may be wider than the selfish thinking of the people who rule us. That's the way I think today, as I wrote here. God knows who will come to dominate society after people will give up HATRED, GREED and the LUST FOR POWER. Maybe finally people will come to LOVE or at least THINK. After this picture of the development of our society, we can say that we live in the era of market greed created by the market economy. And analysts must adapt to the change. Tab.1 The generations from 1901 to the present Name generation 1.Soldiers Generaion 2.Silent Generation ) 3. Baby-boom Generation 4. X Generation

Category heroic artistic prophetic

Years of Birth 1901 - 1924 1925 - 1942 1043 - 1960

nomad

1960 - 1981 373

Historical background World War I World War II Economic development of the West Ideological revolution

5. Y Generation heroic (Millennials, Internet, Google) 6. Z Generation (ipod) artistic

1982 - 2001

Cultural Wars, Postmodernism, digital technology 2002 - present Economic crisis, Terrorism, Globalization Source: Neil Howe, William Strauss -Millennials Rising: The Next Great Generation,Vintage Books, 2000, pg.413 4. WHAT WOULD BE THE THEORETICAL AND PRACTICAL CHANGES, WHICH I CONSIDER USEFUL, IN TERMS OF THE DISCIPLINE I TEACH. I am teaching the discipline "International maketing" at the Faculty of Marketing and International Business, Spiru Haret University, and I'm required to constantly monitor changes taking place in this science, as a result of changes in the society. I cannot fail to notice we are going through crisis and its effect on our behavior as customers or users of products and services. It's about change, customer 2.0, Web 2.0 and Sales 2.0. Therefore, marketing, as we know it and as defined many decades ago no longer works. In the last sixty years, marketing has moved from being centered on products (marketing 1.0) to focus on customers (marketing 2.0). And now marketing turns again, responding to the new dynamics of social environment. Companies are expanding their area of focus from products to customers and then to problems of mankind. This is marketing 3.0, the stage where companies have a humanocentric orientation and balance profitability and corporate responsibility. Welfare, poverty, environmental concern relate to a humanocentric approach brought by the new type of marketing, which proposes itself not only to sell some products or services, but also to participate with the rest of the partners (distributors, buyers, co-share holder) to changing the world for the better. Marketers are faced with two major changes - the effects of the Internet as an environment for communication and the shift from consumer, as central character, toward groups and opinion leaders. The Internet is a space with new rules and we just learn how to do all distribution on the shelves of this space, what price is put on things. We learn that product promotion is not a monologue anymore, as was the televised communication of brands, but it is a dialogue between brand and consumer. Things get complicated when it introduces into the equation the so called "influencers", the opinion leaders. It is here the beginning of the translation from the area of marketing centered on a single consumer toward what Seth Godin calls tribes, groups of people connected to one another, connected to a leader, who share one same idea. Perhaps the best example of a tribe are the fans Apple products, who are more than buyers, sharing passions and interacting with each other. The respective tribe allows the people from Apple to rely on certain sales figures, even increasing - see the iPhone, with increasing sales from one version to another. People P (people) - thus become the fifth P in the formula launched some time ago by Philip Kotler for building brand, formula where we initially met only four, namely Product, Place, Price and Promotion. People, consumers, singular or plural, have changed. The consumer is better informed in the internet age and that of increased speed of movement of information. From an economic perspective, consumers have, despite the crisis, relatively speaking, the greatest willingness to purchase products and services, but have become more selective and more demanding. Therefore, companies must adapt the reporting of consumer profiles as identified by the research company Anamnesis in April 2010. "Research has 374

defined three categories of people based on lifestyle, their aspirations and motivations, the way they look and plan the future or attitude to money, it's about "hedonists", those who enjoy life as much as possible, spend more for immediate pleasures and are optimistic about the future, "calculated people" who have the financial resources, but are very calculated in their spending, and the "entrepreneurs", people who like to fend for themselves and engage in many projects at once. The same Seth Godin said somewhere that the basic idea of the marketing of the 4Ps, that someone can program one's consumption, is obsolete. Online promotion has eliminated the limitations of space imposed on television or radio or by location in case of publications or outdoor advertising. But in case of the Internet occurs a strong limitation, that related to attention. It is questionable whether the front page of the newspaper or magazine can be replaced with the same success by a link recieved from a friend or suggested by Google. "In a world of surfers you need to create the best possible wave. The real revolution is creating the wave, not just ride it," says Godin. The main environment to create waves at this moment is the world of social networking, towards which almost all marketers are focusing. "Social media is now on everyone's lips, but I have rarely seen good campaigns in which on Facebook and Twitter and more recently on Google plus. There are instances where the print is extremely effective, especially for corporate communication, just as there are campaigns in which Facebook can do a lot on marketing communication. In the late '90s, an article in Business Journals (One unhappy customer CAN multiply to many) stipulated that an unhappy customer shares his negative experience to other 8-10 people and that only one in five discusses with more than 20 people. In the era of Web 2.0, the statistics cited is totally obsolete. Currently, an unhappy customer can make their complaint known almost instantly towards tens, hundreds or even thousands of others through social networks, posting on forums, blogs or websites of micro-blogging. And according to recent studies, Generation Y or "Millenials", born after 1981 on the eve of the Revolution (Tab.2), is classified by sociologists as the generation of "transition", "pragmatic" or "google". There are those who grew up in front of the computer surfing the internet, are not interested in politics and have no associative spirit. It is more intransigent than previous generations. For example, a study by Convergys Research in 2008 demonstrated that 73% of Generation Y members have no hesitation in giving up the services / products of a particular company, if they have only one bad experience with that company. What is even worse for those companies mentioned above is that 85% of dissatisfied young people make public their negative experiences by posting online messages, photos or videos. Tab.2 Generation Y and the labor market Availability

Competitiveness

56% are expected to occupy a leading position within three years of

83% are fighting for a pleasant and well-paid job

Ambition to exercise At least 1 in 7 works over 50 hours a week

Interconnectivity

Inconsistency

Mobility

63% are on LinkedIn and is looking for a job using social networks

Although 75% of them are satisfied with current jobs, 57% do not intend to stay at the

90% are willing to make multiple trips for work, and 71%

375

employment

same company for more than two years

to move to another city or abroad for a better job

Source: Claudiu Sorin – Ce nu se vede la tv/razboiul generatiilor in epoca digital. In Q Magazine.ro, 27.08.2012

In the era of Web 2.0, the customer communication preferences tend to change rapidly. According to a Frost-Sullivan study which comparatively analysed (2011 compared to 2010) the new methods of communication (inbound) between customers and companies, we see significant changes, as follows: • telephone communication recorded a decrease of 5% in customer preferences in 2011 (from 98% in 2010 to 93% in 2011); • e-mail registers a moderate 3 percent increase (from 82% in 2009 to 85% in 2011); • Web-based interactions (including web self-service, chat, co-browsing, etc..) increased by 9% (from 56% in 2010 to 64% in 2011); • text messages / SMS register the highest growth of 25% (from 13% in 2010 to 38% in 2011); • Video communication has the second highest growth of 15% (from 5% in 2010 to 20% in 2011). The trends highlighted by Frost-Sullivan’s study are partially confirmed by a new research conducted by Avaya, that 40% of customers prefer non-verbal methods to interact with a company, ie using e-mail, instant messaging or chat. Avaya estimates are that over the next two years, the volume of customers who will prefer e-mail as a method of communication will reach 55%, while web chat will also register an increase of 2 percentage points, up to 18%. As can be seen, online interaction begins to have an increasingly larger share among customer preferences, which obliges Call / Contact Center to conform to these new trends to ensure optimal quality level customer interaction, so that a higher level of their satisfaction can be achieved. Adapting Call / Contact Centres to new requirements imposes, however, important changes in their functioning. On the one hand, the agents must be able to effectively manage customer communication both ways, both the traditional - the telephone - and the online. On the other hand, the monitoring and recording systems of interactions must be integrated so that they can provide a unitary view over a client. However, this aspect is still a delicate one for many Call / Contact Centers. According to a study by NICE Systems company in the U.S., 70% of companies fail to "preserve" the customer data between the different phases of the procurement / transaction process. And 80% of customers say that they must repeat this information several times when requesting / running a complex operation. The integration aspect of communication channels is, however, only part of the problem. One quite real and serious - according to "2010 metrics survey" conducted by Suportindustry.com, only 49.50% of Call / Contact Centres queried have managed the integration of communication channels. Integration with other applications - such as the Knowledge Management and Customer Relationship Management that have direct 376

relationship with the customer interaction - represents the second part of this challenge. Experts say that only by achieving this complete integration, a Call / Contact Center can be transformed from a cost center into one of profit by increasing abilities in the upsell and cross-sell. Social media is the place where customers can learn about all other facets outside of the strictly commercial of a brand. It's where you get to differently communicate anything other than through promotions and discounts, is where brands can become real partners for conversation with their customers. Today’s young people are using technology in ways we could never imagine. Instead of passively watching television, the “Net Geners” are actively participating in the distribution of entertainment and information.For the first time in history, youth are the authorities on something really important. And they’re changing every aspect of our society, says Don Tapscott in his book, „Grown Up Digital -How the Net Generation is Changing The World”. Marketing no longer means, as is well noted by the American journalist Michael Hyatt, to roar in a crowded market, but to reach out to travellers, or to generate transactions, but to build relationships. Consumers are no longer looking for offers on the websites of companies, but on social networks. The decision to purchase a product comes much more from the experiences of other consumers. This means that things will look different in regards of marketing which is a science that takes various shades ingredients. And all these shades of a new type which occurred between the dialogue between company and customer have been adopted by marketing people and used as such as new marketing tools. Therefore, what we consent somehow that has changed is that traditional, arrogant form, of monologue which brands, products, companies possessed with consumers. The consumer gets claimed in the dialogue between the product that addresses him, and him as a community. My duty as a teacher is bringing to the students knowledge all these changes made to the marketing discipline and thus help to form specialists able to adapt to future requirements of a job, through abilities and practical skills acquired in the university environment. 5. PERSPECTIVE OF ECONOMICS OF TOMORROW The digital revolution has hit education, with more and more classrooms plugged into the whole wired world. But are schools making the most of new technologies? Are they tapping into the learning potential of today's Firefox/Facebook/cell phone generation? Have schools fallen through the crack of the digital divide? In Rethinking Education in the Age of Technology, Allan Collins and Richard Halverson argue that the knowledge revolution has transformed our jobs, our homes, our lives, and therefore must also transform our schools. Much like after the school-reform movement of the industrial revolution, our society is again poised at the edge of radical change. To keep pace with a globalized technological culture, we must rethink how we educate the next generation or Romania will be left behind. Economics will change when man will change. Everyone is born with the ability to think with his mind creatively. Why do humans get to think in time more after the minds of others? Why are they losing their meaning and original powers, with which were endowed by at birth and from their creation by the Universal Creator? Maybe someone likes that people are now just consumers. But who can agree on that? Perhaps those who create, but want to be the only creators in the world, and sell as many consumer products and ideas to the others, thereby keeping to themselves the creative power. Perhaps to those who now create new legal laws and economic 377

standards by which others can not create anything except within the limits imposed by them. Perhaps to those who, deprived of the power to create a perfect world for all, a divine world, are satisfied with the idea of creating a world only by their limited strength, confining everyone to their ideas! Since we were small we've been assaulted by our parents' ideas, who were raised in a particular system and were taught to educate their children to remain dependent on the same system. It's that system of limited ideas, where children are taught that the state, religion, economy are almighty, and other things created by some of their predecessors. Because parents believe in certain things, small children learn that they are essential things for them too. Thus children end up their parents little copies, with the same small ideals and with the same beliefs and ways of life. There is no progress from one generation to the next in terms of spiritual ideals. There is only spiritual stagnation. Technological progress does not meet the spiritual needs of man only makes him feel somewhat more refreshed and more dependent on technology, but without making him more alive, more real . What is today's "modern" man ideal? To have a career, earn well and maybe also leave an inheritance to his children who could then just repeat the same ideal for them and their children. Others, scientists - would ensure to the world a technological progress, with which perhaps man could reach the stars, maybe colonizing them... And while the small man feeds on this "ideal" perpetuated by education and advertising, propaganda and preaching, those who lead this petty mankind from the shadow of governments and banks, churches and armies, choose the destiny of all. At the same time, there are those who know that man has a different destiny, which was intended since its inception. A much higher destiny, to create the world, and not to consume it.To know everything in order to create a better future for all. To build the future through everyone's contribution, not just at the orders of a few greedy for power. They are not in power officially, but they are the ones who inspire mankind for truly useful solutions. They are the ones who heal without having to sell drugs, inform without selling television, communicate without using expensive phones and build around the world without demanding tithes. They are the ones that no army can take prisoners, and that no bank can endebt. They are the ones that no church can make their congregants, and no political party can make their followers. They are The Creative People, in the image and likeness of God the Creator. Some call them Grand Masters, Guru, angels of Shamballa, initiate of the White Brotherhood etc. Others call them crooks, false prophets, crazy esotericists and so on. But they are the ones who, without seeking fame and power, are transmitting to all, telepathically and wisely, their message. That message is received well by only those who are on their frequency. Each man should ask himself if he wants to be a consumer or a Creator. The consumer consumes what others produce, and therefore he gets addicted to the products, ideas, theories and systems created and conducted by others. The Creator is the one who creates new meanings and solutions by his creative thinking, first off all in his life, and then in the life of others, and does it for the good of all, not just for his sake, his family, the clique, his party or his religion etc . The Creator can even achieve immortality if He can offer it to the others. And if today we have come to be more consumers than creators, it is not necessarily the fault of consumer society. It is the fault of every person who, when he feels he can be more than just a consumer, prefers to remain like this only because he likes it or it is convenient for him to live just like the others want him to.

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6. SOLUTIONS FOR THE FUTURE OF HUMANITY. SOCIO-ECONOMIC APPROACH The solution for the future of humanity is "The Beautiful Man", as termed by Dan Puric."To speak about The Beautiful Man given in the world where we live, in a mutilated world, of the ugly man, in a crippled world, in a confusing world, that, we fully savor, oh what a great challenge! The world today is in a continuous process of ugliness. In the new empire of ugliness, the beauty is just a memory that barely whispers under the triumphal march of a crippled world, in full offense". The Beautiful man is the last cry of salvation, is the last stronghold of humanity in the fight with the inhuman ocean that is to come. The Beautiful man is the last Christic sigh for a world in final a falling. In fact, the most important thing in the era we live, is to have the ability to recognize The Beautiful Man. The Beautiful man is no longer fashionable. The useful man is trendy, the efficient man is trendy. He is more open to the outside, talking on Skype or Messenger with people around the world, and the brands must take into account of this global perspective. The future stores must keep up with the needs and requirements of consumers. Retail market is constantly changing, therefore, in future, it is expected that total change will show how the product purchases experience. Thus, depending on market requirements, each retailer will create his own store for future. The analysts believe that there are several possible scenarios in organization of shop for the future. For example, some believe that there will be units that will highlight in particular how to connect with all consumers. The buyers will learn about what products or what promotions are in store via smartphone. Some retailers will focus on the format of "green store", that will be more attentive to energy and water consumption, will produce less waste and packaging will be some green products. We think more about environment. 7. CONCLUSIONS After this image of the development of our society, we can say that we live in the era of market greed created by the market economy. And analists must adapt to this change. I teach the discipline "International maketing" at the Faculty of Marketing and International Business, Spiru Haret University, and am obliged to constantly monitor changes taking place in this science, as a result of changes in our society. It is impossible for me not to notice the crisis we are going through and its effect on our behavior as customers or users of products and services. It is about the change, the customer 2.0, Web 2.0 and Sales 2.0. Therefore, marketing itself has evolved, arriving in the 3.0 era. The present day young people, to whom we are responsible for the economic education which they had taken from us, the so-called "Generation Y" or "Millenials", born after 1981, on the eve of the Revolution, form the new mass of buyers of existing products and services. Sociologists classify them as the generation of "transition", "pragmatic" or "google", who grew up in front of the computer, surfing the internal, uninterested in politics and, worse, lacking associative spirit. They are the ones that will replace us and ensure the GDP of our country. The alarm signal that emerges from this paper is the type of man who should save the future of this country. "The beautiful man, useful and efficient.

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REFERENCES 1. Beckwith Harry Ce doresc clientii nostri -, Polirom, 2007 2. Collins Allan and Richard Halverson Rethinking Education in the Age of Technology. The Digital Revolution and Schooling in America, Teachers College Press, 2009 3. Dehaven Brad -Imaginea viitorului, Editura: BUSINESS TECH, 2010 4. Godin Seth-Triburi, Editura Publica, 2010 5. Grozebach Claudia Atentie la manipulare,Editura: All, 2012 6. Hirschmann Wolf- Marketing direct Editura: All, 2012 7. Howe Neil, William Strauss -Millennials Rising: The Next Great Generation,Vintage Books, 2000 8. Jelev Viorica Marketingul serviciilor, vol. 1, Editura Fundatia Romania de Maine, 2009 9. Kotler Philip-Marketing 3.0.De la produs la consumator şi la spiritul uman, Editura Publica, 2010 10. Puric Dan –Despre Omul Frumos, Editura Sophia & Supergraph, 2009 11. Tapscott Don- Grown Up Digital -How the Net Generation is Changing The World , Publisher McGraw-Hill , 2008 Web sources: 12. Ghiţulescu Radu-Cum modifică era Web 2.0 interacţiunea client-companie, Revista Market Watch, 25.09 2011 (http://www.marketwatch.ro/articol/10116/Cum_modifica_era_Web_20_interactiu nea_client-companie/) 13. Biszok Bogdan -Studiu: 90% dintre membri Generaţiei Y îşi verifică e-mail-ului şi profilul 14. de pe reţelele sociale înainte de a se ridica din pat, Revista Capital 14.12.2012 15. Claudiu Sorin –Ce nu se vede la tv/razboiul generatiilor in epoca digital. – Q Magazine.ro, 27.08.2012 16. Silvestru Andra-Magazinele viitorului trebuie să țină pasul cu nevoile și cerințele consumatorilor-Revista retailului si industriei bunurilor de larg consum, 8.10.2012

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APPLICATION OF VANIN MODEL FOR THE WEB MARKET

PhD Student Caraganciu Iulian. University Lucian Blaga, Sibiu, Romania

ABSTRACT: The goal of this paper is to present the importance of awareness and reputation for online intercompany competitive interaction. This paper presents the way companies gain an advantage when opting for larger awareness levels in competition, moreover it shows the importance of awareness which basically relates directly to the market the company would have access to. Keywords: Web Competition; Awarenss in competition; 5 Stage awareness game. 1. INTRODUCTION There are several models out there that try to explain the way the web market works or the way competition on such market takes place. Some of the most important models in the field would have to include the model presented by Ulph and Vulkan 2001. The Ulph and Vulkan 2001 model, tries to show the way companies behave on the web market as well as the way prices can be formed if first and second degree price discrimination is to be taken into account. Therefore this model proposes to see the way price discrimination works on the web market. Another model which had an impact on web market modeling is the model of Baye and Morgan (2009). Their model shows that brand and price advertising is important for the online market. Baye and Morgan (2009) state that some of the researchers treat loyal consumers as exogenous, while they prove to be an effort of the company’s brand and price advertising techniques. The environment in their model is described in the following manner. They consider an environment where there are , each having a marginal cost of m. Each consumer is interested in buying one unit of the good at most from which a value of is derived. More precisely they assume that there are two segments of customers: shoppers and loyals. Shoppers constantly visit price comparison sites to get the best prices available. While loyals visit their preferred site directly and purchase is the price does not exceed . These models show us the importance of brand and advertising levels as well as the power or futility of price discrimination in online markets. While these models are no doubt powerful tool to model and test the online market, in this paper we will be focusing more on Vanin 2007 model, which is about competition and reputation and try to make this model adaptable for the web market, since the model itself is used to describe the real market (these two being different in concept from one another).

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2. Competition and Reputation Paolo Vanin is one of the researchers that was preoccupied with the studies of reputation on repeated interactions of a company with its consumers. Further we are going to present a model by Vanin (2007), which shows how reputation could be treated. Vanin states, that reputation plays a crucial role when consumers have to choose a company to buy products or services from, when there are repeated interactions on the market. Since on the real market as well as on the web market, consumers do have multiple interactions with companies, his research could prove useful as to come to a better understanding of the role of reputation for such. Vanin 2007 considers a game with a four stage structure. At the first stage of the game an amount of N companies decide whether to enter the market or not, each entering company, however, pays a fixed entry cost of . The number of companies who enter the market is denoted by n. At the second stage of the game those n companies decide whether to produce high or low level quality goods. The result of these choices is a vector (when it means that company j has chosen to produce high quality). The number of high quality companies is denoted by . However we have to note that once decided the level will remain unchanged for the following two stages of the game. In order to simplify, Vanin makes an assumption that the quality chosen by each company is known to all the other firms, but not to the consumers. Consumers might find out the quality of a firm’s products only by direct interaction or by the information extraction from equilibrium price signals. The third stage of the game is the first stage when there appears an interaction between consumers and companies. First companies set their prices, determining a price vector . Afterwards, having observed the price vector chosen by the companies, the consumers determine a demand vector of . The fourth stage of the game is similar to the third one, only this time consumers that have consumed a good have information about the quality of the good, whether it be high or low. This time the price vector set is the price vector and the demand vector set by consumers is . Vanin 2007 assumes the following expected utility function: Where is a vector of beliefs, basically this is the expectation of a consumer that a certain company has high quality or low quality goods based on the previous stage of the game.reflects the utility value afferent to the good j’s expected quality. Y represents a perfectly competitive outside good, which is introduced to make partial equilibrium analysis justified. A specific feature of this model is that market size does not depend upon the degree of substitutability or the number of products, and depends solely on the average quality of the goods and the average price of the latter. Each product’s demand can be obtained by the following expression: Or this could be expressed in matrix notation, as pointed out by Vanin 2007 as , where is an n x n matrix. If all companies have the same marginal cost c and all products are expected to be of the same quality , then we can simplify the demand function to: Which converges to c as and further simplifies to the usual monopoly price if n=1. All goods are produced with constant returns-to-scale technology, where higher quality is more expensive to produce. Marginal costs of low and high quality are and . Companies can always exit the market if it is in their interest to do so.

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Assumption 1: . This is needed for high quality companies to always receive positive demand in equilibrium. Assumption 2: . Under perfect information, Assumption 2, which equalizes the intrinsicutility of low quality goods and their production cost, makes demand for lowquality goods insufficient even for the profitable entry of a single low quality monopolist, since its demand would be positive only at prices strictly below marginal cost. Vanin 2007 gained the result of the model, just as expected and the result was that consumers would avoid low quality companies and eventually those companies would disappear from the market. This basically shows the role of reputation for a company, since in this model the information transmission method was only with the help of personal purchase experience or via the equilibrium outputs. This could prove to be a good model to explain the way web market companies interact with consumers, since trust and reputation work closely to the way described in this model. The only problem here being that web market companies, being from different countries could have different costs, therefore different prices with the same quality and with the same mark-up, which could show difficulties when analyzing them through this model. Another potential problem would be to incorporate awareness in a way into the model, which might prove a good starting point for developing our own model of the web. 3. AWARENESS AND REPUTATION GAME Here we try to develop our own 5 stage game by making modifications to the model of reputation presented by Vanin 2007. Some elements of the 5 stage game, which we will be presenting are the same as the ones present in the Vanin model, so therefore we will skip them, presenting only the most important part in this research. The game consists, as mentioned above, of 5 stages. These stages are derived from the ones presented in Vanin 2007 model, with some modifications. Therefore some of the implications are derived from there as well. In stage 1 the companies have to determine which level of awareness they are going to adopt, it can vary from 0 to 1 () and imply a cost of which will be incorporated in the cost to enter the market by the companies. This stage is important due to the fact that the potential market share gain can be derived from the coefficient. Though reputation is important in determining the revenue in later stages of the game, it is not as important as awareness due to the fact that this coefficient models the part of the market the companies have access to. During stage 2 companies determine whether they wish to enter the market or not. However if they do wish to enter the market they must pay a cost of . In our case, the costs from stage 1 and stage 2 sum up as to make up as a whole. This stage takes place at the same time as stage 1. This is due to the fact that companies do not need to adopt a certain level of awareness if they do not wish to enter the market whatsoever. In stage 3 companies determine whether they want to produce high or low quality goods, this can be expressed by the function , where 0 means low quality and 1 means high quality. For simplicity we are to assume, just like Vanin 2007, that consumers do not know about the quality of the goods. The quality of the goods will not be changed in the following two stages. Stage 4.This is the first stage where there is the first market interaction. This stage begins with the companies setting their price levels at and as a response consumers set their

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demand function at . However, at this stage of market interaction consumers do not yet possess the information what quality do companies produce. Stage 5.This stage is the same as the previous stage only consumers know the quality companies produce, provided they have consumed a High quality product in the previous stage. If they have consumed a low quality product in the previous stage then they have no information about the company’s products whatsoever. The company’s demand function is expressed by Vanin in his model by the following expression: In our case, if we were to assume that each company’s demand function is also a solvable demand, then the potential profits of the company could be expressed by the following expression: Where represents the costs supported by the company at stage 1 and at stage 2, a represents the level of awareness gained by the company at stage 1 and represents the demand function for company’s products. At stage 4 we will see that the competition between companies in this instance will be brought down to a Bayes price based competition model. Which means that companies with the same level of awareness will have to undercut each other until they come down to the equality . This will make companies with a higher level of awareness able to increase their prices due to the fact that the potential market for companies with lower awareness is smaller due to the size of the coefficient a. Therefore the companies with larger awareness levels can increase their price as compared to the ones with lower awareness levels and still gain profit from the remaining part of the market (). In turn companies with the most awareness will gain access to all of the market and be entitled to the position of setting the higher price on the market.As it can be seen in figure 1. Figure 1: The influence of awareness on market size

Source: Developed by the Author In this figure we can see the market access for companies according to their selected level of awareness. This figure shows 4 potential choices by companies, although the amount of choices that can be made by a company is infinite. Therefore if the company adopts a level of awareness then its potential market is described by the smallest circle in Figure 1. At stage 5 besides awareness, reputation would come in play, which is expressed in this model by the consumer beliefs about the quality of the good produced by the company.

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Therefore companies that have set their quality to 1 (high) will have higher payoffs than companies that have set their quality to 0 (low), which comes off as natural. This game is good for presenting the role of awareness in company price-setting policy as well as to illustrate its importance on competition and market access, since the web is an information driven market. REFERENCES: 1. David Ulph and Nir Vulkan 2001 – E-Commerce, Mass Customisation and Price Discrimination, April 2001 2. Michael R. Baye and John Morgan - Brand and Price Advertising in Online Markets, Management Science, Vol 55, July 2009, pp 1139-1151 3. Paolo Vanin – Competition and Reputation, February 2007

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AN APPLIED ANALYSIS ON THE USE OF SPECIFIC HUMAN CAPITAL OF HIGHER EDUCATION GRADUATES WITHIN THE FIELDS OF ECONOMICS AND ADMINISTRATIVE STUDIES

Ioana - Julieta Josan University of Bucharest Ph.D. Student at the National Institute of Economic Research”Costin C. Kiritescu”

ABSTRACT The aim of this paper is to underline the career path of the Faculty of Business and Administration graduates at the University of Bucharest in terms of efficient use of human capital accumulated in their studies. The investigation will analyze the use of human capital of highly qualified graduates, Bachelor of Economics and Administrative Sciences fields. Key words: human capital, skills, employment, efficiency, labor market 1. INTRODUCTION The use of human capital generates, on a large scale, competitive advantages. These advantages are won by those people, by those communities, organizations and nations which understand and act to preserve, protect and develop human capital stock. In Romania, the structure of employment has been affected in the past four years as per economic crisis and the deterioration of living standards, increased unemployment which led to significant departures such as migration process. Even on the European level the situation is not a positive one. European Union has registered a negative trend in implementing human capital plan. There was a decrease in the number of jobs by 3.5 million and the unemployment rate increased from 2007 to present. Capital owned at some point and unused for a long period of time will lead to the erosion, to its total or partial loss of skills and competencies that could be used. Most of the times, its erosion is based on economic and political changes (field restructuring, freezing jobs employment in public sector for a certain period) due to which human capital held no longer find use in the labor market, respectively could not produce income. These findings highlight the need for a comprehensive skills training through education, in this case, higher education, so that effective policies could be conceived and applied in increasing the low level of skills in the workforce. Also, Romania as a member state of the European Union must align human capital efficiency with the European concerns (especially to the 2020 Lisbon Strategy). Therefore, an analysis of the use of human capital is required to identify the causes of these destructive effects on human capital. The higher education graduates are a competitive advantage for nations in the race for developing, but also a vulnerability of investment if the institutional and socio-economic context isn’t adapted to the real needs of the labor market. The poverty can cause degradation of human capital stock, “thereby defending the need to develop educational capital as a way to prevent impoverishment, through efficient education systems and through investment in training individuals” (Voicu, 2004). A special interest for investing in human capital is reflected in the constant concern of the OECD to support the development of economic growth of programs of the educational capital. Investing in human 386

capital, respectively in education, training and health concerns on the one hand, the scientific training of human resources available and on the other hand, adapting human resources to structural changes of the economy imposed by technical and scientific progress, based on efficiency. The main objective of the research is the analysis of the current situation the above two fields’ graduates placement on the labor market in the current socio-economic context. The secondary objective is to identify the effective mechanisms for linking supply and demand of labor for higher education graduates and to improve future educational processes. The core trajectories for these graduates are the opportunities that they have on the labor market, the type of work that is carried out, the link between work and skills gained in the higher education, both in terms of required skill level and in the field of activity and bachelor degree. Another level of the analysis will try to underline the training after graduation and the pattern behaviors to search for a job. 2. METHODOLOGY The research will be constructed to answer the following questions: What is the situation of the Faculty of Business and Administration graduates after graduation? To which extent labor market purchases graduates? What is the time spent until the hiring? What is the level of satisfaction with academic preparation in terms of investment made? The result of the study is based on qualitative research by applying a questionnaire among all higher education graduates, specialized in economic and administrative sciences, graduated 2009 and 2011, about 800 alumni of the Faculty of Business and Administration, University of Bucharest. Choosing this economic and administrative specialization is the main argument that the University of Bucharest, after the evaluation and ranking of universities, conducted in 2011 by the European University Association and recognized by the national bodies, was ranked at the 1st place as an institution of advanced research and education, the economic studies program, Business and Administration area obtained the A grade and the Administrative studies obtained the B grade (in a scale of A - D). Also, the University of Bucharest has been recognized by the international academic community as a best educational institutions in the world, in 2010 is placed in the 500-550 category, advancing 50 positions from 2009, when he was in the category of 601 +, ranking conducted by Quacquarelli Symonds Limited. The questionnaire structure is based predominant on closed questions with numerical scales answers, verbal scales responses and less than one quarter questions with opened answers. The questionnaire will be applied during May-July 2013 and the results will be presented in a paper to be submitted at ICEA-FAA conference 2014. The complete research related to insertion of the Faculty of Business and Administration graduates on the labor market and the efficiency analysis of determinants for human capital will be the case study for the PhD thesis. REFERENCES 1. Kenneth Arrow, Higher education as a filter, in Journal of Public Economics no.2 (1973), 193-216 2. Gary Becker, Capitalul uman. O analiză teoretică și empirică cu referire special la educație (București: Editura All, 1997)

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3. Gary Becker, Comportamentul uman – o abordare economică (București: Editura ALL, 1994) 4. Brian Becker and Stephan Hills, The Long Run Effect of Job Changes and Unemployment among Male Teenagers, in Journal of Human Resources, vol. 18, nr. 2, printemps (1983), 197-212 5. Mark Blaug, The Economics of Education and the Education of Economist (New York: New York University Press, 1987) 6. Glen Cain, Challenge of Segmented Labor Market Theories, Ortodox Theory: a Survey, Jurnal of Economic Literature, vol. 14 (1976) 7. Bogdan Voicu, Capitalul uman: componente, niveluri, structuri. România în context European in Journal Calitatea vieţii, XV, nr. 1–2 (2004)

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IBM POWER SYSTEMS - ADVANCED SUPPORT FOR OPERATIONS CONSOLIDATION THROUGH VIRTUALIZATION AND CLOUD COMPUTING

Camelia Cojocaru University of Bucharest Silviu Cojocaru University of Bucharest

ABSTRACT Key words: IBM POWER SYSTEMS, Operational Excellence, consolidation, virtualization, cloud computing 1. INTRODUCTION Virtualization is a catalyst for organizations to create a dynamic infrastructure, enabling integrated management of IT resources, improved resiliency, superior flexibility and faster delivery of services. Many IT professionals think of virtualization in terms of servers. However, we should bring into attention a broad perspective in which virtualization is seen as a general approach to decouple the logical resources from physical elements so that those resources can be allocated faster, more efficient in terms of cost, more dynamic, real-time whenever you require business operations, ideally to meet the challenges posed by the strain or business requirements. This paper, based on a study of 11 organizations using IBM Power Systems servers, explains the benefits generated by virtualization and how the virtualization strategy can help midsize companies to reduce costs, improve services and simplify the management mechanism of IT resources. Based on interviews held with companies in various industries, we can say that virtualization offers an attractive option for organizations wishing to implement infrastructure able to respond to complex needs. Advanced virtualization and high availability servers provide long-term competitive advantages to organizations that choose to use such solutions. This is a short review of our research. The extended paper includes the research methodology and the description of the questions. Detailed statistics about the technical equipment tested, the energy savings and the personnel costs savings are also included in our extended research.

2. LITERATURE REVIEW According to a Center for CIO Leadership study (2007), the world is challenged with innovation and transformation. IT is positioned to lead this work, but practically it is difficult to understand how to begin, whom to involve and then how to measure success. In a competitive environment where IT infrastructure and process automation are leading the IT

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work, it is incumbent upon IT executives to have an impact on their organizations’ capacity to innovate and grow. The concept of virtualization is not new. The first were integrated virtualization solutions from IBM mainframe servers since the early '60s. First consistent implementation of this concept was completed in 1965 at IBM Watson Research Center. The implementation was carried out on an IBM 7044 and is available for testing multiple virtual machines at the center. Forty years ago, on August 2, 1972, commercial use of virtualization concept became a reality with the announcement that IBM made about the availability of Virtual Machine Facility (VM/370). Virtualization has transformed the way we think about basic technology by providing flexible processing resources available to be allocated dynamically in order to help businesses run faster and respond more effectively to their customers’ requests. Today, as then, success is based on agility. You need to adapt to changes in your company, to those your customers generates and those induced by the entire business environment. The suppliers offer a wide range of virtualization solutions designed to help organizations be more agile: • Server consolidation and storage consolidation solutions, including a range of virtualization technologies to improve efficiency and reduce operating costs. In a word, to do more with fewer resources; • Virtualization management solutions developed to ease the tasks that the IT staff has on supporting business priorities; • Solutions to automate data center management to reduce costs and contribute more consistently to key tasks; • Optimized application delivery solutions in the cloud, so they can respond quickly to business needs. In this respect, many organizations use benchmarking in order to improve their efficiency, in IT. According to Gohlke (1997), bbenchmarking requires organizations libraries to examine their work processes and measure their productivity against that of other organizations. In monitoring other organizations, they can enhance their own performance by adopting, or adapting, the competitor's best practices. It should be noted that all companies surveyed have used virtualization features available on IBM Power range and gained advantages in managing IT infrastructure."Virtualization features included in IBM servers were very important to us. We were able to significantly reduce the number of physical servers, resulting in a substantial reduction of IT infrastructure management costs," said one of IBM customers. 3. PAPER CONTENT 3.1. Achieving Operational Excellence as a competitive advantage Operational Excellenceis a competitive advantage: it translates to increased production flexibility, improved customer responsiveness, and cost minimization. In order to streamline the functions and optimize performance, every company should look at their business operations, putting in place comprehensive diagnostics, methodologies, and tools to improve the business processes and organizational capabilities. Operational Excellence provides a direct channel to improving shareholder value, perfectly positioned to deliver transformational results. Across all sectors of the economy, improving productivity and driving value through core business operations is a priority for

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senior executives and stakeholders. The organisations seeking to increase the efficiency of their operations need to streamline their core operational processes and eliminate waste. Fig.1. The most important factors driving Operational Excellence into organizations

Operational Excellenceleverages a combination of cost reduction and productivity improvement. We can think of Operational Excellence in a double way: a) First, there is the Operational Excellence of the company, helping the companies to increase production flexibility, improve the costs savings. In this regard, the information technology plays a tremendous role, driving the general performance of the company. Figure 2 shows how Operational Excellence could be achieved within an organization. b) Second, the IT side of the business strive for the Operational Excellence, too. IT Operational Excellence refers to the effective and efficient delivery of information technology services across the organization, adding measurable value to the business and supporting the organisation’s strategy and goals, with regard to: - Increase profits - Deliver theirs products/ services efficiently and effectively - Increase staff productivity. Fig.2. - Steps to Operational Excellence (Decker, 2005)

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IT systems could enable all the business processes. Operational Excellence in IT can be achieved by: ● Reducing complexity—through standardization and consolidation, leading to reduced operational costs ● Developing shared services capabilities—which can be leveraged throughout the organisation ● creating a dynamic and responsive IT environment—accelerating deployment of new capabilities while managing costs and reducing complexity ● increasing resource utilization—and improving application availability ● Automating manual processes—to reduce operational costs and minimize operating errors ● reducing downtime and improving audit reporting—to help reduce associated risk and mitigate disruption to business. According to S.E. Slack (2007), “What’s interesting about enterprise architecture is that, while it obviously must relate to the information systems in an organization, the emphasis is actually much more closely tied to business optimization techniques. The bottom line: an organization’s architecture must be designed to support an organization’s speciﬁc business strategies. So if a company’s business strategy is tied to improving the efficiency of customer service, its enterprise architecture should provide the foundation for an IT strategy that supports improving the efficiency of customer service. In short, it is important to understand exactly what a company are trying to achieve before begin to select automation technologies—since automation can make both good and bad things happen faster. 3.2. Virtualization for different types of organizations Virtualization is a technology that allows charging level management for applications in a manner independent of the hardware on which they are installed. Multiple applications can share a single physical server. Applications in use process can be moved from one host machine to another without interruptions. IT infrastructure can be managed as a pool of resources rather than a set of physical equipment, which gives a new dimension in addressing hardware. Virtualization is not intended only for large companies. It is a well-established technology whose goals are to reduce physical equipment requirements, to increase hardware resource utilization, to simplify management processes and to reduce energy consumption. Virtualization is a technique of abstraction of the physical resources of a workstation or server. With virtualization, a PC, server or other hardware device will be available as a set of logical resources for other operating systems or applications. A virtualization program is designed to mimic the operation of another computer or operating system, thus providing ability to run multiple simultaneous operating systems. Through virtualization, the IT infrastructure will be used more efficiently. According to research conducted by Gartner, in a large data center is used on average only 40% of its power from the server. Gartner survey figure is confirmed by the companies interviewed in this study. Thus, before virtualization companies surveyed used somewhere between 40-50% of processing power, the rest being used to cover load peaks. Through virtualization the organizations will be able to avoid more common situations in which there are servers used by only a few users or have a decent degree of loading of only a few tens of minutes per day. Virtualization and dedicated enterprise solutions enable a better use of natural resources available on the server and sharing them among all servers in the organization.

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Following discussions with IT representatives of 11 organizations have been highlighted many benefits that you can read them in this study. Companies surveyed are the following: 1. Company member of an international group, with operations in agriculture, livestock and meat industry and over 55,000 employees worldwide. 2. International network of discount stores, with over 130 shops and more than 150,000 customers daily. It has over 3,500 employees. 3. Pharmaceutical distribution company in Romania, a member of an international group, acting in Romania for more than 20 years. 4. Paint and varnish industry company, a regional leader in the field, with over 40 years of experience. 5. A research institute with tradition, both in terms of research and research infrastructure and of the staff and major projects involved in. With a variety of new generation facilities, is an important part of Romanian research infrastructure. 6. A major food manufacturer, part of an international group, a reference name in the global market, with over 300 employees in Romania. 7. A reputable university with a tradition of over 200 years of higher education, a dynamic university with real aspirations to modernity and internationalization. 8. A young university with a comprehensive curriculum, with more than 130 study programs at bachelor, master, doctoral and post-doctoral training level. 9. A renowned university, one of the most prestigious technical schools in Romania. 10. A flagship institution for converting financial instruments market in Romania's economy and creating of attractive investment opportunities in a dynamic and transparent environment. 11. A universal commercial bank that offers customers various and high level of quality products and services, aiming especially financing of SMEs. Based on POWER processor technology, IBM Power Systems servers offer new features in the processing area, beyond traditional systems and servers. In this new era of smarter computing for business and IT, when choosing a work platform for new applications forward-looking companies are considering more than performance servers, existing functions and ease of use. They assess how much the platform will help them to achieve three core business objectives: the rapid delivery of new products and services, better quality and their ability to respond in real time to the changes in the economic environment. POWER processors offer the possibility of developing optimized systems in combination with information software and expertise. To achieve maximum performance, POWER processor-based systems are equipped with technology to optimize the workflow. For example, dynamic management applications change the mode to achieve optimal performance for different tasks. TurboCore mode also facilitates the way to optimize the system for use according to the processing needs of servers, ensuring maximum performance for database and transaction loads. Active Memory Expansion mode helps reducing costs by validating physical memory expansion up to 100% for certain tasks, such as SAP. Given that organizations of all sizes seek costs more closely than ever; the first question that a decision-maker puts himself refers to the economic arguments offered by virtualization technologies. Initial hardware cost is not the most important part of the investment. Most expenses are generated by the cost of long-term of operation and the power supply for the hardware. In order to maximize virtualization performance, the servers must have features capable to satisfy three important requirements: • processing performance;

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• best bitrates; • sufficient memory. SMEs that have implemented virtualization strategy can achieve return on investment (ROI) in some cases even less than a year. IBM servers are designed to provide outstanding energy savings and efficient management systems, helping companies in their effort to save money and reduce administrative costs.Other additional benefits include an attractive warranty system, total cost of ownership much lower and equipment that takes up less space, use less power and make less noise. The new generation of IBM Power processors enables IBM servers to host and run a number of applications that only a few years ago would have required more expensive resources. The smart way to share information, processing and storage resources by various departments of an organization is the most effective way of enhancing the capacity and performance they can achieve multi-core processors. In a virtualized environment, the system resources are put together in a "pool" of virtualized resources that can be dynamically allocated, which allows servers and storage resources to be used in a more efficient way. In terms of IT component, the costs will decrease significantly. This occurs due to reduced infrastructure complexity, higher resource usage, reducing the space required to be used in data centers and improving energy efficiency. At the same time, the quality of services provided will mark a significant increase. Performance and scalability of existing services will be enhanced, and virtualized environment allows the development and implementation of a more accelerated pace of new services aimed to support the businesses. Also, risks will be mitigated because the uptime and availability of systems, applications and mission-critical services essential for successful business operations will be optimized through virtualization. In terms of business, virtualization can help create a solid foundation for growth. When market conditions change constantly requires new strategies, they can be more easily designed, tested and implemented through a virtualized infrastructure. Companies are constantly faced with the need to improve service, manage and reduce risk, and reduce costs of current activities. IBM POWER processor-based servers are a strong support for this category of companies. With their support organizations achieve an exceptional combination of value and performance. "By virtualizing of multiple older generation servers on IBM Power Systems solutions we obtained a power saving of up to 70% compared to the previous period we were not using virtual servers. Also space in the data center for these servers was reduced substantially," said an IT manager interviewed in the study. As a consequence of their server consolidation through virtualization process, organizations are able to reduce the number of people assigned to manage these servers. "The number of IT administrators who are responsible for managing servers halved. This is the consequence of reducing the number of physical servers, as well as of IBM advanced management tools for physical and virtual.” Among the important functions for managing virtual servers and physical infrastructure, IBM Power Systems customers listed Active Memory (sharing, expansion or mirroring), granular control of hardware resources and advanced support for logical partitions available on these platforms. "IBM Power Systems have given us substantial support for the development of IT infrastructure able to meet the requirements of mission critical applications. We initially tried to use servers with Intel or AMD processors, but they have not offered the performance needed for our application or the same features in the virtualization area like the IBM Power Systems did.”

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Another advantage is the development of an IT infrastructure based on the concept of cloud computing. "We managed to build a private cloud infrastructure that responds very well the requirements of our organization and we offer a high degree of flexibility to meet business requirements." Using IBM virtualization solutions, IT services can be implemented in a more efficient way. Maintenance operations do not affect the applications used, which can be relocated to another host. This means that there will be no downtime both in terms of employees and of the customers using those applications. In this way, unplanned downtime can be reduced or even eliminated. 4. CONCLUSIONS AND IMPLICATIONS Technology helps to build an IT infrastructure with similar capabilities to those of large companies and do this at a scale and with a ROI (Return on investment) that fits any type of business. The question if integrated expert systems are too complex to be adopted by small and medium-sized companies could be answers as follows. The complexity of such solution is lower than when implementing their solution, especially because there is a turnkey solution, more efficient compared with one built by their own. This way, such implementation could release important resources so they can focus on core activities. Another question concerned what common concerns small and medium businesses have when considering adoption of virtualization solutions. The answer includes items such as: the resource usage, reuse and sharing, predictability of demand and forecasting future hardware costs, avoiding dependence on a particular manufacturer, the tools and data formats adopted, avoiding confusion caused by platforms or tools that are part of the ecosystem. As a general conclusion about how can the virtualization contribute to the management of costs and complexity of IT infrastructure, the main advantage refers to improving the utilization of resources (much greater effect for the same amount spent), reducing time for entry into service – in the range of days or weeks, not several months, simplifying the management of daily operations and capacity planning, assuring an efficient and transparent management of system failures (recover the entire contents of virtual machines, switching to the backup network). What are the essential requirements to simplify data center of a small or medium business? We could mention here self-service and automation - the ability to mostly solve operational problems; flexibility and speed - agility to respond to business requirements; scalability - to expand storage capacity and processing and to meet unexpected demands; reliability and availability - to reduce or eliminate downtime. Virtualization is a key element of the IT strategy for businesses of all sizes with a variety of benefits for small and medium organizations.

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4. Gohlke, Annette. “Benchmark for strategic performance improvement”, Information Outlook, v1,n8, p22(3). August, 1997 5. Gupta, Dinesh K.; Jambhekar, Ashok. “Which way do you want to serve your customers?” Information Outlook , 6 , 7 , 26(6) July , 2002 6. Henczel, Sue. “To be truly accountable to your clients, identify their needs.” Information Outlook , 32(2) Feb , 2005 7. Hiller, Steve; Self, James. “From measurement to management: using data wisely for planning and decision-making,” Library Trends , 53 , 1 , 129(27) Summer , 2004. 8. IBM, Expanding the Innovation Horizon: The Global CEO Study, 2006 9. IBM, IBM Market Intelligence: CIO Challenges and Aspirations, 2007 10. Lawes, Ann. “The benefits of quality management to the library and information services profession”, Special Libraries, v84, n3, p142(5) Summer, 1993. 11. Oades, C. “Benchmarking workplace libraries”, Library and Information Research News ,v27,n87,p47(8), Winter, 2003. 12. Pursuing Operational Excellence in IT - How a service-oriented operating environment for IT can help accelerate business and IT alignment, (2008) http://www-935.ibm.com/services/us/cio/pdf/ciw03019usen.pdf 13. S.E. Slack, Enterprise architecture essentials, Part 1: Enterprise architecture viewpoints: What’s best for your organization? IBM.com. developer Works, July 2007

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