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2ND INTERNATIONAL M-SPHERE CONFERENCE FOR MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

Book of Proceedings Dubrovnik, Croatia 10th-12th October 2013


2ND INTERNATIONAL M-SPHERE CONFERENCE FOR MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

Book of Proceedings Dubrovnik, Croatia 10th-12th October 2013


2nd M-Sphere Conference, Book of Proceedings. Copyright 2014. All rights reserved. The author is responsible for all of the content that has been published. Printed in Croatia. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in crtitical articles or reviews. COMMITTEE MEMBERS (Alphabetical Order) SCIENTIFIC COMMITTEE MEMBERS FOR THE CONFERENCE: Professor Ivo Ban University of Dubrovnik, Croatia Professor Vesna Babić Hodović University of Sarajevo, Bosnia and Herzegovina Professor Antoni Serra Cantallops Universidad de les Illes Balears, Spain Professor Stjepan Dvorski University of Zagreb, Croatia Professor Felicite Fairer-Wessels University of Pretoria, South Africa Professor Leopoldo Gutiérrez Gutiérrez Universidad de Granada, Spain Professor Pablo Gutiérrez Rodríguez Universidad de León, Spain Professor Rainer Hasenauer Vienna University of Economics and Business, Austria Professor Božo Mihailović University of Montenegro, Montenegro Professor Žarko S. Pavić University Singidunum Belgrade, Serbia Professor Dušan Radonjič University of Maribor, Slovenia Professor Drago Ružić University of Osijek, Croatia Professor Ivona Vrdoljak Raguž University of Dubrovnik, Croatia Professor Vesna Vrtiprah University of Dubrovnik, Croatia ORGANIZING COMMITTEE MEMBERS FOR THE CONFERENCE: Boris Hudina, prof.pscyh. HDPRO, Croatia Miroslav Mandić, PhD University of Zagreb, Croatia Professor Ivana Pavlić University of Dubrovnik, Croatia Professor Doris Peručić University of Dubrovnik, Croatia Professor Diana Plantić Tadić VERN University of Applied Sciences, Croatia Professor Tihomir Vranešević University of Zagreb, Croatia CORRESPONDENCE: Professor Tihomir Vranešević

Organized by: M-Sphere (www.m-sphere.com.hr) Publisher: Accent For Publisher: Tihomir Vranešević Editors: Tihomir Vranešević Doris Peručić Miroslav Mandić Boris Hudina Diana Plantić Tadić Graphic design and layout: Deseto selo d.o.o.

ISBN 978-953-7930-03-5

info@m-sphere.com.hr


M-SPHERE ASSOCIATION FOR PROMOTION OF MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

MISSION

Promote multidisciplinary approach by encouraging and providing the circumstances to exchange of experiences and ideas from different disciplines, in order to further encourage scientific curiosity in research and practical work, with the aim of achieving positive change in all spheres of science and business – respecting multidisciplinarity.

OBJECTIVES

Acquiring of conditions for achieving a permanent mission of the organization of annual conferences, publishing journals and various forms of education.

VISION

Become a focal point of advocacy for multidisciplinary approach science and business.

GUIDING PRINCIPLE

IDEAS WORTH TO SPREAD – RESULTS WORTH TO DISSEMENATE


TABLE OF CONTENTS THE PRINCIPLES OF VALUATION OF BANKS, INSURANCE COMPANIES, PENSION FUNDS AND INVESTMENT FUNDS . . . 1 MILAN HRDÝ THE IMPORTANCE OF EASTERN EUROPEAN THIRD COUNTRIES FOR THE EUROPEAN UNION TRADE POLICY IN THE POST CRISIS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 KRISTÍNA DRIENIKOVÁ , ELENA KAŠŤÁKOVÁ CROSS-BORDER MOBILITY OF COMPANIES IN EUROPEAN UNION AS THE PRECONDITION FOR SUCCESS IN BUSINESS . . . . 13 JERNEJA PROSTOR MINIMUM WAGES AND YOUTH EMPLOYMENT IN THE EUROPEAN UNION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SUZANA LAPORŠEK NEW ECONOMY VERSUS OLD ONE, ALTERNATIVE INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 RADISLAV JOVOVIC, SANDA SENIĆ THE PROBABLE FUTURE OF EU’S FINANCIAL DEVIATIONS AND THE FINANCIAL POSITION OF TURKEY IN EU’S PROCESS . . 35 A. NIYAZI ÖZKER HOW TO TEACH OKUN’S LAW USING MATHEMATICAL METHODS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 PETRA MEDVEĎOVÁ, MARIANA POVAŽANOVÁ FORMATTING SYSTEMS OF EXCELLENCE TOWARDS THE AIM OF DEVELOPING THE QUALITY OF EDUCATION . . . . . . . 54 RENATA MARINKOVIĆ FORMING COMMUNITIES OF PRACTICE IN HIGHER EDUCATION: A COMPARATIVE ANALYSIS . . . . . . . . . . . . . . . . . . . . 62 SHERYL BUCKLEY, MARIA JAKOVLJEVIC, MELANIE BUSHNEY, GRZEGORZ MAJEWSKI PEDAGOGY OF E-LEARNING: CASE OF MARKETING MODULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SANDRA HORVAT, IRENA PANDŽA BAJS, DINO GOSPIĆ THE EFFECT OF MINDFULNESS TRAINING ON EMPLOYEES IN A DYNAMIC ORGANIZATIONAL SETTING . . . . . . . . . . . . 80 INGUNN MYRTVEIT, VEDRANA JEZ, VIGGO JOHANSEN PROGRESSIVE METHODS OF TEACHING AT THE FACULTY OF COMMERCE OF THE UNIVERSITY OF ECONOMICS IN BRATISLAVA . . . 88 PETER DRABIK , PAULINA KRNACOVA, ROBERT REHAK, MARIA VASILOVA UNIVERSITY LIBRARY AS A LIVING LAB: INNOVATING WITH STUDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 ANDREA ALESSANDRO GASPARINI, ALMA LEORA CULÉN MULTIDISCIPLINARY APPROACH BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY . . . . . . . . . . . 107 ŽARKO PAVIĆ, ZORAN KALINIĆ CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS . . 114 DEŠA RATHMAN, KATARINA VAREZ COMBINATION OF PROCESS MANAGEMENT AND SIX SIGMA METHODOLOGY IN THE ECONOMY OF VOJVODINA . . . 125 ZORAN CIRIC, IVANA CIRIC, JELENA BIROVLJEV QUALITY CONTROL IMPROVEMENT USING THE SIX SIGMA METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 ZORAN STANKO, ROBERT OBRAZ, MIRNA VARLANDY SUPEK RISK ATTITUDE ASSESSMENT STUDY: CROATIAN CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 JOSIP KERETA, KATARINA LUKETA, MIRNA VARLANDY SUPEK KNOWLEDGE MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 DAGMAR LESAKOVA SYSTEMS CONCEPT OF EXPERIENCE IN TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 ROMANA LEKIĆ, MARTINA MAJIĆ, NATAŠA MANCE GENDER AS A SIGNIFICANT BUT PROHIBITED RISK FACTOR IN LIFE INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 JANA ŠPIRKOVÁ, MÁRIA SPIŠIAKOVÁ ECONOMIC AND PSYCHOLOGICAL APPROACH TO THE STUDY OF HUMAN RATIONALITY . . . . . . . . . . . . . . . . . . . . . . . 174 ALEKSANDAR MOJAŠEVIĆ INTERGENERATIONAL CONNECTEDNESS AND SOLIDARITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 MAJA MEŠKO, ZLATKA MEŠKO ŠTOK


ESTIMATION OF UNPAID WORK VALUE IN THE SLOVAK HOUSEHOLDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 ALENA KAŠČÁKOVÁ, ĽUBA KUBIŠOVÁ, GABRIELA NEDELOVÁ THE EFFECT OF EXCHANGE RATE ON ECONOMIC GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 SUNA KORKMAZ TOURISTS’ PERCEPTION OF AUTHENTICITY IN WORLD HERITAGE HISTORIC CENTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 204 ODETE PAIVA, JOSÉ LUÍS ABRANTES, CLÁUDIA SEABRA, FERNANDA CRAVIDÃO TOURISM AND TERRORISM: STRANGE COMPANIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 CLÁUDIA SEABRA, MARIA JOSÉ NOGUEIRA, ODETE PAIVA, MARGARIDA VICENTE, JOSÉ LUÍS ABRANTES MOTIVATION AND INVOLVEMENT IN INTERNATIONAL TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 CLÁUDIA SEABRA, MARGARIDA VICENTE, CARLA SILVA, JOSÉ LUÍS ABRANTES SUSTAINABLE TOURISM FOR BETTER LIFE: REVITALIZATION OF ABANDONED VILLAGES IN CROATIAN ISLANDS . . . . 231 SANJA ROCCO, NIKO BARBIĆ RUNNING FOR LIFE: EXPLORING DISTANCE RUNNERS’ MOTIVATIONS AT SPORT TOURISM EVENTS . . . . . . . . . . . . . . 241 FELICITE A FAIRER-WESSELS CATEGORY MANAGEMENT PLANNING: DEFINITION OF TACTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 MILAN GASOVIC, DARKO VASELIC CROATIAN T&C INDUSTRY AND STUDENTS CUSTOMER SATISFACTION WITH CLOTHING PRODUCTS PRODUCED IN DOMESTIC COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 RUŽICA BREČIĆ, MAJA STRACENSKI KALAUZ, ALICA GRILEC KAURIĆ CHARACTERISTICS OF BENEFICIARIES SERVED BY NONPROFIT ORGANIZATIONS IN ALBANIA . . . . . . . . . . . . . . . . . . . 271 XHILIOLA AGARAJ (SHEHU) DRIVER QUALIFICATION IN THE TRANSPORT INDUSTRY – EMPIRICAL STUDY IN AUSTRIA . . . . . . . . . . . . . . . . . . . . . . 276 MARIA DIEPLINGER, SEBASTIAN KUMMER, KATHRIN LENZ DEVELOPMENT OF A HEURISTIC RATING MODEL FOR THE CLASSIFICATION OF KNOW-HOW-INTENSIVE AND TECHNOLOGY-ORIENTED START-UPS (KITSS) IN AUSTRIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 SABINE JUNG USABILITY AND FUNCTIONALITY EVALUATION OF THE MOST PROFITABLE CROATIAN COMPANIES’ WEB SITES . . . . 290 ANTUN BILOŠ, IVAN RUŽIĆ, IVAN KELIĆ IT-FACILITATED INDUSTRIES AND COMPETITIVE SPACES: THE DANCE OF THE ELEPHANTS . . . . . . . . . . . . . . . . . . . . . . 302 MARK KRIGER, ALMA LEORA CULÉN A MULTIPLE-FARE MULTI-PERIOD AIRLINE REVENUE MANAGEMENT MODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 SANG-WON KIM QUALITY COST MANAGEMENT SYSTEM AT CROATIAN AIRPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 GABRIJELA ŠPOLJAR, MIROSLAV DRLJAČA, DIANA PLANTIĆ TADIĆ MARKETING DECISION MAKING UNDER CONDITIONS OF UNCERTAINTY AND RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 OTILIJA SEDLAK, MARIJA CILEG, TIBOR KIS, IVANA CIRIC MARKETING OF ECOLOGICAL PRODUCTS IN OSIJEK-BARANJA COUNTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 MARIJA TOLUŠIĆ, ZRINKA TOLUŠIĆ, ZDRAVKO TOLUŠIĆ MAKING AND CONSUMING CHARACTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 MASAE KANAI, YORITOSHI HARA, HAJIME KOBAYASHI, MASAAKI TAKEMURA EATING HABITS OF YOUNG PEOPLE AS THE BASIS FOR NEW PRODUCT DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . 353 JADRANKA IVANKOVIĆ, MAJA DAWIDOWSKY MAMIĆ, MARTINA MAJIĆ PREFERENCE-BASED FUNCTIONAL FOOD MARKET SEGMENTATION USING CONJOINT AND CLUSTER ANALYSIS . . . . 358 NENAD DJOKIC, INES MESAROS, SUZANA SALAI IMPULSIVE CONSUMER BEHAVIOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 RUŽICA KOVAČ ŽNIDERŠIĆ, DRAŽEN MARIĆ, ALEKSANDAR GRUBOR ANALYSIS OF SPORTS CLUBS’ MARKETING STRATEGIES WITH SPECIAL REFERENCE TO ONLINE MARKETING . . . . . . . 375 RINO MEDIĆ, MARIJO STRAHONJA, BRANKA ŠUPUT ANALYSIS OF MARKETING COMMUNICATIONS ON CROATIAN MARKET OF CARD BUSINESS . . . . . . . . . . . . . . . . . . . . 380 MATEJA ČOP, BORIS JURIČ, KARMEN PRELEC


ANALYSIS OF CONSUMERS' ATTITUDES TOWARDS HOMEMADE AND INDUSTRIAL BRANDS: CASE OF OLIVE OILS ON CROATIAN MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 IVANA STANEKOVIĆ, DAVORIN ŠIMUNIĆ, KATARINA LUKETA MODERN TRENDS OF MARKETING DEVELOPMENT IN BANKING INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 RATIMIR JOVICEVIC ANALYSIS OF IMAGE RESEARCH IN CROATIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 MAJA DAWIDOWSKY MAMIĆ, DIANA PLANTIĆ TADIĆ, MIRJANA BAUTOVIĆ KEY FACTORS, BENEFITS AND LIMITATIONS OF APPLYING SUSTAINABILITY MARKETING . . . . . . . . . . . . . . . . . . . . . . . 408 SILVIJE JERČINOVIĆ, AUGUST SLIVAR, VALENTINA PAPIĆ BOGADI PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . 420 MERICA PLETIKOSIĆ WORKSPACE AND ERGONOMICS OF A SECONDARY TECHNICAL SCHOOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 DAVOR ŽILIĆ, OLIVER HIP, ROBERT IDLBEK NEW CONCEPTS OF BRAND MANAGEMENT – PRIVATE LABELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 STJEPAN DVORSKI, DOMAGOJ KOPREK BRANDS AND BRAND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 PAVAO VRANEŠEVIĆ LOCAL AND REGIONAL GOVERNMENT IN PROCESS OF THE REFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 ZVONKO NOVOSEL – DOLNJAK

ABSTRACTS OF PRESENTED WORK WITHOUT FULL PAPERS ECONOMIC GROWTH PATHS IN EUROPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 JANOS RECHNITZER, TAMAS TOTH HOW DID THE BULGARIAN BANKING SYSTEM COPE WITH THE GLOBAL FINANCIAL CRISIS DURING 2008-2012? A PANEL STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 DIDAR ERDINÇ DIFFUSION OF INNOVATION: ADOPTION OF INNOVATIVE TOOLS FOR COMMUNICATING AND PRESENTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 DINKO SVETIĆ, ALEN DELIĆ, IVA GREGUREC VALUES ORIENTATION IN LOGISTICS MANAGEMENT IN RUSSIA AND THE UKRAINE AND ITS IMPACT ON CORPORATE PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 SAMO O. KOTNIK, ELMAR WILHELM M. FÜRST PRIVACY ISSUES OF SOCIAL MEDIA: A MARKETING PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 CĂLIN VEGHEȘ, MIHAI ORZAN, CARMEN ACATRINEI, DIANA DUGULAN HUMAN CAPITAL AND LABOUR MARKET: THE CASE OF THE VISEGRAD GROUP COUNTRIES . . . . . . . . . . . . . . . . . . . . 465 SILVIE CHUDÁRKOVÁ “EASY-TO-READ” INFORMATION IN PUBLIC TRANSPORT - ITS PERCEPTION, IMPACT AND APPLICATION . . . . . . . . . . 466 CHRISTIAN VOGELAUER, ELMAR W.M. FÜRST MOBILITY BARRIERS AND SOLUTIONS IN PUBLIC TRANSPORT FOR SIGHT IMPAIRED IN RURAL AREAS IMPACT AND APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 CHRISTIAN VOGELAUER, ELMAR W.M. FÜRST REDEFINING STOCK OPTIONS − TOWARDS BETTER SUSTAINABILITY FOR COMPANIES AND THE SOCIETY . . . . . . . . . 468 NATAŠA SAMEC SATISFACTION WITH CRM IMPLEMENTATION IN CROATIAN COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 MIROSLAV MANDIĆ THE IMPORTANCE OF MUSIC FESTIVALS FOR DEVELOPING YOUTH TOURISM, THE CASE OF CROATIA . . . . . . . . . . . . 470 DORIS PERUČIĆ, BLANKA BRADVICA QUALITATIVE RESEARCH DESIGN IN BUSSINES MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 TIHOMIR VRANEŠEVIĆ AUTHORS INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472


I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

2013 M-SPHERE

THE PRINCIPLES OF VALUATION OF BANKS, INSURANCE COMPANIES, PENSION FUNDS AND INVESTMENT FUNDS MILAN HRDÝ

ABSTRACT

The aim of this article is to analyze the methodology of the valuation of banks, insurance companies, pension funds and investment funds. This methodology is prepared by respecting the basic principles of the valuation of enterprises with the projection of the specifics of single financial institutions. The result is then presented as the recommended procedure of valuation of appropriate financial institution. In case of commercial banks the income approach based on dividend potential and obligation prices model are the most suitable approaches. The income approach is based on two phase method supposing the ability to identify the future plan of single income activities and the ability to manage the risk management of banks. The discount rate is derived from the CAPM model. The similar public company method or recent acquisition method is used in practice in case of the existence of the comparable bank or comparable transaction. Also in case of pension funds and investment societies the income approach based on dividend potential is used whereas in case of investments funds the asset-based approach is the best. The methodology of valuation of insurance companies is composed of the income valuation, the market comparison method, and the obligation pricing model. Each of these fundamental procedures will be used to the same degree. Income valuation will be based upon removable net income and the dividend-paying potential principle, which will based on the insurance company’s income with technical reserves being one of the key items planned. Also important will be the determining of the discounted interest rate for the discounting of the future removable net income and with the β coefficient based on statistics data from the past pertaining to this value in the field of life and non-life insurance. As for the market comparison method, finding a comparable insurance company by using the ratio of market value and the book value as a multiplier will be of key importance. KEYWORDS: Valuation, Methods, Analysis, Financial Institutions Note: This paper was prepared with the help of the institutional support of the Faculty of Finance and Accounting, University of Economics Prague IP 100040

1. INTRODUCTION The aim of this article is to analyze the methodology of valuation of banks, insurance companies, pension funds and investment funds. This methodology is not unified and the process of the valuation is realized ad hoc according to the concrete approaches of the single valuation institutions. The preparation of some valuation standards must be realized by projecting some specifics of the concrete financial institutions into the valuation approaches known for the purpose of the traditional enterprises. The specifics of the financial institutions are representing mainly by the management of finance concerning the process of obtaining money from the savers and of providing loans to the debtors. The most important role plays also the investment activity where the financial institutions usually not only increase the value of their own money invested, but also money of their clients. The great difference lies also in the capital structure of this financial institutions where for example in case of the commercial banks the indebtedness in on the level more than 90 %. For that reason it is not possible for the purpose of the identification of the discount rate of the financial institutions to use the method of the average cost of capital and only the cost of equity is necessary to use. Three most important approaches are known for the purpose of the valuation of the enterprises, the income valuation, the market comparison valuation and the property valuation. Are these methods suitable also for the financial institutions? The property valuation is only the subsidiary method of valuation, but it could be easier than in case of the traditional enterprises because most items of the property of the financial institutions are valued in real (fair) values and it is not necessary to adjust their values for their real equivalent. But this method is suitable only for the purpose of the valuation for accounting and tax purposes and not for the valuation of the financial institutions as whole companies. But the value of the financial institution´s assets could be useful also for the methods of so called obligation pricing model which will be analyzed later. The market comparison method can be use in a similar way as in case of the traditional enterprises if it is found some comparable financial institution or some comparable transaction. Also it is necessary to find some suitable so called multipliers as for example P/E ratio or M/B (Market/Book Value) or their combination. If there is real possibility to find above mentioned comparable institutions this method could more precise and easier as for example the income valuation. The income approach is the most important approach to the valuation of the enterprises and in case of the financial institutions the situation is the same. The income valuation in fact is the only valuation which takes into account the future potential of the institution being valued. But the great difference in valuation of the financial

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BOOK OF PROCEEDINGS

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2013 M-SPHERE

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

institution and the traditional enterprise lies in the chosen method. The traditional enterprises are usually valued by the free cash flow method which is not suitable for the financial institutions which administer also money of their clients and have above mentioned great indebtedness. The value of the equity is only necessary to identify and for that reason it is useful to use the income valuation based on the removable net income or the dividend potential which is represented by the amount of the capital that could be obtained from the financial institution by their shareholders or owners. Besides the three basic methods, the income method, the market comparison method and the property method, there is also the method called the obligation pricing model which is represented by the combination of the income and property method. It is based on the following equation1:

H= R x U C Where

H R C U

– – – –

market value of the financial institution (bank) , return on equity, cost of equity, adjusted net value of assets (market value of assets – liabilities)

This model is mainly suitable for the commercial banks valuation. The advantage of this method lies in a relatively easy way to identify the entry data, but this method in comparison with the traditional income approach does not take into account the future potential of the commercial bank being valued and so the results by using of this methods are lesser than in case of using the income method. If there some common information concerning the valuation principles of the financial institutions, it is possible to identify some concrete approaches to the valuation of concrete financial institutions.

2. VALUATION OF THE CONCRETE FINANCIAL INSTITUTIONS In the following text the basic approaches to the valuation of the commercial banks, insurance companies, pension funds and investment funds will be analyzed.

2.1. Valuation of Commercial banks Only common and basic information are stated in the professional literature2 and for that reason it is necessary to prepare some basic approach how to cope with the problem of the valuation of the commercial banks. If there is the comparable commercial bank or the known comparable transaction, the market comparison method could be used with the multiplier on the basis of the P/E ratio or M/B ratio or the share of incomes of the commercial bank being valued and the comparable commercial bank. In other cases the combination of the income method and the obligation pricing model must be used. The income method is based on so called two phase method based on the removable net profit or the dividend potential. The final valuation is derived from the following equation3:

where H – market value of the commercial bank, Dn – dividend potential in nth year, N – number of years of the financial plan, n – single years of the financial plan, i – discounted interest rate, g – requested increase in dividend payments. The dividend potential = net removable income is derived from the following equation4:

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 Miller, W.D. (1995.) Commercial Banks Valuation. John and Sons, Inc., USA, 263 p. and Rezaee, Z., (2001.). Financial Institutions, Valuations, Mergers and Acquisition. Wiley John and Sons, USA, 2001, 434 p. 3 Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 1 2

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where Dp – dividend potential = removable net income, ČP – net income = adjusted profit for the valuation purpose, Kp – capital requirements on the basis of the indicator of the capital adequacy, In – the necessary investments for the purpose of the requested growth, Pf – the law and statutory profit funds , Op – limited conditions for dividend payments according to the Commercial Code Besides the two phase income methods also the above mentioned obligation pricing model could be used and then the final valuation could be the average of both values or the appraisal could choose the higher or lesser value according to the results of the strategic and financial analysis which are used also in case of the valuation of the enterprises.

2.2. Valuation of Insurance Companies The valuation of the insurance companies will be realized on the same basis as the valuation of the commercial banks, but there are some differences. The methodology of the valuation of insurance companies is composed of the income valuation, the market comparison method, and the obligation pricing model. Also the plan of so called technical reserves is the most important part of the financial plan of the insurance company because these items are important for the future liabilities of the insurance company for its persons insured. The equation for the two phase method will be the same as it is case of the commercial banks, but the derivation of the dividend potential or the removable net income would be a bit different. It could be derived from the following equation5:

DPP = VTN + VTŽ + VFI - NFI +(-) PÚ + OV – ON – DP – PZ - OFP Where

DPP – dividend potential = removable net income, VTN – the result of the technical account for the non life insurance, VTŽ – the result of the technical account for the life insurance, VFI – the incomes from the financial investments, NFI – the costs of the financial investments, PÚ – transfer accounts from the financial investments at the life and non life non life insurance, OV – the other incomes, ON – the other costs, DP – tax of incomes, PZ the law and statutory profit funds, OFP - limited conditions for dividend payments according to the Commercial Code

The obligation pricing model is used in the same way as it is used in case of the valuation of the commercial banks. The advantage for the market comparable method is a relatively developed market of insurance companies in Europe and so the comparable insurance company or the comparable transaction to find is relatively easier than in case of the commercial banks. If the three values, from income approach, from the market comparable method and from obligation pricing model are known, the final result will be the average of these three values.

2.3. Valuation of the Pension Funds The valuation of the pension funds would be derived from the income approach based on the dividend potential or removable net income. The final value is composed of the two parts. The first part is represented by the value identified from the voluntary pension insurance and the second part then from the second pillar of the pension system based on an obligatory pension insurance. The value from the voluntary pension insurance could be derived from the following equation6:

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 Hrdý, M., Ducháčková, E. (2011.) The Introduction into Valuation Standards of Insurance Companies. Valuation 4 (4), pp. 3-18. 6 Hrdý, M. (2013.). The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp. 4 5

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where THDPS – the value of the pension fund from the voluntary pension insurance, OCVDPS – removable net income in nth year from the voluntary pension insurance, N – the number of the years of the financial plan, n – the single years of the financial plan, i – discount interest rate, g – expected annual growth of dividend. The value from the obligatory pension insurance is derived from the following equation7:

where THDS – the value of the pension fund from the voluntary pension insurance, OCVDS – removable net income in nth year from the obligatory pension insurance , N – the number of the years of the financial plan, n – the single years of the financial plan, i – discount interest rate, g – expected annual growth of dividend. The final value (FV) of the pension fund will be then: FV = THDPS + THDS The most important item in the previous equations is represented by the removable net income in nth year from the obligatory pension insurance or from the voluntary pension insurance. These data would be mainly derived from the different types of charges for the administration of the savings of the participants of the pension insurance.

2.4. Valuation of the Investment Funds The valuation of the investment funds would not be very easy thing because the planning of the investment activity is very complicated. Unlike the previous types of financial institutions, the property valuation would play an important role. The increase of the property value leads to the increase of the value of the investment fund. So the value of the property and also the incomes from this property would make up the value for the shareholders or the owners. So the final value of the investment fund would be the combination of the property value and the income value. The final value could be derived from the following equation8:

Where THIF – market value of the investment fund, THMIF – market value of the investment fund on the date of the valuation, Dn – dividend potential or removable net income for the owners, n – the single years of the financial plan, i – the discounted interest rate, g – expected dividend growth.

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2.5. The Discount Interest Rate in Case of the Income Valuation of the Financial Institutions. The discount interest rate (IR) for the purpose of the valuation of the financial institutions could be derived from the cost of equity as it was mentioned already in previous text. The cost of equity could be calculated in three ways. The first way is based on so called dividend growth model which suppose the estimation of the future dividend. The final sample is the following: (Dividends×100) IR= + Expected rate of growth (Market Value of Shares-Issuing Costs) The second possibility is to derive the cost of equity from Capital Assets Pricing Model (CAPM) or so called Security Market Line (SML). SML works with the cost of equity on the basis of the requested return in dependency on the risk of the individual share in comparison to the market portfolio. The interest rate is than derived from the following equation: IR=Cost of Equity=Risk Free Rate+β×Market Risk Premium The key problem in this case should be the identification of the coefficient β which express the sensitivity of the change of the return of the concrete share in dependency of the change of the return of the market portfolio. In β=1 this change is the same and for that reason the risk is the same as it is on the market portfolio and so the cost of equity and the required return could be the same as the return of the market portfolio. In case of the valuation of the commercial banks the reality was identified that in case of the relatively stabilized banks coefficient β oscillate according to the value equalled 1. So the process of the identification of the coefficient β comes out from the value of 1 and is then adjusted according to the area where the bank is situated and according to the share of the investment and non investment activities because the investment activities are more risky. The final equation is the following9: where β = final coefficient beta, βI = the basic coefficient beta for the investment activity , βK = the basic coefficient beta for the commercial activity, RR = the risk surcharge concerning the expected growth of the bank, RO = the risk surcharge concerning the area, P = the share of commercial activities on the whole incomes of the bank. In case of the valuation of the insurance companies must be identified individually the share of the life insurance and the share of non life insurance (P) if the insurance company offers both types of insurances and also the risk of the area must be take into consideration. The final equation would be the following10:

The values 0,9 and 1,1 are derived from the following table: Table 1. Coefficients beta of the chosen types of financial institutions Type of Financial Institution

USA

Evropa

Developing Markets

Great Banks

0,71

0,90

0,9

Small Regional Banks

0,91

0,88

1,05

Investment Banks

1,50

1,55

1,9

Brokerage Investment Firms

0,66

0,75

0,85

Non Life Insurance Companies

1,37

1,25

1,5

Assessment the level of usage of sales promotion

1,17

1,20

1,1

Non Life Insurance Companies

0,91

0,95

0,9

Source: Damodaran, A. (2009.). Valuing Financial Service Firms. New York, Damodaran, c 2009, WWW dostupné z <http://pages.stern.nyu.edu/~adamodar/>.

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Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5(3), pp.14-26. Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5(3), pp. 14-26

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The last possibility how to cope with the problem of the identification of the discount interest rate for the purpose of the valuation of the financial institutional is to use so called building-up method. This method is based on the basic risk free rate which is step by step increased by the risk surcharges form the different types of risks. In case of the commercial banks there are for example the risk surcharges for the credit risk, interest risk, liquidity risk, exchange rate risk, share risk and operational risk.

CONCLUSIONS The aim of this article is to analyze the methodology of valuation of banks, insurance companies, pension funds and investment funds. The preparation of some valuation standards was realized by projecting some specifics of the concrete financial institutions into the valuation approaches known for the purpose of the traditional enterprises. The information obtained from the analysis was final synthesised into the recommendations how to act in case of the process of the valuation of the concrete financial institutions. The valuation of the commercial bank could be realized by the method of the market comparison if the value of the comparable commercial bank is known. Otherwise the income method based on the dividend potential and the obligation pricing model is used. The final valuation is then the average of both values or the appraisal could choose the higher or lesser value according to the results of the strategic or financial analysis. In case of the valuation of insurance companies the three methods, the market comparison, the income valuation and obligation pricing model, are used and then the final valuation equals the average of these three methods results. The valuation of the pension fund is realized by using the two phase income method based on the removable net income or dividend potential where the net incomes in single years are calculated from the fees paid by the participants in the system of the pension savings on a voluntary or on an obligatory basis. The results of the valuation of the investment funds would be the combination of the valuation of the fund´s property and the income valuation of the expected incomes from this property. The most important part in the process of the income valuation of all financial institutions plays the identification of the discount interest rates. This rate must be derived from the cost of equity and there are three possibilities how to do it. The first is based on the dividend growth model, the second on the building-up method and the third on the market security line. In the third case the process of the identification of the coefficient beta plays a very important role.

LITERATURE 1.

Damodaran, A. (2009.) Valuing Financial Service Firms. New York, Damodaran, c 2009, www. pages, accessible from <http://pages.stern.nyu. edu/~adamodar/>.

2.

Hrdý, M. (2013.) The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp.

3.

Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5( ), pp. 14-26

4.

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36

5.

Hrdý, M., Ducháčková, E. (2011.) The Introduction into Valuation Standards of Insurance Companies. Valuation 4 (4), pp. 3-18.

6.

Miller, W.D. (1995.) Commercial Banks Valuation. John and Sons, Inc., USA, 263 p.

7.

Rezaee, Z., (2001.) Financial Institutions, Valuations, Mergers and Acquisition. Wiley John and Sons, USA, 2001, 434 p.

DETAILS ABOUT AUTHOR: MILAN HRDÝ ASSISTENT PROFESSOR FACULTY OF FINANCE AND ACCOUNTING, UNIVERSITY OF ECONOMICS IN PRAGUE PRAGUE, CZECH REPUBLIC hrdy@svse.cz

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THE IMPORTANCE OF EASTERN EUROPEAN THIRD COUNTRIES FOR THE EUROPEAN UNION TRADE POLICY IN THE POST CRISIS PERIOD KRISTÍNA DRIENIKOVÁ ELENA KAŠŤÁKOVÁ

ABSTRACT

The development of the world economy under long-term globalization pressures and mainly during the economic crisis gets to a bad situation reflected in the national economies´ economic performance decline. The EU can respond by deepening its own efficiency and better internal reserves exploitation. In the sphere of external relations the EU needs to increase its competitiveness mainly through mutual relations towards a group of so called third countries. The authors see relatively a space in the creation of partnerships especially with a group of countries with which the EU has strong complementary links. The growing dependence on imports of all energy inputs predestines to this position especially Russia or other CIS countries. By deepening mutual economic and trade ties with these countries the EU can pursue its trade policy objectives within the framework of trade liberalization through the conclusion of deeper and more comprehensive free trade agreements. The strategic partnership with Russia is expected to be further developed and deepened followed by the latest initiative through the Partnership for modernization. Efforts to modernizing the Russian economy promise new opportunities for EU businesses. Russia’s accession to WTO will affect the negotiations on a new partnership agreement. The EU seeks to strengthen its economic relations with other promising CIS countries, for example by offering the possibility of concluding free trade agreements in exchange for political and economic reforms. KEYWORDS: European Union, Trade Policy, Russia, CIS countries Note: The paper is a part of scientific project VEGA No. 1/0391/13 The importance of third countries for the strategic development objectives of the EU in the post-crisis period (with implications for the Slovak economy).

1. INTRODUCTION The development of the world economy under long-term globalization pressures and particularly during the economic crisis gets to a bad situation reflected in the national economies´ economic performance decline. One of the ways how to counteract these facts is deeper international trade involvement of national economies, increase of their openness to international trade and strengthening efforts to develop mutual cooperation and liberalized access to new markets. The European Union can respond by deepening its own efficiency by better exploitation of its internal reserves. In the external relations sphere the EU needs to increase its competitiveness predominantly through mutual relations towards a group of so called third countries. The trade policy of the EU is based on the EU common commercial policy, through which the European Commission adopts trade strategies with the common denominator of deepening relations with third countries efforts, develops broader options for mutual cooperation or deeper economic integrations development. A relatively large space for deepening or creating partnership for the EU is embodied in the Eastern European region, a group of the countries with which the EU has strong complementary links. The growing dependence on imports of all energy inputs predestines to this position especially Russia or other Commonwealth of Independence (CIS) countries. The aim of the paper is to demonstrate the foreign trade links between the EU and the Eastern European third countries and to emphasize the strategic potential for mutual trade cooperation and possible deepening of economic integration. The development in the CIS in the last decade shows stagnation as for deepening of mutual economic integration of the Commonwealth member countries, which in many cases is based on lack of interest of individual countries politicians and different ideas of national governments. Several proposals on deepening the integration of the CIS countries in former times stayed abreast of declarations. As a positive step in the integration process’s deepening can be considered the creation of a Customs Union between Russia, Belarus and Kazakhstan in 2010 and efforts to further deepen the integration within the Eurasian Economic Community (EurAsEC), perhaps the most advanced integration association within the CIS. Formation of the Customs Union and the Common Economic Space within the EurAsEC (which formally came into force on 1st January 2012) between these countries represents sufficiently dynamic process that takes into account the experience of the EU and other regional groupings. The knowledge of their strengths and weaknesses creates a significant advantage, which helps to avoid mistakes, to prevent repeating of various bureaucratic shortcomings. At the same time Russia is the main supporter of the so-called Eurasian Economic Union, which aims to create a single economic, political, customs, military and cultural space. The finalization of this process and conclusion of the treaty are

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foreseen for 2015. However, some of the Eastern European countries see their future in closer engagement (economic integration) with the EU, rather than with Russia. It is in the EU´s interest as well.

2. THE TRADE RELATIONS BETWEEN THE EU AND CIS The relations between the EU and individual CIS countries (besides Belarus) are conducted through the Partnership and cooperation agreements (PCAs) concluded during the nineties of 20th century. The aim of the agreements is the consolidation of democracy and economic development; PCAs provide political dialogue, cooperation in the legislative, economic, social, financial, scientific, technological and cultural fields. PCAs are primarily concerned with promoting trade, investment and harmonious economic relations. The CIS countries have become a significant trading partner for the European Union in recent years with growing trade turnover which rose from 172,2 billion euro in 2004 to 380,4 billion in 2008 up to 446,1 billions of euro in 2012.1 Almost three quarters of imports from the CIS consist of energy resources, mineral fuels, whereas EU exports to the CIS territory are more diversified, even though from almost a half consist of machinery and transport equipment. However, CIS countries can be divided into two groups: the exporters of mineral fuels and countries dependent on their imports (Armenia, Kyrgyzstan,2Tajikistan and Moldova). During the global economic crisis the foreign trades of individual CIS countries were focused more on foreign markets in comparison to the intra-Community (CIS) trade, with the exception of Belarus an Kyrgyzstan whose share of exports to the CIS markets in 2012 were high (48% in the case of Belarus and 46% in the case of Kyrgyzstan). The European Union was the most significant market for the CIS countries foreign trade, in 2011 accounting for 45% of total exports and 35% of total imports of the CIS.3 Bilateral trade development in goods between the EU and CIS countries was very dynamic in recent years, as it is detailed in Table 1. Table 1 EU´s trade development with the CIS for the years 2008 – 2012

(millions of euro)

2008

2009

2010

2011

2012

Import

230 456

148 575

202 152

257 570

273 696

Export

149 394

96 115

123 235

152 602

172 430

Trade turnover

379 853

244 690

325 387

410 172

446 127

Balance

-81 066

-52 460

-78 917

-104 968

-101 266

Source: own elaboration according to EUROSTAT data available at: http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/ database (accessed 20.06.2013)

EU’s imports from the CIS countries have risen more rapidly (8.9% on average) than the EU’s exports to that territory (4.3%). Mineral fuels (mainly oil and natural gas) were the most important import commodity with its share 76.3% of total EU imports from the CIS countries in 2011. As for the structure of EU exports to CIS countries, the most significant export items in 2011 were machinery and transport vehicles with their 46.5 % share and chemicals (16.5%). The EU’s trade deficit with the CIS arises mainly from mineral fuels imports, predominantly with Russia, Kazakhstan and Azerbaijan (although it is compensated to some degree by trade surpluses with the other CIS counties). The EU main trades in goods partners from the CIS territory are Russia accounting for 72% of EU exports to the CIS and 77% of EU imports from the CIS, Ukraine, Kazakhstan and Azerbaijan. As far as foreign direct investments, the investment relations between the EU and CIS countries show substantial unbalances in favour of the EU. In the investment structure prevails the inflow of the EU investment to the CIS territory. The largest share of the European foreign direct investment is located in Russia, especially in the energy sector (oil and gas). The EU accounts for about 70% of all foreign investments into the Russian economy. Russia is an interesting partner in terms of market size and capital absorption.

Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/database>. Cisstat, (2013). Share of the CIS and other countries of the world in total imports of individual countries of the Commonwealth [online]. (accessed 20.07.2013). Available at: <http://www.cisstat.com/eng/> 3 Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/database>. 1 2

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3. STRATEGIC PARTNERSHIPS WITH RUSSIA Through its decisions Russia significantly affects not only international political scene, but the world economy and international economic relations as well. The position of the country in the world economy is based on abundant reserves of energy resources; hereby Russia is a major player in world markets. With its geographical location, overall importance in terms of energy resources´ supply, the size and potential of consumer market it represents one of the most important partners of the European Union. The EU trade policy towards Russia is based on the main premise that the EU and Russia are strategic partners depending on each other in wide range of fields (especially economy, trade, energy, security). In spite of their different views of foreign policy, or the form of cooperation, joint interest of both partners lies in deeper mutual cooperation and economic integration. Foreign trade links between the EU and Russia are a key element in their economic and political relations´ development. Long-term relations stretching back to the Soviet Union and European Communities´ era turned into a strategic partnership in the 21st century and have become an indicator of both national economies´ developments, of deepening their interdependence, therefore directly encourage the development of strategic partnership. Russia is the most important single supplier of energy products to the EU, accounts for nearly one third of oil and gas consumption of the EU countries, while the EU is the most important destination for the Russian energy products and the Russian economy still remains highly dependent on oil and gas exports). For the EU Russia is the third most important trade partner after the USA and China. It accounts for 7% of EU exports and 12% of imports to the EU countries.) Exports to Russia have risen continuously following a fall in crisis period of 2009 – from 66 billion euro to a record level of 123 billion euro in 2012. And imports from Russia followed the same pattern - from 118 billion in 2009 to 213 euro in 2012. On the other hand, the EU is the most important trade and investment partner for Russia, accounting for roughly half of Russian exports and 43% imports to Russia.4 The strategic aspect of the partnership is evident also in the cooperation on foreign policy issues, global security, in many areas of the economy. The partnership is based on the cooperation developing in the framework of the so-called four common spaces, which aim is to create an open and integrated market. In this regard, the most important element of the cooperation is the formation of the Common Economic Space (CES). The importance of the strategic partnership between the EU and Russia derives from the mutual historical and cultural ties, geographical proximity - through direct border Russia is the biggest EU neighbour, together with its location connects Europe with Asia, from economic complementarity of both units and at the same time from the common interests to develop, extend and deepen cooperation and relations with the aim to create the CES. Since 2010 a new joint initiative for mutual relations development has been implemented in form of flexible and pragmatic framework of Partnership for modernisation (PfM). This initiative builds on efforts to modernise, to diversify and innovate the Russian economy. Russia strives to attract major foreign investors into its economy through various reform practices in taxation, business law and investment policy which would positively affect economic development in the post-crisis period. These aims promise new investment and business opportunities for EU companies. This linkage would create optimal option for ensuring EU energy security as well. PfM is a shared agenda for reforming in the socio-economic development area, with due respect for democracy and the rule of law. The five priority ideas of the PfM according to its work plan include:5 1. Creation of diversified, competitive and sustainable low-carbon economy. 2. Facilitating and liberalising trade in the global economy, enhancing and deepening bilateral trade and economic relations. 3. Enhancing cooperation in innovation and research and development, including space and nuclear research. 4. Rule of law, strengthening the legal environment, improving investment and the social climate. 5. Promoting people-to-people links and enhancing dialogue with civil society. Partnership for modernization provides additional impulse to mutual relations between the EU and Russia. The framework is also accompanied with bilateral modernization partnerships between Russia and already 25 EU member states.6 Perhaps Germany is the most significant modernization partner for Russia based on long-term positive trade relations (Germany is Russia’s most important trade partner), positive development of political, business, cultural relations and long-term cooperation in energetic that results from mutual energy interdependence (German energy companies are e.g. significant partners for Russia’s Gazprom). The German-Russian modernization partnership started in 2008 with the aim to provide the Europa.eu. (2013). [online]. (accessed 20.07.2013). Available at: <http://europa.eu/rapid/press-release_STAT-12-188_en.htm> ForModernisation.com. (2013). [online]. (accessed 22.08.2013). Available at: <http://formodernisation.com/en/info/progress_report_2012.php>. 6 Consilium.Europa.eu. (2013). [online]. (accessed 25.08.2013). Available at: <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/ foraff/137354.pdf>. 4 5

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most optimal conditions for German businesses on Russian market in exchange for Russia’s access to modern technologies. Russia’s entry to the WTO (22 July 2012) provides an important impetus for EU external trade policy towards Russia expressed in new opportunities to deepen mutual trade cooperation, strengthen the position of European exporters and investors in the Russian market. Russia has committed to reduce tariffs and remove barriers to free trade, and thus the EU can profit from opening up new business opportunities predominantly in form of exports increase. As for the gains for the EU trade policy towards Russia, these should become evident in facts as:

• Reduction of the average tariffs for all products (from 10% to 7.8%) – the EU exporters profit especially from lower import duties on vehicles (reduced from 30% to 25%). To some agriculture products would be applied tariff rate quotas;

• the potential for investments increase into the Russian market in connection with the removal of barriers to foreign investors;

• new opportunities for EU services suppliers in connection with the liberalization of services (e.g. telecommunications, • • • •

financial sector); WTO membership should ensure better intellectual property rights protection in the Russian market; by joining the WTO Russia has undertaken to comply with its rules; Russia’s membership gives a new impetus to progress the ongoing negotiations on a new partnership agreement; The WTO membership is one of the EU conditions for the establishment of free trade zone7.

In general, it is expected that Russia’s WTO membership will improve relations between the EU and Russia, will deepen mutual cooperation in science, technology, innovations, and will increase mutual investment flows. Moreover it should encourage reforms in the Russian economy, strengthen the rule of law and encourage entrepreneurship. However, during the first year of WTO membership the EU took steps against Russia by requesting consultations at the organisation because of Russia’s so-called “recycling fee“ on imported vehicles. On 9th July 2013 EU launched a challenge towards the fee Russia introduced on 1st September 2012, just 9 days after joining the WTO. Japan responded in the same way by filing a dispute against Russia (on 24th July 2013). Both the EU and Japan argue that the fee which is levied on cars, trucks, buses and other motor vehicles, is incompatible with the WTO most basic non-discrimination rule and hampers international trade in key European industry sector. The European vehicle exports to Russia in 2012 were worth 10 billion euro. Russia is becoming more significant export market for the EU in connection with the crisis in euro zone, especially regarding vehicle exports – after Germany it is the second most important export destination (e.g. for Slovakia as well). However the imposed fee nullifies the effect of import tariff reduction agreed to in the WTO accession terms. Moreover, vehicles produced in Russia-Belarus-Kazakhstan customs union are exempted from the fee. The biggest challenge in the areas of political, economic and foreign trade relations between the EU and Russia into the future is the conclusion of a new partnership agreement, which will replace the current and still valid Partnership and Cooperation Agreement (PCA). The PCA no longer reflects the reality of mutual relations which were significantly different in the nineties of the 20th century, when the agreement was signed (1994). The negotiations of the new agreement started in 2008 and till today some progress has been made. The agreement would provide a new solid legal basis and would be a key instrument for deepening the relations. Both sides reiterated that they would like to develop deeper cooperation and economic integration, however the EU and Russia have their own, and different ideas about the agreement’s binding force and its scope.

4. THE EU AND THE EASTERN PARTNERSHIP The Eastern Partnership (EaP) is a specific EU initiative in the framework of the European Neighbourhood Policy (ENP) towards Ukraine, Belarus, Moldova, Georgia, Armenia and Azerbaijan. It is an important instrument of EU political, legal and economic rapprochement to the partner countries. The EU offered them long-term support in market and democratic reforms implementation. The EU relation with these six countries was in 2009 promoted to an ambitious partnership based on respect for fundamental values, including democracy, the rule of law, respect for human rights, international law rules, good governance, respect for the principles of market economy and sustainable development. As for the EU trade policy the main objective of the Eastern Partnership defined in Joint Declaration from 2009 is to create conditions to promote and accelerate political association and strengthen economic integration of the six neighbouring countries and EU internal market. This intention appears from the specific position of the partner countries – the former Soviet Union countries, share common history, cultural and linguistic affinity, and the problems typical for the countries However a new obstacle for establishing a FTA between the EU and Russia is the Russia’s membership in the Customs Union with Belarus and Kazakhstan. 7

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undergoing the period of systematic political and economic transformation as well (whereby this process is still not fully completed). The EaP countries´ common feature is the persistent economic dependence on Russia, although all (except Belarus) see their future in deeper cooperation with the EU. Therefore, the EU decided to respond to particular needs of neighbouring countries, and supports their transition to democracy and market economy. The Eastern Partnership is committed to political and socio-economic reforms in the partner countries and their approximation in relation to the EU. The concept of EaP does not directly offer the possibility of full EU membership. Nevertheless, it does not exclude this as well. In particular it aims at strengthening of bilateral relations beyond the scope of existing cooperation within the European Neighbourhood Policy, whereby is based on its principles. The priority of EU foreign trade policy towards the EaP lies primarily in a topic of trade liberalization and economic integration, which is materialized in free trade agreements, or so called Deep and Comprehensive Free Trade Agreements (DCFTAs) aiming to be an ambitious upgrade of the current trade relations between the EU and EaP partners. The DCFTA agreements will be included in the new legal frameworks (replacements for the PCAs) in form of the Association Agreements reflecting the second aim of the EaP. The Association Agreements are based on political association between the EU and EaP countries, and are unprecedented in number of areas covered and the commitments for both parts (the depth of the agreements).The DCFTAs will go further than classic free trade agreements, as these will both open up markets but also address competitiveness issues and the steps needed to meet EU standards and trade on EU markets. The negotiations on the DCFTAs started with all partner countries except for Belarus and Azerbaijan as non-WTO members. In 2013 EU concluded DCFTA negotiations with Moldova, Armenia and Georgia. As for Ukraine, the Association Agreement was initialled in March 2012 and the DCFTA as its integral part in July 2012 as well. However, nor the Association Agreement nor the DCFTA have not been signed yet because of political events and situation in Ukraine. Ukraine is expected to sign the Association Agreement including the DCFTA at the third Eastern Partnership summit on 28 and 29 November 2013 in Vilnius, Lithuania, but it depends on its progress on a number of outstanding issues. Moreover, the EU is prepared to initial the Association Agreements with Moldova and Georgia as well. Armenia, however, announced by President Serzh Sarkisian its decision to join the Russia-led customs union. The EaP position in EU foreign trade policy is important, it leads up to deepen and facilitate trade and economic cooperation with relevant neighbouring countries. The focus of EU´s trade policy in this regard lies primarily in bilateral approach, aiming to conclude comprehensive free trade agreements. The EaP objectives, however, depend primarily on the efforts of partner countries themselves. The prospects of the EaP initiative are very ambitious, but feasible and for the EU external trade policy represent a challenge how to deal with neighbouring countries´ cooperation, to improve and facilitate access to their markets, mutual trade liberalization and economic integration

CONCLUSIONS In the EU external trade relations sphere there is a huge space for improvement and increase of the EU´s competitiveness in the post crisis period through strengthening its partnerships with the Eastern European third countries, through deepening mutual relations, cooperation and economic integration. The strategic partnership with Russia is expected to be further developed and deepened followed by the latest initiative through the Partnership for modernization, where both partners jointly implement innovative, research and technological projects. Efforts to modernize the Russian economy promise new opportunities for the EU businesses. Russia’s accession to WTO will affect the negotiations on a new partnership agreement. The EU seeks to strengthen its economic relations with other promising CIS countries, especially the Eastern Partnership countries, above all by offering the possibility of concluding deep and comprehensive free trade agreements in exchange for political and economic reforms in these countries. This will strengthen the EU´s position and improve its access to new markets in the Eastern European territory, which is of high importance for Russia as well. Therefore it is not clear how will be the mutual EU-Russia relations affected if Ukraine or other EaP country signs the free trade agreement with the EU.

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LITERATURE 1.

Cisstat, (2013). Share of the CIS and other countries of the world in total imports of individual countries of the Commonwealth [online]. (accessed 20.07.2013). Available at: <http://www.cisstat.com/eng/>.

2.

Consilium.Europa.eu. (2013). [online]. (accessed 25.08.2013). Available at: <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/137354.pdf>.

3.

Drieniková, K. – Zubaľová, Ľ. (2013) Zahraničnoobchodná politika EÚ v meniacich sa podmienkach globálneho hospodárskeho prostredia. Bratislava: Vydavateľstvo EKONÓM, 2013, pp. 264. ISBN 978-80-225-3622-6.

4.

Drieniková, K. – Zubaľová, Ľ. (2012) Zahraničnoobchodná politika EÚ voči Rusku - vybrané faktory ovplyvňujúce nové perspektívy spolupráce. Studia commercialia Bratislavensia, 20(5), pp. 545-557. ISSN 1337-7493.

5.

Euractiv. (2013). EU loses Armenia to Russia’s Customs Union. [online], 4. 9. 2013. (accessed 17.10.2013). Available at: <http://www.euractiv. com/europes-east/eu-loses-armenia-russia-customs-news-530224>.

6.

Europa.eu. (2013). [online]. (accessed 20.07.2013). Available at: <http://europa.eu/rapid/press-release_STAT-12-188_en.htm>.

7.

Europa.eu. (2013). [online]. (accessed 22.08.2013). Available at: <http://europa.eu/rapid/press-release_IP-13-665_en.htm>.

8.

Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/ database>.

9.

ForModernisation.com. (2013). [online]. (accessed 22.08.2013). Available at: <http://formodernisation.com/en/info/progress_report_2012. php>.

10. Kašťáková, E. (et al). (2010). Zahraničnoobchodné vzťahy EÚ s vybranými tretími krajinami II (USA, Kanada, Japonsko, krajiny SNŠ a západného Balkánu). Bratislava: Ekonóm, 2010, ISBN 978-80-225-2986-0. 11. Kurmanalieva, E. (2012). CIS Macromonitor, 2012. [online]. (accessed 21.06.2013). Available at: <http://www.eabr.org/general//upload/docs/ AU/Macromonitor_Mar_2012-eng.pdf>. 12. Sandler, I. (2012). Russia accession to the WTO: Benefits and risks. [online]. (accessed 21.06.2013). Available at: <http://www.jdsupra.com/legalnews/russias-accession-to-the-wto-benefits-34072/>. 13. ec.trade.europa.eu DETAILS ABOUT AUTHORS: KRISTÍNA DRIENIKOVÁ ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA DEPARTMENT OF INTERNATIONAL BUSINESS BRATISLAVA, SLOVAKIA kristina.drienikova@euba.sk ELENA KAŠŤÁKOVÁ ASSOCIATE PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA DEPARTMENT OF INTERNATIONAL BUSINESS BRATISLAVA, SLOVAKIA kastakova@euba.sk

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CROSS-BORDER MOBILITY OF COMPANIES IN EUROPEAN UNION AS THE PRECONDITION FOR SUCCESS IN BUSINESS JERNEJA PROSTOR

ABSTRACT

The decision, in which Member State the company will be established or will pursue its business activity, is the subject of their establishers. The company could therefore be established in the Member State of their location or in situations, where establishers favour cross-border mobility and are looking for the opportunities on the markets abroad, the decision on the location would depend upon the development of business environment. Nevertheless, the regulation of each Member State, especially regarding corporate and tax law could have a decisive influence on this decision. Those questions are of great importance when the company is improving its business position through broadening its activities to other markets as well as relating to cross-border transfer of its activities to another Member State. The freedom of establishment, provided by the Treaty on the Functioning of the EU (the Treaty), is a suitable legal basis for effective cross-border corporate restructuring of companies in EU. There are some possible methods to exercise this freedom, specially regulated with secondary acts, like cross-border mergers and the establishment and economic operation in the legal form of Societas Europaea, whereas the cross-border transfer of the company (its seat) shall be in the light of the case law of the Court of Justice of the EU admitted on the basis of the Treaty. Companies therefore in their intention for cross-border mobility do not need to reconstruct by using the general provisions on establishment and liquidation of companies and through the way of singular succession. There are possibilities, regulated on the EU level, through which companies shall emigrate or spread their business activities to other Member States much simpler and with less cost on the basis of universal succession. The regulation of procedures and the advantages of the mentioned reconstruction methods will be analysed in this article. KEYWORDS: freedom of establishment, corporate restructuring, cross-border mergers, Societas Europaea, cross-border transfer of the seat Preface The decision, in which Member State the company will be established or will pursue its business activity, is the subject of their establishers. The company could therefore be established in the Member State of their location or in situations, where establishers favour cross-border mobility and are looking for the opportunities on the markets abroad, the decision on the location would depend upon the development of business environment – it depends on the presence of trained personnel, logistic advantages,1 suitable legislation, effective judicial and administrative authorities and attained degree of legal certainty. The regulation of each Member State, especially regarding corporate and tax law, could therefore have a decisive influence on this decision. Those questions are of great importance when the company is improving its business position through broadening its activities to other markets as well as relating to cross-border transfer of its activities to another Member State. This article analyses some benefits for companies for the reason of EU membership of their Member State of origin (in comparison with the use of general provisions for corporate restructuring) and emphasizes the importance of SE-Regulation.2

1. Broadening of company’s activities to other markets

A company has a possibility to achieve the corporate restructuring by using general provisions, regulating establishment and liquidation (usually including destroy of the undertaking) of the company. One possibility is the establishment of another company (subsidiary) in another Member State that is the Member State of destination. The disadvantage is that the established company would be the subject of foreign legal system that the establisher may not be familiar with, which increases the costs of cross-border mobility of companies. A company could also pursue its activities in another Member State through its branches3 or pursuant to the Treaty on the Functioning of the EU (the Treaty)4 (for the prohibition of discrimination) even without any legal form in the Member State of destination.5

J. Cremers, E. Wolters, EU and national company law – fixation on attractiveness, Report 120, European Trade Union Institute, Brussels 2011. Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10. 11. 2001, p. 1–21. 3 There is a difference between a subsidiary and a branch. A subsidiary has its own legal personality, while a branch is only a separate unit of the company, which is located outside the registered office of the company and does not have a legal personality. 4 Consolidated version of the Treaty on the Functioning of the European Union, OJ C 326, 26. 10. 2012, p. 47–390. 5 R. Knez in M. Kocbek (editor), Veliki komentar Zakona o gospodarskih družbah (ZGD-1), 3. knjiga, GV Založba, Ljubljana 2007, p. 946. 1 2

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A company might be interested in purchasing an already existing undertaking (business activity)6 in another Member State. Using general provisions it could offer to buy the asset from the owner – asset deal, which is achieved by singular succession (based on the principle cum titulus et modus acquirendi). When purchasing the whole undertaking, assets could only be transferred with its connected obligations. In this regard it is very important to obtain the consent of creditors of the transferred undertaking – they could be rightly concern about who their debtor is – the credit rating of their debtors. In the case of asset deal the acquiring company is then the owner of acquired assets and is entitled to exercise the entitlement of property ownership. Another possibility to broaden company’s activities to other markets, based on general provisions, is an acquisition of an existing undertaking in another Member State by acquiring (take over) shares of the (target) company that owns that undertaking – that is by way of share deal having regard to the provisions of (Thirteenth) Directive on takeover bids7 (for example the way that the Croatian company Agrokor is trying to acquire the Slovenian company Mercator). The acquiring company should obtain enough voting shares in the acquired company to be entitled to have some influence on decisions regarding the acquired undertaking. In this regard it is very important to note that in case of a share deal the acquiring company is not the owner of acquired assets – the management of the acquiring company by executing company’s voting rights could have some indirect influence on the management of acquired undertaking. It should be mentioned that in this case there could also be a problem with the acquiring company not being familiar with the corporate law that the acquired company is subject to. The freedom of establishment, provided by the Treaty (Articles 49 and 54), is a suitable legal basis for another, maybe more effective cross-border corporate restructuring of companies in EU. There are some possible methods to facilitate the exercise of this freedom, specially regulated with secondary acts, like cross-border mergers and the establishment and economic operation in the legal form of European company (Societas Europaea – SE). It should be noted that the SE-Regulation, more precisely the regulation of the cross-border merger as one of the SEs establishing forms significantly contributed to the adoption of the (Tenth) Directive on cross-border mergers of limited liabilities companies (the Directive on cross-border mergers).8 A company might acquire an existing undertaking (business activity) in another Member State by acquiring the owner company by way of cross-border merger. Member States were obliged to implement the Directive on cross-border mergers into their national legislations. A company intending to acquire an undertaking in the Member State of destination, therefore has the right to obtain it by pursuing a cross-border merger, where the acquired company is being dissolved without going into liquidation, transferring all of its assets and liabilities to the acquiring company. This transaction is being executed without the consent of the acquired company’s creditors, since the transfer of the assets and liabilities is made through the universal succession9 which makes the corporate restructuring much easier and faster, with less cost. Acquiring company remains to be governed by the law of its origin. For the reason a liquidation of the acquired company is not required, the important advantage is also the possibility of the continuous operation of the acquired undertaking. In the case of a merger the acquiring company is then the owner of the acquired assets and is entitled to exercise the entitlement of property ownership.

2. Cross-border transfer of the company’s activities to another Member State A company has a possibility to achieve the cross-border transfer of its activities to another Member State by using general provisions, regulating establishment and liquidation of a company, nevertheless EU membership provides some more effective ways of corporate restructuring. By way of above mentioned cross-border merger a company could also transfer its activities to the Member State of destination. A company could in the first step establish a subsidiary in another Member State and afterwards that company could acquire its establisher by pursuing a cross-border merger. Alternative possibility is when meeting the conditions to establish SE by numerous clausus of its establishing forms,10 regulated in the SE-Regulation, to transfer the registered office of the SE to another Member State.

There is a difference between a company and an undertaking. A company is the subject of law and usually has a legal personality, while an undertaking is the object of law. A company can own an undertaking. 7 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L 142, 30. 4. 2004, p. 12–23. 8 This transfer is made in exchange for the issue to the acquired company’s members of securities or shares representing the capital of the acquiring company and (if applicable) a cash payment not exceeding 10 % of the nominal value or of the accounting par value of those securities or shares (Article 2(2) of the Directive on cross-border mergers). 9 Cross-border merger, formation of a holding SE, formation of a subsidiary SE, transformation into a SE (Article 2 of the SE-Regulation). 10 With its real seat. 6

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A company, pursuing its business activities in any other legal form of company, should be in the light of the case law of the Court of Justice of the EU (the Court) as well permitted to transfer the company’s registered office11 to the host Member State (of destination). As the Court held in (the obiter dictum of) the Cartesio12 case the freedom of establishment on the basis of the Treaty includes the performance of moving the registered office to another Member State with the change as regards the applicable national law. In the latter situation the company is without prior liquidation converted into a form of company which is governed by the law of the Member State of destination. It should be mentioned that this operation does not include the change of legal form as known in Member States for national transformations (which are not harmonised on EU level). In other words the cross-border transfer of registered office means for instance the transfer of a joint stock company of Member State of origin to a host Member State (of destination), where it pursues its business activities as a joint stock company, governed by the law of the host Member State. The requirement for prior liquidation would be a barrier to the actual conversion and would constitute a prohibited restriction on the freedom of establishment of the company, unless it serves overriding requirements in the public interest (paragraph 111-113). The Court of Justice concluded the SE-Regulation providing the transfer of SEs registered office should be mutatis mutandis applicable for such situations (paragraph 120). There have been some initiatives to increase the predictability of the company intending to transfer its registered office to the Member State of destination with the conversion into a comparable legal form, governed by its national law by the adoption of the (Fourteenth) Directive on cross-border transfer of the registered office. Nevertheless it has not been adopted yet, but the Court in its recent VALE13 case confirmed its decision in Cartesio case. In addition it held that, although the explicit regulation would facilitate the exercise of the freedom of establishment by transferring the company’s registered office, in the absence of rules laid down in secondary EU law companies can invoke the Treaty provisions to exercise that fundamental freedom. Referring to decision in SEVIC14 case it held that even though such rules are useful for facilitating cross-border conversions, their existence cannot be made a precondition for the implementation of the freedom of establishment laid down in Articles 49 and 54 of the Treaty (paragraph 38). It is important to notice that the transfer of SEs registered office, as regulated in the SE-Regulation, is based on the principle of maintaining the same identity of the company: (1) (2) (3)

company’s assets and liabilities are still the object of the same legal person (identical company); the company is entitled to continue with its business activities – there is no requirement for liquidating the company in the Member State of origin and to re-establish it in a Member State of destination; it causes the company to be governed by another legal system – for that reason creditors and shareholders are prior to validity of transfer protected by the law of the Member State of origin.

The requirement for liquidation and a new establishment would cause a lot of difficulties, since all of the company’s assets have to be realised and all the obligations paid. The undertaking would have to be destroyed in the Member State of origin and a new one created in a host Member State. However these procedures take some time and causes additional expenses, not to mention the loss of business opportunities on the market in the meantime. In commercial practice there are some ideas for companies not only to transfer their registered office to another Member State but to change its legal form as well, for instance the transfer of a joint stock company from the Member State of origin to a host Member State, where it pursues its business activities as a limited liability company, governed by the law of a host Member State. Considering the above mentioned case law of the Court, in the absence of rules, provided by the EU secondary legislation, in my opinion such corporate restructuring is also permitted directly on the basis of the Treaty. The procedure would have to be based on the principle of maintaining the same identity of the company, whereby the provisions, regulating the establishment of the SE by the transformation into a SE could be mutatis mutandis applicable. That would be in line with the principle of functional equivalence, ensuring similar treatment for similar cross-border transactions. Despite the absence of initiatives to harmonise the transfer of company’s registered office with the change of company’s legal form the requirements of business practice give rise to rethink the possibilities of regulating such transactions on EU level as well.

Case C-210/06, Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, European Court Reports 2008, p. I–09641. Case C-210/06, Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, European Court Reports 2008, p. I–09641. 13 Case C-378/10, Judgment of the Court (Third Chamber) of 12 July 2012, VALE Építési kft, European Court Reports 2012. 14 Case C-411/03, Judgment of the Court (Grand Chamber) of 13 December 2005, SEVIC Systems AG, European Court Reports 2005, p. I–10805. 15 M. Kocbek, Sprejetje direktive o čezmejnih združitvah – Deseta direktiva EU s področja prava družb – 2005/56/ES, Podjetje in delo, št. 1/2006, p. 219. 11 12

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CONCLUSIONS Companies in EU in their intention for cross-border mobility do not need to reconstruct by using the general provisions on establishment and liquidation of companies and through the way of singular succession. There are possibilities, regulated on the EU level, through which companies shall emigrate or spread their business activities to other Member States much easier, faster and with less cost on the basis of universal succession or by maintaining the same identity of the emigrating company. The SE-Regulation is a very important legal source, since it explicitly regulates the transfer of the registered office of the SE and also the cross-border merger and the procedure of the transformation into SE as its establishing forms. Therefore its importance should not be measured through numbers of actually established SEs or their business success, rather by its influence on the adoption of the Directive on cross-border mergers and eventual Directive on cross-border transfer of the registered office. While monitoring the needs of business practices it may one day contribute also to the regulation on company transformation into another legal form on the basis of the principle of maintaining the same identity of the transforming company. DETAILS ABOUT AUTHOR: JERNEJA PROSTOR ASSISTANT UNIVERSITY OF MARIBOR FACULTY OF LAW MLADINSKA ULICA 9, SI-2000 MARIBOR, SLOVENIA jerneja.prostor@um.si

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MINIMUM WAGES AND YOUTH EMPLOYMENT IN THE EUROPEAN UNION SUZANA LAPORŠEK

ABSTRACT

The purpose of this paper is to analyze minimum wage systems in the EU and to estimate minimum wage effects on youth employment in the European Union. The analysis of minimum wage systems across EU Member States is based on the overview of literature and descriptive statistics. To estimate the minimum wage effects on employment of youth between 15 and 24 years of age, paper uses panel regression method with fixed effects. The panel regression analysis includes data for 18 EU Member States with statutory minimum wage for the period 1996–2011. The study finds a negative, statistically significant association between minimum wage and employment rate of young workers. The association remains negative and statistically significant also when controlling for other labor market institutions. KEYWORDS: minimum wage, youth employment, labor market, economic policy, European Union.

1. INTRODUCTION Minimum wage, its role, objectives and functions have been a subject of academic and political debate and controversy for already more than a century. At first minimum wage presented a tool to prevent exploitation of workers (Starr, 1981). Over time, the focus changed to assuring people a decent living and to helping them to become more self-sufficient (Neumark & Wascher, 2010). Still, minimum wage remains a subject of a controversy, as each of the social partners attaches to it a different role. From the viewpoint of employees and unions, minimum wage reduces wage inequality and poverty, and protects vulnerable groups of workers (Freeman, 1996; Saget, 2002), whereas from the viewpoint of employers minimum wage increases labor costs per unit and harms firms’ competitiveness. The effect of minimum wage on employment has been one of the most debated topics in the economics. Majority of empirical studies confirm negative employment effects of minimum wage, especially for young and less skilled workers. Early studies or so called “old minimum wage research”, which were mostly based on time series data for the US, showed that a 10 % increase in the minimum wage reduces teenage employment by 1 or 3 % (Brown et al., 1982). These findings were weakened by the “new minimum wage research”, which exploited experimental methods and micro data. Especially important are findings of Card and Krueger (1995), who reported about positive minimum wage effects on employment. Nevertheless, based on an overview of more than 100 new minimum wage studies Neumark and Wascher (2007) showed that almost three quarter of studies find a consistent, although not always statistical significant negative effect, by which the effect is stronger for less skilled workers. The objective of this paper is to analyze minimum wage systems in the EU and to study minimum wage effects on employment of young European workers. The empirical analysis focuses on young workers, as they are at most affected by changes in minimum wage legislation. The analysis is based on the panel of 18 Member States of the European Union (EU) for the period 1996–2011, focusing on the EU countries with statutory minimum wage with different dynamics of changes in minimum wage over time and with different minimum wage levels. Although the issue of minimum wage effects has been a subject of several studies, there is a lack of panel studies that would focus on the EU countries and use recent data. In this way this study adds to the existing literature. The rest of the paper is organized as follows. Section 2 overviews minimum wage systems and minimum wage level statistics across the EU Member States. Section 3 presents data and methodology. Section 4 provides results of the panel regression analysis on the association between minimum wage and youth employment. The last section concludes.

2. MINIMUM WAGE IN THE EUROPEAN UNION 2.1 Overview of the minimum wage systems Each of the EU Member States has some form of a minimum wage. Nevertheless, minimum wage systems differ significantly between EU countries, also due to differences in institutional arrangements and historical development of their labor markets. Minimum wage systems can therefore be divided into two groups (see Table 1). Majority of the EU countries, that

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is 20, has a national minimum wage. In most of these countries, minimum wage is regulated by law. Only in six countries national minimum wage is determined by a national bipartite or tripartite collective agreement. The second group includes countries, which set their minimum wages at the sectoral or occupational level by collective agreements. The only exception in this group is Cyprus, which regulates minimum wage by law, however only for nine different occupations. As noticed in Table 1, minimum wage is set on sectoral and occupational level mainly in Scandinavian and continental EU countries, i. e. countries with highly developed system of collective bargaining and high coverage with collective agreements. (Grimshaw & Rubery, 2010; Schulten, 2012a). Majority of the EU Member States with national minimum wage has a non-discriminatory minimum wage, implying that all workers are eligible to minimum wage. Exceptions from this rule are Belgium, Luxembourg and Spain (in these countries minimum wage is provided only to workers in the private sector; there are also some other minor exceptions), and Greece, where minimum wage is not mandatory for domestic workers. In countries with minimum wage set by collective agreements, minimum wage coverage reflects coverage with collective bargaining. In Scandinavian countries, Austria and Italy minimum wage therefore covers 80 % or more workers, while in Germany and Cyprus only 60 to 70 % of workers (Carley, 2006; Schulten, 2012a). Table 1: Overview of minimum wage system types in the EU Member States Minimum wage Statutory regulation system National minimum wage

Western countries: France, Ireland, Luxembourg, the Netherlands, United Kingdom Southern countries: Malta, Portugal, Spain

Collective agreement Tripartite agreement: Belgium, Estonia, Greece Bipartite agreement: Bulgaria, Poland, Slovakia

Central and Eastern countries: Czech Republic, Hungary, Latvia, Lithuania, Romania, Slovenia Sectoral and Cyprusa occupational minimum wage

Scandinavian countries: Denmark, Finland, Sweden Continental countries: Austria, Germany, Italy

Note: a Cyprus sets statutory minimum wage for nine occupations, including shop assistants; clerks; nursing aids (employees offering personal care); child-care workers (assistant baby and child minders); security guards; and care takers (ILO, 2013). Sources: Vaughan-Whitehead, 2010; ILO, 2013; Rycx & Kampelmann, 2012; Schulten, 2012a.

Minimum wage systems do not differ only in their legal regulation, but also in the wage setting mechanisms. About half of the EU Member States with national minimum wage sets a lower minimum wage for younger workers to avoid negative minimum wage impact on their employment. Though, practices between countries are different. Some countries use proportional minimum wage, implying that the level of minimum wage increases with age (for example, Belgium, Czech Republic, France, Greece, Ireland, Luxembourg, Malta, the Netherlands, and the United Kingdom), whereas other link minimum wage level to employment duration. For example, first time entrants to the labor market in Poland are entitled to 80 % of minimum wage during the first year and to 90 % of minimum wage during the second year of employment. A similar regulation can be also found in Ireland and Luxembourg (see ILO, 2013). The only EU country where minimum wage is higher for younger workers is Latvia. Namely, young Latvian workers are entitled to the adult minimum wage, but, as their working week is shorter, they receive higher minimum wage measured per hour than adult workers (EIRO, 2012). The EU countries set also lower minimum wage based on the qualification level and status of workers (for example, for less experienced workers and trainees, disabled). A single national wage floor is used only in the transition EU countries that became EU members in 2004 or 2007, with exception of Bulgaria, probably due to lack of strong collective bargaining institutions. The EU Member States also differ in the method of setting and adjusting minimum wage. Most countries with national minimum wage adjust minimum wage at regular intervals, usually once a year (minimum wage adjustment is possible twice a year in Greece, the Netherlands, Poland and Spain). On the other hand, Ireland, Latvia and Luxembourg adjust

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minimum wage occasionally. In most cases, the level of adjustment is defined by the government in co-operation with social partners. Only in Belgium, Luxembourg and Malta minimum wage automatically adjusts with the consumer price index (Carley, 2006; EIRO, 2012).

2.2. Levels of minimum wage in the European Union There are tremendous differences in the level of minimum wage among the EU Member States. Figure 1 shows minimum wage per hour in EUR and in the Purchasing Power Standards (PPS) and the ratio between gross minimum and average wage. Minimum wage exceeds EUR 10 per hour in Luxembourg, while workers in Bulgaria receive less than EUR 1 per hour. Differences between countries are smaller when comparing real values of minimum wages. Measured in EUR PPS, the ratio between the lowest (EUR 1.6 in Bulgaria) and the highest (EUR 8.6 in Luxembourg) minimum wage decreases from 1:13 to 1:5. Figure 1: Gross minimum wage in EUR and EUR PPS per hour (April 2012) and ratio between gross minimum and average wage in % (2011)

Source: WSI Minimum Wage Database (Schulten, 2012a, b); Eurostat, 2013; OECD.Stat., 2013.

As regards the ratio between minimum and average wage, it is the highest in France (48 %), Malta (47.4 %) and in Slovenia (47.2 %). The ratio in these countries is about 9 percentage points higher than the average of all 20 EU Member States with national minimum wage. In most of the countries the ratio between minimum and average wage varies between 30 and 40 %, and is the lowest in Czech Republic, where the minimum wage accounts for 28.7 % of average wage. Although there is no fully comparable data on the minimum wage levels in countries with minimum wages set by collective agreements, studies show that Scandinavian countries have higher minimum wages than most of the EU countries with the statutory minimum wage – in these countries minimum wage presents around 60 % of the average wage. Minimum wages are lower in Germany (on average ranging between EUR 7 and EUR 13 per hour, in some sectors between EUR 5 and EUR 6 per hour), in Austria (on average EUR 6 per hour) and in Cyprus (on average EUR 5 per hour) (Carley, 2006; Schulten, 2012a). Figure 2 presents changes in minimum-average wage ratio over the period 2001–2011 (Bulgaria and Romania are not included in the analysis due to lack of data). On average, minimum wages were increasing faster than average wages – relative value of the minimum wage increased between 2001 and 2011 by approximately 4 %. The dynamics is more pronounced in the new EU Member States – the ratio between minimum and average wage decreased after 2004, however it started to increase after 2007. In southern EU countries the ratio increased slowly, whereas in western EU countries stayed more or less the same.

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Figure 2: The ratio between minimum and average wage by groups of EU countries, 2001–2011

Note: Classification of countries in groups follows the division in Table 1. Source: OECD.Stat, 2013; Eurostat, 2013.

Minimum wage dynamics is nowadays under a great influence of crisis in a number of EU countries. Minimum wage policy is particularly restrictive in the Member States that were at most exposed to the economic and financial crisis. For example, in February 2012 Greece reduced minimum wage by 22 % for adult workers and for 32 % for workers under the age of 25 at the request of the European Commission, the European Central Bank and the International Monetary Fund (i.e., Troika) (Georgiadou, 2012). Likewise, a year before Ireland reduced minimum wage for EUR 1 per hour (to EUR 7.65 per hour) or for 11.5 % (Farrelly, 2011). The Portuguese government has agreed as part of its arrangements with the Troika to increase minimum wage only if justified by economic conditions (Schulten, 2012a). Countries also differ in the share of minimum-wage earners. Although there is no uniform data on the proportion of employees receiving the minimum wage at the EU level, the literature shows that in more than half of the EU countries the share of minimum wage earners is lower than 5 %. On the other hand, the share of minimum wage earners exceeds 15 % in Latvia, Greece and Romania. Based on the sample of nine EU Member States, Rycx and Kampelmann (2012) showed that compared to the rest of the population, minimum wage earners are, on average, younger and less educated, higher is also the proportion of women. Furthermore, using the logistic regression, authors showed that changing job increases the probability of receiving minimum wage, whereas by increasing work experience the likelihood of receiving minimum wage decreases.

3. METHODOLOGY AND DATA In the continuation of the paper we empirically examine the association between youth employment and minimum wage in the EU. The analysis is divided in two parts. Firstly, a basic panel data model similar to the model used by Zavodny (2000) and Neumark and Wascher (2004) is applied, using data for 18 EU countries with statutory wage over the 1996–2011 period.1 The model estimates the association between minimum wage and employment rate of young workers between 15 and 24 years of age. The basic regression function has the following specification: (1) where ERit denotes employment rate for workers between 15 and 24 years of age in country i in time t, MWit is the ratio between minimum and average wage, AURit presents unemployment rate of adults between 25 and 54 years of age to control business cycle effects and POPit presents the proportion of young aged 15 to 24 in the total population aged 15 to 64 and serves as a supply-side control. Parameter εit refers to random error.

Decision on the length of studied period was motivated by two facts: i) availability of data; ii) going further back in the past would not bring clear results in most of the NMS due to changed political and economic situation. For the United Kingdom and Ireland we include data from the introduction of minimum wage afterwards, i.e., from 1999 and 2000, respectivelly. 1

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Following the strategy of Bertola et al. (2001), the above basic regression function is re-estimated with inclusion of year dummies (vector Λ). In this way we control for effects that may influence all countries in a given year in the same way (for example, world-wide shocks):

(2)

In the second part of the analysis, the above panel regression models are extended by including data on other labor market institutions. The following regression function is applied:

(3)

where EPLit refers to overall Employment Protection Legislation index (according to the OECD Version 1) to control for rigidity of contractual arrangements, ALMPit refers to expenditures for active employment programs as % of gross domestic product, GRRit is gross replacement rate for unemployed, TUDit denotes trade union density as a measure of trade union’s presence and TWit is tax wedge for single person without children earning average wage as a control for labor taxation. Due to the lack of data the panel comprises of only 14 EU countries (without Latvia, Lithuania, Luxembourg and Romania) with statutory wage over the 1996–2008 period. The above panel regression function is again re-estimated with inclusion of year dummies (vector Λ). The panel regression models are estimated using fixed effect to control for country-specific effects.2 All regression models were controlled for heteroskedacity and autocorrelation using robust standard errors.3 Data for the analysis were obtained from the OECD.Stat and the Eurostat database. Missing estimations for EPL index for Slovenia were obtained from Vodopivec et al. (2007), whereas estimations for Estonia, Latvia and Lithuania from Muravyev (2010). Missing historical time series for expenditures for ALMPs and labor taxation of average worker were collected from the CEP-OECD institutions dataset (Nickell, 2006). Time series data for trade union density were obtained from Visser (2011).

4. EMPIRICAL ESTIMATES OF THE ASSOCIATION BETWEEN MINIMUM WAGE AND YOUTH EMPLOYMENT The panel regression estimates, on overall, are in line with previous empirical findings, as they confirm a significant negative effect of minimum wages on youth employment. The first three columns in Table 2 (models 1, 2 and 3) show estimates of the basic model specification. In all three models coefficients on the minimum wage variable are negative and statistically significant, ranging from –0.22 to –0.48. When including other labor market institution (models 4 and 5), the relation remains negative, yet weaker – the estimates range from –0.16 to –0.22. As regards other labor market institutions, associations are not statistically significant for EPL index variable, expenditures for ALMP variable and gross replacement rate variable, therefore not allowing us to draw firm conclusions. Nevertheless, there is a statistically significant positive association between trade union density and youth employment, implying that countries with higher union coverage record higher employment rates. On the other hand, the association between tax wedge on labor and youth employment is negative, showing that high labor taxation reduces employment.

Although the estimates of Hausman test showed that fixed effects are appropriate for the analysis, we estimated all panel regression functions also by random effects to avoid potential biases. The panel regression estimates using random effects were similar to fixed effects, confirming our results. The random effect results are available by the author. 3 The presence of heteroskedacity and autocorrelation was confirmed by likelihood-ratio test and Wooldrige test, respectively. Statistics can be ob tained from the authors. 2

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Table 2: Estimation results of the panel regression analysis, dependent variable: youth employment rate, 18 EU countries over 1996–2011 Models

(1)

(2)

(3)

(4)

(5)

–0.476** (0.178)

–0.300** (0.130)

–0.224*** (0.065)

–0.221* (0.103)

–0.163** (0.078)

–0.864*** (0.219)

–0.955*** (0.090)

–1.120*** (0.201)

–1.090*** (0.118)

0.864 (0.515)

–0.223 (0.226)

0.231 (0.609)

0.250 (0.302)

EPL index

–1.461 (2.207)

–0.637 (0.976)

Expenditures for ALMP

–2.443 (3.457)

–3.390 (2.302)

Gross replacement rate

0.0271 (0.099)

0.0267 (0.061)

Trade union density

0.262** (0.121)

0.391*** (0.084)

Tax wedge

(0.264)

–0.312

–0.387*** (0.136)

Minimum wage ratio Adult unemployment rate Share in population

Constant Year effects Observations Adjusted R2

50.17*** (6.459)

38.75*** (8.044)

54.73*** (4.467)

58.91*** (17.75)

52.01*** (8.956)

NO 281 0.108

NO 281 0.408

YES 281 0.484

NO 173 0.533

YES 173 0.500

Notes: The sample period is from 1996 to 2011, except for Ireland (2000–2011) and the United Kingdom (1999–2011). For more details see section ‘Methodology and data’. Standard errors are shown in parentheses. Statistical significance: *** p<0.01, ** p<0.05, * p<0.1

CONCLUSIONS Minimum wage is an important element of labor market regulation and is in some form used by all EU Member States. This paper examines minimum wage systems across EU countries and, most importantly, studies the association between minimum wage and youth employment. The empirical estimates based on the panel of 18 EU countries with statutory wage over the 1996–2011 period are in line with empirical findings on individual countries. Panel regression estimates show a negative, statistically significant association between minimum wage and employment rate of young workers. The association remains negative and statistically significant also when controlling for additional labor market institutions. Minimum wage presents an important element in the EU policy. This can be also noticed from the increasing number of policy discussion on the possibility of common minimum wage policy at the EU level. However, common EU policy opens a set of new questions, especially because of great differences in economic and labor market environments and situations among EU Member States and possible negative effects of minimum wage on labor market outcomes, especially in times of crises. Therefore, implementation of common minimum wage policy is not, at least on short term, a real option in the EU (Vaughan-Whitehead, 2010). Taking into account empirical results of this study, the EU countries should be more cautious when setting up minimum wages for youth, as the disemployment effects may have been downplayed.

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LITERATURE 1.

Bertola, G., Blau, F. D. and Kahn, L. M. (2001). Comparative Analysis of Labor Market Outcomes: Lessons for the US from International Long-run Evidence (NBER Working Paper 8526). Cambridge MA: The National Bureau of Economic Research.

2.

Brown, C., Gilroy, C. and Kohen, A. (1982). The Effect of the Minimum Wage on Employment and Unemployment. Journal of Economic Literature, 20, 487–528.

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Card, D. and Krueger, A. B. (1995). Myth and Measurement: The New Economics of the Minimum Wage. Princeton: Princeton University Press.

4.

Carley, M. (2006). Key Themes in Global Industrial Relations: Minimum Wages and Relocation of Production. Luxembourg: Office for Official Publications of the European Communities.

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EIRO (2012). Pay Developments 2011. Dublin: European Foundation for the Improvement of Living and Working Conditions.

6.

Eurostat (2013). Statistical Database, available at http://stats.oecd.org/Index.aspx (accessed 5 June, 2013).

7.

Farrelly, R. (2011). Impact of Government’s Four-year Plan on Minimum Wage and Sectoral Wage Agreements, available at http://www.eurofound.europa.eu/eiro/2012/12/articles (accessed 20 June, 2013).

8.

Freeman, R. B. (1996). The Minimum Wage as a Redistributive Tool. The Economic Journal, 106(436), 639–649.

9.

Georgiadou, P. (2012). Troika approves New Set of Changes in Jobs and Pay, available at http://www.eurofound.europa.eu/eiro/2012/03/articles/ gr1203019i.htm (accessed 20 June, 2013).

10. Grimshaw, D. and Rubery, J. (2010). Minimum Wage Systems and Changing Industrial Relations in Europe: Comparative Report. Manchester: European Work and Employment Research Centre, University of Manchester. 11. ILO (2013). Minimum Wages Database, available at http://www.ilo.org/travaildatabase/servlet/minimumwages (accessed 20 June, 2013). 12. Muravyev, A. (2010). Evolution of Employment Protection Legislation in the USSR, CIS and Baltic States, 1985–2009 (IZA Discussion Paper 5365). Bonn: Institute for the Study of Labor. 13. Neumark, D. and Wascher, W. L. (2004). Minimum Wages, Labor Market Institutions, and Youth Employment: A Cross-National Analysis. Industrial and Labor Relations Review, 57(2), 223–248. 14. Neumark, D. and Wascher, W. L. (2007). Minimum Wages and Employment (IZA Discussion Paper 2570). Bonn: Institute for the Study of Labor. 15. Neumark, D. and Wascher, W. L. (2010). Minimum Wages. Cambridge: The MIT Press. 16. Nickell, W. (2006). The CEP-OECD Institutions Data Set (1960–2004), available at http://hdl.handle.net/1902.1/13555UNF:3:A8ghQ3fq7k4yYPdF Inkfkw (accessed 28 June, 2013). 17. OECD.Stat (2013). OECD Statistics, available at http://stats.oecd.org/Index.aspx (accessed 20 July, 2013). 18. Rycx, F. and Kampelmann, S. (2012). Who earns Minimum Wages in Europe? (ETUI Working Paper 124). Brussels: European Trade Union Institute. 19. Saget, C. (2002). How to get the Maximum out of the Minimum Wage, in ILO (Ed.), Paying Attention to Wages, ILO Labour Education Report, 3(128), 67–73. 20. Schulten, T. (2012a). European Minimum Wage Policy: A Concept for Wage-led Growth and Fair Wages in Europe. International Journal of Labour Research, 4(1), 85–103. 21. Schulten, T. (2012b). Minimum Wages in Europe under Austerity (WSI Minimum Wage Report 5/12). Vienna: WSI. 22. Starr, G. F. (1981). Minimum Wage Fixing: An International Review of Practices and Problems. Geneva: International Labour Office. 23. Vaughan-Whitehead, D. (2010). The Minimum Wage revisited in the Enlarged EU. Geneva: International Labour Office. 24. Visser, J. (2011). ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts in 34 countries between 1960 and 2007, available at http://www.uva-aias.net/208 (accessed 28 May, 2013). 25. Vodopivec, M., Dolenc, P., Vodopivec, M. and Balde, A. (2007). Mobilnosti dela in fleksibilnost sistema plač (Labour Mobility and Wage Flexibility). Koper: Faculty of Management. 26. Zavodny, M. (2000). The Effect of the Minimum Wage on Employment and Hours. Labour Economics, 7(6), 729–750.

DETAILS ABOUT AUTHOR: SUZANA LAPORŠEK UNIVERSITY OF PRIMORSKA FACULTY OF MANAGEMENT CANKARJEVA 5, P.P. 345, 6104 KOPER, SLOVENIA suzana.laporsek@fm-kp.si

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NEW ECONOMY VERSUS OLD ONE, ALTERNATIVE INTERPRETATION RADISLAV JOVOVIC SANDA SENIĆ

ABSTRACT

In this paper, we decided to take a closer look at the relationship among old and new economy. The economic and social reality is changing and becoming more complex very quickly. Those changes are adding up. They establish and develop new connections between individuals, companies, organizations and states. A complexity, uncertainty and variability of the environment are the only constant components in the life of organization. Research of phenomena of new economy, has lead authors to realized a complexity of the real economic life, and need that suggest this approach, which has lead to the conclusion that modern economy is a virtual-informational game and computer magic. Additionally, new economy is dominantly global, with no bottoms or boundaries. What are the desirable directions of change driven by new economy? Authors try, and suggest alternative interpretation and establishing greater interdisciplinary approach in the future research of these issues. KEYWORDS: economics, social sciences, new economy, interdisciplinary, economics

1. INTRODUCTION OF PARADIGMATIC OF NEW ECONOMY Challenges, consequences, possibilities and limits of new economy (n.e.) are large and numerous. They deserve scientific attention and a phenomenological approach, especially in explaining its paradigmatic character. This paper explains some of the theoretical and practical aspects of n.e. as a metaphor that reflects the spirit of the post-industrial-information era, through the prism of valuation and phenomenology of its paradigmatic. In terms of theory, our analysis shows that the n.e. paradigm is highly questionable, because there are no objective elements that prove its existence. Traditional laws, principles and categorical apparatus of economic science are still valid and active. Basically, n.e. has not changed. Therefore, it can not hold the title of paradigmatic theory, knowing that it significantly reduces the choice as the essence of the economy, creating top competence of individual economic subjects (monopolists), forcing intracorporate exchange and network partnerships, representing the modern sophisticated “naturalization” of goods and money relations and restricting competition. In practice, IT, telecommunications, innovation, organization, globalization and other developments and events undoubtedly make the economy “new”, even in the paradigmatic sense. The latest technological revolution (especially in the field of communications and transport, which use micro-processors, fiber optics, databases, computers, digital networks, lasers, etc.) has great economic implications. The most important is creating the basic infrastructural requirements for the so-called post-industrial (post-Fordist) era, that relativizes the number of differences (spatial, temporal, cultural, ethical, political, ideological and others) and verifies the theory of convergence, but not the economic convergence. Through the knowledge and information, waves of globalization are persistently surging. By the end of last century, the service sector has become globally dominant with 61% in the value- added GDP (World Bank, 1999), with a tendency of accelerated expansion. Innovations in the field of IT, computer networks, telecommunications, and transportation systems, have contributed to connecting markets at all distances and boom international capital movement, goods, services, people, ideas and cultural values. In such conditions, the economy is nowadays called weightless, informative, networking, digital, technotronic, E-conomy, etc.. It is believed that F. Machlup was the creator of the information society concept. In his study “The production and distribution of knowledge in the United States” (1962), he noted that “knowledge industry represents 29% of the total national output,” (according to Clark, 2004). The term n.e. is the synergic unity consisting of knowledge (intellectual property), digitalized communication and information, the Internet, online business networking with the very permeable boundaries, innovation, virtual and dynamic connecting, intra-corporate exchange with reduction by eliminating intermediaries and markets, global competition, Web electronic business, flexible manufacturing systems and organizational structure, ownership and partnership, etc.. (Kotlica, 2000, pp. 197-199). In addition to these, the new trends are forming new economic sectors, modifying classical forms of work, eliminating and/or relativizing the traditional vertical hierarchy and horizontal structure of organization, changing the structure of employment and moving towards the service sector, multiplying human knowledge by accessing, processing and distributing the information, automatising business transactions, experiencing a real boom of e-commerce, online banking services and electronic media. The effect on the economy is variable, but here are some positives: less time to conduct business transactions, reduced operating costs and prices, increased revenue and profit, reduced engaging of the business assets, increased productivity, more efficient inventory, better and faster handling customers and so on. (Bjelic, 2001, p. 29).

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Paradigm of n.e. is reflected in the practical sense and the fact that the high-tech has directly influenced the economic environment and has changed some common laws, primarily the market. Since the network goods cannot be practically manufactured at zero marginal costs and since they manufacture external network effects for users, it leads to a nontraditional behavior of supply and demand. It is well known that the standard (neoclassical) economic theory exhibited behavior of manufacturers and customers across the supply and demand curves. The supply curve has a positive slope (because of rising marginal costs that are in its basis), and the demand curve has a negative slope (because of diminishing marginal utility of goods). In the situation of network goods, supply and demand curves are changing their traditional places. The supply curve S0 has a negative slope because of the marginal costs tending to zero in significant intervals, while the demand curve D0 has a positive slope, because the marginal utility of network resources increases the extent of growth in the amount of users. If the process is to be developed with the current pace in the long run, the curve will tend to the equal coordinating point that represents decreasing price and increasing amounts.

Figure 1 â&#x20AC;&#x201C; Market equilibrium for network goods (Source: Draskovic, Jovovic, Draskovic, 2013. P. 27) Figure 1 shows that the equilibrium market price decreases from p0 to p1 and the equilibrium quantity from q0 to q1. Market equilibrium is moving from the point E0 to the point E1. This way, the network good increases its value in proportion to the growth of its quantity, and thereby its price declines in proportion to the growth of its value for the customers. So, the highest value in terms of the knowledge society has the goods to be provided free of cost! It is a paradoxical conclusion, but only at first, because we are not talking of any goods, but the network goods, which are essential to the knowledge society. Above mentioned cases already exist in practice: Microsoft, Netscape and other provide their browsers for free. Not to mention piracy in the area of software products and their free copying. There is another phenomenon, important for the knowledge society, linked to the creation of new monopolies, such as Microsoft, based on knowledge and innovation. C. Shapiro (1999, p. 352) has shown that a combination of the volume effects on the side of supply and demand reinforces monopolistic tendencies. In addition, there is another paradox: monopoly in the market for information products increase production volumes and reduce costs! The first 5Mb hard drive in 1956 costed $50.000 (which means that the 1Mb costed $10,000). From early 1980â&#x20AC;&#x2122;s to today, the price of hard disk capacity of 0.1 GB was reduced from $20,000 to $300 (1000 GB). So, in 30 years (1980-2010) 1Mb price was reduced from $200 to $0.0003 or 666,666 times! And in the period of 1956-2010 as much as 33.3 million times! It seems unlikely, but it is true.

2. THE CHARACTERISTICS OF THE NEW ECONOMY The term n.e. has appeared in the mid 1980s articles relating to the information economy and the knowledge economy. D. Bell has created the concept of post-industrial information age, later renamed to Information Society. It involves the society transition from manufacturing to services economy where theoretical knowledge, technology and information would become the main product. Apart from expensive manufacture, its advantage is the cheap reproduction. However, it is believed (Ilic, 2004) that it formed in the late 20th century. This period coincides with the transition from Third to Fourth scientific and technological revolution, ie. from the industrial to the information economy. The term n.e. is used in the same sense as the term knowledge economy. In this context, the modern society is called information (due to the domination of information as a new factor of production), the knowledge society, the mega-society, communication society, tehno-society, digital society, etc.. The basic characteristics of n.e. are:

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information production basis (information becomes the most important factor of production), fast-changing products and services, flexible production systems, network organization of production, integration, services followed by the products, knowledge, skills generalization, and skills education, knowledge and talent, as the most important factors for socio-economic growth and development.

Many authors agree that n.e. represents the set of industries characterized by high technological achievements and dominant production of services in the globalized business environment. According to Ilic (Ibid.), n.e. is founded on three principles: • complexity (emergence, influence, system components, non-linear process, dynamic structure), • chaos (as an offset of “creative destruction” - J. Shumpeter), and • synergy (no internal system conflicts; the whole is stronger than the sum of its mechanical parts). The importance of information in n.e. system is explained by the perception of the organization as a quality of the relationship (not the physical distribution of functions and responsibilities), ie. the ways of establishing links within it. These connections are better if the flow of information between the organization elements, which are faster. Some characteristic manifestations of n.e. are: • material production requires fewer people employed, • new and better global communication infrastructure, • the new products, intelligent work and production tools, applicable in a humane workplace, • free capital is plentiful and circulates in the world, and • entrepreneurial spirit. According to P. Drucker, characteristics of n.e. are classified into three groups: • industrial production in terms of cost becomes independent of the raw materials and gets associated mainly with the services (continued decline in raw prices and increasing the share of the service costs in the price of the product since 1977), • industrial production is realized and increases with continued reduction in the number of production workers which are directly employed (employment focus is shifted from material production to a service sphere), and • the transformation of global economy from real do symbolic (the amount of capital substantially exceeds the value of total trade). Competitive advantage depends primarily on the knowledge, skills and skills of employees. Therefore, the education system is one of the key assumptions in transition to n.e. It must respond to the changing and demanding needs of the ICT industry. A. Toffler in his book The Third Wave (1980) announces a new culture and civilization, founded on the information. The basic idea of his book is a possibility to divide the complex and contradictory human history according to certain patterns of behavior and characteristics of society. He devised it in metaphorical waves, carrying a certain civilization changes in the technological and social sense. The first wave started when the man left nomadic way of life and began to engage in agriculture. The second wave started with the industrial revolution in the 18th century. The third wave marks the transition to the information society (knowledge era). In his book, “New Rules for the New Economy ...” K. Kelly (1998) cited three basic features of n.e.: • global character of the changes, • operating the intangible resources: ideas and information and • overlapping and mutual influence of individual n.e. segments. According to Hawken (1983), the mass economy has been characterized by industrial age since 1880. The term “mass” has emerged as an economic category, meaning the economy which paradigm was based of two dominant categories: in production, on the economies of scale and mass exploitation of energy sources (oil, coal, gas, etc..) and in consumption, on the mass consumption of material goods and the accumulation of material wealth, capital (property, money, luxury goods, etc.). The difference between mass and information in the economy is reflected in the implementation of the relationship that is built into the product (Hawken, Ibid., p. 35). Mass economy still exists due to the mass consumption of material goods, which are indispensable for human survival. Information economy and the knowledge economy is built on other grounds. It becomes the dominant paradigm of the social growth, all over the world. In addition, the knowledge economy will not replace the mass economy, but will only absorb it to the extent which is necessary and sufficient, and include it in its own evolution. In the economy, there is no clear distinction dividing the mass from the information. That line is defined by the amount of information embedded in the product (Ibid., p. 37). The products of information economy use intelligent solutions (information and knowledge) and consume much less energy per unit of product.

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M. Castells distinguishes five characteristics of n.e.: • production increasingly depends on the use of scientific methods and quality of information and management, • in developed countries, there is a shift of attention from manufacturers and users of material production to information, • a profound transformation of productive organization (from standardized mass production to atomized and from vertically integrated organization an horizontal network of mutual relations between the parts), • the global nature of the economy, where capital, production, management, market, labor, information and technology are organized across national borders, and • revolutionary character of technological change based on IT. The IT “shortens” time and space, creating more opportunities for rapid communication between distant businesses. Distance is no longer an obstacle to cooperation, because it enables new communication and direct contact between buyer and seller, simultaneously. Internet provides great opportunities for researching supply, demand and prices. It dramatically reduces transaction costs. Kelly writes that “communication is no longer a sector of the economy, it is the very economy.” D. Tapskott (1999) points out that the new type of society is characterized by the following 12 features: orientation to knowledge, numerical form of expression, virtual nature, molecular structure, integration and network connectivity, eliminating and/or reducing agents, convergence, innovative nature, transformation of manufacturer-consumer relationship, great dynamics, global scale and the existence of contradictions.

3. OLD AND NEW ECONOMY IT leads to rapid and radical changes. They change human relationships in time, space, economy and society. With computer and communication technologies (Internet, etc.) establishment of networks and virtual elements is enabled. That way, information as a non-material factor gains a significant and often a leading role in the production. N.e. conditions the new communications and convergence, which leads to connecting the world and its unification in many areas. Globalization has generated all the major changes in one strong paradox: people are getting closer in space and time, but they are estranged due to the growing economic and social inequalities. The rise of the information economy is marked by the development of a new organizational logic, associated with a current process of technological change. Interaction between the new technological paradigms and new organizational logic is not a historic backbone of n.e. The dominant knowledge economy feature is the use of information resources, which are significantly different from the traditional ones. Creating the knowledge economy must precede a national security of the social freedom, good educational system, quality institutional environment, guaranteed rules of running the business, and a reasonable balance between state control and market freedom. The absence of these conditions shows only a simple slogan. These conditions can serve as a good criteria for valuating the real development possibilities of knowledge economy. The economy is characterized by steady share growth of the scientific research in the national cost and private companies, as well as steady capitalization growth of the scientific companies. The research can prove a steady value growth of intellectual capital (registered patents, methods and organizational structure, etc..). Identifying the new ideas and categories, contained in the n.e., we can see the differences related to the classical economics. The common thread of these differences is the increasing role of knowledge, information and technology. To understand the difference, between “new” and “old” economy, we must go back to the very beginning, or to the economy offspring (simplification) - transaction. Today, in a complex economy, transactions require different activities that generate costs. Transaction costs depend on: • the legal system (a system of property rights, the application of property rights, the ability to predict judicial decisions), and • the political, educational, social and cultural systems. This means that the economic system can not be explained only by the economy. It takes knowledge and other (legal, social, political, psychological, technical, technological, institutional) knowledge to understand the real functioning of economic system. The level of transaction costs is also influenced by IT. The largest component of transaction costs is the cost of obtaining information. Knowing that IT, in fact, reduces the cost of obtaining information, it reduces the transaction costs. As a result of technological change, IT made significant changes in the economy through the reduction of transaction costs. This topic was analysed by H. Varian (1999, p. 42): “The new economic concepts have never emerged parallely with the new economic phenomena. There was a lot of discussion about the growing restitution, the effects of networking, the input costs, etc... These are hardly the new concepts, these as just been parts of the economic literature for decades. These are very important ideas, but not great ideas. They explain certain phenomena, but their range is limited. I think the great ideas (when it comes to economic literature) can be found only if we go back and study the work of ‘The nature of the firm’ (1937)”. R. Coase (1997, p. 4) disagreed. He found it interesting that this study has become part of the Internet literature. “Transaction

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costs are reduced: what are the effects?” he asked. According to Varian, representatives of n.e. found this idea (category of transaction costs –author’s note) very attractive. One of the Internet’s advantages is the cheaper communication. This, in turn, reduces transaction costs and changes the company limits. The company would move and reduce the functions that are not necessary and would be carried out more transactions using Internet, rather than sending internal memos. Varian reviewed this observation. He said, “even though Internet reduces the cost of transactions between companies, it also reduces the cost of communication within the company and thus facilitates organizing and functioning of large companies.” According to Coase, this was not the end of analysis. Reducing the transaction costs allows the companies to reduce the cost of their essential activities, which can lead to a greater activity, higher production and expending the companies. The essence of the firm and understanding of the market is significantly altered in the n.e. In the era of knowledge economy, economic policy must be based on the following fundamental principles: • developing the science and technology as the propulsive factor of economic growth, • creating a favorable investment climate and stimulating the investments in hight-tech production, • creating a flexible institutional environment in all economic segments (institutional pluralism), particularly in the area of national regulation, which must be able to react to market failure, especially in science and education, • supporting the conditions of competitiveness in part of stimulating innovation and labor productivity, • training of the working resources for managing the changes, risks and crisis, and • implementing the stimulative economic, legal, and organizational solutions. There are two context of the knowledge economy. The first is scientific, which analyze empirical hypothesis, ie. generalization of the trends and characteristics of modern society (knowledge, information, etc..). The second is political, where economy knowledge is viewed as a program goal and a vision of the future. Those contexts are in some way connected to each other through the daily practice through phenomenological elaboration in the literature. However, they seem to operate according to different rules: in the scientific context they function as a hypothesis, and in the political as a statement. For example, scientifically, the knowledge economy is generally interpreted for its growing role of knowledge and information, and politically, focus is on the production and use of information and communication technologies, in the spirit of technological determinism. The effects of the knowledge economy are amazing. The good example is a case of Russian programmer A. Pajitnov, who earned $15,000 for creating the popular computer game “Tetris”. The Computing Centre of the Russian Academy of Sciences earned four million dollars from it. The transnational corporation “Nintendo” which bought the patent, earned more than one billion dollars. Today, Pajitnov works for “Microsoft”, whose main funds are worth 10 billion dollars and the market value of the company is 350-400 billion dollars, with the annual profit of 70 billion dollars. The production of knowledge in the world is very localized. Its consumption is widely and uniformly globalized. Another paradox related to the knowledge economy is this: knowledge is virtually unlimited resources, but the expertly human resource is extremely rare (limited), absolutely and relatively.

3.4. Analysis of the differences between the old and new economy Below are some key points to the differences between “old” and classical, modern economy through analyzing the relationship between local and global, change and continuity of the change, turbulence and stability, specialization and diversity, heterogeneity and homogeneity, motivation and control, market exchange and transaction, competition and cooperation (as complement and substitute), flexibility and economy of scale, stimulation and regulation, target inputs and target outputs. Localization vs. globalization. Economists attach different importance of geographic space in the old and new economy. Standardization of products and production in the old economy reduces the importance of specific regional characteristics. As presented by neoclassical production function, the old economy production is the result of inputs: land, labor and capital (Romer, 1992). While these traditional inputs are playing a role in the n.e., the knowledge emerged as the most important factor of production. The recent texts point out that knowledge is fundamentally different from the traditional factors of production. It can not be transferred without cost through geographic space (Lucas, 1993). That is why geography plays an important role in the n.e. Because the knowledge is developing in the context of local networks, known as innovation clusters. Empirical data clearly show that research and development (R&D) and other sources of knowledge not only create externalities; also, spreading of such knowledge tends to be geographically link within a region, where the new economic knowledge has been generated (Audretsch and Feldman, 1996). The new economic knowledge can be spread, but it is geographically limited. In fact, the geographical dimension of knowledge remain a local phenomenon, in most cases unaffected by globalization, which allowed free transmission of specific information through geographic space. In the old economy, the traditional factors of production (land, labor and capital) have been the predominant source of competitive advantage, while in the n.e. comparative advantage is based on innovative activities. An important source of innovative activity is the awareness of the knowledge spillover, which can not easily spread through the geographic space.

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Change vs. continuity. There is an inherent difference between change and continuity. The old economy depends on continuity (Chandler, 1977), the n.e. provokes changes and is based on them. Innovation is present with the changes and continuity. The difference determines a distinction between radical and incremental innovation. Innovations can be considered as incremental when compatible with the general competence and technological trajectory of the company (Teece et all., 1994). Implementation of incremental innovation does not require significant changes in the company. In contrast, radical innovation can be defined as an expansion beyond the limits of competence and technological trajectory of the company. Theoretical studies and empirical data support the thesis that the company is characterized by technological closure. The old economy is shaped so it can absorb the changes within a given technological paradigm. Threrefore, the tipical company is characterized by incremental innovation. Conversely, the capacity of the n.e. is strengthened to it overcomes the technological closure within the existing paradigm. Turbulence vs. stability. The old economy was characterized by a remarkable stability in terms of homogeneity and durability of the product demand, resulting the constant immobility of the workers. This stability is useful for mass production. Taylorism actually provided marginal mechanism for ensuring the stability and reliability of workers in the production process, since the competition was focused on prices and not necessarily on product differentiation (Chlander, 1977). The n.e. is characterized by high turbulence. It is constantly moving, increasing the number of new companies. Variety vs. specialization. A specialization is a precondition to the neoclassical economics. Diversity has been recommended in the n.e. Recent studies have provided evidence by testing the influence of diversity versus specialization on the regional performance, as measured in terms of development and innovative activity (Feldman and Audretsch, 1999). These studies provide systematic empirical proof that diversity is better for spreading the knowledge and innovation activity than specialization. Heterogeneity vs. homogeneity. There are two dimensions that shape the degree of homogeneity/heterogeneity. The first dimension refers to the genetic characteristics of individuals and their personal experience (Nooteboom, 1999). The second dimension refers to the information. The old economy is based on homogeneity and the n.e. is based on heterogeneity. The world of homogenous economy promotes diffusion, rather than innovation. In the heterogeneous population, each individual has a unique set of information (Olson, 1982). New ideas will likely arise from communication in a heterogeneous, not homogeneous world. Motivation vs. controls. In the industrial era, the work was considered to be unnoticeable in comparison to other inputs. That is why the work input in the production process was reduced to a routine (Chandler, 1990). However, given that the comparative advantage of industrialized countries is based on the new knowledge, access of command and control of the work becomes less effective. It is important to motivate employees to facilitate the discovery and implementation of new ideas. The main feature of today’s life and work is dealing with uncertainty, and workers who are ready to handle it are “more valuable” in the n.e. It motivates them to participate in creating and commercializing the new ideas, not only in controlling and regulating its behavior. Market exchange vs. company transactions. In the era of great uncertainty and imperfect information, market exchange is more limited than in the intra-corporate transactions in relation to the market exchange. In the old economy, dominated by a high degree of certainty and information predictability, transactions within the company were more efficient than market exchange. This was elaborated in the works of R. Coasea (1937) and O. Williamson (1975), underlining an analytical dinstinction between exchange markets and transactions within company. Company size is defined by the response to the Coasea’s (1937, p. 30) question: “How much are the transaction within the company?” Coase and Williamson proved that uncertainty and imperfect information increase the cost of transactions in the company. Competition and cooperation as a complement vs. competition and cooperation as substitutes. Models of competition assume that companies behave autonomously and models of cooperation include links between companies. This requires various forms, like joint ventures, strategic alliances, formal and informal networks (Gomes-Casseres, 1996, 1997). In the old economy, competition and cooperation are seen as substitutes, because the companies were vertical integrated and competed primarily in the product markets. Cooperation between companies decreases the number of competitors and the degree mitigate your competition. In the n.e. companies are vertically independent and specialized for the product market. Greater degree of vertical disintegration in the new economy means that collaboration among independent firms changes the internal transactions within a large vertically integrated cooperation. At the same time, there is a greater number of companies, resulting in increased competitiveness and cooperative interface. The likelihood that the company will compete and/or cooperate with another company is higher in the n.e. A new and improved formula leads independent companies together on the new and unexpected paths.

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Flexibility vs volume. The classic way to reduce the cost per unit of production in the old economy was through expanding the production volume. Large companies had more advantages. This led to concentrated industrial structure (Chandler, 1977). In the n.e., the alternate source to reduce the average cost is flexibility. Teece (1993, p. 218) stated that “... flexible specialization... and contracting can lead to greater advantage than economy of scale. Industries, in which demand for certain products is constantly changing, require flexible production system that can meet the changing demand. There are four main sources of flexibility: technology, organization, demand and quality. They result in reducing the importance of economy of scale. “ Stimulation vs. regulation. Public policies emerged after World War II, in the era of old economy, dealing with the company in the market, were limited in nature. There were three types of public policies in the business - antitrust (competition policy), regulation, and public ownership. All of these three policy approaches restricted freedom of the company contracting affairs. Although specific approaches were generally more associated with one country, more than with others, such as the U.S. antitrust or public property in France and Sweden, most countries had a common approach to intervention, in order to limit the market power of large companies. Public policies limiting the company freedom has been consistent with what was being created in the theory and empirical evidence. If not controlled, large corporation, which possess market power, will allocate the resources in a way that reduces social welfare. Through national intervention, the efficiency and the fairness ratio would resolve in a socially satisfactory way. J. K. Galbraith (1956) commented the role of government in the old economy, where national intervention involved social partnership of big business, government and labor unions. This social partnership existed in almost every western economy. The relevent political issue in the n.e. is no longer: “How the government may restrict the company from abusing the market power?”, but rather: “How the government may create an atmosphere that will lead to the success and vitality of the company?” The main issue of the n.e. has converted from the problem of excess income and abuse of market dominance to international competition, development and employment. It protects the corporations not because of their considerable success and power, but because they are not sufficiently successful. Jorde and Teece (1991) advocated the need to loosen the antitrust laws, allowing U.S. companies to collaborate and compete in as efficient manner as possible in relation to Japan and European companies. Target inputs vs target outputs. Due to the relative certainty in terms of the markets and products in a controlled economy, the appropriate policy response is targeted result and output. Specific industries and certain companies can promote themselves through government programs. Specific target companies in selected industries had represented a successful Japanese politics in the postwar period, which helped it to achieve a competitive advantage in industries such as automobiles and electronic. J. Stiglitz (1996, p. 151) in “Some lessons from the East Asian miracles” said that “the national interventions act coordinated.” They have contributed, at least in part, the postwar Japanese development miracle. The success of Japanese industrial policy in promoting the performance criteria, which expanded trade performances to economic development, documented in a series of empirical studies (Pugel, 1984; Audretsch, 1989; Noland, 1993; Okuno-Fujiwara, 1991). Local vs. national policy. An important aspect of the difference between the old and n.e. is a political location. In the old economy, the appropriate place for policy-making was at the national or federal level. While targeted recipients of the policy can be localized in one or more regions, the most important political institutions are at the national level. In the n.e., a place of national policy towards business tends to be decentralized and regional. High-risk capital cs. low-risk capital. According to the n.e. traditional funding sources are no longer appropriate. The capital investment in partly risky projects is very important. It is a form of financing of hight-risky new forms and informal capital market (Gaston, 1989; Gompers, 1999).

4 NETWARE FORMS IN NEW ECONOMY A stronger competition is the inevitability of modern economy. It imposes increased demands on companies for fast adaptation and large changes. In the last 15 years, the battle for market is on again, among others, by method of enlarging (mergers and acquisitions). It is the fifth wave of so-called strategic takeovers (from 1993 till today). So far, there were monopolies (1897-1904), oligopolies (1916-1929), conglomerates (1966-1974) and non-friendly takeovers (1981-1989). Merger and acquisition (MA) boom peaked in 2000. That wave is already significantly declining and ending. This raises the question: Is there a sixth wave of virtual connecting through business networking, which is the essence of network economy? Innovations, increasing level of knowledge and skills, modernization, continuous monitoring of market demands, know-how and maximum informativenes were imperative of modern times. But this was not enough for gaining a decisive competitive advantage. The traditional hierarchical-bureaucratic forms of organization and management, with appropriate functional elements of organizational culture, have become a serious obstacle to strategic dynamization of modern companies and organizations. It’s a natural aspiration of every business to reduce its costs and realize greater synergic effects. It turned out that, apart from taking strategies, the key knowledge, skills and other advantages valorized in the market as

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competitive, can be achieved even through networking. Modern business has already established the network economy in strategic, organizational and managerial terms. The network economy is closely linked to globalization, alternative employment and development of autonomous working forms. It is especially characteristic for global enterprises in the service area. It enabled the boom of information and communication technologies, which have contributed to the market transparency, reducing the information searching costs, deregulating and dominating the customers market. In practice, when multiplied and multivariate communication flows at a distance are enabled, the goal of communication technologies and network systems is realized quickly. Remains only its application and practice training, provided by innovative business. The network economy was conducted simultaneously on two fronts, and in two ways: • internal (intra-corporate, conducting market mechanisms within the company, developing the entrepreneurial spirit and combining the control methods) and • external (expanding the cooperative networks with sub-suppliers, customers, similar enterprises and even competitors)., The practice has proved that networking of organizational structure, business processes, scientific research and so on, produce a key knowledge, skills, and other benefits, valorized on the market as competitive. The networked partners in business processes increasingly use their key competencies for faster, cheaper, more flexible, better quality and greater results, creating a competitive advantage in the global market. The network economy is defined in various ways. Its main goal is to achieve beneficial economic and organizational effects (direct and indirect). It can be explained by its basic principles and functional specifics, consisting in tendency of organizational development and training in order to achieve the greatest success in the market. Essentially, it is a self-managed polycentric economic structure, which is target oriented to specific tasks, and is based on the following principles: • elitist connecting the competent business partners (Rajss, 1997, p. 94), • business and partnership anti-bureaucracy and anti-formalism, • decentralization of authority and responsibility (“democratic hierarchy”), • highly sophisticated communication-informational integration, • branch character of connection, • free connecting based on equality and independence, in certain time and on a consensus basis, • coordination of mutual cooperation, based on clear rules, ambitious goals, and advanced system of controlling, • vertical and horizontal communication, • applicability in the dependence of the new problem situation, • dynamisation of business and organizational strategy by introducing so-called “internal market” institutions (of compensatory character), expert knowledge, innovative combination of managing and organizational models, motivating entrepreneurial initiatives, etc.., • hybrid and non-traditional organizational structures, and • “unlimited” expansion, ie. deletion of organizational and business boundaries between the companies merged in any way. On these principles are created new forms of alliances, strategic networks and virtual enterprises, consisted of multiple organizational units with a unique goal to provide a synergistic contribution and increasing the quality of mutual organizational communication and cooperation. From an economic and organizational perspective, the main goal of network economy is to achieve beneficial effects (results). V. Rolf (2003, p. 84) has distinguished the direct and indirect network effects. He believed that direct network effect was characterized by a situation where benefits of the goods directly increased due to the greater use by many people (eg, phone, fax, internet, etc..). The phone itself does not bring any benefit to its user, if he can not communicate with other people, but expanding the circle of users increases the overall benefit for each user. B. Metcalf has expressed this in equation: VM=K2 - K, connecting the lawful value dependence of network amount VM and its users K (Ibid.). For example, if VM for the one network user is €1, applying this network value formula for 10 users is 90€, and for 100 users is €9,900. Also, there are questions of the adaptation period, the adaptation of losses and minimal number of network users. Indirect effects are characterized by daily market situation, where completed products or services (spare parts, service, programs, etc.) become cheaper and more accessible. These effects are achieved when the growth of demands for certain goods increases interchangeability of spare parts, improving service and forming the market standards that stimulate mass production, contribute increasing the quality and reducing the cost of production (Ibid.). In the economy of the industrial society dominated a law of diminishing marginal productivity with negative-feedback effect. According to the classical theory, this contributed to the stabilization and the balance of the productivity through rational use and allocation of resources. But in the economy oriented to information and network, dominate a direct network effects and positive feedback. This is reflected by the growing marginal productivity, as shown in Figure 2. This positive feedback connection has formed and intensified under the influence of four factors (the first two affect the demand, and the other two affect the offer): • direct network effect on the factor income growth under the influence of the production volume growth,

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• growing expectations that the network expansion would affect the consumer’s will to get involved and therefore increase the usefulness,

• dominance of fixed costs and low marginal cost, where manufacturer seeks maximum production volume to compensate high initial fixed costs, and

• training and accumulated experience increase the positive feedback effect (Rolf,ibid., s. 87).

Figure 2. The difference between the industry and netware economics (Source: Draskovic, Jovovic, Draskovic, 2013, p. 72) The principle of the mutual dependence, which in traditional organizational structures acts as a stabilizer, is not a typical for the complex and temporary network constructions with many newly formed connections and relationships. Similarly, the confidence between the partners is only possible after a “long run”. Usually, it is not the case with a network economy, based on the synergetic linking partners. Often mentioned virtual enterprise is difficult to restrict from conceptual design and module organization. Therefore, it represents the organizational form that has no legal basis. The virtual enterprise is a group of companies, based on common goals and supplying the market of specific goods or services. In economic relations, they are correlated, informatively networked, legally linked, independent, usually without institutionalizing the functions of top management, and with mutually trusting partners. The term “virtual” is primarily related to the creation of timely deposited situational management competencies for fast response to the changes in the environment and the realization of the market goals. It usually involves the allocation of resources, knowledge management, and marketing. The idea of virtuality is simple. It comes from a desire to reduce risk and relativize competition (by increasing the number of networked partners), to obtain competitive advantage and managerial competence. In practice, it manifests in several ways, including: • creating a foreign branches and joint companies, where large firms delegate certain competences, based on the “encounter movement” of the partners as a form of evolutionary quasi-externalizing, in which the contracts regulate the terms of cooperation, rules of conduct, strategic leader, etc.., • reverse path from the previous one, in which small and medium enterprises offer their competence to the big companies with business image, know-how, information infrastructure, leadership, etc.., and • vertical and horizontal interconnecting the small and the medium-sized enterprises.

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CONCLUSIONS It has been long since the economic science and economic reality have stepped into the new epoch of pluralistic economic synergetic. It relies on the evolution of complex, dynamic, open and virtual business systems based on the principles of flexible self organization, equal partnership cooperation and limited autonomy. Although today the state competition and economic power essentially reflect through the competition of the knowledge level, in most of the states in transition which have traditionally forced knowledge in the previous period, the long term crisis has reflected adversely to the area of knowledge as well. Transition to economy of knowledge is characterized by several significant steps: information becomes the most important resource; an information-communication technology becomes the fundamental infrastructure. Today, the key factors imposing conditions of business are customers (final customers) selecting only the most quality and innovative products having been implemented the new knowledge into. The subject of our research is the explanation of main modern development tendencies in the era Internet, and digital technologies, and distinction new economy from old one. It is about the civilization and paradigmatic step and phenomenon deserving the comprehensive consideration. The dominant distinctive characteristics of new economy are: a) growing position and importance of knowledge for creation of competitive advantages within modern conditions of fast changes and growth of uncertainty, as well as for social and economic development, b) imperative necessity of its max forcing and widest application, at all levels and all segments of society, c) the necessity of constant learning, specialization and adoption of new knowledge, d) significance and paradigm of knowledge, e) gradation connection of new economy, economy of knowledge and knowledge management.

LITERATURE-references 1.

Ackoff, R. L. (1989), “From Data to Wisdom”, Journal of Applied Systems Analysis, Vol. 16, 3-9.

2.

Argyris, C., Schön, D. (1978) Organizational learning: A theory of action perspective, Addison Wesley, Reading, Mass.

3.

Archibugi, D., Lundvall, B.-Å. (2001), The Globalizing Learning Economy, Oxford University Press, New York:.

4.

Arrow, J. K. (1951), The Economics of Information, Collected pa-pers of Kenneth J. Arrow, Oxford, Basil Blackwell Limited, 41–53; 153-196; 225.

5.

_____ (1962), “Economic Welfare and the Allocation of Resources for Invention”, in: R. R. Nelson (ed.), The Rate and Direction of Inventive Activity, Princeton University Press, Princeton, 609-626.

6.

Audretsch, D. B. (1989), The Market and the State, New York Uni-versity Press, New York.

7.

_____ (1995), Innovation and Industry Evolution, MIT Press, Cam-bridge.

8.

Audretsch, D. B., Feldman, M. P. (1996), “R&D Spillovers and the Geography of Innovation and Production”, American Economic Review, 86 (3), June, 630-640.

9.

Audretsch, D. B., Stephan, P. E. (1996), “Company-Scientist Loca-tional Links: The Case of Biotechnology”, American Economic Review, 86 (3), June, 641-652.

10. Audretsch, D. B., Elston, J. A. (1997), “Financing the German Mittelstand”, Small Business Economics, 9 (2), 97-110. 11. Audretsch, D. B., Thrik, R. A. (1998), What’s new about the new economy?, Institute for Development Strategies, US. 12. Blagovest-B.Bjelić, P. (2001), “Elektronska trgovina”, Ekonomika preduzetništva No 1-2, 27-30. 13. Coase, R.H. (1937), “The Nature of the Firm”, Economica, Vol. 4, 386-405 (objavljeno u zborniku Williamson, Masten: The Economics of Transaction Costs, Edward Elgar Publishing, 1999, USA, pp. 1-22). 14. _____ (1988), “The Nature of the Firm: Influence”, Journal of Law, Economics and Organization, Vol. 4, No. 2. (Spring), Oxford, UK. 15. ______ (1997), Interview about New Institutional Economics, Ro-nald Coase Instititut. 16. Clark, D. (1985), Post-Industrial America: a Geographical Perspec-tive, New York-London. 17. _____ (2004), Fritz Machlup — Knowledge Industr, A Brief History of Information and Knowledge, www.nwlink.com 18. Drucer, P. (1995), Managing in a Time of Great Change, Truman Tal-ley, New York. 19. ______ (1999), Management Challenges for the 21 st Century, New York: Harper Business. 20. ______ (2001), “The next society”, Economist, september, 47 -56. 21.

______ (2002), Managing in the next society, New York.

22.

Gaston, R. (1989), Finding Private Venture Capital for Your Firm: A Complete Guide, John Wiley & Sons, New York.

23. Gomes-Casseres, B. (1997), “Alliance Strategies of Small Firms”, Small Business Economics, 9 (1), 33-44. 24. Hawken, P. (1983), The Next Economy, Holt, Rinehart and Winston, New York. 25. Ilic, B. (2004), Tranzicija industrijske (tradicionane) u novu (informatičku) ekonomiju, Ekonomski anali br 162, 99-126 26. Kelly, K. (1998), New Rules for the New Economy: Ten Radical Strategies for a Connected World, Penguin Books, New York. 27. Kotlica, S. (2000), ”E-konomija”, Ekonomika preduzetništva, No 7-8, 197-201. 28. Lucas, R. E. Jr. (1993), “Making a Miracle,” Econometrica, 61 (2), 251-272. 29. Machlup, F. (1962), The Production and Distribution of Knowledge in the United States, Princeton University Press, Princeton, NJ. 30. Nooteboom B., 1994, “Innovation and Diffusion in Small Firms”, Small Business Economics, No 6, 327-347. 31.

Rajss, M. (1997), „Granici ‘bezgraničnih’ predprijatij: perspektivi setevih organizacij“, Problemi teorii i praktiki upravlenija, No 1, 92-97.

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32. Romer, P. M. (1986), „Increasing returns and long-run growth”, Jo-urnal of Political Economy, No 94, 1002-1037. 33. Roos, J. et all. (1997), Intellectual Capital: Navigating in the New Business Landscape, Macmillan Business, Houndsmills. 34. Shapiro, C., Varian, H. R. (1999), Information Rules: A Strategic Guide to the Network Economy, Harvard Business Press, Boston, MA. 35. Tapskott, D. (1999), Elektronno-cifrovoe obšćestvo, INT-press, Kiev; Relf-buk, Moskva. 36. Teece, D. J. (1981), „The market for know-how and the efficient in-ternational transfer of technology“, Annuals of the American Association of Political and Social Sciences. 37.

______ (1993), “The Dynamics of Industrial Capitalism: Perspecti-ves on Alfred Chandler’s Scale and Scope”, Journal of Economic Litera-ture, 31, 199-225.

38. Varian, H. (1999), Information Rules, Harvard Business School Press, Harvard. 39. Williamson, O. (1968), “Economies as an Antitrust Defense: The Welfare Trade-offs”, American Economic Review, Vol. 58, No 1, 18-36. 40. ______ (1975), Markets and Hierarchies: Antitrust Analysis and Im-plications, The Free Press, New York. 41. World Bank (1999), World Development Indicators, The World Bank, NY.

DETAILS ABOUT AUTHORS: RADISLAV JOVOVIC PROFESSOR radejovovic@t-com.me SANDA SENIC POSTGRADUATES STUDENT FOR BOTH AUTHORS: MONTENEGRO BUSINESS SCHOOL “MEDITERIAN” UNIVERSITY OF PODGORICA

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THE PROBABLE FUTURE OF EU’S FINANCIAL DEVIATIONS AND THE FINANCIAL POSITION OF TURKEY IN EU’S PROCESS A. NIYAZI ÖZKER

ABSTRACT

In the study, we attempt to EU’s financial future with the probable financial deviations or fragilities in the framework of candidate countries, especially like Turkey that take aim at the groundwork financial alterations as a developing country in order to constitute the associated financial ground together with the perfect member countries in EU. This phenomenon present some points connected with different financial structures, which is under debate and the concerned points make some current issues directed towards the future like the probable financial deviations. This structural reality that is attempted by these approaches and discussions bring up the other financial contradictions reality relating to financial applications integrity as well as related to the financial future of EU. The matter is to be meaningful and sharpness the whole financial relations’ future that deals with the countries’ different structural positions and ensure the more financial politics harmonious, which maintain the financial reliable position continuity in EU. Hence, the countries that want to be the perfect membership participating in EU, like Turkey, have to review and regulation criteria directed towards the entire member in the adaptations process. It appears that the financial indicators and Its’ probable evaluations is the main argument both the concerned adaptation process agreement and to give meaning to the future. Especially, the developing countries being outside of the membership in EU have generally financial fragility due to the financial points under considerations like the highly inflation rates, the loaded public deficits and the insufficient financial infrastructure. In order to resolution on the base of financial adjustments modify Turkey’s financial conditions connecting with the location in EU to suit the requirements of EU the complicated financial criteria have to be considered with each other, but comparing with the perfect member countries giving examples of financial denominations. KEYWORDS: Financial Conditions, Adaptation Process, Financial Alterations, Financial Politics, Financial Deviations.

1. INTRODUCTION Financial deviations are very complicated phenomena, which affect the level of economic balances with financial politics in the economic adaptation process for countries all over the world. Therefore, EU countries’ financial applications have been subject in the scope of different financial matters too. The current financial deviations that are occurred different criteria make a current issue as the probably financial deviations’ future and designate the aimed financial balances plan of member countries. For example like Greece, some countries could be in the paradoxical deviations because of financial fragility, which has different but meaningful financial national location in comparison with the membership countries EU. It is common asserted that the financial fragility is related to the financial location in EU and all countries have different empirical designs. This approach in the scope of economic union shapes the different fact in touch with the future, which brings up the specific measure putting something to use for each other country to the future. Therefore, the probable future comes into being as an item in a set of the several countries future affecting the EU’s probable future. In this point, the financial deviations come on the scene in the two main points being public budget balances that give shape to the financial relations with the other member countries and the national trade options’ level related to GDP. In addition, the approach includes the regressive empirical design consisting of the level of financial location for country-specific or EU-wide implementation mechanisms. Certainly, also the financial deviations come on the scene due to the financial integration fact that engages in public economic relations in themselves because of the different structural features1. The structural phenomenon is accepted the priority matter to EU’s future toward aimed at the similarity financial framework due to the member countries’ different macroeconomic financial indications. The other matter that results in the financial deviation and financial fragility directed towards to the future are macroeconomics signs and public finance indicators that state macroeconomic stability at the same time. Therefore, public budget balances, public borrowing options and its’ percent to GDP, public expenditures’ level and its’ criterion effect on the financial applications are especially considered in order to analyze the risk factors that constitute the probable financial stabilization formations aimed at the future 2.

7 2

Kamps C. (2005), “Is there a lack of public capital in the European Union?”, EIB Papers, Vol. 10, No: 1, p. 78. Filipozzi F. & Staehr K. (2013), “Covered Interest Parity and the Global Financial Crisis in Four Central and Eastern European Countries”, Eastern European Economics, Vol. 51, No: 1, January–February 2013, p. 22.

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2. THE FINANCIAL INTEGRATION MATTER AND DEVIATION DYNAMICS’ APPEARANCE The financial integration, first of all, has been in the process of structural based on the financial dynamics for a long time and these processes define a financial situation between economic agents. As money using Euro would become like the monetary deviation rates within the euro area, which has moved consistently corresponding standard deviations within domestic borders3. But, the level of financial deviations and failure monetary options have increased in the attracted attention appearances some countries that like Greece, Spain, Italy in the recent years. This is a sign that the financial markets need to monetary demand, which results in the stressed financial market conditions. On the other hand, some countries becoming stabilized Euro area are demanding an extra premium to lend to counterparties located in other countries that have not strong financial ground and institutions4. These two financial relation formations have negative impression on the financial integration process based monetary balances and options due to impair the financial power distribution aimed at Monetary Union in the scope of EU countries too.

2.1. The Financial Key Variables in Touch with The Probably Deviation Process The some financial variables are considered as key financial stabilization both the structure balance formations aimed at providing adaptation process and the probable financial decrease related to the future. On the other hand, these financial key variables express some easily offended points constituting financial stabilization dynamics subjected on both the presented financial indicators connected with the financial formations in the future and the required financial decisions that give an the desired shape to be prevented especially the probably ruined financial stabilization among EU countries via public decision making process5. Because, each country’s has different aims and these aims shape the countries’ financial transmission mechanism considering these institutionally financial stabilization options in touch with all the member countries in order to ensure that will able to come true analyses directed the probably deviations in the future. It is apparent that the probably financial deviations’ future will be established on the associated institutionally financial options due to the global finance markets in the associated economic areas feel the necessity of inevitable financial variables bring all institutional monetary transactions’ power into play with not keeping in mind to the next periods. These some important key financial variables including some their probably effects connected with the next years and locations in the financial markets are exposed as follow6: Bank assets/GDP Banking assets in the financial markets have direct and indirect effects, which affect on the macroeconomics stabilizations and the institutional financial fragility especially including public and private assets can appear due to the deviation of banking sector’s negative monetary business transaction via different optional bank assets. This phenomenon is a remarkable financial variable in touch with central bank to provide adaptation criteria directed towards European Central -or Consolidated Data- Bank Data (ECBD) and Monetary Financial Institutions (MFI). Market Capitalization/GDP Market capitalization has a direct effect on the national borrowing level, the debenture bond costs and the demanded financial valuables that assist in the formation of stock investment the property is directly related to the associated financial unity to the future. And also, the probably deviations in the financial unity is in touch with the global market capitalization aimed at the financial adaptation process. Public Loans/Market Capitalization Public loans and market capitalization in instability process are important causes, which result in the financial fragility and deviations because of the public borrowing phenomenon could obstruct the optimal financial formations and financial fragility too. The public intensify loan transactions affect on the selective credit options including private banking and the national public loans connected with international finance institutions, which bring up the probably financial deviations together with unsuitable adaptation process. Herrmann S. & Axel Jochem A. (2003), “The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector”, Economic Research Center of The Deutsch Bundes bank Discussion Paper 07/03, Frankfurt am Main: Economic Research Center of The Deutsch Bundesbank, March 2003, p. 2. 4 Collignon S. (2010), Propesed Reforms of Europe’s Economic Governance are Flawed, http://www.social-europe.eu/2010/09/proposed-reforms-ofeuropes-economic-governance-are-flawed/ (Accessed 25.07.2013). 5 Kamps C. (2005), “Is there a lack of public capital in the European Union?”, p. 89. 6 Herrmann S. & Jochem A. (2003), “The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector”, p. 3. 3

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Interbank Deposits /Transaction Balance EU countries can use Interbank deposits for ensuring the national transaction balances in order to maintain both financial balances on one’s own and monetary balances that should be to prevent financial decrease. Hence, consolidated banking data and interbank deposits / transaction balances in touch with European Central Bank has an important situation aimed the optimal financial unity. Also, Interbank deposits effect on the global interest rates that have the desired credit limits and probably transaction balance using by some countries to overcome the own financial balances directed the probably deviations in the next times. Bank Assets and All Financial Balances / European Central Bank Consolidated Data European Central and Eastern Bank Data attempt to ensure financial unity using EU countries’ banking transaction assets and monetary liquidity levels. On the other hand, European Central Bank has an important role being mediator and intermediately institution directed to deal with the probably financial deviations. All Financial Balance Limits Controlled by Associated Unity / EU Central Bank Assets Each country financial transaction capacity has on one own financial structure and EU countries’ should be controlled by associated unity being standardized via EU Central Bank Assets, which maintain the participation financial future in order to rightly analyses aimed at shareholder financial and monetary limits directed towards the probably financial deviations. Financial markets have developed growing up constantly in Central and Eastern Europe (CEE) since the early 1990’s and EU countries’ economic system have synchronized economic and financial affairs in EU. But, the main problem have gone due to growing trade and Its’ financial operations since the early same years. The form of foreign exchanges effected directly national banking system facing the other countries’ banking system and their financial transactions. European Commission’s analysis studying, put forth for consideration in the early months of 2013, on the economic forecasts of member countries aiming at the structural synchronization together with the other countries which have different macroeconomics values in EU confirm and support this financial fact.

2.2. The Location of Euro Area from The Point of view of Public Finance pertaining to The Probably Financial Deviations The Euro Area is accepted as an important financial signs’ ground based on bring monetary transactions power into the play in these countries that primary prefer using Euro because of the probably financial decreases’ occur be likely within these countries’ fragility and not much strong financial structures. This fact, on the other hand, means that these countries’ public finance process and options need to be market by debate as “Public Gross Dept”, “Total Government Balances”, “Nominal and Structural Primary Balance”, and “External Borrowing”, “Change of GDP”. Hence, these countries emplaced in the table 2 are especially selected connected with these public balance options. France and Germany are not included due to these countries express not the financial crises process in EU. Table 1. Rebalancing in Euro Area – Adjustment in The Periphery: Public Finance

Country

External Borrowing (-) / Landing (+) in 2012 (% of GDP)

Change from 2009 to 2012 (% of GDP)

Export of Goods and Services - Cumulative Growth (%) 2009-2012

Probably Financing Needs (% of GDP) Bond, Budgets Deficits and Other Deficits for 2014 EUR bn % GDP

GDP Growth Rates for Probably Forecast 2013 2014

Greece

-5.5

7.7

3.4

36.8

16.2

-4.4

-0.6

Spain

-1.5

2.8

23.4

150.4

13.3

-1.4

0.8

Ireland

2.1

5.2

14.5

19.4

11.1

1.1

2.2

Portugal

-1.2

8.4

22.2

19.8

10.9

-1.9

0.8

Italy

-0.6

1.4

20.3

135.4

8.0

-1.0

0.8

Slovenia

1.1

2.4

19.1

123.7

9.6

-2.0

0.7

Euro Area

1.5

1.4

21.5

-0.3

1.4

1046.2 billion

Source: European Commission (2013), European Commission Staff Working Papers European Economic Forecast Winter 2013 - European Economy 1/2013, European Union European Commission Directorate – General for Economic and Financial Affairs, Winter 2013, pp. 130-134.

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In spite of the monetary transactions in Euro Area have an positive primary role on the based monetary financial manipulations, the changed risks in the scope of using Euro or Its’ liquidity conditions would be occurred some financial deviations including the transaction risk as well as liquidity exposure or less foreign assets liquidity7. Also, there are the other reasons connected with the formed financial integration matters. On the other hand, it is appear that there are the remarkable methodological differences being the cause of the probably financial deviations8. Therefore, It needs in order to find meaning in the scope of financial deviations understanding Its’ probably future. It is possible to bring up in the three important points that follow9:

• First off all, it is the most important and meaningful which brings up the main financial balances with monetary trans-

actions between European Systemic Risk Board (ESRB) based European Central Bank Data (ECBD) -or Consolidated Bank Data (CBD)- and Monetary Financial Institutions (MFI). Because, the relevance of consolidation differs within EU countries due to not perfectly financial case connected with monetary applications for most EU countries. Hence, the defective strongly interconnected via proprietary and not perfectly controlled links causes financial adaptation matters for becoming member countries at the last period linked the integration process to EU10. The aggregated financial data became established monetary options and transactions have not been in perfectly using directed towards the macro-prudential analyses. The limited using cause the defective outcomes of analyses bring up two critical question related to probable financial integration deviations. The first question is which adjustment level of financial integration should be or how the financial adaptation case is. The other point consideration related to the aggregated Consolidated Bank Data (CBD) is whether the used some financial analyze techniques are appropriate or suitable for some another countries in EU. Because, some analyze outcomes is signify noting for some countries, which phenomenon have an negative influence on the financial adaptation process for some countries being out of this analyses. The large banking systems and Its’ the different effective levels mean that the needed financial supports and subventions cause to be not enough controlled by European Central Banking. This negative formation gets weak the intermediaries of financial system in EU making difficult the financial integration in order to catch the desired financial unity based monetary transactions in the future. On the other hand, it means that this case already bring up to take measures in order to prevent probably financial deviations. Moreover, large banks ’behavior is poor proxies of smaller banks’ behaviors because of the countries in EU interact differently having specifically systemic connections. These differences which are especially financial-monetary applications as well as banks’ trade-monetary behaviors introduce alongside domestic local banks’ trade-monetary transactions making difficult the structural based monetary integration process. In this respect, the dealing with structural financial matters need to bring into focus the importance of monitoring small and medium size finance institutions including banks and the other finance centers related, directly or indirectly, to Consolidated Bank Data (CBD) and European Central Bank11.

3. THE PROBABLE FINANCIAL DEVIATION UNITS IN THE SCOPE OF (MFI) AND (CBD) AND THE PREVENTIVE APPROACHES IThe main problems that usually appear come originally on the science from institutionally differences within EU countries related to the probably financial deviations in EU. All the associated consolidated financial data including non-banking transactions should be taken up together with Monetary Financial Institutions considered with its’ structural national effects order to meaningful analyzes that needed to catch the desired financial integration process. This approach is more meaningful in order to cope the financial deviations considered with the structural dynamics and their regional effects. Banking and the based on financial institutions’ monetary analyses have to be considered with transactional units and their monetary coverage reporting non-euro area in order to bring up the probably financial deviations. Table 1 state this case as follows:

European Central Bank (2013), Monthly Bulletin August 2013, Frankfurt am Main: European Central Bank 08/2013, p. 98. European Central Bank (2013), Monthly Bulletin August 2013, p. 106. 9 Borgioli, S. & Cláudia Gouveia A. & Labanca C. (2013), “Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU”, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013, p. 7. 10 European Commission (2008), European Union Public Finance, 4th.Ed., Luxembourg: Office for Official Publications of The European Communities, 2008, p. 265. 11 Borgioli S. & Cláudia Gouveia A. & Labanca C. (2013), “Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU”, pp. 7-8. 7 8

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Table 2. The Structural Location of The Probably Financial Deviation Units in Touch with MFI and CBD The Probably Deviation Units MFI’s Balance Aimes in It’s Structural and Its’ Location Effects Location

The Taken Aim at Institutionally of (CBD)

Main Purpose to Prevent Probably Deviations

Monetary Analyses Aimed at Financial Integration

Banking and Based on Monetary Institutions’ Stability-Adaptations Analysis

Coverage

Euro Area Including Largely Reported Non-Euro Area EU Countries

EU Countries and Their Financial Units

Country Allocation and Population

Monetary Financial Institutions (MFI) Including Money Market Funds (MMF), Hosting (Residency)

All domestic Credit Institutions -as Defined National Laws- as well as The Branches of Foreign Banks

Sector Consolidation

Only Possible for MFI (Excluding NonFinancial Corporations)s

Domestic Banking Groups and The Consolidated Foreign Financial Branches and also The Capital Requirement Directive (2006/48/EC) Excluding All Insurers and Financial Institutions

Valuations in Financial Transactions

Currency at Nominal Value. Deposits Loans at Nominal Amount (on a gross basis) and Also, Securities at Market Value (preferred) Associated Values as Defined in The Relevant and National Accounting Standards (accepted)

International Financial Reporting Statistical Standards (IFRS) The Common Reporting (COREP) and Generally Accepted Accounting Principles (GAAP)

Counterparty Breakdown According to ESA 95 and The Structural and The Data Content Analy- Securitization Directed Towards The ses’ The Probably Fall into Ensured Monetary Options Errors

Not to be atomized Financial Institutions and Theirs’ Capital Movements, The Associated Assets Quality and Profits based Financial Units

Source: Stefano B. & Cláudia Gouveia A. & Labanca C. (2013), Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013, p. 10.

As dealing with over financial declinations need to take on the monetary liabilities included in the embrace of national –or local- banking, MFI’ s extent considered with data shared with CBD have to be meaningful to comment on the integration process dynamics. And also, the institutional meaningful occurred can provide to more improvement adjusted in the associated data distribution process, which concentrate on credit transactions and those financial valuable items have to be suitable EU’s congeniality definitions to the member countries and also in themselves. The completed financial transactions should be definition in the standard deviations as a the large of institutionally applications in order to analytical analyze both the probably adaptation deviations based on monetary transaction and the pertaining to analyze approach aimed at structurally financial matters to the future.

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Figure 1. Composite Indicator of Systemic Stress (CISS), (Jan. 2007-29 Mar. 2013)

Source: Constâncio V. (2013), Fragmentation and Rebalancing in The Euro Area, Joint EC-ECB Conference on Financial Integration 25 April 2013, Brussels: European Central Bank, April 2013, p.4

Figure 1 express the financial stress based on Monetary Transaction for Euro Area in the altered recent years including the financial crisis in 2009 that it has continued until recently months in the beginning some negative effects. Since 2009, the stress index –composite indicators that express as percent deviations- have been clearly in the fall down trend in spite of undulation ground on monetary transaction bring up from 80 % to 0.10 %. These undulations coursed of financial existences are accepted as the cause of probably financial deviations in connected with EU’ financial future by some analysts. In a the realistic approach framework, Outright Monetary Transactions including borrowing procedures have been in the fall down process giving cause to hope directed towards EU’s future. The financial crisis that appear in 2009 came not to an end and even if this financial phenomenon, especially comprising monetary transactions, is seen on the markets positively. But it is possible that the EU’s financial balances which are directly influenced by international financial markets’ fragility can carry on the probably financial risks and deviations on Euro Area. Monetary transactions’ that have gone on within EU countries will able to increase monetary capacity continued in the way of searching financial balances using Euro as associated monetary unit, and this financial vicious circle can be offer more likely the financial fragility which will able to cause the probably financial deviations especially after 2014 or following years12.

4. TURKEY’S FINANCIAL BALANCE VALUES AND ITS’ FINANCIAL LOCATION CONNECTED WITH EU FINANCIAL CRITERIA Turkey’s financial balances have been in the positive evaluations for recently years in spite of Its’ more financial signals such as public budget balances, public borrowing limits and the rate of all this financial values to GDP have gone in the undesired currently levels for a long time to the future. Since EU’s financial criteria determine maintaining the member countries integrations in the scope of desired financial aims, the matter is that Turkey has lived in both financial balance matters based on not only financial fragility but socio-economic problems like national income distribution and Its’ unemployment and education level of the national population.

Tropeano D. (2013), Financial Fragility in The Current European Crisis, CITYPERC Working Paper Series No. 2013/09, London: London City University Political Economy Research Centre Department of International Politics, pp. 13-14. . 12

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4.1. Turkey’s Financial Appearance Based on Institutionally Approach The institutional structure has an important location within EU countries, which is directly accepted as an adaptation process component for the integration process because of some candidate countries have to evaluation their own financial institutionally structures. Turkey have been in the same development and evaluation period since It’s own recourses date. The matter in the point, of course, is that Turkey’s different financial system especially tax application, public expenditure and banking system. Certainly, this structural phenomenon affect on the being perfect member process due to this institutionally condition will able to cause the undesired financial adaptation matters with EU countries making financial implicationally procedures including trading transactions financial amorphous a current issue. But, following the financial crises 2001 the financial reconstructive process has gone on the positive formations along with the national macroeconomic improvement especially resulting in the banking sector’s transactions attested. On the other hand, especially the institutionally financial approach is taken up based on Turkish Central Bank observing Turkish institutionally structure, the some financial formation in Turkey is that express measures adopted as follows13:

• The adopted strategies for using foreign exchange reserves based on institutionally applications are keep in mind by • • •

Turkish Central Bank. But, the considered fact is not in the optimal financial framework to primarily support the foreign exchange liquidity need of the banking system in touch with the desired European Central Bank’s criteria as an institutionally approach14. The resumed Turkish Central Bank’s activities as intermediary options directed towards the aimed foreign exchange market have account deposits, which options are convertible into foreign currency. And also it is need that the determined financial process can take over these convertible monetary obligations based on institutionally structure until the removal of uncertainties in international markets15. The other positive improvement is that the rules applicable and transaction operations to catch the aimed export limits rediscount loan limit, which have to be arranged in order to render the use of these loans easier. In this point, Turkish Government introduced an institutionally restructure reform packets and this institutionally evaluations have been in the increased process continuity for a long time16. The allowed banks to restructure have reserved an important place in the institutionally adaptation process aimed at EU member for a long time in Turkey. On the other hand, this fact means that the remarkable quantity of institutionally loans will be able to restructure to ensure smooth functioning of all the national loan regulations oriented towards the associated EU financial balances in the free of financial participation process, especially between financial institutions, certainly before all else banking in Turkey, and non-financial institutions to the probable interactional deviations of EU in the future17. The expenditure taxes that are remarkable located in Turkish Tax System as especially value added tax and special tax have great rates than the income taxes in comparison with the directly taxes in the total tax revenues18. The undesired financial phenomenon is an important reason inclined towards the income distribution deviations with tax injustice in Turkey19. It is appear that the institutionally regulations that are fountain stone to maintain all the optimal financial application in touch with basically institutions20.

The financial sector became stronger putting forte financial development and evaluations that express the total assets rose from 130 billion USD (2002) to 465 billion USD (2008). This ratio is more meaningful to GDP that is positive effected as a sign economic growth because of these ratios to GDP from 57 percent to 77 percent rapidly increasing these numerically indicators of branches and staff21.

The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, Istanbul: The Bank Association of Turkey, October 2009, pp. 2-3. Steinherr, A., Tukel, A. & Ucer, M. (2004), “The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership”, Econstor, Luxembourg: Economic and Financial Reports / European Investment Bank, No. 2004/02, p. 18. 15 Steinherr, Tukel & Ucer, M. (2004), “The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership”, p. 29. 16 McLaren L. M. (2007), Explaining Opposition toTurkish Membership of The EU, European Union Politics, DOI: 10.1177/1465116507076432, Vol. 8, No: 2, 2007, p. 252. 17 McLaren, L. M. (2007), “Explaining Opposition toTurkish Membership of The EU”, p. 256. 18 Paturot, D. & Kirsti, M. & Brys B. (2013), Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries, OECD Taxation Working Papers No.15, OECD Publishing 2013, p. 14. 19 Paturot, D. & Kirsti, M. & Brys B. (2013), “Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries”, p. 16. 20 Atiyas, I. (2009), Economic Institutions and Institutional Change in Turkey during The Neoliberal Era, New Perspectives on Turkey, No. 14, Fall 2012, p. 58. 21 The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, p. 5. 12 14

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4.2. Turkey’s Financial Balances Going as It should be EU’s Member It is fact that the finance structurally balances is the most important matter covering unemployment and reel production levels, which cause Its’ negative foreign trade balances as public deficits together with current deficits, market failures and sectoral productive units’ negative circumstances to the wished for EU’s criteria. On the other hand, this financial phenomenon has been to get into financial stress to integration process and especially Turkey’s current deficits have been in the remarkable augmentation. Therefore, it is appear that Turkey’s membership issue is not a solitary respective issue and it is required to catch achieving economic union that express the acceptable macroeconomics balance values from EU; but also the associated formation in touch with monetary union including monetary transaction based on the participated EU’s monetary for being perfect authorized member in the same process22. The some macroeconomics sings taken into consideration from EU’s financial approach are expressed in table 3 as follow: Table 3. Turkey’s Macroeconomic and Financial Balances in The Last Two Years GDP Last Previous Average Unit

Reference

GDP Growth Rate

1.60

0.10

0.95

Percent

2013-03-31 Quarterly

GDP Annual Growth Rate

3.00

1.40

3.93

Percent

2013-03-31 Quarterly

MARKET

Last

Previous

Average

Unit

Currency

1.95

1.94

1.00

Government Bond (10Y)

8.77

9.14

8.91

Percent

2013-08-01 Monthly

Stock Market

73401.75

73377.44

21658. 31

Index Points

2013-08-01 Monthly

PRICES

Last

Previous

Average

Unit

Reference

Inflation Rate

8.30

6.51

37.84

Percent

2013-06-30 Monthly

Consumer Price Index

221.75

220.07

152.79

Index Points

2013-06-15 Monthly

Export Prices

108.13

108.35

114.49

Index Points

2013-05-15 Monthly

Import Prices

109.32

111.08

111.52

Index Points

2013-05-15 Monthly

MONEY

Last

Previous

Average

Unit

Reference

Interest Rate

4.50

4.50

60.63

Percent

2013-07-23 Monthly

Interbank Rate

3.50

3.80

46.54

Percent

2013-07-15 Monthly

Foreign Exchange Reserves

144320.5

148911.6

39964.2

USD Million

2013-05-31 Monthly

TRADE

Last

Previous

Average

Unit

Reference

Current Account

-7524.00

-8209.00

-1141.84

USD Million

2013-05-15 Monthly

Current Account to GDP

-6.10

-9.70

-2.29

Percent

2012-12-31 Yearly

Balance of Trade

-8570.42

-9947.77

-1315.99

USD Million

2013-06-15 Monthly

GOVERNMENT

Last

Previous

Average

Unit

Reference

Government Budget

-2.80

-1.80

-6.53

Percent

2012-12-31 Yearly

Government Debt to GDP

36.00

39.40

51.82

TRY THO

2013-06-15 Monthly

Government External Dept

349895.0

336863.0

149211.1

USD Million

2013-03-13 Quarterly

Reference 2013-08-02 Monthly

Source: SBERBANK (2013), Turkey Economic Indicators, http://www.tradingeconomics. com/turkey/indicators, (Accessed 02.08.2013); TCMB (2103), Temel Ekonomik Gelişmeler-02 Ağustos 2013, Ankara: Türkiye Cumhuriyet Merkez Bankası (TCMB) Araştırma ve Para Politikası Genel Müdürlüğü, Ankara 2013, pp. 39-42, pp. 52-54 & pp. 69-79; TCMB (2013), Financial Stability Report-May 2013, Vol. 6, Ankara: Central Bank of Republic of Turkey, Ankara 2013, pp. 63-70; Development Ministry (2013), Economic Improvements-June 2013, Ankara 2013, pp. 12-18 & pp. 13-15 & pp. 17-18.

It is appear that Turkish economy has been in the desired adaptation criteria process and this balanced macroeconomic situation can be taken up in the positive approached framework to get EU membership. But, it is difficulty say that this balance situation is enough to reach the perfect membership like the other initially member countries expressed that mean the first fifteen countries. Because, Turkey’s financial balances are in the structural fragility due to national politics’ instability and structural market by struggle. Hence, government budget deficits, government debts to GDP and currency 22

Atiyas, “Economic Institutions and Institutional Change in Turkey during The Neoliberal Era”, p. 16. .

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account balances being currency deficits are affected before all else as seen on table 3. As for all member countries it is important application case that joins and enters into European Monetary Union (EMU) or being the associated application for minimum two years in the European Exchange Rate Mechanism (ERM), which must be done firstly of course. For Turkey, foreign exchange rates is changeable and instability exchange options due to both the more fresh money flow to Turkey from external money markets and the not optimal variable limits of “Foreign Exchange Reserves”, which resulted in the financial instability indications. Therefore, Turkey’s location in the being perfect member process has been is a situation under debate in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro for a long time.

CONCLUSIONS The probably financial deviations in the scope of EU economic and financial trends to the future have different effects due to EU countries’ distinctive economic locations. Therefore, financial deviations occur and appear with different financial key variables that increase the variety of EU countries’ being different responsibility to the considered key variables. Monetary transactions with Euro Unit that is accepted the associated using in EU’s financial ground results in some intermediation manners because of Euro Area comprise not all the EU’ countries using their own market procedures. These being different cause the complex banking transactions on monetary ground and especially the less developed countries then the others having membership in the beginning of EU economic concept face to face a confidence manner in the point under stability consideration aimed. Certainly, the phenomenon causes to build up and improve the different opposite within some countries especially getting new membership in touch with the financial amicableness harmonization institutionally. This fact, before all else, has been seen as the main reason to the probably financial deviations especially regarding as banking transactions intermediary as well as institutional adaptation process to the future. The structural alterations and evaluations have given hope to enter into the perfectly member countries as a the candidate member for Turkey, but it is appear that the accomplished financial balances in touch with the perfect member countries’ balance options including the unemployment and the other different social-economic dynamics which is based on restrictive financial criteria have not been in the positive progress that is desired optimal financial values for being member of EU on the evaluation of Turkey’ financial location since the established led of EU. On the other hand, Turkey has a poor income distribution that means occurring some the other socio-politics manners and certainly this fact needs stronger financial intermediations in order to catch all the criteria of EU. In the light economic research recently, it is appear that the stronger financial ground in the intermediations framework is not only corner adaptation stone to economic growth aimed at the desired EU’s criteria, but is also a railway engine to deal with Turkey’s unstable growth to the future. Turkey’s aim into the European Union (EU) is highly contentious matter and this fact has been not completely by EU countries. The perfect being member into EU needs not only financial harmonization process, but needs the structural politics as well as the other programs containing social relations’ in themselves. Hence, it is appear that EU citizens have an important role in order to Turkey’s admission into EU supporting based on the public union mutually, regardless of what their leaders’ politic approaches that is in a biased manner. And at the last, it is possible to reach the final decision on whether Turkey allowed to join the EU that EU citizens themselves will decision making, taking into consideration all the financial and social balances, because of the high degree of citizen relevance to this particular decision voting European Constitution as a the associational democratic approaches’ required.

22

Atiyas, “Economic Institutions and Institutional Change in Turkey during The Neoliberal Era”, p. 16. .

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LITERATURE-REFERENCES 1.

Atiyas, I. (2009), Economic Institutions and Institutional Change in Turkey during the Neoliberal Era, New Perspectives on Turkey, No. 14, Fall 2012, pp. 45-69.

2.

Bayoumi, T. (1992), Shockıng Aspects of European Monetary Unıfıcatıon, NBER Working Papers Series, Working Paper No. 3949, Cambridge, MA: Natıonal Bureau of Economıc Research, January 1992.

3.

Borgioli, S. & Cláudia Gouveia A. & Labanca C. (2013), Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013.

4.

Collignon S. (2010), Propesed Reforms of Europe’s Economic Governance are Flawed, http://www.social-europe.eu/2010/09/proposed-reformsof-europes-economic-governance-are-flawed/ (Accessed 25.07.2013).

5.

Constâncio V. (2013), Fragmentation and Rebalancing in The Euro Area, Joint EC-ECB Conference on Financial Integration 25 April 2013, Brussels: European Central Bank, April 2013.

6.

Development Ministry (2013), Economic Improvements-June 2013, Ankara 2013.

7.

European Commission (2008), European Union Public Finance, 4th.Ed., Luxembourg: Office for Official Publications of The European Communities, 2008.

8.

European Central Bank (2011), “Ensuring Fiscal Sustainability In The Euro Area”, Monthly Bulletin 04/2011-Articles, Frankfurt am Main: European Central Bank 04/2011, pp. 61-77.

9.

European Central Bank (2013), Monthly Bulletin 08/2013, Frankfurt am Main: European Central Bank 08/2013.

10. European Commission (2013), European Economic Forecast Winter 2013, European Economy 1/2013, European Economy Commission Staff Working Document, Luxembourg: European Unity, European Commission Directorate-General for Economic and Financial Affairs, Winter 2013. 11. Filipozzi F. & Staehr K. (2013), “Covered Interest Parity and the Global Financial Crisis in Four Central and Eastern European Countries”, Eastern European Economics, Vol. 51, No: 1, January–February 2013, pp. 21–35. 12. Herrmann S. & Jochem A. (2003), The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector, Economic Research Center of The Deutsch Bundesbank Discussion Paper 07/03, Frankfurt am Main: Economic Research Center of The Deutsch Bundesbank, March 2003. 13. Kamps C. (2005), “Is there a lack of public capital in the European Union?”, EIB Papers, Vol. 10, No: 1, 2005, pp. 73-93. 14. McLaren L. M. (2007), Explaining Opposition toTurkish Membership of The EU, European Union Politics, DOI: 10.1177/1465116507076432, Vol. 8. No: 2, 2007, pp. 251-278. 15. Paturot, D. & Kirsti, M. & Brys B. (2013), Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries, OECD Taxation Working Papers No.15, OECD Publishing 2013. 16. Pownall, G. & Wieczynska, M. (2012), Deviations from The Mandatory Adoption of IFRS in The European Union: Implementation, Enforcement, Incentives, and Compliance, September 2012, http://business.fiu.edu/soa/pdf/EU_IFRS_9_11.pdf, (Accessed 18..08.2013). 17. SBERBANK (2013), Turkey Economic Indicators, http://www.tradingeconomics. com/turkey/indicators, (Accessed 02.08.2013). 18. Steinherr, A. & Tukel, A. & Ucer, M. (2004), The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership, Econstor, Luxembourg: Economic and financial reports / European Investment Bank, No. 2004/02. 19. TCMB (2103), Temel Ekonomik Gelişmeler-02 Ağustos 2013, Ankara: Türkiye Cumhuriyet Merkez Bankası (TCMB) Araştırma ve Para Politikası Genel Müdürlüğü, Ankara 2013. 20. TCMB (2013), Financial Stability Report-May 2013, Vol. 6, Ankara: Central Bank of Republic of Turkey, Ankara 2013. 21. The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, Istanbul: The Bank Association of Turkey, October 2009. 22. Tropeano D. (2013), Financial Fragility in The Current European Crisis, CITYPERC Working Paper Series No. 2013/09, London: London City University Political Economy Research Centre Department of International Politics. DETAILS ABOUT AUTHOR: A. NIYAZI ÖZKER ASSOC. PROF. DR. PUBLIC FINANCE DEPARTMENT BANDIRMA FACULTY OF ECONOMIC AND BUSINESS ADMINISTRATION BALIKESIR UNIVERSITY – 10200 \ TURKEY niyaziozker@yahoo.com

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HOW TO TEACH OKUN’S LAW USING MATHEMATICAL METHODS? PETRA MEDVEĎOVÁ MARIANA POVAŽANOVÁ

ABSTRACT

The article deals with incorporating mathematical methods into teaching Macroeconomics theory in the faculties of economics. It focuses onto special part of Macroeconomics – Okun’s law. This law is named after Arthur Okun, which in 1962 reported an empirical regularity: a negative short-run relationship between unemployment and output. Since many other studies confirmed this finding, this law has become a stable part of macroeconomics textbooks. There are existing alternative approaches to estimating it which are using different mathematical methods. The article examine some of those methods with the aim of choosing the most appropriate for the special group of students, while taking into consideration their knowledge of the concrete mathematical methods. KEYWORDS: Okun’s law, Changes version, Gap version, Hodrick-Prescott filter

1. INTRODUCTION Unemployment is considered to be serious problem in the economy. Unemployment can be regarded as a cause of poverty and income inequality hence it is often in the centre of the interest of many people, not only the government and the scientists. Typically in the economy, the periods of decreasing of product are accompanied by the increasing of unemployment. This negative correlation between output and the unemployment has been named Okun’s law after the economist Arthur Okun (1962) who using data from American economy showed that each percentage point of real output growth above 4 percent was associated with a fall in the unemployment rate of 0.07 percentage point. This relationship is well known for economists. Many studies confirm the above mentioned relation and Okun’s law became a fixture in many Macroeconomics textbooks (for example: Blanchard, 2010; Mankiw, 2010). When studying macroeconomics, Okun’s law is in that part of macroeconomics which aims to explain the relationship between basic macroeconomics variables. It often serves as a linking point between the Phillips curve and the short-run upward sloping aggregate supply curve. Okun’s law is also useful for explaining the demand side of the economy. It is based on the idea that when output is increasing, there is higher product in the economy. More factors of production are required to produce more goods and services in the economy. If we look at the labour as an important factor of production, then if output of the economy is increasing, demand for labour as well as employment rate are increasing and the unemployment rate is decreasing. From this point of view it seems that Okun’s law justifies those economic policies aiming at supporting the aggregate demand. In reality sometimes Okun’s law served as role of thumb (Knotek, 2007). Okun’s law is a stable part in many macroeconomics textbooks. Students should be familiar with it. We know from the experience that it is much easier for students to understand macroeconomics, and economic logic behind the economic laws, when they are explained on real data, preferably on real data from the country where they live in. From this point of view Okun’s law seems to be ideal, because Okun’s law expressed the relation between output and unemployment by simple equations. But review of the literature shows that there exist different versions of Okun’s law and different mathematical and statistical methods are used for calculating Okun’s coefficient from these expressions. Using these methods requires certain mathematical and statistical knowledge. To get the best results, it is necessary to teach this part of economic theory in that way which takes into consideration students’ knowledge of mathematics and statistics in order to choose the most appropriate version of Okun’s law and most appropriate methods how to calculate the Okun’s coefficient. The article deals with incorporating mathematical methods into teaching Okun’s law in special groups of students in the Faculty of economics at the University of Matej Bel in Banská Bystrica, Slovakia. We focus on so called “Changes version” and “Gap version” of Okun’s law. In order to calculate Okun’s coefficient through the Changes version linear regression is used. In gap version of Okun’s law when trying to express the natural rate of unemployment and the potential output we recommend to use the most obvious methods: to fit the output and unemployment rate time series with the Hodrick-Prescott (HP) filter and then estimate linear model using method of least squares (OLS). Section 2 of this article examines the changes version and the gap version of Okun’s law. The aim of this article is not to explain in details economic theory considering the Okun’s law, nor the mathematics or statistics. The aim of this article is to show, how selected mathematical and statistical methods could be useful in teaching economic theory. In this section we also

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decide which mathematical and statistical methods should be used when teaching Okun’s law to students with different mathematical and statistical knowledge. Sections 3 and 4 have a form of preparation for seminar, which could be used in teaching process. It contains questions for students with the answers for instructor. Section 3 is devoted to the teaching of changes version of Okun’s law, section 4 to the gap version of Okun’s law.

2. CHANGES VERSION AND GAP VERSION OF OKUN’S LAW Okun’s law depicts the negative relationship between output and unemployment it has been named Okun’s law after the economist Arthur Okun. In his original work Okun discussed three empirical relationships, but the third relationship is observationally equivalent to one of the others. Review of the literature shows that there are also different versions of the relationship between growth of output and unemployment rate which are collectively called Okun’s law since original relationship proposed by Okun has been subject to revisions in an ever-changing macroeconomics. Economists have expanded Okun’s original two simple equations to include elements that Okun omitted in his analysis. For example in the literature we can meet with the dynamic version of Okun’s law or with the production function version of Okun’s law just to mention some of them. A review of literature shows that many of the Okun’s coefficients estimated have been obtained for the U.S. data (for example Prachowny, 1993; Freeman, 2000, Ball, 2012). Two of the few studies undertaken with Slovakia and other Central and Eastern European countries are the cross-country studies of Gabrisch and Buscher (2006) and Izyumov and Vahaly (2002). Generally, two methods are used in the literature for estimating Okun’s coefficient: changes version and gap version. 1. Method commonly known as: “Changes version“, captures how change in the unemployment rate from one time period to the next moved with growth in real output in that time period. It took the form (1) where Δ is the change from the previous period,Yt is the output, Ut is the unemployment rate,β is the Okun’s coefficient, α is the intercept and ωt indicates a residua. This version captures the contemporaneous correlation between output growth and movement in unemployment – how output growth varies simultaneously with change in the unemployment rate. The ratio α/β gives the rate of output growth consistent with a stable unemployment rate (normal growth), it means what should be the economic growth in the country if there are no changes in the unemployment. The value of Okun’s coefficient β gives the impact on the change of the unemployment rate from the previous period caused by output growth different from normal during examined time period. The constant α expresses how much unemployment rate will rise if there is zero output growth, in the other words even if the output is constant, the unemployment increases. Using quarterly data from the second quarter of 1948 through the fourth quarter of 1960, Okun expressed this relation as follows change in the unemployment rate = 0.3 – 0.07 * real output growth. According to this estimation, if the unemployment rate remains constant from one quarter to the next, the real output increases by 4.3 percent. Zero real output growth in a given quarter was associated with an increase in the unemployment rate of 0.3 percentage point in that quarter. The value of Okun’s coefficient implies that each percentage point of real output growth above 4.3 percent was associated with a fall in the unemployment rate of 0.07 percentage point. When using changes version of Okun’s law it is necessary to make an assumption that the natural rate of unemployment is constant and potential output grows at constant rate. 2. Method commonly known as “Gap version“ (2) where β is the Okun coefficient, εt indicates a residua. In the case of „gap version“, the difficult problem is to measure the natural rate of unemployment (Ut *) and potential output (Yt *). In potential output Okun sought to identify how much the economy would produce “under conditions of full employment” (Okun, 1962). In full employment, Okun considered what he believed to be an unemployment level low enough to produce as much as possible without generating too much inflationary pressure.

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Today there are several methods how to calculate potential output and the natural rate of unemployment. According to Ball et.al (2012) the most obvious method is to smooth the output and unemployment series with the Hodrick-Prescott (HP) filter. Okun used Gross national product (GNP) in his original work. However, many authors have since produced estimates of Okun’s coefficients using real Gross domestic product (GDP) (for example Harris and Silverstone, 2001). It seems that the estimated Okun’s coefficients tend to be sensitive to the choice of real output data as well. We recommend our students to use the real GDP data. When explaining Okun’s law to students it seems to be easier to focus on changes version, because it requires only the knowledge about linear regression. But the main weakness of this approach, as mentioned above, is the fact that when calculating Okun’s coefficient it is necessary to make an assumption that the natural rate of unemployment is constant and potential output grows at constant rate. In the case of Slovakia, especially during the last worldwide recession it does not seem to be reasonable. But on the other hand, despite such a weakness of this approach, we consider to be important for students to use it, because we believe that when they “get their hands dirty with data“, they will better understand the economic logic of this Law. We are also aware of the fact that if we want to test any economic law, a lot of assumptions should be made. Finally, economics is not primarily a set of answers, but rather a method of reasoning. For above mentioned reasons we consider to be useful for students to use this method if they have only limited knowledge of mathematical and statistical methods. When using this method we recommend for Slovakia to examine time period 1999 - 2008, since in 2009 GDP of Slovakia dropped sharply, which caused also decline of potential product which is in contrary with necessary assumption. For students which have knowledge of mathematics and statistics on intermediate level, we recommend use the HP filter approach. In our faculty t here are two study programs: Bachelor study and Master study. Macroeconomics is included within faculty compulsory subjects in both programs. In the Bachelor program the aim of the study of macroeconomics is to explain principles of macroeconomics and basic macroeconomics models (Uramová, Lacová, Hronec, 2010). The Macroeconomics in Master program is on intermediate level (Uramová, Piteková, Paľa, 2009). The mathematical and statistical skills of students are different in master program, since not all of the students attend the Econometrics, because Econometrics is only voluntary subject in the faculty. To use the Hodrick-Prescott (HP) filter it is necessary to pass this subject. That is why we can divide the students of Master program into two groups: in the first group there will be students who did not attend the Econometrics course. For this first group we recommend to use the Changes version of Okun’s law. For the second group, Gap version of Okun’s law.

3. ESTIMATING OKUN’S COEFFICIENT FOR SLOVAKIA USING CHANGES VERSION OF OKUN’S LAW 3.1. Exercises for students In this exercise we estimate Okun’s coefficient using changes version of Okun’s Law and real data for Slovakia. In order to solve the exercises, Internet access (access to Eurostat database) and Excel program are necessary. Very briefly repeating, Okun’s law depicts negative relationship between changes in the unemployment and the growth of output. Typically, when output is increasing, the unemployment rate is decreasing and vice versa. In the literature there are different versions of the relationship between growth of output and unemployment which are collectively called Okun’s law. In this exercise we focus on changes version (1) where Δ is the change from the previous period, Yt is the output, Ut is the unemployment rate, β is the Okun coefficient, α is the intercept and ωt indicates a residua. Tasks for students are as follows: 1. Collect the data on output and unemployment rate for Slovakia from the Eurostat database (you will need real GDP growth rate, percentage change on previous year, the time period 1995 – 2012, although it is possible to obtain these data directly, try also to calculate them in an Excel worksheet from the data on GDP expressed in millions of euro, chain-linked volumes, reference year 2000 (at 2000 exchange rates) using formula for output growth (3)

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The data for unemployment rate in Slovakia are available only for years 1998 – 2012. In this version of Okun’s law, we need to calculate the changes in unemployment rate. Calculate them from the overall data on unemployment rate – annual average, not seasonally adjusted data using formula. (4)

2.

3. 4. 5. 6. 7. 8. 9.

Make a table and also a graph, in which there will be Slovakia’s GDP growth as percentage and change in unemploy ment rate as percentage for time period 1999 – 2012); Look at the data and the graph from the previous task. Is it possible to recognise any relationship between output and unemployment? Is there any significant decline in GDP during the examined time period? When using the changes version of Okun’s law it is necessary to make the assumption that the natural rate of unemploy ment is constant and potential output grows at a constant rate. Is it reasonable to make this assumption for years 2009, 2010? Since in 2009 the potential output in Slovakia fell, it seems to be more reasonable to consider the data only for 1999 – 2008 when using the changes version of Okun’s law; Discuss why it is not appropriate to use the data from 1989 – 1994; Estimate a linear regression model and write the expression of the changes version of Okun’s law for years 1999 – 2008; Make a graph that shows the change in unemployment rate versus output growth in Slovakia for years 1999 – 2008; Verify, whether the selected model is appropriate, decide whether the coefficients are statistically significant; Interpret Okun’s coefficient; Find out how much unemployment rate will rise if there is a zero output growth; Determine the rate of output growth consistent with the stable unemployment rate (the normal growth).

3.2. Answers (for the instructors) The answer for Task 1 is in Table 1 and in Figure 1. Table 1. Data of GDP and unemployment rate, Slovakia Year

GDP in market prices

GDP growth (percent) Unemployment rate

Change in the unemployment rate (percent)

1995

18 651

1996

19 946

6.94

1997

20 833

4.44

1998

21 741

4.36

12.7

1999

21 749

0.04

16.5

3.8

2000

22 047

1.37

18.9

2.4

2001

22 815

3.48

19.5

0.6

2002

23 860

4.58

18.8

-0.7

2003

24 999

4.77

17.7

-1.1

2004

26 264

5.05

18.4

0.7

2005

28 012

6.66

16.4

-2

2006

30 350

8.35

13.5

-2.9

2007

33 534

10.49

11.2

-2.3

2008

35 463

5.75

9.6

-1.6

2009

33 712

-4.94

12.1

2.5

2010

35 190

4.38

14.5

2.4

2011

36 325

3.23

13.7

-0.8

2012

37 061

2.03

14

0.3

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Figure 1: Chart describing GDP growth and change in unemployment rate, Slovakia

Source: authors with respect to Eurostat data

Answer 2. When looking on the graph we can recognize that there is a negative relationship between the growth of output and the change in unemployment rate. A significant decline in GDP is in 2009. Answer 3. It is not appropriate to use the data from 1989 – 1994, because of a transformational recession in Slovakia, in which output fell and the rate of unemployment increased. Answer 4. The estimated of linear regression model is given by (5) Answer 5. Figure 2 shows the dependence of the change in unemployment rate on output growth in Slovakia for years 1999 – 2008. Figure 2: Slovakia – Okun’s law, 1999 – 2008 (annual data)

Source: authors with respect to Eurostat data

Answer 6. Because both p-values of individual coefficients significance tests are below 0.05, they are statistically significant and the estimated linear regression model can be considered appropriate. Answer 7. The value of Okun’s coefficient implies that each percentage point of real output growth in Slovakia above 4.6 percent is associated on average with a fall in the unemployment rate of 0.64 percentage points. Answer 8. A zero real output growth in a given year is associated with an increase in the unemployment rate by 2.94 percentage points in that year. Answer 9. According to the estimation results, the real output should grow by 4.6 percent in order to keep unemployment rate unchanged.

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4. ESTIMATING OKUN’S COEFFICIENT USING GAP VERSION OF OKUN’S LAW STUDENT INSTRUCTION SHEET 4.1. Exercises for students In this exercise we estimate Okun’s coefficient from gap version of Okun’s law using real data for Slovakia. In order to solve the exercises, Internet access (access to Eurostat database), MS Office Excel and R systems are necessary. “Gap version“ of Okun’s law is expressed by the formula (2) where ϐ is the Okun’s coefficient, εt indicates a residua. In the case of „gap version“, the difficult problem is to measure the natural rate of unemployment ( Ut*) and potential output ( Yt*). Review of the literature shows that there are different methods, how to calculate Ut* and Yt*. In this exercise we are going to use Hodrick-Prescott (HP) filter. Tasks for students are as follows: 1. Collect the data on GDP and unemployment rate for Slovakia from the Eurostat database, time period 2000 – 2012. (You will need the annual data of the real GDP in millions of euro, in constant prices and average unemployment rate); 2. Apply the HP filter on time series of GDP (Y) and unemployment rate (U) (the recommended fitting parameter for annual data is λ=100); 3. Evaluate gapY and gapU ; 4. Check stationarity of gap time series (for both the output gap and the unemployment rate gap, use Augmented DickeyFuller test (ADF) test); 5. If series gapY and gapU are stationary, estimate the linear regression model of Okun’s law; 6. Make a graph that shows the change in gapU according to gapY ; 7. Verify that the classical assumptions of the linear regression model hold; 8. Decide whether the estimated coefficient is statistically significant; 9. Interpret the coefficient of determination and Okun’s coefficient.

4.2. Answers (for the instructors) Answers for the first three tasks are in Table 2. Table 2. Data of GDP and unemployment rate (λ=100 ) Year

Y

U (%)

U

Y HP

U HP

gap Y

gap Y

2000

22046.9

18.9

0.189

18491.36

0.196092

0.175869

-0-03684

2001

23572.9

19.5

0.195

23018.48

0.187925

0.0238

0.036958

2002

25971.7

18.8

0.188

27581.17

0.179686

-0.06013

0.045229

2003

29489.2

17.7

0.177

32220.5

0.171377

-0.08858

0.032285

2004

33994.6

18.4

0.184

36961.5

0.163079

-0.08368

0.1207

2005

38489.1

16.4

0.164

41801.85

0.154933

-0.08257

0.056877

2006

44501.7

13.5

0.135

46709.57

0.147285

-0.04842

-0.0871

2007

54810.8

11.2

0.112

51619.57

0.140577

0.059986

-0.22726

2008

64413.5

9.6

0.096

56444.65

0.135123

0.132063

-0.34184

2009

62794.4

12.1

0.121

61129.55

0.130955

0.026871

-0.07906

2010

65869.5

14.5

0.145

65698.68

0.12771

0.002597

0.126968

2011

69108.3

13.6

0.136

70193.11

0.12493

-0.01558

0.084897

2012

71463

14

0.14

74655.61

0.122327

-0.04371

0.134942

Source: Eurostat and authors

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Answer on the Task 4 is illustrated by the next graphs. Stationarity can be verified by a visual examination in combination with statistical methods. The following t-plots and the ACF and PACF plots suggest that time series under analysis are stationary. This is also confirmed by ADF test. Figure 3: Chart describing the gap GDP and the gap unemployment rate. Slovakia

Source: authors with respect to Eurostat data

Figure 4: Autocorrelation function (ACF) and Partial autocorrelation function (PACF) for time series gap Y Series x

0.0

-0.5

-0.4

-0.2

0.0

ACF

Partial ACF

0.5

0.2

0.4

1.0

Series x

0

2

4

6

8

10

2

4

6

8

10

Lag

Lag

Figure 5: Autocorrelation function (ACF) and Partial autocorrelation function (PACF) for time series gap U

0.2 0.0 -0.4

-0.2

Partial ACF

0.4

0.6

Series x

2

4

6

8

10

Lag

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-0.5

0.0

ACF

0.5

1.0

Series x

0

2

4

6

8

10

Lag

Source: authors

Answer 5. Because the series gapY and gap U are stationary, we can construct the linear regression model and estimated it as follows (6) Answer 6. Figure 6 illustrates the dependence of unemployment gap on output gap. Figure 6: Slovakia – Okun’s Law. 2000 – 2012 (Annual data)

Source: authors with respect to Eurostat data

Answer 7. Residuals can easily be checked for their normality, homoscedasticity, uncorrelatedness and for absence of outliers. Answer 8. Because p-value of coefficient significance test is below 0.05, it is statistically significant and the estimated linear regression model can be considered appropriate. Answer 9. The value of coefficient of determination is 0.40. It means that 40% of variability in unemployment can be explained by variability in output of the economy. As Okun’s coefficient is –1.08, if the output gap goes up by one percentage point, the unemployment gap is expected to fall by approximately 1.08 percentage points.

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CONCLUSION Many studies confirm negative relationship between output and the unemployment rate proposed primarily by Arthur Okun. Okun’s law became a stable part in many macroeconomics textbooks. Students of macroeconomics all around the world should be familiar with it. The task for teachers of macroeconomics is to make students familiar with the covered topics and to make it interesting to them. One way how to explain economic laws in interesting way is to use the real data from the real world around them. However, review of the literature shows that majority of the Okun’s coefficients have been estimated for the U.S. data and for western European countries. For that reason it seems important when teaching macroeconomics in Slovakia to explain Okun’s law using real data for Slovakia. Since there are many different versions of Okun’s law and different mathematical and statistical methods are used for calculating Okun’s coefficient from these expressions, it is also very important to choose that version which take into consideration students’ knowledge of the concrete mathematical and statistical methods. In the conditions of Faculty of Economics, Matej Bel University, Banská Bystrica, Slovakia we found the most appropriate to use Changes version and Gap version of Okun’s law.

ACKNOWLEDGEMENTS The authors were supported by the Project: Mobility - enhancing research. science and education at the Matej Bel University. ITMS code: 26110230082. under the Operational Program Education co-financed by the European Social Fund.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Ball. L., Leigh. D., Loungani. P. (2012). Okun’s Law: Fit at 50? Paper presented at the 13th Jacques Polak Annual Research Conference Hosted by International Monetary Fund. pp. 1 – 41. (References from Proceedings and Books) http://www.imf.org/external/np/res/seminars/2012/arc/ pdf/BLL2.pdf Blanchard. O., Amighini. A., Giavazzi. F. (2010). Macroeconomics. A European Perspective. Pearson Education Limited. ISBN: 978-0-273-72800-9. pp. 205-226. (References from Proceedings and Books) Freeman. D. (2000). a Regional test of Okun’s law. International Advances In Economic Research. Vol. 6. pp. 557-570. (References from Journals) Garbrisch. H., Buscher. H. (2006). The Relationship between Unemployment and Output in Post-communist Countries. Post-Communist Economies. vol. 18. No 3 pp. 261 – 276. (References from Journals) Harris. R., Silverstone. B. (2001). Testing for asymmetry in Okun’s law: A cross−country comparison. Economics Bulletin. Vol. 5. No. 2 pp. 1−13. (References from Journals) Izyumov. A., Vahaly. J. (2002). The Unemployment-Output Tradeoff in Transition Economies: Does Okun’s Law Apply? Economics of Planning. 35: pp. 317-331. (References from Journals) Knotek. E. S. (2007). How useful is Okun’s Law? Kansas City: Federal Reserve Bank of Kansas City. pp. 73 –103. (References from Other Literature) http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/4q07Knotek.pdf. Mankiw. N.G. (2010). Macroeconomics. Worth Publishers ISBN-13: 978-1-4292-1887-0.. pp. 260-262. (References from Proceedings and Books) Moosa. I. A. (1997). A Cross-Country Comparison of Okun’s Coefficient. Journal of Comparative Economics. 24. pp. 335–356. (References from Journals) Okun. A. M. (1962). Potential GNP: Its Measurement and significance. in Proceedings of the Business and Economics Statistics Section. American Statistical Association (Washinghton. D.C.:American Statistical Association. 1962): 98-103. Reprinted in Arthur M. Okun. Economics for Policymaking (Cambridge. MA: MIT Press. 1983). pp. 145-147 (References from Proceedings and Books) Prachowny. M. F. J. (1993). “Okun’s Law: Theoretical Foundations and Revised Estimates.” Review of Economics and Statistics. 75. 2. 1993. pp. 331-5. (References from Journals) Uramová. M., Lacová. Ž., Hronec. M. (2010). Makroekonómia I. Banská Bystrica: Univerzita Mateja Bela. Ekonomická fakulta. 2010. pp. 1-277. ISBN 978-80-557-0043-4. pp. 187-207. (References from Proceedings and Books) Uramová. M., Piteková. J., Paľa. J. (2009). Makroekonómia II. Banská Bystrica: Univerzita Mateja Bela. Ekonomická fakulta. 2009. pp. 1-120. ISBN 978-80-8083-728-0. (References from Proceedings and Books)

DETAILS ABOUT AUTHORS: PETRA MEDVEĎOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA. SLOVAKIA petra.medvedova@umb.sk MARIANA POVAŽANOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA. SLOVAKIA mariana.povazanova@umb.sk

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FORMATTING SYSTEMS OF EXCELLENCE TOWARDS THE AIM OF DEVELOPING THE QUALITY OF EDUCATION RENATA MARINKOVIĆ

ABSTRACT

In the light of the development of the educational process, a by this the overall system, there occurs the permanent need for its advancement. Through the realization of that aim it will be contributed to the development of the contemporary society – both regional as well as global. The quality educational process also means the achievement of quality, applicable knowledge, which is said to be power. With the thought of Francis Bacon “Knowledge is power” begins the project of the modern. René Descartes joined him as the leader of the modern with his rationalistic stance “I think, therefore I am”) which opens presumptions for the later period of the postmodern. In the new times, by applying concretization of independent constructivism, creativity, independency and working on oneself, various pedagogical models open spaces to human thinking and creation and also to interactive relations indispensable for the development of pedagogical thought and work. Then we talk about the postmodern. Readiness for quality processes can be seen in the context of formatting social competences (within the social terms), which includes educational, human potentials, strategies and structures of developing politic. What do they incline to? They aspire to the realization of the system of excellence in all fields and all levels of education. The formatting of the overall system of excellence must be accompanied quality and creative processes of managing and regulation. KEYWORDS: competencies, creativity, quality of education, standards, strategy, structure, system of excellence, managing

1. INTRODUCTION This work deals with problems and queries of realization of the more qualitative educational process in the context of social movements, possibly social development as well. The social conditioning of all processes, positive and negative, could be seen as the state of affairs in all segments of the society. This particularly relates to the “developing” trends of educational politic as part of social politic, which would have to secure more qualitative politic prosperity of the personnel, and at the same time it could strengthen its importance and role in the overall developments. There is a very discussible question posed about the interdisciplinary and multidisciplinary, and by this at the same time transdisciplinarity as deck conjointness of the cultural circle and conjunction of all activities, scientific disciplines and practical events. International contents and interactive impact will make it possible that the analysis of the state of (no)existence of the strategy of development, structure of integral and partial processes and systems of activities, and it would respond to the partially accepted co-existence of the social, humanistic, economic, technical and other professions on the way of mutual cooperation and improvement. The aim is to see how by formatting of quality of (highly) educated system we can achieve and maintain the system of excellence or at least the majority of creative processes and fields. This supposes all the educational (pedagogic), psychological, sociologic and social, politic, economic, technologic and other innovative categories. We shall see in what measure it is possible to establish a possibly quality relation between the business practice, market and specific educational contexts and personnel. In this multidisciplinary world we shall observe the systematicness of the professional development and education of teachers who transfer values and information (in qualitative and quantitative meaning), and also their impact on the development of social, mental, emotional and other competencies of individuals.

2. PRESUMPTIONS FOR THE DEVELOPMENT OF QUALITY (HIGH) EDUCATION How can we realize quality results of education at all, even with high education? Which elements in the system of values and criteria while bringing operative decisions must be satisfied so that we would realize positive motions or be able to practice their application? During such consideration we have to be conscious that the quality of every activity is conditioned by the level of education and the possible degree of its application. However, the fundamental presumption of such realization comes from a number of processing stages of feasibility, and by it also the systematical definitiveness. In the light of these determinants whose aim is to achieve the best quality interdisciplinary and multidisciplinary connections it is supposed that the realization would be efficient and whereby qualified as well. In the realization of quality there are indispensable competitive values out of which results a competitive spirit of desire for the better that in the end results with a sound competition. The sounder the competition, the better the quality of realization will be on a

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higher level. This aim of the development actually implies educational standards that can achieve that we would competently speak about every particular system (education, tourism, urbanism, health, economy and the like), the overall, integral process that has its structure, creative elements in the functional and operative meaning (organization, human factor, working phases, tools or equipment, investments, or the like), which will finally result by the strategy of carrying out of defined tasks. The strategy can be flexible, depending on practical indicators and possible new aims. The absence of strategy of the development of social, even (high) educational politic, crucially makes an impact on the quality of the system of managing of all social, educational processes, but also of activities of all possible orientations. This is when every, and particularly quality structure and construction lacks quality integral development. Its integral development means open doors to the innovations, creative ideas, foreign influence (not at any cost), numerous guest tours of experts in our country and our experts abroad. Appreciating the referent frame for eight key competences that in the framework CARDS program (2006) was brought by the European Parliament, which was proclaimed as elements of achievements of social standards, it must be emphasized some other assumptions for the achievements of standards that define personality competences. The mentioned competences relate and cover school subjects from the knowledge of mother tongue, foreign language, mathematics and natural sciences, information-communication cognition. This is only barren conclusion, well known to everybody for centuries. It can stand as a fact, however, here it should stress some other presumptions of the educational character that lie in the basis of every activity, every professional orientation and realization. They are the foundation of realization of social activities as such, but also of knowledge, ability and specific competences. Let us state some of these values that should be developed parallel to the realization of professional, expert competences. It was not perceived that any science, except the psychological, sociologic and pedagogic sciences only sporadically deals with these questions. Hence, probably, there come the practical indicators and unsatisfactory results. Therefore, such values form a net of formatting personalities, and at the same time they affect the more quality realization of posed goals. Some of them are:

• • • • • • • • •

development of communicational abilities; communication based on socialization; formatting of the system of adequate values (stimulation of intellectual, moral and working values); stimulating energy of the personality identity (awareness of reality of one’s own value, objectivity); formatting and respecting the personality’s authority but based on proved value, knowledge, competence, professional results, and not by impostrous and self-conceit enforcement – thus appreciating authority based on the personality’s quality; representation and application of argumentative criticality (positive and negative), and not flat assessment according to subjective “criteria” – depending on sympathies, ignorance, nepotism, personal interests and the like; development and stimulating courage for the emphasizing one’s stand, idea – by public action and the fight for the new and different; stimulation of responsibility to oneself and others; gradual development of the system of value, elaborate criteria and evaluation of the level and degree of quality of achieved results.

From all of this it could be resumed and emphasized the importance of certain actions on the way to realization of educational, professional and living standards, based on competencies into which there are included some European/ worldly values to which it is not necessary to attach completely, but it should be respected and, depending on the necessity, it should be applied. Thus we could conclude that:

• • • • • • • • •

competences have their developing role, on the way to professionalization and the lifelong or permanent learning; goals and methods change permanently as due to motivation and creative approach results are achieved; establishing national and institutional strategies and mutual correlation is necessary for the improvement of quality; all of it is consolidated and pervaded by the European net for the securing of quality; it is indispensable to secure the vertical and horizontal porosity of the educational system, which is not adequately valorized and established on critical bases; it is indispensable to establish. pedagogical standards for high education in all segments, orientations, particularly in the contextual, personal and strategically-structural sense; only the theoretically touched pedagogical excellence practically becomes the goal of the educational politic; the establishment of the regulations is important (contextual, instrumental, operatively) in the sense of ponderability of outcomes, the result of learning; permanent training of (university) teachers (on all educational level and academic orientation and degrees) becomes and remains a permanently present process, and also permanently enriches with contents, methods and results;

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• standardization of evaluation of educational results must contribute to the enrichment ad direct impact on the development of economic flows accompanied by security of employment – very discussible in practice;

• education must be education with a goal, expected adequate result and achieved degree of satisfaction – which renders the perspective of educational standards.

Thus the politic of education or educational politic (if it exists) should take care about some elements that would stimulate and strengthen the values of human potentials, contextual capacities and the availability of achieved results. Some of them would relate to:

• • • • • •

attractableness (of contents, methods, technologies,…); mobility (regarding teachers, students, researches – at the international level); comparability with foreign high education and qualifications; securing of the quality relations of university educations between the home and foreign scene; recognizing formal degrees of education/knowledge as well as real levels of their results; competition of knowledge on the working market.

If we were to omit any of the mentioned elements, and mostly we omit more, we should speak about the quality to which we tend, and we would speak less about the excellence that is recorded administratively and not quintessentially. If we add to it that decisions about its enforcement bring by those who are semiliterate and uninterested, and in no way academically oriented individuals, then it becomes understandable the bitterness and non-rendering, even then when we refer to “adequate results”.

3. WHAT IS MISSING - little, much or nothing Trying to answer to this question there occur passing by in opinions/judgments. This depends on the degree of criticism, the degree of cognition – home and foreign, expert knowledge, contacts, psychological-pedagogic knowledge, experience, objectivity, being interested, engaged, courage to disclose one’s stand, beware positions achieved in various ways, and the like. There is the factor that the mentioned elements do not mutually exclude. They could synchronistically “act” but in practice there are more who because of their absence cannot act at all. In the Strategic frame for the development 2006 – 2013 certain reasons are quoted that would explain how the basic role of the high education has been linked to it:

• • • • • • • • • • • • • • • •

absence of developing vision and the short time and long time developing programs; variable development of the system, whose main characteristic is concentration of institutions in the capital; insufficient investment in spatial capacities and scientistic and technological equipment of the high education; unfavourable age and sex structure of teachers; absence of evaluation of study program plans; absence of systems of quality control of instruction (polls exist but this is not an equable and trustworthy model of following the quality of the instruction; the discouraging conditions of advancement; lack of connection of educational institutions, which makes it impossible to develop interdisciplinariness; loitering in carrying even minimal changes and permanent resistance to innovations; negligible mobility of university teachers; absence of programs of lifelong learning; neglecting internacionalization, which is manifested by an extremely small number of programs in the English language (this is why they are launched by private educational institutions); instances of unethical behavior, particularly the relation towards students; longtime process of social marginalization of science; absence of strategic plan of scientific development and related priorities; overall inefficient, lack of incentive and backward system of pre-graduating and particularly post-graduate education.

Each of these points merits the elaboration which would give us anu opportunity to find other faults that daily accompany us. As this Strategy was written in the year 2006, it would be desirable to determine how many things have changed backward in all those years. Except for some improvements of certain elements, it seems that nothing crucial has changed. Certain changes are connected to individuals and individual work, but there are no systematic, institutional (re)organization and activity.

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Let us overview some other burdening factors upon which there is nothing done. Let us observe it from the stand of students, teachers, teaching programs, university institutions. It is rather difficult to mutually separate them because they are logically intertwined and by the recent situation conditioned. Students are exposed to nonfunctional high education considering the fact that no one had taught them in the earlier schooling that whatever they learn they do not learn it for their marks, diploma and to impress their teachers and parents, but that they learn for themselves, because they need their knowledge and development, as well as their advancement in life. (There is the question how much knowledge means in the current time when it is most often not criteria of efficacy. This might sound contradictorily but knowledge, though it is nit the question of the statute, it is the question of one’s own security, value and strength of a personal breakthrough). Moreover, the registration politic at the faculties is not directed to real needs of the profession but for years the same number of registered students is repeated and it is well known that when they graduate they will not have the place to work there, because that segment, either of production or academic further improvement is either made impossible or extinct. Consequently, it should be necessary to coordinate the registry politic with the needs of the market and reduce the number of registered students, but also the number of study programs, i.e. of faculty departments/sections whose teachers, using unproductive programs neglect the young people because, in no way do they follow world’s programs (at least partially) and remain on the level of the students’ dissatisfaction. The appraisal of the state of affairs would show in practice that there are an array of useless profiles that should be extinguished or reorganize and coordinate and harmonize with foreign trends, following their experience and quality of realization. Until it will begin to start thinking in that way and start promptly acting – the work market will have no opportunity to start functioning. This is why we conclude: simultaneously following the appraisal of the state that would connect the needs of the practice and the educational registry politic, and parallel with this it would influence the reorganization of the studies as such and the adaptation of the programs – and that would be the most important activities and processes which would contribute to the quality of high education. On the other hand, the realization of teachers’ time schedules are often defined by legislation and number of students is small. The salary of the teacher is the same as the salary of the teacher who has several hundred students, those who have to be examined and carry out all accompanying operations (seminars, exercises and the like). It seems that no one takes care about it. The educational programs are often doubled because under the similar or different names of the lecture courses there is the same literature, the same tasks and the same contents concealed. Who finds this useful? Simultaneously, there is almost no following of foreign contents that could enrich our educational scene and offer the students much more. Beside the fact that students are inadequately educated, there is also the permanent education of teachers unattended in terms of psychological-pedagogical and didactic-methodical and communication accessory qualification that would be intended for assistants and younger (why not also to more experienced) teachers. Such educational profiling at the Zagreb University started in the far year 1971, practically it culminated in the year 1976 – and then stealthily became silent. As a matter of fact, in the world such a need was established in the far decades with the aim that the university teachers were to be educated in practical segments of their profession, which would also apply to the educational system. This related to the teachers of the humanities and even more the non-humanity faculties which by the fact that they were economists, lawyers, engineers, physicians, they were at the same time teachers to their students and also it was a necessary enrichment to the pedagogical-didactic work in practice. Simultaneous competence – professional (e.g. architect) and pedagogic (educational) only consolidate and with more quality present contents. The experience of some other countries (e.g. England, Institute of Education University of London) speak about the necessity of refurbishment of educational licenses in (high)educational institutions. Who takes care about this in our country? There is another problematic institutional question – the problem of one large University with more than 30 faculties, which objectively cannot follow the development of the diverse corpus. Diverse in organization, in contents, orientation, personal ability of teachers, quality of the students, interests and needs. All the more as the some of the faculties very large and could be as such be universities. By allocating university autonomy to the faculties that would accomplish a homogenate structure that would realize more qualitative results because it would be turned to itself and to its goals. In the world the mentioned criteria are more esteemed, so they would easier and more qualitatively function. The current equaling of natural, social, humanistic and technical sciences, as also art academies, as well as the treatment of state and private colleges – all this acts confusing and often leaves a trace of incorrect relation from the collective universus. These were only some observations that actually were practical indicators of the earlier mentioned deficiencies from the Strategic frame for the development 2006 – 2013. However, in the same document there are also some advantages of the current system of higher education specified. Is this the result of an advised systematical action, foreign influence or individual personal activity – this is a question. This is how the current advantages of our University is listed which we should know how to exploit:

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• defined number of eminent scientists and scientific institutions; • Croatian science disposes of motivated and well educated young scientists who are characterized by the readiness for changes and entrepreneurial spirit;

• Croatian asserted scientists who are active abroad; • presence of several academic centers of excellence as well as successful research-developing institutes in economy; • presence (a smaller number) of successful highly educational programs that encompass contemporary educational •

methods, instigate active contribution of students and offer wide-range theoretical knowledge necessary for the contemporary interdisciplinary trends; entire existing infrastructure (personal, institutional and technological), despite of the fact that it lapses after world’s standards, and offers foundations for necessary changes.

4. THE EU AND THE EASTERN PARTNERSHIP Self-assuredness and one’s knowledge is shown by active engagement, interpretations of one’s own considerations, critical relation in the positive and negative ...., and finally by the practical, concrete re(actions). This is posed by those who know, but also those who at the same time desire that is better, more and qualitative. These are rare individuals and thereby exceptional. Only the exceptional regret making efforts for common benefit. These are the ones who are mentioned at the end of the abovementioned chapter (citation from the Strategic frame for the development 2006 – 2013). Only the exceptional, i.e. excellent ones, demand and choose for cooperation those who are better than them. Why? Because they are self-assured and know their own abilities, and they are conscious of the fact that no one is going to endanger them. Because two able ones can any time do more than one. By way of illustration, the best examples are the selection and estimation of young assistants at the faculties. According to the choice of assistants it is possible to realize what quality the teacher has. A quality teacher is going to choose the best, the other one is going to choose somebody who is inconspicuous, “gray”, with no perspectives, with whom it can be manipulated and directed according to one’s desire. Such perspective of high education is certainly doubtful, because the lower level of the abovementioned level of education of future students is, the lower will the scientific level be, and consequently the overall system. What about excellence here and in what correlation is it with the knowledge? On such a degree, i.e. quality, pondering and behavior, the further strategy will depend as well as the structure of the overall educational and scientific corpus. Standardization, equalization of human factor (as subjective) at the expense of knowledge and specific values – excellence (as an objective factor) will suppress everything that is valid. Such profiles dare not enter into something new, they dare not undertake something because the do not know, because they are uncertain, withdraw by itself, because they are afraid. Because of that they are unwilling to work, they expect that someone else is going to do it because why should the work for another person, when this other person could work for them instead. And so we go round in circles and thus there are no changes. So there are no (or there are very few) action programs, there are no researches, no indicators which would make comparability possible and point out quantitative data that should rise and quantitatively result in productive activities. Simultaneously, the strategic determinant of the Zagreb University (this relates to other universities) quotes its activity as researching university that develops quality high education which means graduating and doctoral studies that stimulate transdisciplinarity and interdisciplinarity as well as the nourishing cultures of innovations and transfers of knowledge and new cognitions. Let us perceive this as a statement, which is not the first, but nothing important has particularly occurred.

4.1 Entrepreneurial competences and business excellence Nourishing entrepreneurial competences, if it should appear, should be also enriched with humanistic, moral, intellectual values and knowledge and also by personal adaptation. This would be the basis for the achievement of business excellence and success. The business excellence represents overall improvement of working and activities of an organization – be it educational, economic or some other. This is the query of developing continuity. From this it results that all the participants are satisfied with the achieved, and they are motivated for further activities; this means that they are simultaneously instigators of processes who give a frame based on several criteria. Some of them encompass data about what the organization does and they are – enablers: leadership, people, politic and strategy, partnership, resources and processes. The following criteria tell us about the results which the organization achieves: human results (in business and educational meaning), results of the society and results as key indicators. The aforesaid relates both to the (high) educational institutions and the other business organizations.

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However, there are differences in defining achieved excellence in various spheres of activities. It is only the educational region that is unprofitable (in literal meaning) because it is about the achievement of quality education, and by this there is the acquirement of knowledge. Simultaneously, every other organization with the aim of achieving business excellence in the first plane has a financial benefit. And this is the difference between the acquirement of spiritual value (knowledge) and the material values. But there exist common points that present barriers in the application of any model of excellence. These are the following limitations in considering, and by this in activity:

a) expressed attitude that “our business activity is different” (we would never interfere in someone’s ideas); b) there exist numerous differences in the perception of quality and business excellence (diverse approaches); c) there exist priorities and politic that are in conflict with the already proved approach of some model; d) there exist environments where the quality and business excellence are understood as an imposed program which is detached and not integrated in the business in the way it is usually done.

Throughout all the organizational structures, whether educational or economic, there stretches the question of the human resource development, into which the least of all segments of the society are invested. This is proved by the recourses of the pre access funds from the recent times when we yet not members of the EU. Why is the relation to the basic value, person, inferior, inapprehensible, although it is expected of everybody to render an engagement, contribution, but it has no support, neither financial nor educational, even any verbal. How can we realize quality, even excellence in any activity?

4.2. Strategic commitment and educational excellence There is in operation for a certain time that European documents treating the problematic of our high educational institutions, like Green paper, that appeared in the year 2011 as a great challenge, then also Europe 2020, Horizont 2020 and Teaching 2020. The document Europe 2020 is a strategic document and represents goals of the strategy of high education development. It is based on integral, innovative and safe associations. The foundation for it should be interdisciplinariness and multidisciplinariness – which makes links among all disciplines, profession, institutions and countries. Being led by the direction from these documents, and representing Smjernice za strategiju odgoja, obrazovanja, znanosti i tehnologije/ Guidelines for the strategy of upbringing, education, science and technology (Minister MZOS - Ž. Jovanović, 9.5.2013.) was speaking about the „strategy“ that he wants to call Hrvatska 2020 (Croatia 2020), emphasizing rational usage of all resources, from the material to human, so that in our country should realize a number of faculty educated professionals for the working market, and not for employment institutions. To achieve it is necessary to apply professionalism in the overall educational system. Implying reform in educational qualification, it is supposed that there will occur the rise of the rate of the highly educated by 40 percent. However, tending to reality, the satisfactory result would be between 25 to 30 percent of highly educated persons in the actively working population. The fact that “Croatia has no economy based on knowledge, nor has the society an equal chance” (Ž.Jovanović), there is a practical question posed: How should we organize the entire (high)educational system in order for young people to be able to prepare with quality for the working market? Since we have only 18 percent of (high)educated working acting population, while there are 3,350 researches per a million of inhabitants, and for the science and research there is less than 1 percent of GDP set aside. Is it then suitable to pose the question about excellence? In doing so accept foreign materials of international conferences the emphasis is put on the linkage of social sciences, art and technology and linking of researchers, their ideas and results into the world’s collectiveness - development, researching, applications of knowledge in economy and quality results. What is interesting are the different world approaches to education, particularly on the level of high education and the lifelong learning as ways towards excellence. The American trend is learning through work, via working, where the error is corrected by further work (learning by doing). The Japanese approach is somewhat different, and it relates to the learning by experience where the corrections are performed through walking so that one should not lose time and results. This is a logical sequence for the workaholic Japanese, and it is known under the term – learning by experience. There is also the interesting view of the other eastern industrial giant to this question – Korea. They are very practical and undertaking, and accordingly ingenious because their concept of development in education, and by this the production is based on deliberation that everything is already made up, there is only important that it should be well combined, integrated and further develop offered activities and processes. By their philosophy they merge everything they can find and then they make something – new. This new then becomes qualitatively recognized and praised in the world (learning by integrating). Probably it is possible to find an array of similar conceptions and resources also in other countries, but it is definitely more important to recognize and adapt what is nearest and best in an individual country and its mentality. Being occupied with the question of acquirement of (relative) degree of excellence as a notion, the question of organizational form of excellence’s existence got imposed. Some activities and some sciences have recognized this possibility of for-

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matting and application of excellence in the activity of centers of excellence, particularly in highly educational institutions. The goals of acting of such centers would be observed through stimulating of educational excellence, through managing quality changes in the educational system, through the development of new educational programs applicable to students for later work in economy, through competition on the market relation to knowledge and skills, achieving efficacious intellectual and pedagogic potential and the like. This would achieve a quality professionalization through lifelong learning and attainment of socially responsible pedagogues. By the activity of such a pedagogic excellence center, educational activities would be, in terms of programs, specifically intended to all educational employees, advisers, mentors, directors, students, professors in the private and state sector, in agencies, ministries, at the university, in management linked to the economic development. In this way higher criteria and more quality systems of educational values would achieved as well as key competences on all the educational levels. Taking into account that the Zakon o osiguravanju kvalitete u znanosti i visokom obrazovanju /Law on securing quality in science and high education (2009), and somewhat earlier the MZOS published the goals of the Znanstvena i tehnologijska politika RH / Scietific and technologogical politic of the RH whose basis is the stimulation of excellence in science – the conception of possible center of pedagogic excellence by way of their goals could be specified in the light of:

• • • • • • • • • • •

strategy and planning of development of pedagogic theory and practice; stimulation of educational excellence – using chosen themes; managing changes in the development of the system of high education; determining existing teachers’ and other competences as further development of professional values; development of new teaching programs applicable in high education and economic organizations; common activities and development of educational and economic structures; competition the market in knowledge and skills; securing implementation of longlife education and quality professionalization; achievement of efficacy of intellectual potential – pedagogic and the like; recognizable character of the pedagogic profession and its system of values; achievement/realization of socially responsible pedagogy.

Taking into consideration the numerous educational population that is not encompassed by defined educational contents, and it should have been, the expected results were as implied:

• better knowledge and development of business activities that are dealt by (un)professional persons; • achievement of greater dignity and distinguishing of the pedagogic profession and pedagogic science in whose shelter there are all the educational activities of various orientations and commitments;

• development of awareness that pedagogy is everywhere round us ant it should be used in all segments of life – whether we are aware of it or not;

• adoption of higher criteria and quality system of values (in business / in the family / in society / in the (university) class; • recognizing the necessity for realization of longlife learning/education along with its development. • By virtue of these statements we would draft the strategy of development excellence in many educational and active segments which would be a very demanding assignment.

CONCLUSIONS Accepting all the mentioned elements, processes and activities we must affirm that they affect effectiveness, impacts, results of education as such, and particularly high education. In this way assumptions are formatted for the advancement of the integral social system which implies the development of economy, possibility of employment, stimulating cultural consciousness and national identity, and also the enculturation of the population that should be ennobled by newly obtained conditions of life and environment. In so doing one should not neglect European and world’s cognitive values but they should be followed and possibly adapted by homeland’s conditions. Understood in this way, meaning knowledge, it is thus applicable with understanding and it will be “real” knowledge that will be useful, both to the individual and to the social system as a whole. Unified human, educational-cultural and economic capital will constitute a quality platform for the realization of social-politic development.

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LITERATURE 1.

Afrić, V. i dr. (2011.) Društvene pretpostavke društva znanja, Filozofski fakultet Sveučilišta u Zagrebu, Institut društvenih znanosti Ivo Pilar, Učiteljski fakultet Sveučilišta u Zagrebu, Zagreb 2010.; Afrić, V. and others (2011) Social hypothesis of the society of knowledge

2.

Jantti, M.H. (2002.) Minding your Own Business: Can a Business Excellence Framework Translate to the Education Sector ?(online). Dostupno na: http:// ro.uow.edu.au/asdpapers/19 (15. lipanj 2013/ June, 2013)

3.

Keely, B. (2009.) Ljudski kapital (Od predškolskog odgoja do cjeloživotnog učenja), Educa, Zagreb 2009.; Human capital (From the pre-school education to longlife verning)

4.

Liessman, K.P. (2009.) Teorija neobrazovanosti, zablude društva znanja, Jesenski i Turk, Zagreb 2009.; Theory of noneducation, misapprehension of the society of knowledge

5.

Marinković, R. (2007.) Croatian Educational Space and European Influences, R. Marinković (Ed).: New Perspectives in Quality Development of Higher Education, A.Z.P. Grafis d.o.o. Zagreb 2007, pp. 25 – 48.

6.

Marinković, R. (2007.) Quality Management and Communication in Higher Education, A.Z.P. Grafis d.o.o. Zagreb 2007.

7.

Standards and Guidelines for Quality Assurance in the European Higher Education Area, European Association for Quality Assurance in Higher Education, Helsinki, 2007.

8.

Strateški okvir za razvoj 2006 – 2013., Vlada Republike Hrvatske, Središnji državni ured za razvojnu strategiju i koordinaciju fondova EU, Zagreb, 2006.; (Strategic frame for development 2006 – 2013, Government of the Republic of Croatia, Central State Department for developmental strategy and coordination of funds EU, Zagreb, 2006)

DETAILS ABOUT AUTHOR: RENATA MARINKOVIC PROFESSOR FACULTY OF HUMANITIES AND SOCIAL SCIENCES, UNIVERSITY OF ZAGREB ZAGREB, CROATIA rmarinko@ffzg.hr

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FORMING COMMUNITIES OF PRACTICE IN HIGHER EDUCATION: A COMPARATIVE ANALYSIS SHERYL BUCKLEY MARIA JAKOVLJEVIC MELANIE BUSHNEY GRZEGORZ MAJEWSKI

ABSTRACT

In the light of the development of the educational process, a by this the overall system, there occurs the permanent need for its advancement. Through the realization of that aim it will be contributed to the development of the contemporary society – both regional as well as global. The quality educational process also means the achievement of quality, applicable knowledge, which is said to be power. With the thought of Francis Bacon “Knowledge is power” begins the project of the modern. René Descartes joined him as the leader of the modern with his rationalistic stance “I think, therefore I am”) which opens presumptions for the later period of the postmodern. In the new times, by applying concretization of independent constructivism, creativity, independency and working on oneself, various pedagogical models open spaces to human thinking and creation and also to interactive relations indispensable for the development of pedagogical thought and work. Then we talk about the postmodern. Readiness for quality processes can be seen in the context of formatting social competences (within the social terms), which includes educational, human potentials, strategies and structures of developing politic. What do they incline to? They aspire to the realization of the system of excellence in all fields and all levels of education. The formatting of the overall system of excellence must be accompanied quality and creative processes of managing and regulation. KEYWORDS: Communities of Practice, higher education, action research, knowledge sharing, online learning, survey.

1. INTRODUCTION Communities of Practice (CoPs) are all around us. It has been in existence for a long time. Communities can be found in schools, universities, research institutes (Nistor, Baltes, & Schustek, 2012) and business organisations. Gannon-Leary and Fontainha (2007) emphasise that in view of technological developments which gave rise to improved communication and participant interactivity, academic staff and learners (students) in higher education have been functioning in virtual Communities of Practice (VCoPs). These online environments allow participants to communicate synchronously or asynchronously (Baran, 2006). According to Bolger (cited by Gormley 2012) VCoPs can advance employee development and learning while preserving crucial organisational knowledge. However, the specific guidance to form CoPs in higher educational institutions (HEIs) does not exist. On the other hand, Nistor et al. (2012) point out that although VCoPs lead to improved academic participation and learning success, only a small number of learners and faculty participate in VCoPs on a regular basis. Participation in CoPs delivers several benefits in the form of the accumulation of experience, the stimulation of the social construction of knowledge and the development of expertise (Boylan, 2010; Nistor, Baltes, & Schustek, 2012), which makes it interesting for educational research on formal learning. Given that knowledge as a valuable asset must be managed in a knowledge-based economy and most organizational knowledge exists in tacit form within employees’ minds (Gromley, 2012), issues of knowledge management have also become more prevalent among researchers. Krishnaveni and Sujath (2012) emphasise that knowledge sharing in CoPs have not been entirely researched so far. It is noteworthy that research on the environments of online CoPs has increased (Baran, 2006). Some remaining questions still need to be answered. To establish CoPs and keep it alive is more difficult than the blink of an eye. Unfortunately, the majority of literature on CoPs originates from outside Europe although e-learning articles have been widely distributed around Europe. Gannon-Leary and Fontainha (2007) advocate further research on CoPs and virtual learning communities across European Union countries. Similarly Petersen (2007) cited by Gannon-Leary and Fontainha (2007) proposed that the concepts of learning in CoPs need to be further developed. Overall, more research is required about CoPs (Baran, 2006; Wubbels, 2007) to gain more insight about it. This study has been initiated as part of a Women in Research project about CoPs that consists of six phases: developing a theoretical framework for communities of practice; exploring students’ preliminary attitudes towards communities of

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practice; forming pilot communities of practice; evaluating pilot communities of practice groups; implementing action research to pilot communities of practice and applying the communities of practice model (CoPM) to other groups. The aim of this paper is to highlight phase two of the study namely exploring students’ preliminary attitudes towards communities of practice. The main purpose of this paper to determine to what extent are learners willing or prepared to share knowledge within learning CoPs at three institutions of higher education in order to empower learning and knowledge sharing within those institutions. The University of Johannesburg in South Africa, the University of Witwatersrand and the University of Zadar in Croatia are compared in this paper. All of them are urban universities which offer contact tuition. Furthermore, Croatia joined the European Union on 1 July 2013 (Mahony, 2013). The research questions are the following: 1. What are the perceptions of undergraduate and postgraduate students at two South African universities about CoPs in terms of their willingness to share knowledge and experiences? 2. What are the perceptions of undergraduate and postgraduate students at a European university about CoPs in terms of their willingness to share knowledge and experiences? 3. In which way does CoP influence the study methods of undergraduate and postgraduate students at all universities?

2. DEFINING COMMUNITIES OF PRACTICE Wenger and Snyder (2000: 139) define CoPs as “groups of people informally bound together by shared expertise and passion for a joint enterprise”. Lave and Wenger (1991) and Wenger (1998) view CoPs as groups of people who share “goals, activities and experiences in the frame of a given practice”. Barab, Makinster and Scheckler (2004) regard a CoP as a “persistent, sustained social network of individuals who share and develop an overlapping knowledge base, set of beliefs, values, history, and experience focused on a common practice and/or mutual enterprise”. The improvement of knowledge of the members in the community is the result of the communication. Online CoPs differ from co-located CoPs. Gannon-Leary and Fontainha (2007) describe virtual communities of practice (VCoPs) as a “network of individuals who share a domain of interest about which they communicate online”. Lai, Pratt Anderson and Stigter (2006) point out some differences. It takes longer to develop online CoPs than co-located CoPs. Technological support is crucial for online CoPs but not for co-located CoPs. Communication in online CoPs is mainly computer-mediated but in co-located CoPs communication is mainly face-to-face.

3. PARTICIPATION, TRUST AND KNOWLEDGE SHARING WITHIN COPs Wenger (1998) focuses on participation as an “encompassing process of being active participants in the practices of social communities and constructing identities in relation to these communities”. Interactions do not have to be long (Krishnaveni & Sujatha, 2012). Knowledge sharing occurs via reflection and story telling and CoP members communicate among themselves. CoPs ultimately serve as a platform to question and explore the topics of interest. In order to learn through social interactions, the members produce and reuse resources e.g. the artefacts and its memory. The resources support the tacit knowledge of CoP members and those members share their knowledge and competencies. To communicate with others in a community, creates a social presence. The social presence influences the likelihood of individuals to participate in CoPs, especially in online environments. The degree of participation in CoPs differs depending on the individual expertise of the members. Those who display more expertise become involved in more activities which include activities with a higher degree of difficulty and responsibility. In CoPs the expert status relates to the identity of the members in that community. Members can be full and peripheral community members according to Lave and Wenger (1991). Experts with their exceptional knowledge and skills are full members of CoPs and members recognise them socially as such. It follows then that expert identity results from “the interaction with and recognition of other members” in CoPs which takes place in the context of participation. The impact of “expertise participation on expert status is mediated by participation” (Nistor et al., 2012). Furthermore, Krishnaveni and Sujatha (2012) report that members address issues with the assistance of other experts within the CoPs. Gradually mentors come to the forefront in view of their long-term association and they start to assist newcomers. It is easy for new members to join if they have the particular interest. In passing of time they associate with senior members and more experts which opens the way for transfer of knowledge from the experts to the learners. After

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a while the members know which part of the knowledge can be codified and which part must be shared by means of storytelling or other means (Krishnaveni & Sujatha, 2012). The Oxford English Dictionary (2013) describes trust as a ‘firm belief in the reliability, truth, or ability of someone or something’. Members will use CoPs once they trust it to have reliable and objective information. For CoPs to be successful, the members must highly trust the integrity and competence of its members (Krishnaveni & Sujatha, 2012). If the community includes a number of known people, the CoP members will feel more comfortable, but they will also be inclined to participate in CoPs consisting of entirely new members if they have great levels of trust in the institution. Usoro, Sharratt, Tsui and Shekhar (2007) conclude that trust in VCoPs contains three elements: competence, integrity and benevolence. Usoro et al. (2007) found trust in the integrity of the community to be the most important predictor to share knowledge. Competence-based trust refers to the confidence of the members in the particular expertise of others. Integrity/benevolence-based trust involves the expectation of the trustees that others will treat them in an honest and kind manner. Ardichvili (2008) cited by Gormley (2012) further added institution-based trust, which refers to moderators who ensure the trustworthy behaviour of members through organisational structures. In an earlier study, Ardichvili (2003) identified integrity/benevolence-based trust and competence-based trust as important barriers to participation in VCoPs, due to the fear of misuse by others of information posted, for example, facing a personal attack by others. Often members of CoPs come across several barriers that hinder them to participate and exchange knowledge.

4. APPROPRIATE TECHNOLOGY FOR COPs Internet technologies enabled knowledge sharing in online CoPs. Active knowledge sharing contributes to successful VCoPs. Expert knowledge can be shared by the medium of Web 2.0 tools which include blogs and wikis. Web 1.0 and Web 2.0 deal with the ways in which technologies are used. Web 1.0 consisted of static web pages that were filled with information but users could not interact with the site except for example to download a document or an application. Web 2.0 enabled people to connect with others through the Web by using for example social networking sites like LinkedIn or Facebook (Gelin & Milusheva, 2011). It allows communication, participation, collaboration and editing of information (Gormley, 2012). Users can contribute (e.g. Wikipedia) or share content (e.g. YouTube). If anybody wanted to create CoPs, Web 2.0 would be the technology to apply. However, Web 2.0 is beneficial if members continue to use the community for knowledge sharing. Web 2.0 tools ought to decrease the time users spend to source content by improving the visibility of existing content instead of being used to offer an alternative to what exists already. On the other hand, VCoPs is able to operate successfully without the latest high-tech tools (Gelin & Milusheva, 2011). Learners may require training to use social media or to participate in blogs, wikis and forums for knowledge sharing. They need to obtain the relevant skills and competence to use them. Davis (1989) cited by Gormley (2012) postulates that the perceived usefulness and perceived ease of use of technology influence substantially on the users’ motivation to accept and use information technology. For instance Karpinski (2008) cited by Gormley (2012) reported that people may not use Web 2.0 resources if they did not have a perceived need for the resource, thereby not viewing it as useful. Interestingly, technology itself may add to the misinterpretation of messages, due to lack of face-to-face communication (Gannon-Leary & Fontainha, 2007; Gormley 2012). Management must play a supportive role to promoting the usefulness and advantages of Web 2.0 tools for knowledge-sharing and collaboration and make the technology available to employees.

5. CULTIVATING COPS WITHIN ORGANISATIONS For Wenger, McDermott and Snyder (2002) a successful CoP relies on the purpose and objective of the community as well as the interests and resources of the CoP members. Instead of reinventing the wheel and starting from scratch, Schenkel and Teigland (2008) as cited by Krishnaveni and Sujatha (2012) advise that one should look at the existing communities and networks first. In the absence of the latter, the recommendation is to form relationships among coworkers around common themes and interests followed by developing goals for CoPs in alignment with organisational objectives. In a strongly framed CoP, transmission of knowledge takes place closely between the members thereof. The opposite is true. When transmission of knowledge is less frequent, the CoP is weakly framed. The danger of disintegration occurs when the ability to communicate closely among the CoP members, is hindered (Schenkel and Teigland, 2008 cited by Krishnaveni and Sujatha, 2012).

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Top management ought to have an awareness of networks of knowledge workers and the importance of knowledge sharing. CoPs flourish when they receive active support and the necessary resources e.g. time to participate, technical infrastructure, CoP sponsors ensure the whole support for the development and expansion of CoPs. CoP sponsors serve as a support link between CoP leaders and top management. The sponsor can further play the role of a control agent and request the CoP leader to provide a number of best practices to be developed at specific time intervals. Sponsors should supervise the best proactive adoption process and provide appropriate technology to enable best practice exchange within the CoP ( Borzillo, 2009 as cited by Krishnaveni and Sujatha, 2012). Successful CoPs are able to generate sufficient excitement, relevance and value to attract and engage members, a sense of aliveness in other words. How can one design CoPs for this aliveness? Wenger, McDermott and Snyder (2002) postulate that CoPs must invite the interaction that makes them alive. Well-structured CoPs enable group discussion, one-onone conversations, observing experts tackle cutting-edge issues. Despite the voluntary nature of CoPs, well-structured community design can invite aliveness. Wenger, McDermott and Snyder (2002) identified seven principles or actions in order to cultivate CoPs so that they will become “alive“: 1. Design CoPs to evolve naturally. Since CoPs are dynamic, in the sense that the interests, goals and members may change, CoP forums need to be designed to support these shifts in focus. 2. Create opportunities for open dialogue between inside and outside perspectives. Although the CoP members and their knowledge are a valuable resource, it is to the advantage of the CoPs to look outside of the CoPs to gain understanding and insight in the different possibilities to accomplish their learning goals. 3. Invite different levels of participation. The first level is the core group that participates intensively in the community through discussions and projects. They fulfill leadership roles to guide the group. The active group, second level of participation, participate regularly but not to the same extent as the level of the leaders. The third level, the peripheral group, although being passive members in the community are still learning from their involvement. The majority members resort to this third group. 4. Develop public and private community spaces. CoP members in public spaces share and discuss ideas but private exchanges must be made possible. Different CoP members could coordinate relationships among the members and resources by adopting an individualised approach based on particular needs. 5. Focus on the value of the community. Members ought to have opportunities to discuss the value and productivity of their participation. 6. Combine familiarity and excitement. As part of the CoP structure learning opportunities must be provided to shape their learning experiences in a brainstorming session and investigating the traditional and radical wisdom with regard to their topic. 7. Create a rhythm or pace for the community. Members need to meet, reflect and evolve on a regular basis. The pace should maintain an engagement level that will sustain the vibrant CoP but at the same time not become so fastpaced that it becomes unwieldy and overwhelming.

5.1 Principles for cultivating CoPs Lai et al. (2006) argue that online CoPs or VCoPs involve more than merely transferring a CoP to an online environment. Technology infrastructures must enable the online CoPs to address barriers that are not applicable in co-located CoPs: time to meet and communicate; members may be large and involve many locations; members are dispersed across organisations and experience different organisational cultures. It is debatable whether trust can be developed online. Lai et al. (2006) provide the following design principles for online CoPs: 1. Online CoPs must be cultivated to grow naturally. Although these online CoPs “can be built in terms of the technology”, the members themselves must take rersponsibility to grow the community. Online CoPs must allow development. 2. Developing online CoPs by considering sociability (interaction of members) and usability (interaction of members with the technology). Several strategies are provided to promote sociability and participation. Allow different levels of participation; allow time to participate; ensure that there is ease of use of technologies and build social relationships and trust. 3. Attract diverse members so that a critical mass of people are members of the online CoPs. Structure the online CoPs to take into account geographical and contextual diversity. 4. Provide for different roles in the online CoPs. The types of roles are: leadership roles, core members, support persons and community members. Defined roles deliver the benefits of reassurance, continuity and structure. 5. Incorporate technology designed with functionality to support sociability and knowledge sharing. To choose appropriate technology, the following must be considered: the needs of the community, access; level to technology and the level of available funds. 6. Adopt a blended approach to development where online activities are supported by offline activities.

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5.2 Strategies for empowering CoPs Au, Reiner and Urbanowski (2009) suggest five additional strategies that can be applied in CoPs: 1. Create an equal environment. Members must be at ease to participate and intimidation should be discouraged. To develop a common understanding of the value of the community requires intensive preparation. All members must be engaged and they need to find a way to work together to accomplish goals together. 2. Keep material and activities engaging. In order to prevent boredom, excitement can be created by examining or discussing different activities that everyone will be interested which will motivate members to return for more. Wenger et al. (2002) concurs that successful CoPs supply sufficient structured activities to build a pace of participation and opportunities to share innovative ideas. 3. Establish a routine. Members of CoPs need to know what will be accomplished during each meeting and when. Since all participants have different schedules for all their commitments, a routine is necessary so that members can work around their commitments (Au, Reiner & Urbanowski, 2009; Wenger et al., 2002). 4. Support third party opinions. Apart from professional opinions, third party opinions of people who do not form part of the practice serve as a neutral opinion on what the CoP is looking for, what is lacking, what has been overdone or tried previously. For Wenger et al. (2002) insider and outsider perspectives are necessary. While insiders understand the issues and barriers to problem-solving and may possess the knowledge required to assist the CoP, outsiders who are non-experts and neutral facilitators on the issue may help open up new possibilities. 5. Design for growth and expansion. With the passing of time, new information, new ideas and techniques could be incorporated. Changes in the organisation also place new demands on the CoP and the community must prepare for the growth and expansion. 6. Adhering to the preceding will contribute to CoPs being successful. The next section deals with the empirical part of the study.

6. RESEARCH DESIGN 6.1 Research approach This research can be described as a quantitative case study as the learning experience of students is investigated relating to a specific event in a bounded context (Creswell, 1994; Yin, 1994; Merriam, 1998). The quantitative research approach allows researchers to collect quantifiable data in challenge to deliver neutral results (Creswell, 1998).

6.2 Sampling and data gathering method A non-probability sampling approach was used through convenience sampling. Participants from the three groups of students (Department of Economics, University of Zadar, Croatia, Department of Mining, University of the Witwatersrand and Department of Applied Information Systems, University of Johannesburg) presented a purposive convenient sample, as they were available and inexpensive to this study (Patton, 1980:104). A survey was undertaken with 500 students registered for undergraduate and postgraduate diplomas and degrees at three Universities. Lectures conducted an off-line questionnaire using existing database of undergraduate and postgraduate students at three universities.

6.3 Assessment of trustworthiness Participation was strictly voluntary and students were free to decline to participate in this research study, or they could withdraw their participation from the study at any time. Students were informed that anonymity will be protected in any reports, research papers, thesis documents, and presentations that result from this work. The students completed a questionnaire, which they returned to the researchers electronically. The issues of credibility and reliability in the questionnaire design were considered (Creswell, 1994,1998; Patton, 1980).

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6.4 Questionnaire design The questionnaire was divided into sections A - demographic information (gender, age, year of study, nationality) and B - 5 categories/measures, namely: willingness; team preparedness; communication modes; and perceived benefits. In total the questionnaire consisted of 20 questions and the variety of questions contributed to the richness of the preliminary data by revealing studentsâ&#x20AC;&#x2122; perceptions, opinions with respect to CoPs.

7. DATA ANALYSIS 7.1 Cross-tabulation and Chi-Square testing Inferential statistics (a cross-tabulation and Chi-Square testing) were used to analyse studentsâ&#x20AC;&#x2122; responses that are considered as variables. A cross-tabulation is a technique that is based on joint frequency distribution of cases based on two or more categorical variables. Categorical variables should contain integer value, which would indicate membership in one of several possible categories. The range of potential values for such variables is limited. Due to the low number of possible values of categorical variables it is not possible to make any assumptions regarding the distribution (e.g. whether it is normal distribution) (Crossman, 2013). Chi-Square test can be utilized in this study to investigate whether the results of the sample analysis are representative of the larger population (Crossman, 2013). The Chi-Square test of statistical significance assumes that the variables are measured at the nominal level. This means that should there be any information regarding the order of, or distances between categories, it is ignored. A critical assumption for the Chi-Square is independence of observations. Moreover large frequencies are expected (Michael, 2002). The Chi-Square test helps us to determine whether two discrete (categorical) variables are associated. The Chi-Square test computes the sum of the squares of the differences between actual and expected values of variables and assigns a probability value to that number depending on the size of the difference and the number of rows and columns of the crosstabs table. If the probability value p computed by the Chi-Square test is very small it means that the differences between actual and expected values are significantly large. This means that the assumption of the independence between variables is not met and that there is a relationship between the variables. Should the value p be large, differences between the actual and expected values are not statistically significant and therefore variables are indeed independent. The Chi-Square test is only reliable if all expected values are 5 or more. Figure 1 presents the results of the cross-tab and Chi-Square analysis for the variable measuring the willingness to share knowledge in the same field. Figure 1: Willingness to share knowledge in the same field (Cross-tab and Chi-Square test). Cross- tab Institution Strongly Disagree 5.1 Are you prepared to share your knowledge and experience with others in the same field?

Disagree Neutral Agree Strongly Agree

Total

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Total

Zadar

UJ

Wits

Count

1

3

3

7

% within Institution

0.5%

2.6%

1.3%

1.3%

Count

1

0

0

1

% within Institution

0.5%

0.0%

0.0%

0.2%

Count

12

19

13

44

% within Institution

6.0%

16.4%

5.6%

8.0%

Count

130

50

60

240

% within Institution

65.0%

43.1%

26.0%

43.9%

Count

56

44

155

255

% within Institution

28.0%

37.9%

67.1%

46.6%

Count

200

116

231

547

% within Institution

100.0%

100.0%

100.0%

100.0%

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Chi-Square Tests Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

91.732a

8

.000

Likelihood Ratio

90.299

8

.000

Linear-by-Linear Association

29.318

1

.000

N of Valid Cases

547

a: 6 cells (40.0%) have expected count less than 5. The minimum expected count is .21. In this case there are 6 cells (about 40%) that have the expected count below 5, which makes the Chi-Square test not reliable.Figure 2 presents the results of the cross-tab and Chi-Square analysis for the variable measuring the willingness to share knowledge depending on the character or the other members of CoP. Figure 2: Willingness to share knowledge depending on the character of the other members of CoP. Cross- tab Institution Strongly Disagree 5.2 Would the character of the other members play a role while sharing knowledge?

Disagree Neutral Agree Strongly Agree

Total

Total

Zadar

UJ

Wits

Count

0

1

4

5

% within Institution

0.0%

0.9%

1.7%

0.9%

Count

1

1

6

8

% within Institution

0.5%

0.9%

2.6%

1.5%

Count

29

24

36

89

% within Institution

14.5%

20.7%

15.7%

16.3%

Count

115

57

92

264

% within Institution

57.5%

49.1%

40.2%

48.4%

Count

55

33

91

179

% within Institution

27.5%

28.4%

39.7%

32.8%

Count

200

116

229

545

% within Institution

100.0%

100.0%

100.0%

100.0%

Chi-Square Tests Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

21.371a

8

.006

Likelihood Ratio

22.782

8

.004

Linear-by-Linear Association

.056

1

.813

N of Valid Cases

545

a: 6 cells (40.0%) have expected count less than 5. The minimum expected count is 1.06.

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As with the data in Figure 1, there are 6 cells, which have the expected count below 5, which makes the Chi-Square invalid in this case. Similar situation to those two presented previously (cells with values below 5) occurs in the case of the following questions in the questionnare: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Are you a team player? Which form of communication would you most use as a participant in a CoP? By sharing knowledge, my knowledge base will increase Sharing my personal knowledge and experiences will maintain or increase my status amongst my peer Sharing my personal knowledge and experiences helps build trust among peers study methods are unique and effective like to share them with others We all possess certain tacit knowledge. Sharing with others will make us more effective I will learn more from peers about new developments in my field than from reading literature benefit from knowledge sharing My peers benefits from knowledge sharing Associating voluntarily with others to share knowledge, friendships can develop based on trust Since voluntary, I can opt out any time Sharing the same identity creates a strong bond amongst the members of a CoP CoPs are created out of passion for one’s work and they ‘die’ from lack of it Sharing my personal knowledge and experiences will not be detrimental to my own performance (e.g. detracts from doing other work ) I have personal knowledge and experiences that would be important for my peers to have Sharing my personal knowledge and experiences will increase my power to influence decisions

Therefore for these questions the analysis based on the Chi-Square test would yield unreliable results. In the case of these variables it is advisable to gather more data or reinvestigate the scales utilized.There are only two questions in the questionnaire that meet the criterion of having all of the expected frequencies above 5: 16. Do you prefer to work alone? 17. I am frustrated with my studies and would like to feel free to discuss it with others. In the case of these questions it is possible to proceed with the Chi-Square test as the results of it are likely to be reliable. Table 3 presents the Cross-tab and Chi-Square for the first questions, while table 4 presents the Cross-tab and Chi-Square for the second variable. Figure 3: Preference of working alone.

Cross- tab Institution

Strongly Disagree Disagree 5.4 Do you prefer to work alone?

Neutral Agree Strongly Agree

Total

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Zadar

UJ

Wits

Count

15

16

47

78

% within Institution

7.5%

13.8%

20.3%

14.3%

Count

68

29

60

157

% within Institution

34.0%

25.0%

26.0%

28.7%

Count

64

40

82

186

% within Institution

32.0%

34.5%

35.5%

34.0%

Count

46

16

27

89

% within Institution

23.0%

13.8%

11.7%

16.3%

Count

7

15

15

37

% within Institution

3.5%

12.9%

6.5%

6.8%

Count

200

116

231

547

% within Institution

100.0%

100.0%

100.0%

100.0%

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Chi-Square Tests Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

34.615a

8

.000

Likelihood Ratio

34.203

8

.000

Linear-by-Linear Association

4.879

1

.027

N of Valid Cases

547

a: 0 cells (0.0%) have expected count less than 5. The minimum expected count is 7.85. Figure 4: Frustration and willingness to share it Cross- tab Institution Strongly Disagree 7.5 I am frustrated with my studies amd would like to feel free to discuss it with others

Disagree Neutral Agree Strongly Agree

Total

Total

Zadar

UJ

Wits

Count

16

11

22

49

% within Institution

8.0%

9.6%

9.6%

9.0%

Count

68

20

45

133

% within Institution

34.0%

17.4%

19.7%

24.4%

Count

68

31

58

157

% within Institution

34.0%

27.0%

25.3%

28.9%

Count

45

41

65

151

% within Institution

22.5%

35.7%

28.4%

27.8%

Count

3

12

39

54

% within Institution

1.5%

10.4%

17.0%

9.9%

Count

200

115

229

544

% within Institution

100.0%

100.0%

100.0%

100.0%

Chi-Square Tests Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

45.869a

8

.000

Likelihood Ratio

51.336

8

.000

Linear-by-Linear Association

18.845

1

.000

N of Valid Cases

544

a: 0 cells (0.0%) have expected count less than 5. The minimum expected count is 10.36.

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The values of p are quite high therefore it is possible to conclude with high certainty that there is no relationship between the values for these variables and the institution the study was conducted with. In other words the institution was not affecting the answers of the respondents. Although this is only a preliminary study it is possible to formulate the potential hypotheses that could be further investigated during the full empirical research with the participating institutions. H0: There is no statistically significant difference in how the Communities of Practice are utilized in the participating institutions. H1: There is a statistically significant difference in how the Communities of Practice are utilized in the participating institutions. At this point it is however difficult to evaluate, which one of these hypotheses would be valid. Given that only two of the variables (as compared with fifteen that did not meet the Chi-Square criteria) could be utilized to investigate the hypotheses presented. Based on the preliminary study data it is possible to state that the result of the analysis of the two variables supports the null hypothesis – that there is no statistically significant difference in how the CoPs are utilized in the participating institutions. This statement is not a strong statement however. It is necessary to remember that these two variables were measuring only two aspects (and not the most important ones) of the CoPs. It is recommended that this study with improved questionnaire questions is conducted with a larger group of potential respondents.

8. DISCUSSION This paper investigated the concept of Communities of Practice (CoPs) and the potential for their usage in the higher educational institutions (HEIs) environment. It first started with an in-depth literature review on the subject of CoPs. Literature review explored the problems faced by the CoPs in the business environment, factors affecting participants while they engage in knowledge-sharing processes and the technological aspects of CoPs. Data for the empirical research was obtained from three higher-education institutions (HEIs). One of them was from Europe (University of Zadar, Croatia) and two from South Africa (University of Johannesburg and University of Witwatersrand). At this point it is good to realize, that although these institutions are geographically dispersed and have a different culture, they all are in similar situation when it comes to the establishment of CoPs. Therefore it is possible to perform a comparative study on them. Moreover such a comparative study may be useful for any future studies, which would investigate concepts such as CoPs or knowledge sharing across different countries, cultures and levels of development. At later stage of the research the empirical data from the preliminary study carried out with the members of CoPs from the participating institutions was analyzed and presented. Next section will briefly describe the conclusions that can be drawn based on the secondary and primary research.

CONCLUSIONS This research is the first step in the process of investigating the potential for the use of (Virtual) Communities Practice (VCoPs) in the Higher Educational Institutions (HEIs). Due to this fact it is rooted in the existing literature on the subject. The concepts from the literature review were utilized in order to develop constructs, which formed a basis for the empirical research. The empirical research was in a form of a pilot study carried out with three HEIs: University of Zadar (Croatia, EU), University of Johannesburg and University of Witwatersrand. At this early stage it is difficult to provide decisive conclusions due to the limited scope of the underlying research. Based on the secondary research and the preliminary study it is however possible to state that the research in this area is very relevant and sought-after given the existing trends in the industry and academia. As it was described previously VCoP are an already established concept in the industrial world. Therefore their inclusion in the academia would allow students to learn this concept in advance and therefore would provide them a seamless start in the world of industrial VCoPs. This conclusion is valid both for the European countries as well as most-economically potent countries in the developing world (South Africa is one of the best examples of such countries). Another conclusion that can be drawn based on this study is that there is a possibility of using the constructs taken from the industrial CoPs and “refining” them to the educational CoPs. It is expected that any further studies involved with such constructs will yield relevant and reliable results. The empirical pilot research carried out for this study is a visible

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proof for that. Although the questionnaire items need to be further worked upon it is possible to state that they are a good tool to measure the most common concepts of CoPs in HEIs.

LITERATURE/references 1.

2. 3. 4. 5. 6. 7. 8. 9.

Au, L.; Reiner, D. & Urbanowski, D. (2009). Communities of Practice. Communities of Practice conference paper. 13-14 March 2009. Calgary, Canada. Baran, B. (2006). Knowledge Management and online Communities of Practice in teacher education. The Turkish Online Journal of Educational Technology, 5(3), pp. 12-19. Barab, S.; Makinster, J.G. & Scheckler, R. (2004). Designing system dualities. In Barab, S. A. & Gray, J. (Eds.). Designing for virtual communities in the service of learning, pp. 3-15. Cambridge, Massachusetts: Cambridge University Press. Brink, D., (2010). Essentials of Statistics. David Bring & Ventus Publishing ApS, ISBN 978-87-7681-408-3. Boylan, M. (2010). Ecologies of participation in school classrooms. Teaching and Teacher Education, 26(1), pp. 61-70. Crossman, A.(2013). Descriptive vs. Inferential Statistics. http://sociology.about.com/od/Statistics/a/Descriptive-inferential-statistics.htm Accessed 05.09.2013. Gannon-Leary, P. & Fontainha, E. (2007). Communities of Practice and virtual learning communities: benefits, barriers and success factors. eLearning Papers, 5. ISSN 1887-1542. www.elearningpaers.eu. Accessed 2 September 2013. Gelin, P. & Milusheva, M. 2011. The secrets of successful Communities of Practice: real benefits from collaboration within social networks at Schneider Electric. Global Business and Organizational Excellence, July/August, pp. 6-18. Gormley, S. (2012). Understanding Participation in Knowledge-Sharing in Virtual Communities of Practice on the HSELanD elearning Portal. Unpublished Master of Science dissertation. Trinity College, Dublin.

10. Lave, J. & Wenger, E. (1991). Situated learning: Legitimate peripheral participation. Cambridge: Cambridge University Press.

11. Lai, K.W.; Pratt, K.; Anderson, M, and Stigter, J. (2006). Literature review and synthesis: Online Communities of Practice. Executive summary. http://www.educationcounts.govt.nz/publications/curriculum/5795. Accessed 14 August 2013. 12. Mahony, H. EU Croatia becomes 28th EU member state. EUobserver.com. euobserver.com/enlargement/120688. Accessed 7 September 2013.

13. Michael, R. S. (2002). Crosstabulation & Chi Square. http://www.indiana.edu/~educy520/sec5982/week_12/chi_sq_summary011020.pdf. Accessed 05 August 2013. 14. Nistor, N.; Baltes, B. & Schustek, M. (2012). Knowledge sharing and educational technology acceptance in online academic communities of practice. Campus Wide Information Systems, 29(2), pp. 108-116. 15. Oxford English Dictionary (2013). Oxford: Oxford University Press. http://www.oed.com. Accessed 9 September 2013.

16. Petersen, K.B. (2007). E-Learning in Virtual communities of Practice – And beyond? Research findings based on interviews. mpra.ub.unimuenchen.de/8708/. Accessed 9 September 2013.

17. Usoro A., Sharratt M., Tsui E. & Shekhar S. (2007). Trust as an antecedent to knowledge sharing in virtual communities of practice. Knowledge Management Research & Practice, (5), pp. 199–212. 18. Wenger, E. (1998). Communities of Practice: Learning, meaning and identity, Cambridge: Cambridge University Press.

19. Wenger, E. & Snyder, W. (2000). Communities of practice; the organisational frontier. Harvard Business Review, Jan-Feb, pp. 139-145.

20. Wenger, E., McDermott, R., & Snyder, W.M. (2002). Seven principles for cultivating Communities of Practice. Cultivating Communities of Practice. A guide to managing knowledge, pp. 1-9. Cambridge: Harvard Business School Press. Excerpt. 21. Wubbels, T. (2007). Do we know a community of practice when we see one? Technology Pedagogy and Education, 16(2), pp. 225-233. DETAILS ABOUT AUTHORS: SHERYL BUCKLEY ASSOCIATE PROFESSOR SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA bucklsb@unisa.ac.za MARIA JAKOVLJEVIC ASSOCIATE PROFESSOR SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA jakovm@unisa.ac.za MELANIE BUSHNEY ASSOCIATE PROFESSOR SCHOOL OF MANAGEMENT SCIENCES, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA E-mail: mbushney@unisa.ac.za GRZEGORZ MAJEWSKI PhD, POSTDOCTORAL STUDENT SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA grzegorz.majewski@gmail.com

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PEDAGOGY OF E-LEARNING: CASE OF MARKETING MODULE SANDRA HORVAT IRENA PANDŽA BAJS DINO GOSPIĆ

ABSTRACT

Although technology plays a central role in the e-learning environment, it is important to take into account the application of pedagogical principles that will enable the effective adoption of online content by students. Successful e-learning implementation must be based on sound pedagogical grounds during all stages of the development and content management, but also in the implementation through the students support and their evaluation. This paper is based on the assumption that it is necessary to combine and apply different strategies and methods of e-learning (i.e. presentations, demonstrations, practice and repetition, tutoring systems, games, simulations, discussion groups, different ways of interaction, modeling and collaborative work) in order to achieve high level of effective adoption of online content by students. All aforementioned teaching methods and e-learning strategies are analyzed from the pedagogical aspect and their contribution to effective learning. Defined theoretical principles are further analyzed through the case of e-learning Marketing module implemented at Faculty of Economics and Business, University of Zagreb. KEYWORDS: e-learning, pedagogy, marketing module

1. INTRODUCTION E-learning represents learning based on the use of modern information and communication technologies, with particular emphasis on interactivity and customization of learning taking into consideration the needs of students (Ružićić, Nikolić & Žižović, 2010). Although in the e-learning environment technology plays a central role (Saracevic and Masovic, 2011) it is also important to consider the application of pedagogical principles that will enable students to effectively adopt the online content. Pedagogy is dimension of e-learning environment associated with the process of teaching and learning, through activities such as content analysis, goal analysis and analysis of media to be applied (Stankov, 2009). It includes teaching methods related to the presentation of experiences, engagement of students, reinforcement, motivation, organization of teaching tasks, feedback, evaluation, and curriculum integration (Meyen et al, 2002). Successful e-learning implementation must be based on sound pedagogical grounds during all stages of development and content management, but also in the implementation through the students support and their evaluation (Govindasamy, 2002). All above mentioned elements must be designed in a way to answers the question: “What must be done in order to achieve successful e-learning activities for different categories of learners?” (Khan, 2002 in Stankov, 2009). In this paper the theoretical principles of e-learning model based on pedagogical principles are analyzed through the case of e-learning Marketing module implemented at the Faculty of Economics and Business, University of Zagreb.

2. CHANGES VERSION AND GAP VERSION OF OKUN’S LAW Teaching and learning theories up to the 1990s have looked at the interaction and communication primarily through interaction between teachers and a student, while more recent theories emphasize that learning is primarily a process of group experience involving mutual collaboration and group interaction. Accordingly, Rekkedal and Qvist-Eriksen (2003) analyzes three theories of distance learning: 1. Theory of autonomy and individualism entails distance learning that requires greater autonomy and independence of students. To succeed in such distance learning programs, the learner must be able to act independently and autonomously. 2. Theory of industrialization looks at distance learning as a typical product of industrial society, where distance learning is seen as a new form of industrialized technology based education. It presumes that distance education organized through IT systems, could attract and keep highly motivated students who wish to improve their vocational and professional status. 3. Theory of interaction and communication refers to distance learning that achieves better results, greater efficiency in cooperative learning methods than individual learning. This ‘third generation’ of distance learning puts less emphasis on electronic learning materials and high emphasis on student-student and student-teacher interaction through a web portal for learning.

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Regardless of the theory applied, Conole et al. (2004) accentuate that in the context of e-learning development the following theories and models of learning can be applied: behaviorism, cognitive theory, constructivism, activity-based, socially situated learning, experiential and systems theory. Based on their research aforementioned authors have developed a learning model based on pedagogical principles which consists of 6 elements: 1. Individual – individual is the focus of learning; 2. Social – learning is explained through interaction with others (such as a tutor or fellow students), through discourse and collaboration and the wider social context within which the learning takes place; 3. Reflection – conscious reflection on experience is the basis by which experience is trans-formed into learning; 4. Non-reflection – learning is explained with reference to processes such as conditioning, preconscious learning, skills learning and memorization; 5. Information – an external body of information such as text, artifacts and bodies of knowledge form the basis of experience and the raw material for learning; 6. Experience – learning arises through direct experience, activity and practical application. The e-learning module should therefore be designed to enable an individual activity of a student, but also to provide experiential and reflective learning, learning from others through mutual dialog and learning from the information or the knowledge provided by others. According to Conole et al. (2004) better mapping of different pedagogical tools and techniques will provide a pedagogic approach that is more reflexive and consistent with practitioners’ theoretical perspective on learning and teaching.

Pedagogical Principles For Effektive E-Learning The whole learning process as well as the interaction between teachers and students in the e-learning course takes place under the auspices of software called a Learning Management System (LMS). LMS is a set of standardized components for learning, designed to connect learning with existing IT systems within a specific organization or through a web portal for learning (Saračević and Mašović, 2011), such as Moodle, WebCT etc. Educational institutions and teachers use the LMS to develop content online making it available to students at any time and place. But in doing so it is necessary to consider and to apply the pedagogical principles that will enable effective adoption of online content by the students. According to Ružičić, Nikolic and Žižović (2010), the process of learning in the school and the academic environment is not only related to individual efforts in getting the knowledge and skills, but it is also based on social interaction between students and lecturers, as well as between the students themselves. That is why, for the success of the educational process, is not enough that students only receive information from the available literature and electronic resources, but in communication with tutor, to get help and support in overcoming educational content, as well as feedback on their performance. The social aspect of the group education is especially important, because the motivation of the participants is influenced by communication and greater sense of security and satisfaction with the participation of students in group forms of teaching. Accordingly and based on the e-learning theories and models described above, principles of effective online learning and LMS support have to comply to following demands (Vrasidas, 2004):

• Learner-centered: Students organize information and knowledge, take control of their learning, act as autonomous • • • • • •

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individuals who plan and execute learning tasks. An LMS should provide tools that allow students to organize information, contribute content, and engage in learning activities. Engaged and active: Students engage in interesting activities that motivate them and employ active learning principles to solve class problems. An LMS should provide tools that support active learning and problem solving. Constructive: Learning is a constructive process during which students co-construct knowledge and meaning while interacting with peers, tools, and content. An LMS should provide tools that support various kinds of student-teacher and student-student interactions. Situated and contextual: Learning is situated in real world contexts where it gets its actual meaning. An LMS should provide tools that enable students and teachers to seamlessly integrate real-world authentic activities within class schedule. Social and collaborative: Learning is a social activity and students learn best when they interact frequently with teachers and peers. An LMS should allow students to interact by providing synchronous and asynchronous communication tools. Reflective: Students engage in reflective thinking about their actions, skills, competencies, knowledge, and metalearning skills. An LMS should provide tools that scaffold and support reflection on the learning process. e.g. journal keeping, probing questions to reflect on, etc. Requires prompt feedback: Integrate feedback within the grade portfolio. An LMS can use Intelligent Agents to provide feedback to student work and help the teacher monitor student progress.

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Study conducted by Vrasidas (2004) has confirmed aforementioned principles of effective online learning development by showing that students learn the best when they are engaged in active learning, have available learning materials presented in multiple ways, when they participate in authentic activities with a real-world connections, have their work evaluated following authentic assessment and when they collaborate with peers in solving real world problems.

3. METHODS AND STRATEGIES OF E-LEARNING IMPLEMENTATION In order to comply with all the principles necessary to develop effective e-learning course within LMS, teachers have to combine and apply different methods and strategies of e-learning. These methods may include presentation, demonstration, practice and repetition, tutoring systems, games, simulations, discussion groups, different ways of interaction, modeling and collaborative work (Stankov, 2009). Accordingly, the basic forms of educational materials that create online content are: a digital textbook, digital course, a collection of tasks, a collection of examples, materials and instructions for exercises, a collection of simulations, a collection of animation, digital catalog of materials on a particular subject, the virtual tour (Sinković and Kaluđerčić, 2006). When deciding which methods to use in their e-learning course teachers have to take into account that students differ based on the preferred learning style. There are three basic styles of learning according to regular mental behaviors that individuals habitually use in the learning process (Ružicic, Nikolic and Žižović, 2010): • • •

visual (29%), auditory (34%) and kinesthetic (37%).

These different learning styles require application of different learning methods within the same e-learning course. Studies have shown that students who are using multimedia materials are achieving better results on the exams due to the fact that e-learning easily combines all learning techniques and different teaching methods. The integration of text, images and sound, may also increase the amount of material that students can absorb per unit of time (Sinković & Kaluđerčić, 2006). Besides using different types of media, advantage of e-learning implementation is reflected in the social component which means that students interact frequently with teachers and peers. Communication has to be foundation of every e-course. All communication tools can be classified into one of two e-learning systems (Stankov, 2009):

• asynchronous system in which the interaction between student and teacher takes place with a time delay, both •

sides of the communication may not be simultaneously active. Communication can be accomplished through email, forums and tutoring systems. synchronous system means that both student and teacher are active at the same time and communicate within chat rooms, videoconferencing, etc.

To adopt effective course content, students should be able to communicate using both synchronous and asynchronous communication tools. In the process of e-learning implementation based on pedagogical principles specific duties and tasks of the teacher can be specified as follows (Vrasidas, 2004):

• Design the overall structure of the course, the syllabus, and establish expectations for successful course completion. • Select the activities that students will be asked to engage in while taking the online course. Decide when it is appropriate to use individual assignments, collaborative groups, online discussions and debates, etc.

• Select the learning strategies and appropriate media that will be more likely to help students achieve the desired • • • • • •

outcomes. For example, decide when to use a visual illustration, a video clip, an audio strip, or an animation, and how it will support learning. Monitor student enrollment, maintain student records, ensure security of online information, and handle all managerial and administrative tasks that relate to the online class. Establish the rules and procedures to be followed in course activities and discussions. Prepare assessment that is in alignment with learning outcomes and the goals of the course. Maintain student records and assessment results, and monitor student progress. Provide students with constructive and immediate feedback. Make sure that the students’ work submitted as part of course requirements are authentic and the students’ own. Establish clear goals, structure, activities, and expectations for online discussions. Unless these are clear, students will not participate. Encourage participation by employing various techniques and strategies (e.g., collaborative projects, debates, small group-discussions) to stimulate the interest of students.

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4. APPLICATION OF PEDAGOGICAL PRINCIPLES: CASE OF E-LEARNING MARKETING MODULE nE-learning Marketing module is an elective course in the second year of undergraduate studies at the Faculty of Economics and Business, University of Zagreb. The course was developed on available web portal Moodle, based on opensource code and intended for developing e-education content and conducting distance learning courses. A various tools that help teachers in effective development and conduct of e-learning courses are already integrated into Moodle system. The tools also enable students to organize individually gathered knowledge in one place thus contributing prosperity of everyone involved in the e-learning course. One of the most important tool used in the process of distance learning through e-learning Marketing module are presentations that cover teaching units planned by syllabus. The presentations were made available to students in the beginning of every week. Taking into account that about 29% of students are more visual type, the teachers were trying to embed more visual elements into presentations, such as pictures, video clips, graphic displays, charts, summary in tables etc. Alongside presentations the students have been encouraged to read chapters from the designated course literature in order to acquire a better, more detail insight into all teaching units. Nonetheless, developed presentations present a great base of stored information, which is always available to students, either for preparation for midterms and exams or writing weekly assignments as one of the component of distance learning process. Weekly assignment could be considered as a crucial element of e-learning course Marketing because they allow the teachers to monitor students’ progress on a weekly basis. The assignments were developed in the way to stimulate the students to examine scheduled teaching unit in more details and broaden available knowledge by linking the theory with concrete examples from business practice. This kind of assignments enable students to frame information gathered from different sources altogether (into the whole) and as such remember, retain and use it in their midterms and exams. It has been shown that students who participate in this kind of tasks have better results overall than students who don’t engage in weekly assignments. Weekly assignments are part of the final grade and thus are subject to a regular evaluation by teachers and through their prompt feedback student can realize their mistakes and use a constructive criticism in the next assignments. Every weekly assignment is followed by a short test with multiple answers questions. These tests enable students to double check what they have learnt in that week. To stimulate the students’ critical thinking and adaptation of problem solving skills, various case studies have been used showing specific examples of the best and most interesting Croatian and foreign business practice. Apart from stimulating the skills mentioned before, the case studies have been used to provide the teachers with better insight into the way students are thinking and how they approach problem solving. Each student got a personal feedback regarding the quality of solved case study and a scope for improvement. The discussion forum has been used to induce the students’ public opinion expression in the way which is understandable, argumentative and concise. The forum was used as the alternative to classroom discussions commonly used in classical learning process. Unfortunately, the level of discussion did not approach the level of classical classroom discussion. However, the usage of forum has been more frequent with controversial subjects, such as ethics and corporate social responsibility, where there is a lot of space for elaboration and argumentation of one’s own opinion. The great value of e-learning Marketing module is in the archive of video clips collected from different sources, mostly from the internet. The video clips are linked to the teaching material mentioned before, and they present extra materials which complement and expand students’ knowledge and encourage students to further research on designated teaching units. To encourage the students to watch available video clips, the possibility of collecting extra points by participating in discussion of a video clip has been offered. Therefore, the students’ active participation and collective discussion has been increased. Also, the process of learning has been facilitated due to the usage of multimedia materials. To students the most interesting and the most demanding part of the e-learning process is, probably, the team assignment. The students have been divided into teams consisting of three or four members with a task to choose one subject among a dozen of them that had been offered by the teachers. The subjects have been partly linked to the syllabus, but some have required deeper understanding of the issue and a further desk research. Of course, everything written needed to be corroborate by an example of a company or business practice involved in particular issue being researched. Examples of the subjects that have been offered to the students to choose among are “Price wars”, “Social media marketing”, “Product placement”, “Comparative advertising” etc. The goal of this kind of assignment has been to help students to develop social skills through collaboration with other colleagues, to respect different opinions and one’s time and effort. The students have had to present their work in front of their teachers and colleagues so one of the benefits of participating in the team assignment is a chance to develop and improve presentation skills which are very much needed in students’ future career. Considering the fact that the time available for completion of team assignment was limited, the students had the chance to also improve their time management skills.

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Having in mind that every learning process should be fun and appealing to students, games “Who wants to be a millionaire?” and “Sudoku” were also available as an integral part of the e-learning Marketing course. The games were developed on the basis of the subjects/chapters covered by the syllabus. The students have been offered the chance to test their knowledge before midterms or exams but they were also used to help with breaking the routine which occurs over time and could demotivate students to continue with a learning process.

CONCLUSION E-learning as a concept represents learning based on the use of modern information and communication technologies. New technologies provide a wide range of opportunities for developing and modeling learning materials according to teacher’s wants and needs. However, mere application of technology into learning environment is not enough to ensure positive learning outcomes. These outcomes can be achieved only if teachers, in developing e-learning courses and content itself, apply pedagogical principles. In accordance with theory of interaction and communication, in this paper we refer to distance learning as learning which puts less emphasis on electronic learning materials themselves but rather focuses on student-student and student-teacher interaction through the Learning Management System (LMS). Therefore effective online learning course has to be learner-centered, engaging and active, constructive, contextual, social and collaborative, reflective and it requires prompt feedback from the teacher. When designing e-course, teachers have to keep in mind that different students have different learning styles, so some will prefer visual while others prefer auditory or kinesthetic learning materials. Modern LMS offer the teachers possibility to integrate all forms of learning materials into their course enabling students to absorb more learning materials (5)the per unit of time and simultaneously increase their results on the exams. Final learning results will also depend on amount and intensity of communication between the teacher and students as well as between students themselves. In order to facilitate the desired level of communication teachers have to include and moderate different forms of asynchronous and synchronous communication systems. E-learning Marketing module presented in this paper is an example of application of pedagogical principles into LMS. In the course we have developed different learning materials suitable for different types of students like presentations, case studies and video materials. Students progress was monitored continuously trough individual weekly assignments, case study solving, weekly tests and available games. Team work among students was enabled through participation in team assignment. Communication, stimulated and facilitated by teachers, played crucial role in e-learning Marketing module. Different communication methods were available to students but they mostly used personal e-mail communication or more public forum discussions. Finally, after analyzing the theoretical contributions concerning use of pedagogical principles in creating and implementing e-courses as well as the insight gained from the presented e-learning Marketing module, we can conclude that effective e-learning module needs to include:

• various educational multimedia materials with integration of text, images and sound; • individual student activities through individual assignments with real-world connections; • activities that require active involvement of students in creating the e-learning content and solving learning problems;

• social activities through collaborative projects with peers in solving real world problems; • asynchronous and synchronous communication and discussion with teachers and fellow students through discussion groups, e-mail, chat rooms, videoconference;

• teachers’ prompt feedback on students activities and performance.

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When absorptive capacity meets institutions and (e)learners: adopting, diffusing and exploiting e-learning in organizations, International Journal of Training and Development, 7/4, pp. 228-244. Mehanna, W.N. (2004.) E-Pedagogy: the pedagogies of e-learning, Research in Learning Technology, 12/3, pp. 279-293. Meyen, E.L, Aust, R., Gauch, J.M., Hinton, H.S., Isaacson, R.E., Smith, S.J., Tee, M.Y., (2002.) E-Learning: A Programmatic Research Construct for the Future, Journal of Special Education Technology, 17/3, pp. 1-29. O’Malley, J., McCraw, H., (1999.) Students Perceptions of Distance Learning, Online Learning and the Traditional Classroom, online dostupno na: http://www.westga.edu/~distance/ojdla/winter24/omalley24.html Pagliarello, M.C. (2007.) Reluctant teachers and traditional learning methods: the multimedia teaching as a crossroads between the old and the new, Scottish Online Journal of e-Learning, 1/1, pp. 68-75. Prat, N. (2012.) Teaching information systems with cases: An exploratory study, Journal of Computer Information Systems, pp. 71-81. Procter, C. (2002.) Proportion, pedagogy and processes: the three P’s of E-learning, paper presented at 17th Annual Conference on Informatics Education Research, in Proceedings of International Academy of Information Management, Barcelona, Spain Rekkeda, T., Qvist-Eriksen, S. (2003.) Internet based e-learning, pedagogy and support systems u: The role of student support services in elearning systems, Zentrales Instutut fur Fernstudienforschung (ZIFF), FernUniversitat in Hagen Riding, R.J., Sadler-Smith, E. (1997.) Cognitive style and learning strategies: some implications for training design, International Journal for Training and Development, 1/3, pp. 199-208. Roljić, L. (2011.) Metode i tehnike e-učenja i njihova klaifikacija u Zborniku radova III međunarodnog naučno-stručnog skupa Informacione tehnologije za e-obrazovanje, Panevropski fakultet, Banja Luka, 7-8 oktobar Romiszowski, A.J. (2004.) How’s the E-learning Baby? Factors Leading to Success or Failure of an Educational Technology Innovation, Educational Technology, 44/1, pp. 5-27. Rudestam, K.E., Schoenholtz-Read, J. (Ed.) (2010) Handbook of Online Learning, 2nd edition, SAGE Publication, Thousand Oaks, California Ružičić, V., Nikolić, R., Žižović, M. (2010.) Elektronski materijali za kombinovani način učenja, dostupno online na: http://www.e-drustvo.org/ proceedings/YuInfo2010/html/pdf/014.pdf Salmon, G. (2005.) Flying not flapping: a strategic framework for e-learning and pedagogical innovation in higher education institutions, Research in Learning Technology, 13/3, pp. 201–218. Sadler-Smith, E. (1996.) Learning styles: a holistic approach, Journal of European Industrial Training, 20/7, pp. 29 – 36. Sadler-Smith, E., Down, S., Lean, J. (2000.) “Modern” learning methods: rhetoric and reality, Personnel Review, 29/4, pp. 474 – 490. Sadler-Smith, E., Smith, P.J. (2004.) Strategies for accommodating individuals’ styles and preferences in flexible learning programmes, British Journal of Educational Technology, 35/4, pp. 395-412. Saračević, M., Mašović, S. (2011.) Infrastruktura za realizaciju i razvoj e-učenja u obrazovnom sistemu, dostupno online na: http://muzafers. uninp.edu.rs/radovi/OSTALO/E-LEARNING%20-%20SEDA.pdf Sinković G., Kaluđerčić, A., (2006.) E-učenje - izazov hrvatskom visokom školstvu, Ekonomska istraživanja, 19/1 Schiaffino,S., Garcia, P., Amandi, A. (2008.) eTeacher: Providing personalized assistance to e-learning students, Computers&Education, 51, pp.1744–1754. Sharpe, R.,Benfield, G., Lessner, E., DeCicco, E. (2005.) Final report: Scoping Study for the Pedagogy strand of the JISC e-Learning Programme, Unpublished internal report 4(1) JISC. Sinclair, A. (2009.) Provocative Pedagogies in e-Learning: Making the Invisible Visible, International Journal of Teaching and Learning in Higher Education, 21/2, pp. 197-209.

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44. Sitzmann, T., Kraiger, K., Stewart, D., Wisher, R. (2006.) The Comparative Effectiveness Of Web-Based And Classroom Instruction: A Meta-Analysis, Personnel Psychology, 59, pp. 623–664. 45. Sloman, M. (2001.) The e-learning revolution: from proposition to action, CIPD House, London, UK 46. Solimeno, A., Mebane, M.E.,Tomai, M., Francescato, D. (2008.) The influence of students and teachers characteristics on the efficacy of face-toface and computer supported collaborative learning, Computers&Education, 51, pp.109–128. 47. Stankov, S. (2009.) E-učenje, Prirodoslovno-matematički fakultet, Split, dostupno online na: https://39ff9189-a-62cb3a1a-s-sites.googlegroups.com/site/kolegiji/home/sustavi-e-ucenja/E-ucenje_Stankov.pdf?attachauth=ANoY7cocJSLXGQPssKLkAfTUwVc1quRQCPp36Sh KGeJwtVC_9bbHkgrkdx1w2dFpJ_UAlol3Kt76dTm0gOBzcKHUP9QFHtv4nxh7GztCcXDuDR6SGozlDUvCjW2WXqwn05yZt-d4DvYHQDYuebVMBeASg6Ra98aKDJE47hzCNzni5HxD2LNYxAVr6yR4Bt8UP1E2O4vjVCJrXmPzirLYCUOYSCXYUVbsBeSTuz7XE73u-oJaUceVd7S6rbwdTz7D_ CwzYg1C8QUc&attredirects=0 48. Stankov, S., Rosić, M., Granić, A., Maleš, L., Grubišić A., Žitko, B., (2004.) Paradigma e-učenja & Inteligentni tutorski sustavi, u Zborniku radova Računala u obrazovanju, MIPRO 2004, Rijeka, str. 193-198. dostupno na: http://bib.irb.hr/datoteka/150750.Rad_MIPRO2004.pdf 49. Summers, J.J., Waigandt, A., Whittaker, T.A. (2005.) A Comparison of Student Achievement and Satisfaction in an Online Versus a Traditional Faceto-Face Statistics Class, Innovative Higher Education, 29/3, pp. 233-250. 50. Sun, P-C., Tsai, R.J., Finger, G., Chen, Y-Y., Yeh, D., (2008.) What drives a successful e-Learning? An empirical investigation of the critical factors influencing learner satisfaction, Computers & Education, 50, pp. 1183–1202. 51. Šćepanović, S. (2010.) Creating and using environment for e-learning 2.0, online dostupno na: http://www.e-drustvo.org/proceedings/YuInfo2010/html/pdf/079.pdf 52. Tsoi, M.F., Goh N.K., Chia L.S., (2005.) Multimedia Learning Design Pedagogy: A Hybrid Learning Model, US-China Education Review, 2/9, pp. 59-62. 53. Yli-Luoma, P.V.J., Naeve, A. (2006.) Towards a semantic e-learning theory by using a modeling approach, British Journal of Educational Technology, 37/3, pp. 445-459. 54. Vrasidas C., (2004.) Issues of Pedagogy and Design in e-learning Systems, Paper presented at ACM Symposium on Applied Computing, Nicosia, Cyprus, March, pp. 14-17 55. Wild, R.H., Griggs, K.A., Downing, T. (2002.) A framework for e-learning as a tool for knowledge management, International Management & Data Systems, 102/7, pp. 371-380. DETAILS ABOUT AUTHORS: SANDRA HORVAT SENIOR ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA shorvat@efzg.hr IRENA PANDŽA BAJS SENIOR ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA ipandza@efzg.hr DINO GOSPIĆ dino.gospi04@gmail.com

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THE EFFECT OF MINDFULNESS TRAINING ON EMPLOYEES IN A DYNAMIC ORGANIZATIONAL SETTING INGUNN MYRTVEIT VEDRANA JEZ VIGGO JOHANSEN

ABSTRACT

The access to information and multiple sources of communication has changed the way we work, and relate to our work day. The boundaries between work and home often disappear, increasing potentially employees’ stress level, diminishing cognitive capabilities, and splitting attention between numerous tasks. The consequences of multitasking have been widely studied, as well as individual differences. Based on other studies, mindfulness based stress reduction (MSBR) method appears to have a positive effect e.g. on attention, working memory, stress and empathy. Thus, this experiment introduces an intervention in the form of mindfulness training, which lasted for 12 weeks for all 110 employees, who are located in 13 countries world wide. In addition, employees attended a seminar per week during 10 weeks. These seminars were mainly based on positive psychology. In order to collect data three surveys were sent out (before the intervention, 12 weeks after the first seminar and 6 months later). Two specific measurements were used, which are Mindfulness Awareness Scale (MASS) and Perceived Stress Scale (PSS). Findings showed a significant increase in MAAS, and diminishing values in PSS, meaning that treatment, in the form of MBSR had an affect on the perceived stress in the firm. KEYWORDS: mindfulness training, mindfulness based stress reduction (MSBR), perceived stress

1. INTRODUCTION The words such as multitasking, “continuous partial attention”, “email apnea”, have become an every day representation of working demands and expectations. Throughout the history, philosophers, scholars and writers such as Socrates, Peter Drucker, and Lord Chesterfield, pointed out the importance of focusing on one thing at the time. (Drucker, 2007; Rosen, 2008) With the introduction of technology, access to massive amount of information has tempted and stimulated workers to change their working habits. According to Lindbeck and Snower, (2000) the shift occurred from “Tayloristic” organization, which emphasized focus on a single task specialization to “holistic” organization, featuring job rotation, learning new tasks and integration of tasks. The possibility to access large amounts of information and numerous possibilities to communicate with others have often moved and changed the boundaries between work and home. During working hours, employees might also be occupied by their private things e.g. checking private email and social media accounts. On the other hand, constant checking work email and the possibility to be always reached, e.g. available for an important question has created a feeling of constantly being “on”. Mark and Gonzalez (2005) observed knowledge workers, who switch every 3 minutes between single tasks, or every 11 minutes between working spheres, which Mark and Gonzalez defined as a group of related tasks. Thus, multiple projects require constant switching between tasks, which create a fragmented working day, where they often need to switch their attention. The intensity of working environment and job demands on individuals has led to a discussion on the effects of multitasking on productivity. (Appelbaum, Marchionni, & Fernandez, 2008; Freedman, 2007) However, psychology researchers mostly focus on diminishing cognitive capabilities (Ophir, Nass, & Wagner, 2009a) information technology (Czerwinski, Horvitz, & Wilhite, 2004; Spink, 2004) education (Jenkins, Clinton, Purushotma, Robinson, & Weigel, 2006) and consequences of those on learning (Poldrack, 2006), creativity (Madjar & Shalley, 2008), and other concepts. Each of these fields has framed multitasking in their own context. The most concern raise problems with concentration, diminishing cognitive capabilities, problems with learning, general consequences of split attention. However, it is important to mention individual differences related to the ability to multitask. According to Konig, Buhner and Gesine (2005) working memory is one of the predictors on how well one can multitask. Thus, it is not those who believe that are good at multitasking that perform well (Ophir, Nass, & Wagner, 2009b) but those who have better working memory. However, one of the consequences of constant switching between tasks and being available to be disrupted leads to increased stress levels. Linda Jones, the former executive at Microsoft named the condition “email apnea”, which she discusses in her article in Huffington Post, describing it as “Shallow breathing or breath holding while doing email, or while working or playing in front of a screen,” which lately has been verified in a study by Mark, Voida and Cardello (2012).

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According to Jensen et al. (2012) study, they point out the effects of mindfulness training (MT) and its potential positive effect on working memory, stress reduction and empathy. Although various studies have reported positive effects of MT on stress and empathy, most of these studies were done on either medical (Sibinga et al., 2011) and nursing students (Beddoe & Murphy, 2004), or patients, who are struggling with different stress related problems, traumatic experiences, and chronic disorders. Contrary to previous research, which aimed at testing MBSR’s effect on various stress-related disorders, this paper presents an experiment within a dynamic organizational setting, where all employees were encouraged to participate, independently of their health problems, stress level, motivation, attitude and need.

2. LITERATURE REVIEW 2.1 Multitasking The problem of multitasking has been discussed in decades by management scholars, psychologists and lately education professionals and neuroscientists. Their concerns and focus of studies are different depending on the interest of their field. Studies within management field have been mostly concerned with the effects on productivity. However, increasing number of studies shows the stress related problems due to highly demanding working environments. Brillhart (2004) went even so far to name the type of the stress caused by technology, technostress. He defines it “as the minds attempt to deal with change, malfunctions, multitasking issues and the over abundance of technology and data that keeps employees working harder and giving them less down time when away from work.” Further on, he explains for different types of stress, where multitasking madness is its own category. The consequences are increasing stress that may cause stress related problems, such as headaches etc. In their latest study, Mark, Voida and Cardello (2013), looked at the effect of email on multitasking and stress level at work. Interestingly, they found out that removing the email from a working setting decreased the level of multitasking and positively affected a focus on a task. Equally, the removal of email led to less stress. Santora and Esposito (2010)point out that it is to expect in dual-income families to struggle with stress, when trying to balance the multitasking demands with work and home life. Thus, multitasking takes a place of a major source of stress in finding a balance between work and home. Offer and Schneider (2011) suggest that for mothers, multitasking at home and in public leads to an increase in negative emotions, stress, and work-family conflict and psychological distress. Although multitasking is a more complex concept with a wide range of consequences, this paper solely focuses on stress related to multitasking. In dynamic environments, where real-time information has an impact, multitasking and continuous presence might be necessary, but also costly.

2.2. Mindfulness Mindfulness is an ancient practice belonging to the Eastern Wisdom Traditions, particularly Buddhism, and as such it goes back at least 2500 years in time. The original term for “mindfulness” is sati (Pali), or smrti (Sanskrit), which connotes “memory” or “recollection,” but as a spiritual or psychological faculty it signifies an attentive awareness of the reality of things. In the early Buddhist traditions sati/smrti signifies presence of mind, meaning the ability to be attentive to the reality of whatever unfolds. It has the characteristic of not being distracted, which implies not leaving the object one has chosen to focus upon. Essentially, there is nothing in the original teaching and practice of mindfulness suggesting that one needs to be Buddhist in order to pursue it, although it originated and was systemized in a Buddhist environment.

2.3. Mindfulness based stress reduction (MBSR) One of the most common examples of mindfulness practice is mindfulness based stress reduction (MBSR) that has been introduced by Kabat-Zinn in late 1970s, where he defines it as paying attention on purpose, in the present moment, and nonjudgmentally” (Kabat-Zinn, 2003) According to Bishop (2002) it is a clinical program, which originally was designed as a help for patients to learn to adapt to their illnesses through self-regulation approach, which would diminish stress reduction and

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emotion management. The goal of the meditation is to “foster the quality of mindfulness”, which is a self-regulatory approach to bring attention back, without being caught up in thoughts about a specific situation or emotional reaction to it. (Bishop, 2002) The researchers, especially psychologists and medical workers, have tested the effect of MBSR method on numerous patients with difficulties, such as HIV-infected youth and those at risk (Sibinga et al., 2011) posttraumatic stress disorder due to domestic violence (Smith, 2010), emotional regulation related to social anxiety(Goldin & Gross, 2010), depression, anxiety and pain (Marchand, 2012)among others. All these studies found a positive effect of MBSR on these conditions and patients well being, especially on the ability to handle attention, rumination (Campbell, Labelle, Bacon, Faris, & Carlson, 2012), interpersonal relationships, hostility (Sibinga et al., 2011)or physical manifestations such as blood pressure and blood sugar. (Campbell et al., 2012) Although MBSR method has been used mainly in patients, researchers have also looked at the benefits of the method on the ability to deal with stress and empathy in medical, premedical (Shapiro, Schwartz and Bonner 1998) students and nursing students (Beddoe & Murphy, 2004). According to Shapiro, Schwartz and Bonner (1998) the inability to deal with stress may lead to serious personal and professional consequences. Fries (2009)in his paper discuss how changing work environment, with high uncertainty and instability, affects workers and causes stress. He suggests that the five basic factors of mindfulness, such as non-reactivity, observing, awareness, labeling and non judgment (Baer, Smith, Hopkins, Krietemeyer, & Toney, 2006) an change one’s inner perceptions, regardless of external happenings, thus affecting stress level. Therefore, previous research finds that MBRS reduces stress among patients and students related to highly stressful medical environment, with high risk of fatal consequences. However, to our knowledge, the method has not been used within a business setting, although it has been suggested by Fries (2009). Due to technology driven working days, employees are often exposed to high stimuli and stress. Thus, this setting could use MBSR as a method for dealing with consequences of multitasking. Hypothesis 1. MBSR has a positive effect on stress-level of employees in a dynamic business environment. Hypothesis 2. MBSR reduces stress-related health problems in employees Hypothesis 3. MBSR increases the ability to be present in the moment.

3. METHODS The method that we used in this project was an experiment, which consisted of an intervention in the form of mindfulness training and seminars.

3.1. Mindfulness Training as an Intervention Mindfulness training consists of practice and ten seminars. During practice the participants were supposed to engage in 10 minutes of mindfulness breathing, and “paying attention in a particular way on purpose, in the present moment, and nonjudgmentally.” (Kabat-Zinn, 1994) These mindfulness practices took place every day for 12 weeks. The program contains 10 modules, which are conducted at the work place. The first seminar was a two-hour workshop on “introduction to mindfulness” and the remaining nine sessions were an hour each. The sessions were on ten different topics, which are mostly based on positive psychology. These seminars are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Introduction to mindfulness Perception & The importance of awareness Your brain at work & Activities with mindfulness Inspiration & Dealing with hindrances Happiness & Valued living Optimism & Mindfulness and neuroscience Acceptance & Automatic thought-patterns Emotional intelligence & The good life Freedom & Letting go Mindfull Living

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The program lasted for 12 weeks, consisting of daily 10-minutes mindfulness training. TGS has an open landscape solution, where top management team sits together with everyone else. The training took place in this area every morning from 8:50 to 9:00.

3.2. Data and Sample In order to test the hypothesis, the firm that has participated in the experiment is Telenor Global Services (TGS), which consists of ca. 120 employees located mostly in Norway, but also in large number of other countries as well. Participation in mindfulness training, seminars and surveys was highly encouraged by top management in TGS but voluntary. The top management team participated visibly in all activities and general participation in training and seminars were high. The range of participants is between 20 and 67, where all age groups and both sexes are equally represented. In the survey group, 80% of employees have a bachelor or master degree.

3.3. Data Collection We distributed three surveys to all employees; the first before the intervention, the second immediately after the intervention and the third after another six months. In addition to questioning the employees about simple self-reported stress, and stress-related problems we asked them to respond to some widely used and validated psychological instruments for measuring stress “Perceived Stress Scale”, PSS, and mindfulness “Mindfulness Attention Awareness Scale”, MAAS. Perceived Stress Scale (PSS) PSS is the most widely used psychological instrument for measuring the perception of stress. (Cohen, Kamarck, & Mermelstein, 1983)L. Harris Poll have gathered information on more than 2000 respondents in the US as a reference norm. (From Cohens homepage http://www.psy.cmu.edu/~scohen/) Mindfulness Attention Awareness Scale (MAAS) MAAS measures ”a core characteristic of mindfulness, namely, a receptive state of mind in which attention….simply observes what is taking place.” Higher MAAS scores reflect higher levels of mindfulness. (Brown & Ryan, 2003) 77 responded to the first survey. However, some complained about the survey because of its length. The employees in TGS are of all ages, both sexes, and 80% have a bachelor degree or more.

3.4. Data Analysis We compared differences in means between groups by ANOVA and compared differences in 2 proportions by two sample proportion z-test.

4. RESULTS 4.1. Findings before MBSR training and seminars

85% of respondents report good or very good health. Overall, they are very happy to be working at TGS and hardly have any plans to leave the company in near future. They report high job satisfaction and organizational commitment on several indicators (not reported). However, there is a heavy work load and 30% report that stress is a problem. Further on, workrelated and family related stress is equally problematic (see Figure 1.).

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Figure 1. Where 1=difficulties sleeping, 2=Fatigue, 3=Tension, 4=Irritability, 5=Lack of memory, 6=Lack of concentration,7= Headache or pain in shoulders, neck etc., and 8= None.

We observe that 16% did not have any of the suggested problems. The main stress-related problems were “difficulties sleeping” (30%), “Lack of concentration” (36%) and “Headache or pain in shoulders, neck etc” (39%). All these stressrelated problems are likely to influence individual wellbeing and job performance. In addition to questioning the employees about simple self-reported stress, we asked them to respond to some widely used and validated psychological instruments for measuring stress “Perceived Stress Scale”, PSS, and mindfulness “Mindfulness Attention Awareness Scale”, MAAS. Table 1. *Community adults in 4 independent samples n=436, mean=4.2, SD=0.69 (Brown and Ryan 2003 and Carlson and Brown 2005) Harris poll

TGS March 2012

Mean US

SD

Mean

N

SD

12.1 13.7

5.9 6.6

14 16 15

43 34 77

5.6 6.0 5.8

14.2 13 12.6 11.9 12

6.2 6.2 6.1 6.9 6.3

16 17 13 17

13 27 32 5

7.8 5.5 5.3 3.2

SEX Male Female Tot average Age US

Age TGS

18-29

<30

30-44

31-40

45-54

40-60

55-64

>60

65 and older

Differences between age-groups are significant (p=0.08) . The numbers suggest that the employees in TGS are more stressed than average US adults , which is not disturbing as this group is presumable a selection of more competitive hardworking and ambitious people than the average population. Also, we find that women are more stressed, but not more so than reflected in the US population. Furthermore, age differences are relatively equal to what is reflected in the US population, with the exception of the oldest employees. We may speculate that older There are large differences between the departments, some score much higher on PSS than others. These large differences between the various departments triggered discussion in TGS, and is important input to the top management. The results also suggest the employees in TGS are a little more mindful than the average US adult, measured by MAAS.

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4.2. Findings after MBSR training and seminars Second Survey Findings – 12 Weeks Later The second survey was distributed in June immediately after 12 weeks of MBSR training and seminars. This time we got 60 respondents (compared to 77 on the first survey). We consider this a very good response rate as summer vacation had just started for some employees. 80% report that they have participated several days a week or more in MBSR training. 90% have participated in seminars. A vast majority claim they have got something of lasting value and 80% express that they will continue with MBSR training in the future. We observe (Table 1.) that self-reported “stress is a problem for me” is reduced to some extent, and that the stress that bothers some is less family-related. We also observe that there is a large, 16%, and significant reduction in headaches or pain in shoulders, neck etc. Also several persons report less difficulties sleeping. Actually, in open question on benefits this was reported by many. The widely used psychological instrument, PSS, shows a significant reduction in stress (p=0.01). And the Mindfulness instrument, MAAS, shows a significant increase in mindfulness in the group (p=0.02)(see table x). Third Survey Findings – 6 Months Later The third survey was distributed in December, 6 months after MBSR training and seminars to investigate lasting effects. The third survey was limited to a few related to continued practice and benefits , PSS and MAAS. Due to some technical difficulties the response rate was low, n=40. However, results are still reported. In the period between survey 2 and survey 3, TGS experienced a hard time. Thus we expected increase in stress. However, the results actually indicate the opposite. Self-reported stress is decreased. PSS and MAAS are approximately the same as right after MBSR training and seminars, which we and the top management in TGS find surprising. Table 2. Results on self reported stress levels and problems Survey 1

Survey 2

Survey 3

Statement

No

Yes

No

Yes

No

Yes

“Stress is a problem for me”

73%

27%

75.4%

24.6%

85%

15%

“It is mostly work-related stress that bothers me”

57%

43%

41%

59%

45%

55%

“It is mostly family-related stress that bothers me”

67%

33%

74%

26%

78%

22%

We observe that stress is less of a problem – and that in particular family-related stress is reduced. Changes in stress-related problems: Table 3. Changes in stress-related problems: *p=0.1, **p=0.05, ***p=0.01 Problem

March

June

Difference

Difficulties sleeping

29,9

25

-4.9

Fatigue

22.1

30.4

+8.3

Tension

24.7

19.6

-5.1

Irritability

28.6

25

-3.6

Lack of memory

15.6

16.1

+0.5

Lack of concentration

36.4

32.1

-4.3

39

23.2

-15.8 **

15.6

21.4

+5.8

Headache or pain in shoulders, neck etc None

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We observe that several stress-related problems are reduced, however, only “headache or pain in shoulders, neck etc” show a significant and large reduction. For some reason “Fatigue” has increased. We do not understand why. At closer inspection we found that 17 persons had answered “yes” to this each time, however the percentage increased in a smaller sample even if there is not a perfect overlap between the samples. PSS and MAAS are approximately the same in December as in June. Table 4. PSS and MAAS and *p=0.1, **p=0.05, ***p=0.01 TGS March

TGS June

TGS Dec

PSS score

15

12.5 ***

13.35

MAAS

4.4

4.7 **

4.7

In December we asked about continued practice and benefits. 75% still practice MBSR sometimes or regularly. And more than 50% claim to experience changes in colleagues and/or the working environment as a result of the mindfulness training.

5. DISCUSSION The changes in a working environment have been a topic during past decades. Working tasks have been changing from a linear and orderly to more chaotic, diverse and dynamic tasks. As mentioned earlier, Lindbeck and Snower (2000) point out technology as one of driving forces for changes in the working environment. In dynamic environments, changing between tasks, being continuously available and interrupted might lead to increased stress level, causing various stress-related issues. In our experiment, which takes place in the technology company facing heavy competition, 30% of the employees reported stress as the problem. They also report various stress-related health problems, such as headache, pain in the neck and shoulders and difficulties with sleep. Interestingly, the most stressed employees have benefited the most from MBSR training and seminar. They report having less difficulty with sleep, headaches, and pain in the neck and shoulders. Similarly, the widely used instrument for measuring perception of stress, PSS, shows a significant reduction in the whole group. Although the company is experiencing hard times and changes, the effect of MBSR method continues to have an effect after six months. New technologies and social media blur the border between work and leisure and encourage multitasking at home and in the office. We find that family-related stress is reduced with MBSR training and seminars. We speculate that employees with mindfulness training become more attentive, both at home and in office. Being able to be more” present in the moment” and not thinking about work while being with family – and visa versa. In addition to employees being “always online” we face increasing globalization, uncertainty and financial instability that characterize today’s working environment. These factors are likely to increase stress in the work force. Although this paper does not test or discuss the consequences of multitasking in general and its effect on productivity, it address the problems caused by dynamic environments, with high demand for multitasking, which might be a cause for high stress and stress-related issues in the company. However, this stress might be detrimental to individual’s wellbeing, mental health and productivity. We suggest MBSR as a low threshold and low cost tool to counteract this.

CONCLUSION This experiment took place in a dynamic organizational setting, with high demands for multitasking due to the nature of business. The results in the first survey showed that 30% suffer from stress; work related stress, as well as personal stress. By introducing the all employees of the firm to the MBSR training and seminars, there was a significant change in self-reported measures on stress and stress-related problems. According to Perceived Stress Scale (PSS) the stress level decreased as well. In addition the ability to be in the moment and focus attention, which Mindfulness Attention Awareness Scale (MAAS) measured, showed a positive improvement. Thus, we find support for all three hypotheses.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

Appelbaum, S. H., Marchionni, A., & Fernandez, A. 2008. The multi-tasking paradox: perceptions, problems and strategies. Management Decision, Vol. 46 (Iss: 9,): 1313 - 1325. Baer, R. A., Smith, G. T., Hopkins, J., Krietemeyer, J., & Toney, L. 2006. Using Self-Report Assessment Methods to Explore Facets of Mindfulness. Assessment, 13(1): 27-45. Beddoe, A. E., & Murphy, S. O. 2004. Does mindfulness decrease stress and foster empathy among nursing students? The Journal of nursing education, 43(7): 305-312. Bishop, S. R. 2002. What do we really know about Mindfulness-Based Stress Reduction? Psychosomatic Medicine, 64(1): 71-83. Brillhart, P. E. 2004. Technostress in the Workplace Managing Stress in the Electronic Workplace. Journal of American Academy of Business, Cambridge, 5(1/2): 302-307. Brown, K. W., & Ryan, R. M. 2003. The benefits of being present: Mindfulness and its role in psychological well-being. Journal of Personality and Social Psychology, 84(4): 822-848. Campbell, T. S., Labelle, L. E., Bacon, S. L., Faris, P., & Carlson, L. E. 2012. Impact of Mindfulness-Based Stress Reduction (MBSR) on attention, rumination and resting blood pressure in women with cancer: A waitlist-controlled study. Journal of Behavioral Medicine, 35(3): 262-271. Cohen, S., Kamarck, T., & Mermelstein, R. 1983. A global measure of perceived stress. Journal of Health and Social Behavior, 24(4): 385-396. Czerwinski, M., Horvitz, E., & Wilhite, S. 2004. A Diary Study of Task Switching and Interruptions, CHI 2004, Vol. 6. Vienna, Austria. Drucker, P. F. 2007. The effective executive. Amsterdam: Elsevier. Freedman, D. H. 2007. Why interruption, distraction, and multitasking are not such awful things after all. Inc., 29(2): 67-68. Fries, M. 2009. Mindfulness Based Stress Reduction for the Changing Work Environment. Journal of Academic & Business Ethics, 2: 1-10. Goldin, P. R., & Gross, J. J. 2010. Effects of mindfulness-based stress reduction (MBSR) on emotion regulation in social anxiety disorder. Emotion, 10(1): 83-91. Jenkins, H., Clinton, K., Purushotma, R., Robinson, A. J., & Weigel, M. 2006. Confrontin the Challenges of Participatory Culture: Media Education for the 21st. Century: MacArthur Foundation. Jensen, C. G., Vangkilde, S., Frokjaer, V., & Hasselbalch, S. G. 2012. Mindfulness training affects attention—Or is it attentional effort? Journal of Experimental Psychology: General, 141(1): 106-123. Kabat-Zinn, J. 1994. Wherever you go, there you are: Mindfulness meditation in everyday life. New York, NY: Hyperion. Kabat-Zinn, J. 2003. Mindfulness-Based Interventions in Context: Past, Present, and Future. Clinical Psychology: Science and Practice, 10(2): 144-156. König, C. J., Bühner, M., & Mürling, G. 2005. Working Memory, Fluid Intelligence, and Attention Are Predictors of Multitasking Performance, but Polychronicity and Extraversion Are Not. Human Performance, 18(3): 243-266. Lindbeck, A., & Snower, D. J. 2000. Multitask learning and the reorganization of work: From Tayloristic to holistic organization. Journal of Labor Economics, 18(3): 353-376. Madjar, N., & Shalley, C. E. 2008. Multiple tasks’ and multiple goals’ effect on creativity: Forced incubation or just a distraction? Journal of Management, 34(4): 786-805. Marchand, W. R. 2012. Mindfulness-based stress reduction, mindfulness-based cognitive therapy, and Zen mediation for depression, anxiety, pain, and psychological distress. Journal of Psychiatric Practice, 18(4): 233-252. Mark, G., Voida, S., & Cardello, A. 2012. “A pace not dictated by electrons”: an empirical study of work without email, Proceedings of the SIGCHI Conference on Human Factors in Computing Systems: 555-564. Austin, Texas, USA: ACM. Offer, S., & Schneider, B. 2011. Revisiting the gender gap in time-use patterns: Multitasking and well-being among mothers and fathers in dualearner families. American Sociological Review, 76(6): 809-833. Ophir, E., Nass, C., & Wagner, A. D. 2009a. Cognitive control in media multitaskers. PNAS Proceedings of the National Academy of Sciences of the United States of America, 106(37): 15583-15587. Ophir, E., Nass, C., & Wagner, A. D. 2009b. Cognitive control in media multitaskers. Proceedings of the National Academy of Sciences of the United States of America, 106(37): 15583-15587. Poldrack, R. 2006. Multi-Tasking Adversly Affects the Brain’s Learning Systems: UCLA Department of Psychology. Rosen, C. 2008. The Myth of Multitasking. The New Atlantis - A journal of Technology and Society. Santora, J. C., & Esposito, M. 2010. Dual Family Earners: Do Role Overload and Stress Treat Them as Equals? Academy of Management Perspectives, 24(4): 92-93. Shapiro, S., Schwartz, G., & Bonner, G. 1998. Effects of mindfulness-based stress reduction on medical and premedical students. Journal of Behavioral Medicine, Vol. 21, (No.6). Sibinga, E. M. S., Kerrigan, D., Stewart, M., Johnson, K., Magyari, T., & Ellen, J. M. 2011. Mindfulness-based stress reduction for urban youth. The Journal of Alternative and Complementary Medicine, 17(3): 213-218. Smith, J. D. 2010. Mindfulness-based stress reduction (MBSR) for women with PTSD surviving domestic violence. ProQuest Information & Learning, US. Spink, A. 2004. Multitasking information behavior and information task switching: an exploratory study. Journal of Documentation, 60(4): 15.

DETAILS ABOUT AUTHORS: SANDRA HORVAT INGUNN MYRTVEIT PROFESSOR BI NORWEGIAN BUSINESS SCHOOL; DEPARTMENT OF ACCOUNTING – AUDING AND LAW HANDELSHØYSKOLEN BI; 0442 OSLO; NORWAY ingunn.myrtveit@bi.no VEDRANA JEZ PHD CANDIDATE BI NORWEGIAN BUSINESS SCHOOL; DEPARTMENT OF STRATEGY AND LOGISTICS HANDELSHØYSKOLEN BI; 0442 OSLO; NORWAY vedrana.jez@bi.no VIGGO JOHANSEN COGNITIVE COACH viggo.johansen@intui.no

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PROGRESSIVE METHODS OF TEACHING AT THE FACULTY OF COMMERCE OF THE UNIVERSITY OF ECONOMICS IN BRATISLAVA PETER DRABIK PAULINA KRNACOVA ROBERT REHAK MARIA VASILOVA

ABSTRACT

The presented paper deals with the progressive methods of teaching in the conditions of the Slovak Republic. The following methods are introduced by the Faculty of Commerce of the University of Economics in Bratislava in order to create space for multidisciplinary teaching. The key share of participation with economic practice in the learning process, combined with modern and progressive methods of teaching, the significant space is created, especially for faster and better targeted application of graduates in the labour market. The main objective of these methods is to adapt the undergraduate education to the new challenges and labour market requirements. This paper is prepared in the Cross Border Cooperation Programme SR-AUT 2007-2012 in the project Cross-border in hi-tech centre, code N00092. KEYWORDS: Interdisciplinarity, Multidisciplinary Learning, Innovation in Higher Education, Employability, Cross Border Cooperation.

1. INTRODUCTION The growing attention within higher education to enhancing students’ employability responds to student motivations as well as to actual policy concerns in the EU – a high rate of unemployment of young people. Employability has become one of the strategic directions of national education departments all over Europe. Universities are facing many challenges and have to make the necessary reforms to fully participate in the global market place in the fields of teaching, research and innovation. In addition, European Commission emphasizes the need for cooperation between universities and business which has currently been transformed into one of the incentives within the EC modernization agenda for universities (Communication of 10 May 2006 from the Commission to the Council and the European Parliament). Building partnerships with enterprises often leads to interdisciplinarity and multidisciplinarity. Universities therefore have to redefine their education and research priorities in order to adapt to these new challenges. The Faculty of Commerce of the University of Economics in Bratislava is an educational and research institution that provides education in trade-related scientific disciplines and is well rooted among other higher education institutions in Slovakia. One of the primary ambitions of the faculty is to provide students with skills, understandings and personal attributes that make them more likely to gain employment and be successful in their chosen occupations. Therefore first pilot interdisciplinary modules have been developed to bring together students with their potential employers. The purpose of this paper is to discuss main points, where cooperation between technology–oriented professionals, producers, small entrepreneurs on one side, and business management and marketing management students on the other side, may be suitable to prepare them effectively for future careers development or activities in their own start-up projects. First, we review the research dealing with interdisciplinarity, university-business cooperation and alternative approaches to teaching in trade-related scientific disciplines. Secondly, we report on a multi-disciplinary module with a special focus on two case studies, through which several interdisciplinary connections between faculty and enterprises have been established. Presented case studies result from two years interdisciplinary cross-border project called High-tech Center. The innovative experience has been carried out by a group of lecturers from the Faculty of Commerce with aim to test alternative teaching strategies to facilitate students´ critic learning and provide skills that will increase their employability in future. This paper is prepared under the project “N00092 ETC Cross Border Cooperation Programme SR-AUT 2007-2012 hi-tech center in der grenzüberschreitenden Region”.

2. THEORETICAL PRINCIPLES AND THE BACKGROUND OF STUDY Slovak universities, especially in the domain of business sciences, are still characterized by the top-down educational model – the simple dissemination of knowledge from teachers to students through lectures and seminars, which does not pro-

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mote the development of expertise in the complicated information society. A general change in methodological approach is needed, that would center on learning and meaningful activities based on real life problems and would stimulate the development of skills of future experts. Research on innovative methods of learning in higher education is currently focusing on the effects of business-university alliances on the quality of output and scientific performance of universities. Furthermore, innovation in higher education is strongly connected to the change of approach towards interdisciplinarity. According to Jacobs (1989), interdisciplinary approach in teaching applies methodology and language from more than one discipline to examine a central theme, problem or discipline. The current literature (Woods, 2007; Holley, 2009) also distinguishes (1) multidisciplinary learning, when disciplinary knowledge from several domains is connected by a simple additive approach and (2) cross-disciplinarity, which uses cognitive tools from one discipline to answer questions in another. However, this shift from simple memorizing facts to application of knowledge relative to theme enables students to use higher order of conceptual skills such as analyzing, applying and generalizing in order to find solutions to diverse problems across disciplines. It was found that interdisciplinary educational programs stimulate engagement of both teachers and students by supporting connections, participation, and interactive teaching and learning. Although engagement can be defined differently in different contexts, in the context of higher education, it refers to high-quality programs in which students, teachers and the faculty invest time and effort in mutually supportive teaching and learning (Haworth, Conrad, 1997). After years of teaching experience, the Faculty of Commerce realizes that it is the engagement on the two sides which is a barrier to change. According to the engagement theory, by focusing on four dimensions (Table 1) the faculty may provide students with highquality education and finally help them to succeed in their future careers. Table 1. The Four Dimensions of Engagement in Higher Education 1.

Diverse and engaged participants

2.

Participatory cultures

3.

Interactive teaching and learning

4.

Adequate resources

Source: Haworth, J. G., Conrad, C. E. (1997.) Emblems of Quality in Higher Education: Developing and Sustaining High-quality Programs

We now briefly describe the four dimensions and illustrate them by examples within the interdisciplinary experience presented in part 3 of this article. 1. Diverse and engaged participants – in order to reach a high level of students´ satisfaction, it is crucial to find the right participants, both students and teachers. The level of satisfaction should be measured afterwards by course evaluations and retention rates. 2. Participatory cultures – multi-layered interactions, both formal and casual are developed between students and teachers. Students attend classes, lectures, seminars, workshops and optional activities, develop their own learning communities and begin to appreciate the value of collaborative problem-solving. 3. Interactive teaching and learning – the learning experience must not be limited to the classroom. On the contrary, students should participate in learning activities that will reflect real-life situations and where they are able to confront theoretical knowledge with actual practice. 4. Adequate resources – none of the later criteria can be met without financial and organizational support. When participants are free from worrying about how to fund their activities, they focus much better on teaching and learning. The question is, whether these four dimensions can be reached by using traditional forms of teaching and learning, such as lectures and seminars. The move from conventional direct teaching methodology to modern and innovative approach can be facilitated by integrating elements of project–based learning, especially into seminars. The project orientation is currently experiencing and enormous increase not only in business practice. Designing and developing projects, their application in practice has now become an important social tool enabling to bring to life a new idea or a vision (Orgonáš, Filo, 2012). Project-based learning is a model that organizes learning around projects by giving students the opportunity to work relatively autonomously over extended periods of time, because it involves students in design, problem-solving, decision making, or investigative activities. Moreover, empirical studies show that critical thinking, communication skills, problem solving are identified as the most important individual competencies defined by employers, closely followed by the ability to effectively work with others (Jackson, Chapman, 2012). Knowledge exchange and structured partnerships in this field are not very widespread - universities are developing their own methods and knowledge, and information on good practices is shared less frequently. Moreover, there is still little empirical evidence available about the effects of interdisciplinary teaching experiments. Therefore, in the following sections we will describe our own example with focus on progressive teaching methods that have been applied during a half year

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experimental course “Entrepreneurship in practice”. The presented interdisciplinary experience should result in a didactical proposal through which we intend to modernize traditional business and marketing courses and curricula, and establish an innovative interdisciplinary teaching module at the Faculty of Commerce.

3. DESCRIPTION OF THE INTERDISCIPLINARY EXPERIENCE 3.1. Context The experience we describe in this paper has been developed as a part of the interdisciplinary cross-border project called Hi-Tech Center supported by the European Regional Development Fund. The pilot theme clubs were set up in the summer semester 2012 at the Faculty of Commerce at the University of Economics in Bratislava1. However, one of the important issues that still need to be solved is the implementation of the interdisciplinary learning module into a very rigid structure of the existing bachelor´s and master´s programs. After the first year of experiment, a new platform Talent Way has been set up, which covered 10 specialized clubs (figure 1) operating within the module “Entrepreneurship in practice”. The module is obligatory for all students of the business and marketing management program. Since the summer semester 2013, the platform Talent Way has also provided internships and support for start-up ventures creation.

Figure 1: Clubs Organized by the Talent Way Platform

3.2. Project Characteristics and Development Mindfulness is an ancient practice belonging to the Eastern Wisdom Traditions, particularly Buddhism, and as such it goes Eight lecturers, about forty practitioners and 250 students of business and marketing management program participated in this experience. The courses involved in the experimental platform Talent Way covered several disciplines as it is shown in figure 1. The club structure that has been set up in 2012, has already offered an open meeting space where experts from the different disciplines came together and helped each other to surmount the inherited barriers for interdisciplinary teaching and learning in the diversified Slovak university landscape (Hasenauer, R., Filo, P., Störi, H., 2012). Moreover, new partnerships which have been created ensured that practitioners engaged in this experience were from different knowledge areas. Hasenauer, R., Filo, P., Störi, H. (2012.) The Marketing of High-Tech Innovation: Research and Teaching as a Multidisciplinary Communication Task. 1st international M-Sphere conference for multidisciplinarity in science and business: book of abstracts. p. 50. 1

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During the subsequent semester in summer 2013, lecturers participated in the experiment as a “critic friend” (García, Roblin, 2008) – their role was to encourage students´ reflection, critical thinking and opinion exchange. Lecturers were actively involved, especially in the final stage of the experiment – as consultants during the preparation of master´s thesis proposals. They also had to face and solve any problem that emerged during the experience. Each club produced valuable results in form of new teaching and learning experience, partnerships and a starting point for innovation in education at the Faculty of Commerce. However, we decided to further describe two cases, where outcomes were the most significant for both lecturers and students.

3.2.1. Case Study No.1 AGRO-BIO club represents the platform that aim is to connect academic and business sphere in the fields which are related to agriculture and food industry. In practice, the club is dedicated to the all parts of food chain (for example, public sector, producers of packaging materials, food services providers, etc.), food safety problems, aspects of healthy lifestyle and so on. The aim is to link up theoretical knowledge of marketing, innovation, consumer behaviour, project management, commodity science, product management and above mentioned fields that underline the club interdisciplinarity. The club activities are primarily created for the students of the Faculty of Commerce who can be concentrated on the specific field of their interest and can confront their theoretical knowledge with practical experiences of business representatives. The club activities are generally carried out in the form of workshops and team projects. Members of club can create their own thesis titles and write the chosen thesis with help of teachers or economic (business) experts. In the academic year 2012/2013, in order to reach the main objective of the club’s activity – the connection of students (theory) with practice, we chose an interactive form of education vastly different from the typical ways and forms of connecting theory with practice that our teaching staff is used to (such as developing term papers, practical examples, case studies, video projections, problem solving and so on). We decided to implement a pilot project titled STUDENTS’ MARKET with this years’ subtitle WINEFEST. The essence of STUDENTS’ MARKET lies within the possibility for students to gain a firsthand experience of working in the area of trade, merchant tactics, sales tactics, marketing skills, risks of entrepreneurship, but also in order to apply the theoretical knowledge in work experience. Our aim is making STUDENTS’ MARKET become a tradition at the Faculty of Commerce, as well as an event that is organized by students twice per year – depending on its thematic focus. This year, we concentrated the pilot project on a specific area of thematic focus of the AGRO-BIO club – viticulture and winemaking, and therefore having the subtitle WINEFEST. What preceded the organisation of the WINEFEST event? How does the innovative education in the AGRO-BIO club work? The basis of the club activities was organising workshops led by experienced specialists in cooperation with the club’s supervisor. During the term, we organised a series of workshops for students, where we gradually introduced them to all necessary knowledge for organising an event. Since the work on STUDENTS’ MARKET project is team-oriented, during the first workshop (WS1) titled “Wine marketing – successful commerce” we tested the students in order to discover their abilities and aptitude for working in a team. Then, according to The Belbin Team Roles Model, we created seven teams of five members each. Each team was represented with all groups of roles (action-oriented roles, people-oriented roles, thinking-oriented roles). Subsequently, the students were informed about the task and objectives they need to implement during the term: 1. Main objective: • To organise and market WINEFEST event. Winefest is a typical wine festival, where different wineries are represented with their portfolios, and the visitors come to taste samples of different wines. 2. Partial tasks: • PT1: Each team will find a winery to cooperate with, and therefore, during this project become sales representatives/ sommeliers of the winery that agrees to cooperate. The cooperation of the winery means that they will consent to having students represent them in the event, and at the same time supply their products, marketing materials, inventory and so on, all according to the agreement and demands of the students. • PT2: Reality game – think, you will represent the brand you are presenting. It is important to know everything about the given winery and their products, but also be aware of the general information about wine as a product itself.

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• PT 3: To prepare wine tasting from an organisation and marketing point of view (budget, inventory, propagation materials and such).

Significance and value of the given tasks for students: • PT1: developing their communication and negotiation skills, assertive communication, abilities to make deals and trading. • PT2: this task needs a real interest from students in gaining enough information about products, ways of production, packing, storage, sales tactics, but also consumer preferences directly from specialists – winemakers and vine-dressers. This also means gaining practical information and experience based on face-to-face communication, meetings or even excursions to wineries they work with, eventually taking part in wine festivals or tastings organised in the wider area. • PT 3: application of theoretical knowledge from marketing, tourism, business economics, planning etc. gained during their studies at the Faculty of Commerce. Above-mentioned objective and tasks, place and date of Winefest, participation limited for students and employees of the Faculty of Commerce were the only information that students received from us (supervisors). We allowed them to do anything on the way to achieve stated goals and tasks. We were not influencing their team work in any way. Our aim was to coordinate the meetings, to create content of workshops and to help and advise them just in the case of any complications, questions or problems. In our opinion there is a significant change that can be also obvious for students that are usually used to receive information from teachers passively - without any effort or work. In AGRO-BIO club students have become active participants that were responsible for conducting of all activities. They had to prepare event WINEFEST in 6 weeks and could communicate only among themselves, all of personal meetings with supervisors were excluded (except second workshop WS2). WS2 titled “Wine – Drink of Gods” was led by sales representative and sommelier of one the most modern winery in Europe with the aim to explain basic information and knowledge about wine (grape sorts, wine production process, packaging, storage, quality evaluation, principles of wine tasting) to students. The next workshop WS3 was held 6 weeks after workshop WS1 during which students “teams of winemakers” presented their ideas and progress in event preparation. They informed about wineries that wanted to participate and cooperate with them and discussed all necessaries concerning wine festival at the Faculty of Commerce (event promotion details – creating of posters, invitations and their distribution, renting of tasting glasses, print of tasting coupons, etc.

Figure 2. Official Invitation for Teachers and Employers of the Faculty of Commerce Organizers (students) invited employees of the Faculty of Commerce to final workshop of AGRO-BIO club – event WINEFEST by personal invitations (see figure 2). Posters (see figure 3) were published in the faculty. The important communication channel especially for students segment as potential participants was social networks and event page on Facebook.

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Figure 3: Poster Figure 4 illustrates atmosphere and organization of event.

Figure 4: Photos of event WINEFEST After WINEFEST the next workshop (WS4) focused on evaluation of the event took place. Students evaluated event in very positive way. Summary of incomes and expenditures of all teams are presented in Table 2. Team

No. of tasting coupons

Income (€)

Expenditure (€)

Profit (€)

Tokaj

387

151,10

124,00

27,10

Vinotéka Galéria

385

115,50

105,17

10,33

Elesko

340

102,00

96,00

6,00

Vinkova

290

87,00

80,80

6,20

Masaryk

279

83,70

86,80

- 3,10

Chateau Topoľčianky

222

66,60

55,00

11,60

Slováček a Gašparovič

160

48,00

12,00

36,00

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On the basis of participants feedback we can conclude that WINEFEST was successful project and will go on. Students (the club members) were very satisfied by success and positive participant´s references. Furthermore, they were really surprised by success and high level of event that was being prepared during semester. The event was also positively assessed by other participants – students, employers and representatives of the Faculty and the University of Economics in Bratislava. In our opinion students did a great job during the semester and persuaded us that they can connect their gained theoretical knowledge with practical experiences of experts. As a form of compensation, but also to motivate students to perform at their best, we prepared a tour of the ELESKO winery for all members of the AGRO-BIO club. Elesko winery uses the most modern technologies in producing wine and its storage and may become a future strategic partner of the Faculty of Commerce. A part of the excursion was a tour of the winery with an expert commentary and professional wine tasting with their experienced sommelier. Before the end of the academic year, we all met at the last workshop WS, whose aim was to evaluate the activities of the club (not just events), which is intended to help the supervisor on a quest for improvement. The evaluation results of club activities are of paramount importance to us. In addition, the student gets the opportunity to express his/hers opinion (positive or negative), which also has an impact on creating of club activities in the future. We believe that through this kind of evaluation the interest of students to actively participate in improving the club will rise. Moreover, it creates a more open relationship between teachers and students, as students may freely express their views, opinions and give suggestions for improvement. Students rated 5 aspects of the club (see table 3). Based on the results, we found that:

• The best rating mark was given to the aspects of students´ work (Winefest event and team work) – the event was •

evaluated as unexpectedly highly professional. Negative points were given to uneven workload of team members as not all members of the team worked. In the meantime, they recommended continuing in such activities in the future. The worst rating average mark of 2.85 was assigned to the “way of organising the subject” – on the other hand, they rated the creative aspect of the project, professional workout of the workshops and the workshops led by practitioners very positively. Some of the proposals for improvement were to have joint meetings more often (frequency this year was approx. 2 times a month for 3 hours) and to change the way users log into clubs that operate at the Faculty of Commerce.

Table 3. Students´ evaluation of the project Criterion

Average Mark

Event Winefest

1,25

Team Work

1,61

Attitude and supervisors´profesional qualitites

1,78

Communication

1,83

The way of organizing the workshops

2,85

Finally we would like to present opinions and statements of the students – AGRO-BIO club members that prove this form of education is interesting, challenging, creative, innovative and motivating: “I did not expect so much as it was offered. I was satisfied. “ “Very good event and many good points to the faculty and event. Super! “ “I would not change topic of the club activities... It is necessary to go on!” “The workshops - interesting, they were super!” “The event WINEFEST - excellent, could be organized on a regular basis.” “The event WINEFEST - funny, finally something practical and different.” “Absolutely great event at the faculty, creative expression of students and not memorizing of theory.”

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3.2.2. Case Study No.2 LogisticClub has been established as a platform of the Faculty of Commerce in January 2013. The aim is to link the academic sphere with the experience in the field of logistics. The primary objective is to increase the applicability of the students in the labor market and create opportunities for multidisciplinary issues of logistics.

Figure 5. The Official Logo of LogisticClub The club offers various solutions to problems in the field of distributions systems and logistics: • Basic assignments and problems are solved within “workshops” with the students under the supervision of selected experts. • More complex assignments are completed through theses under the guidance of the expert from mentioned faculty, supported by the professional from real practice. • The most difficult assignments (which may require multidisciplinary expertise) are solved by expert ‘workshops’ of the club. Their aim is to bring together the professional community with expertise on the relevant issue. LogisticClub gives opportunity to students´ active participation in “workshops”, scientific (thesis) projects and skills and knowledge development in the field of logistics. The club also offers internships, expert workshops and seminars, and the opportunity to participate in research projects concerning logistics and supply chain management. So as to teaching capacity at the Faculty of Commerce, LogisticClub covers the topics on logistics, distribution and supply chain management. Moreover, the outcome may be beneficial for the academic community – the club offers opportunity to lecturers to participate in tasks and projects specified by practitioners. However, the added value of the club is represented by the multidisciplinary solutions of various issues in the field of logistics. During the summer semester 2012/2013, five workshops have been held. Their aim was to help students to apply the theoretical knowledge they have acquired. Participants were students who have completed the module ‘Distribution systems and logistics’ in the winter semester 2012/2013. The program of the workshop, as shown in the table 4, was strongly connected to the theory covered by the mentioned module. Table 4. Thematic Workshops of the LogicticClub, summer 2012/2013 Tesco Stores (26/02/2013) – Category management - retail in terms of the retail chain Metro Cash & Carry (03/13/2013) – Category management – supply chain management BITO (03/26/2013) – Storage technology GoodYear (04/09/2013) - Retail in terms of the Premio network Mary Kay (04/16/2013) – Direct marketing & personal selling Based on the topics solved within the five workshops, the members of LogisticClub (26 students) prepared their own proposals of master´s thesis responding to their interests and orientations. There were also several proposals designed by the practitioners (about 20%). During the workshops, there also has been a pre-selection of students which will be offered the possibility to attend the dual education scheme at master´s level. As we previously mentioned, the experimental platform Talent Way results in master´s theses proposals, where about 20% of proposals are designed by practitioners. During the following semester,

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students will complete their master´s projects in cooperation with company and under the supervision of lecturer specialized in the topic. The dual approach is expressed as follows: - -

The thesis supervisor – lecturer will be engaged in the theoretical part of the project. The practical part corresponding to a specific problem will be completed by the company’s expert – practitioner.

The student is required to spend a minimum of 8 hours per week experiencing real-life situations inside the studied company. The voluntary work may result in a paid internship or a full-time agreement after finishing the master´s program. In order to facilitate the development of practical skills and interdisciplinary knowledge of students, arrangements with the Faculty Vice-dean were made, so that some obligatory duties could be reduced and students could complete their projects “in field”. This innovative approach will be tested exclusively by the LogisticClub during the two following years. The success of this experiment requires personal but also organizational support, especially in replacing or enriching the traditional teaching and learning modules by the new innovative courses. We understood that the transition process needed to be made gradually. As has been mentioned, the topics of the LogisticClub are strongly connected to the module “Distribution systems and logistics”. In addition, another module on “Distribution management” is obligatory during the next year of master´s program. The idea now is to cover both by the multidisciplinary module provided by the lecturers and practitioners of the LogisticClub. The first step has already been made by shifting the traditional courses on distribution and logistics to a more practical, interactive and participative workshops. The next step will be to link the two modules ‘Distribution systems’ and ‘Distribution management’ and focus more on workshops and cooperation with experts from practice. As the interdisciplinarity may stimulate high-quality research, an important activity of the club is to participate actively in scientific research projects. The members of Logistic Club, both academics and practitioners, have prepared a research project proposal called “Supporting the innovation of distribution processes through implementation of modern technologies and optimization of operations in logistics, with focus on the environmental burdens reduction and increase of the quality of life.” Besides the previously mentioned academic outcomes of LogisticClub, another important benefit is the possibility to gain additional financial resources in form of sponsorship. In year 2013, LogisticClub found several sponsors among its partners for renovation of classrooms, which will be used as training rooms and an interactive space for workshops. Future goals: For the following semester, LogisticClub has set up several goals and activities:

• • • •

acquisition of new partners for cooperation, development of interdisciplinary research activities, cover all educational activities related to logistics by LogisticClub, increase the quality and quantity of scientific publications.

The whole realization team of LogisticClub is convinced that our actions will improve students´ success on the labor market, link practice and the academic world and gain recognition of the Faculty of Commerce as one of the high-quality educational institution in Slovakia.

3.6. Findings and Discussion Several studies carried out in Europe (Franke, Lüthje, 2003; Lüthje, Prügl, 2006) show that business management students generally have low awareness and appreciation of interdisciplinary cooperation with technically trained people. Moreover, there have been identified several problems associated to interdisciplinary co-operation, that have to be considered. These are caused by stereotypical perceptions of members of different disciplines due to lack of information and experience, especially in highly competitive domains, and can result in important barriers to interdisciplinary projects. To understand the importance of linkages between business and universities, both sides have to appreciate the benefits of these relationships. During the past two years, several elements of interdisciplinarity have been integrated into courses at the Faculty of Commerce. We now recognise, that the co-operation between two distinct professional disciplines can be useful for both sides and for the society as a whole (table 5):

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Table 5.Potential Benefits of Interdisciplinary Alliances and Ties between Universities and Business BENEFITS FOR UNIVERSITY/FACULTY - Job creation for graduates through new venture creation - Opportunity to diversify financial resources - Increase the attractiveness of study programs and overall reputation of the institution - Better achievement of accreditation criteria BENEFITS FOR BUSINESS PROFESSIONALS - Access to cheaper specialized labour in form of graduate students - A steady stream of talented researchers - Access to knowledge and other key resources, such as market information, new ideas.. - Costs reduction BENEFITS FOR BOTH SIDES - Knowledge spillovers from university to practice and vice-versa BENEFITS FOR SOCIETY - Contribution to the growth of entrepreneurial culture in the region - Strengthening local economies Source: Authors

A promising educational approach to integrate two traditionally separate academic fields is to include interdisciplinary elements into existing course modules. Within our experiment described above, we have identified two levels of integrating interdisciplinarity into traditional learning modules: - Level 1: courses with added high tech engineering (LogisticClub, Future Vision, Eco-Vision, Online Club) and servicesoriented low-tech elements (Agro-Bio Club, Agro-tourism, CSR, Health Market) have been designed and tested; - Level 2: pure interdisciplinary course has been set up (Creative Business Club) with teams of students from different types of academic institutions: the Faculty of Commerce, University of Economics in Bratislava and the Academy of Fine Arts and Design in Bratislava. Now, we can come back to the four dimensions of engagement promising success in increasing quality in higher education (see table 1). We illustrate on examples, how the four dimensions have been reached during our experience. Diverse and Engaged Participants • Lecturers, practitioners and even students (in the Creative Business Club) were from different knowledge areas and had different teaching, presenting and learning styles. This diversity enhanced the whole experience and brought some innovative aspects into the traditional approach by the synergy of multiple viewpoints, opinions and experiences. • The level of students´ satisfaction has been measures within all 10 clubs and final evaluations are being analyzed as a part of internal university research project. Participatory Cultures • It is important to mention, that team work and collaboration among lecturers and students were essential to ensure a successful progress toward the objectives of the experiment. Regular meetings and informal communication helped us to share ideas, solve problems and make decisions in these new situations. Interactive Teaching and Learning • Interactivity was reached by giving students the opportunity to work outside the cases – they had to organize meetings with professionals in the field, participate in excursions to companies´ facilities, take part in events and PR activities. • The use of ICT was helpful especially as it allowed students to follow up the activities developed in class and keep up with the courses, but also it provided space for interactive communication and exchange of information between students and lecturers through new channels for dialogue and interaction (such as social networks, social media).

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Adequate Resources • None of the above mentioned activities would be possible without personal and administrative support from the Faculty and the University. Emotional support coming from colleagues and senior lecturers was also necessary to encourage engagement of both – students and lecturers involved in the experiment. However a less rigid organizational structure would facilitate the interdisciplinary work. • Five individual classrooms have been renovated and equipped with help of partners. Sponsorship contributions have been made through: o o o

Monetary donation – resources used for classroom renovation Equipment donation Combination of the above items.

The engagement theory showed us a path how to explore the strengths, weaknesses and main issues of an innovative interdisciplinary approach in teaching and learning. In future development, the four dimensions will serve as reflective indicators of how well the innovated master´ s program is meeting the unique needs of students.

CONCLUSION As we have moved on the experiment, several decisions needed and will need to be taken and changes made in the interdisciplinary teaching strategy introduced, as a result of the reflection processes and feedback received from students, practitioners and colleague lecturers. We have observed, that joining activities and developing common experiences not only helps to reduce negative stereotypical information about individuals outside one´s discipline, but also improves communication skills, mutual understanding, the ability to use analogies and think in extra-disciplinary perspective. We believe that the shift from traditional categories “class”, “teachers” and “students” to the creation of a diverse, interactive and participatory learning climate facilitated free expression of ideas and opinion exchange. Finally, we must notice, that taking this experience into practice has not been an easy task for lecturers involved in the project as it applies a lot of hard work, time and dedication. Even though it was a relatively small initiative, it allowed us to gain new insights into challenges of interdisciplinary approach, as well as to reflect about the processes of educational change in which we are ready to continue in future.

LITERATURE Franke, N., Lüthje, C. (2004.) Entrepreneurial Intentions of Business Students: a Benchmarking study. International Journal of Innovation and Technology Management 1(3), pp. 269–288. 2. García, L.M., Roblín, N.P (2008.) Innovation, Research and Professional Development in Higher Education: Learning from our own experience. Teaching and Teacher Education, 24 (1), pp.103-116. 3. George, G., Zahra S.A., Wood, D.R. (2002.) The Effects of Business–University Alliances on Innovative Output and Financial Performance: A Study of Publicly Traded Biotechnology Companies. Journal of Business Venturing, 17(6), pp. 577-609. 4. Haworth, J. G., Conrad, C. E. (1997.) Preface, Emblems of Quality in Higher Education: Developing and Sustaining High-quality Programs (pp. xixvii). Boston: Allyn and Bacon. 5. Holley, K. (2009.) Interdisciplinary Strategies as Transformative Change in Higher Education. Innovative Higher Education, 34(5), pp. 331-344. 6. Hasenauer, R., Filo, P., Störi, H. (2012.) The Marketing of High-Tech Innovation: Research and Teaching as a Multidisciplinary Communication Task. 1st international M-Sphere conference for multidisciplinarity in science and business: book of abstracts. p. 50. 7. Jackson, D., Chapman, E. (2012.) Empirically Derived Competency Profiles for Australian Business Graduates and Their Implications for Industry and Business Schools. The International Journal of Management Education, 10 (2), pp. 112–128. 8. Jacobs, H.H. (1989.) Interdisciplinary Curriculum: Design and Implementation. Alexandria, VA: Association for Supervision and Curriculum Development, 97p. 9. Lüthje, C., Prügl R. (2006.) Preparing Business Students for Co-Operation in Multi-Disciplinary New Venture Teams: Empirical Insights from a Business-Planning Course, Technovation, 26 (2), pp. 211-219. 10. Newswander, L.K., Borrego, M. (2009.) Engagement in Two Interdisciplinary Graduate Programs. Higher Education, 58 (1), pp. 551-562. 11. Orgonáš, J., Filo, P. (2012.) Projektový Model Vyučovania - Moderný Spôsob Seminárov a Cvičení. Vedecké state Obchodnej fakulty 2012, pp. 554-567. 12. Woods, C. E. (2007.) Researching and Developing Interdisciplinary Teaching: Towards a Conceptual Framework for Classroom Communication. Higher Education, 54 (6), pp. 853-866 1.

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DETAILS ABOUT AUTHORS: PETER DRABIK ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA pr.of@euba.sk PAULINA KRNACOVA ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA paulina.krnacova@euba.sk ROBERT REHAK ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA robert.rehak@euba.sk MARIA VASILOVA ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA maria.vasilova@euba.sk

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UNIVERSITY LIBRARY AS A LIVING LAB: INNOVATING WITH STUDENTS ANDREA ALESSANDRO GASPARINI ALMA LEORA CULÉN

ABSTRACT

Ubiquitous and pervasive technologies are part of everyday life, including the portion of it that has something to do with the university libraries: all students use personal mobile technology and all books have embedded sensors. This paper describes three years long experience with student-lead innovation of student-oriented university library services. Students, as library users themselves, have a potential to initiate changes in the existing practices, or offer novel technological solutions based on ubiquitous and pervasive technologies that are easy to adopt and use for this user group. Within the project described in the paper, the library was established as a living lab for a student-lead innovation. At this stage, the innovators are recruited among interaction design students. The approach shows very promising results, some of which are showcased in the paper. KEYWORDS: Innovation, Service Design, Interaction Design, Library Services

1. INTRODUCTION The university library as an institution balances a fine line between being traditional and being innovative. The acquisition and the loan of academic books are a centuries old tradition. Rapidly changing information technology strongly influences how this traditional work is being done. The question whether libraries should simply adapt to the changes dictated by technology or be innovative in their own right is an old one. Addressing the issue of innovation in libraries (Olaisen et al., 1995) say: “Even though it would be foolish to argue that all innovation is beneficial or that continual change for its own sake is desirable, there is evidence in the business literature that innovation is necessary for both development and survival. … Libraries must ask the penetrating questions: Is innovation necessary? For what can innovation theory be used in libraries?” The disruptive innovation in the book delivery system, see (Christensen & Raynor, 2010), forced by the appearance of disruptive technologies such as eBooks first and tablet later (Culén et al., 2011; Culén & Gasparini, 2011a), has practically forced the libraries to innovate. Ubiquitous and pervasive technologies are part of the library ecologies today. In terms of pervasive (sensor based) technologies in the library, paper books are all embedded with RFID tags. The use of ubiquitous, personal and mobile, technology in Norway is widespread: 97.2% of Norwegian population is using the internet, see (“Norway - New Media Trend Watch Europe,” 2013), and 63% of the whole population uses social media. For the student population, Internet access is 100%, and although we do not have data for social media use, it is significantly higher than that for the general population. Students routinely use their smart phones for access to information, social media, e-commerce, m-commerce, gaming and even TV watching. Students are a savvy group who likes cool things, and value for their time or money. It is not easy to provide services for this user group that would be widely accepted and used, see (Culén & Gasparini, 2012). For example, the results from an upcoming master thesis (Edvartsen, 2013) show that 45% of 244 users that participated in a survey around the use of library services, do not use the library web site at all. This lack of interest in library online services is also supported by a larger research done by JISC (Rowlands et al., 2008), where one of the findings is that today’s students, being digital natives, generation Y or millennial generation, rely heavily on search engines like Google, rather than specialised, curated, library search engines providing only the material that passes quality control. The low level of awareness around the quality of information is also resulting in poor search strategies, (Rowlands et al., 2008). The most numerous user group of the university library are students. Thus, it was reasonable to try to create a context in which students can contribute to service innovation, leading to increased and better use of library services. Three years ago, we offered students possibility to become innovators of library services, through academic instruction in interaction design, see (Moggridge, 2007; Saffer, 2010; Sharp et al., 2007) for an introduction to interaction design. This also implied innovation in teaching. Although the book “Creating Innovators” (Wagner & Compton, 2012), appeared on the market two years after we have set in practice similar ideas, it confirms that these are the ideas whose time has come. (Wagner & Compton, 2012) site the results of GE’s 2011 survey on innovation, stating that 77% of those interviewed considered that “the greatest innovations of the 21st century will be those that have helped to address human needs more than those that had created the most profit”, and 69% agreed that “today, innovation is more driven by people’s creativity than by high level scientific research.” The logical question that authors then pose is: can innovation skills

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be learned? The authors state: “The DNA of innovators might be considered a set of skills that are essential elements in design thinking”. Design thinking, see (Brown, 2008), is changing the innovation scene, but also education within some fields that are not traditional design fields, see (Culén et al., 2013). Thus, through the context of the course, using creativity and design thinking, students were enabled to take the lead in designing new or re-designing existing library services. The main concern of this paper is thus discussion of how to involve students in innovation and service design (Polaine et al., 2013) processes within the university library. The idea is simple: allow human-computer interaction design students to take a lead in innovating student-oriented services at the library. We will describe our methodology, the context for innovation situated in a physical location as a living lab. Further, we will present some examples of students work throughout the innovation process, from ideation, to implementation. The stage set out for this work is truly multidisciplinary and involves fields of innovation, interaction design, education, library science and service design. The paper is structured as follows: Chapter 2 presents the Living Lab as a concept used to raise awareness of innovation processes within the library. Chapter 3 gives an overview of the work done during the last three years while chapter 4 discusses in depth one specific project. Chapter 5 present findings so far, and chapter 6 discussion, followed by the conclusion in Chapter 7.

2. LIVING LAB AS FRAMEWORK FOR RESEARCH We consider a Wikipedia definition of a living lab (“Living lab - Wikipedia, the free encyclopedia,” 2013) to be a good definition, even though our scope is a bit narrower: “A living lab is a user-centred, open-innovation ecosystem,[1][2] often operating in a territorial context (e.g. city, agglomeration, region), integrating concurrent research and innovation processes within a public-private-people partnership.” The citations in the definition relate to highly relevant work of von Hippel, Cheesbrough and Bilgram et al. (Bilgram, et al., 2008; Chesbrough, 2003; von Hippel, 1986). We have used the Living Lab as a research concept and as a framework within which we could contextualize, study and understand the effects of the design of student lead innovative processes within the library. The Living Lab as a concept implies building of awareness among stakeholders around activities related to innovation. It also implies a specific context where the action happens and evolves through time (Schumacher & Feurstein, 2007). This sensibility can be used to validate and refine solutions in multiple, and similar context, but requires a very high level of observation and participation to enact new activities (see Figure 1). The Living Lab has been widely used as a research framework during the last years, even though it is quite new. Other researchers have used this framework to conduct analysis of online community activities and grasp how innovation, cooperation and voluntarism enact when the stakeholders are developing, for instance, open source software (Brandtzæg et al., 2010; Følstad, 2008a). The Living Lab framework is also used in design and deployment of welfare technology for the elderly (Thiesen et al., 2009). Figure 1: Participation and Context of Innovation

Source: (Eriksson et al., 2006)

The “context” is an interesting attribute of the Living Lab framework. In the case of Living Labs, one can operate with two different notions of context (Følstad, 2008b). The first notion, the “Familiar context”, implies that the ambient is set up to support users through the concept of familiarity. For instance, the living lab for designing with elderly may contain objects that they were familiar with in their youth and use those to build their competence with something new. The second notion, the “Real-World context”, implies that the living lab is taking place in the actual situation of practice. This approach

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of is highly discussed, pointing out the novelty of this field (Thiesen et al., 2009) and the complexity (Markopoulos, 2001). Regarding our research and use of the living lab, we have settled on the use of the Real-World context and given it a physical space, the university’s science library. Observations of several different layers of library practice are carried out in this setting. First, the interaction design students do surveys and interviews with diverse library users, getting feedback and data around changes in the use of the library. The second layer consists of a series of observations and interviews done by researchers with the students participating in the interaction design course, thus collecting data on how they work. Finally, interviews, observation, focus group with librarians and library leadership are carried out by researchers, collecting data on how the innovation is perceived and what are the effects of it in the science library.

3. PRELIMINARY WORK IN THE SCIENCE LIBRARY Three years ago the science library at the University of Oslo decided to take a deep look into its organization, operation and the meaning of technological changes on the way these operations are taking palace. As one of the consequences, several small libraries were merged into one, at a new location, in March 2012. Another change that took place was a decision to adopt the user centric view and redesign or develop new services that better serve users’ needs. Libraries have a long history of offering services to users. Preserving, keeping acquiring and lending books and other information material are very old, globe wide agreed upon practice. Usually free of economic interest for end users, libraries worldwide cooperate on keeping this practices a live (Matheson, 1995). Therefore, the introduction of new user centered services implies the necessity to align them to a strong, long-lasting main practice. In order to investigate the users’ needs and let users develop services that they are interested in, the leadership of the science library established cooperation with the institute of informatics, group for design of information systems. The class in interaction design was chosen in order to explore the idea of new service design with students, for students. The framework to achieve this innovative user centric idea was then established, and during the past 3 years, several student-lead projects have informed the library of the kind of services students see as valuable. The first year of users involvement towards informing the library started in the fall of 2010. This was the year when the iPad came out and many have seen tablets as disruptive technology that will change the education. The library was interested in finding out how it would be for students to have an entire curriculum on the iPad; is it really a game changer (Culén & Gasparini, 2011b)? They also wanted to establish a new practice around the acquisition and distribution of documents on this new platform. The role of interaction design students was to observe how a graduate level class in geoscience, equipped with iPads, and an undergraduate class in economy, equipped with an e-book reader Boox, used these devices and reading materials on them (Culén et al., 2011). The period when the project started was quite uneasy for the library since the e-book reader and the iPad represented two disruptive technologies, which could cause major changes in how the library works in the future (Culén & Gasparini, 2011a). Those technologies opened also for other possibilities, for instance an ecofriendly aspect of using these devices was the possibility to reduce the prints-out of diverse materials, including research articles, power point presentations for courses etc. The interaction design students found these side effects of the use of tablets interesting. The second year, in the fall of 2011, before the new science library building was completed, interaction students were challenged to investigate ways of organizing new services for the library. There student projects were defined, and the central tension was around whether one should use the old way of organising services in one large web-based portal, or are some things much better done using mobile phone applications. For two of the project groups, the main idea was to mirror the services offered on the web site of the library, arguing that familiarity would aid adoption. The third group used a different strategy, making a prototype of an app that would be very useful in situ, at the new library. The services included “book a librarian”, “book a study-room” or “see the map of the library”. See (Student Projects, 2011) for all three projects. The third year, in the fall of 2012, the library had opened its doors at a new location and helped provide a better context for students work. The library started a more formal project “User Driven Innovation” (BDI, 2012), and also sought external funding to support the students efforts. What happened in this period regarding innovation is the focus of the next section.

4. THE CASE STUDY In the third cycle of cooperation between the library and the department of informatics in the fall of 2012, the organized

support to facilitate students work increased substantially. Three library staff members had weekly meeting with students, again organized in three project groups, and the instructor for the interaction design course. In addition, the library organized a daylong meeting with a professional user-experience consultancy company (Netlife Research, Oslo), where stu-

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dents presented projects and get feedback. The library staff helped project groups with programming competence, library management system interface issues, as well as with simpler contextual help such as booking rooms for focus group or interviews, and some financial aid for gifts to the respondents. The projects, in turn, were really exciting. The results were, naturally, not fully developed systems or applications, but the way towards completion was clearly charted. An app that one of the project groups worked with is released and available at AppStore and Google Play, while the second application is ready for implementation. The interest with these projects was not only in novelty of ideas for services or implementation of those. It was also methodological. Two of the project groups have used Participatory Design approach (Sharp et al., 2007) as their design strategy, where selected users are participating in the entire design effort. The last project used user-centred Design (Sharp et al., 2007) where needs and interests of users are always in focus. The methods and techniques employed with all stakeholders were based on interviews, questionnaires, focus groups and workshops. The design was also supported by observation and user based testing. The three project groups have managed to engage diverse groups of participants, with diverse skills that were well used during the design process. Figure 2: App for book search and possibility to scan ISBN barcode.

Source: (Reistad et al., 2012)

The first project, “Bookworms”, developed a smartphone app, which helps users to find physical books on the shelves in the science library. If the book is also available in electronic edition, the user has an opportunity to choose this option. The students said that they were motivated to work on this project because the library was a place they often used, and they were exited about possibility to innovate “… since the library has essentially been the same for many years, without much innovation.” (Reistad et al., 2012) The students also point out that the library staff was positive and interested to help, and their involvement in the project was very crucial for their choice of project (Reistad et al., 2012). The second project, the “BibApp”, was related to the access to the knowledge resources of the library, from student’s perspective. The smartphone app they designed checks their curriculum and tells them which books and articles the library has. The BibApp also enables a user to discuss and comment on the resources. The students stated that the motivation for this project was the following: “The background for this project was …. to help the University of Oslo Library adapt to the society and the student’s demand…” (Arnesen et al., 2012). The last project, “Minesweeper”, focused on a task that combined value-based design democratizing the existing room booking system, with social aspect based in wide spread use of social media. The booking system was to work in situ, one could at glance get overview of rooms in use. For those that were in use, but had some empty seats, the users using the room could post the topic discussed and number of available seats on a feed shown on a large screen by the entrance to the library. Tweets were enabled as well, possibly attracting friends from the same class to come. For the project group the motivation was to “…increase the library’s appeal.” (Sætre et al., 2012)

5. FIRST RESULTS AND EFFECTS One of the first effects of the User Driven project was a seminar at the end of the 2012, where students presented the projects for interested guest from the University, the University library and other libraries in the country. The interest was overwhelming, and the conference room was more than full. At the end of presentations a vivid discussion started about

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the need of the library to make changes and let the users participate in the innovation processes. The results presented by the involved students, contributed to making the library leadership to commit to give economic support to a new larger research project to monitor and understand the results from these student-lead innovation projects, and finally to continue working with students. The aim of the larger research project, which started in February 2013, is to monitor and understand the effects of these efforts on the library. The first results from the data-gathering through interviews with leadership show that the leaders of the library are willing to fail with some of the student projects. They are also willing to learn from them. Further they state that some of the innovative results do not need to last. If a service is obsolete, or users point out a need for change, closing down such a project would not be seen as a failure. Faster changes would be enabled. For the science library, the awareness around users needs that students’ projects have raised is relevant. With interviews, focus groups and surveys, the students have gained a new understanding of how the library services work at present, and the possibility to influence and participate in the future of the library. The science library, by committing to student lead innovation projects, also committed itself to close cooperation with the institute for informatics, which in itself opens new possibilities for multidisciplinary cooperation. Analysis of the project reports from 2010, 2011 and 2012 shows that the results were the strongest in 2012, both in terms of how innovative ideas were and how close to being finished products the prototypes were. This, of course, can be in part due to the increased interest and support that the library has given, but may be also in part contributed to other factors such as overall increased interest in service design as a field.

6. DISCUSSION In Section 4, some of the motivation factors for projects were presented. The first results obtained from the interview analysis with involved students show that proper motivation was important for our innovators/users. This is also in accordance with the large body of literature on motivation to innovate. For example, research on what motivates workers in a high technology company like Apple, states that one factor is a very high focus on specific goals, and as another example states that company often keeps hidden some disturbing elements, such as bad economy, from their employees (Lashinsky, 2013). Describing a young innovator, Wagner states that: “... people worked incredibly hard, not because of any compensation package, but because they believed in what they were doing.” (Wagner & Compton, 2012). Analysing motivation factors of interaction design students, we find that the fact that they are designing better solutions for themselves and for future generation of students who would have seemilar needs, also had a large impact. On being given the support and encuragment to innovate, as one of the groups stated in Section 4, was an important motivation factor. In the literature, see (Hoholm & Araujo, 2011; Stevenson & Jarillo, 1990), support as motivating factor is discussed, pointing out that this also affects the innovators. In our case, the students have not shown inclination to be drastically innovative. Rather, they were trying to improve the existing services and making them easier to use. This may be the consequence of the support given and a desire to design a service that would also be valued by the library. This topic will be taken further and explored in interviews with this year’s students participating in the project. By observing students at work, we could get a close look at how they thought about innovation. We noticed that they are focused on practical issues of their student life in the library such as easy access to syllabus or a simple search interface into the library resources. Usefulness and functionality are more important to them than, for example, to make the library into a cool place to be. The course in interaction design did not mandate the focus on design of services; students could have chosen many other approaches, e.g. tangible interactions. In a different study, we have found out that the “cool” factor was important for the typical student age group (18 – 25) (Culén & Gasparini, 2012). The “cool” factor includes fun interactions with technology, joy in the process and it stimulates cool behaviors. However, no student projects so far have tried to use the “cool” technology and make it be part of some library service. Some researchers argue that the library is an institution that often tries to be innovative, see for example (von Hippel, 2005). Von Hippel points out the need for the library to develop services and systems that reach their intended user groups. In order to do so, von Hippel claims that they have to use the latest technology. The User Driven project supports this approach well. The experience the library and the leadership had with this last iteration with innovation projects from 2012, was much like that of supporting a start up company. Supporting the interaction students in their work also has the effect that, with each new generation of students, the library learns abut how students use new technology. This in turn supports and inspires the development of new practices and services built on the latest technology in the library. From the researchers point of view, this is a framework offering good conditions for research, since some attributes are constant, and some are changing,

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but the change can be observed within the context of the Living Lab. This, according to (Winthereik et al., 2009) is precisely when living labs work the best. When we revisit the discussion from the introduction around the necessity of innovation in the library, see also (Olaisen et al., 1995), our conclusion is that there really is not other alternative for the libraries but to innovate. Been passive in responding to users demands may cause the library to become obsolete, and at the end, only a museum containing old and almost valuable books.

CONCLUSION The student innovators have been quite careful, nearly conservative, in choosing what and how to innovate library services. They have, though, accomplished several positive results, resulting in positive input to the research related to this project. Making students and library employees aware of the possibility to innovate, has changed the way both students and the library look at existing services and identified opportunities for future development. The empowerment of the library users, by let them innovate for the users is quite complex, so the effect it has on the services will be interesting to monitor in future cycles of the project. Using the Living Lab as a framework will gives us the possibility to monitor what enact the users, and gives the library the possibility to prepare and support future cycles of innovation.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

Arnesen, I., Børsting, J., Myrhstuen, M., Sun, L., Gustavsen, J. (2012.) Student Project BibApp. Retrieved from http://www.uio.no/studier/emner/ matnat/ifi/INF2260/h12/projects/library-projects/BibApp/final-report.pdf BDI. (2012.) Brukerdrevet Innovasjon ved UBO. Retrieved from http://www.ub.uio.no/om/prosjekter/brukerdrevet-innovasjon/index.html Bilgram, V., Brem, A., Voigt, K.-I. (2008.) User-Centric Innovations In New Product Development — Systematic Identification Of Lead Users Harnessing Interactive And Collaborative Online-Tools. International Journal of Innovation Management (ijim), 12(03), 419–458. Brandtzæg, P. B., Følstad, A., Obrist, M., Geerts, D., Berg, R. (2010.) Innovation in Online Communities – Towards Community-Centric Design. In P. Daras & O. M. Ibarra (Eds.), User Centric Media (pp. 50–57). Springer Berlin Heidelberg. Brown, T. (2008.) Design thinking. Harvard Business Review, 86(6), 84. Chesbrough, H. (2003.) Open innovation: the new imperative for creating and profiting from technology. Boston, Mass.: Harvard Business School Press. Christensen, C. M., Raynor, M. E. (2010.) The innovator’s solution: creating and sustaining successful growth. Boston, Mass: Harvard Business School Press. Culén, A. L., Engen, B. K., Gasparini, A., Herstad, J. (2011.) The Use of iPad in Academic Setting: Ownership Issues in Relation to Technology (Non) Adoption. Presented at the ICEM&SIIE, Aveiro, Portugal. Culén, A. L., Gasparini, A. (2011a.). E-book Reader and the Necessity of Divergence from the Legacy of Paper Book. In Proceedings of the 4th International Conference on Advances in Computer Human Interaction (pp. 267 – 273). Culén, A. L., Gasparini, A. (2011b.) iPad: a new classroom technology? A report from two pilot studies. In Information Sciences and e-Society (pp. 199–208). Presented at the INFuture 2011, University of Zagreb. Culén, A. L., Gasparini, A. (2012.) Situated Techno-Cools: factors that contribute to making technology cool in a given context of use. PsychNology Journal, 10(2), pp. 117–139. Culén, A. L., Joshi, S., & Atif, A. (2013.) HCID: Who is an interaction designer? In Proceedings of the 2nd International Conference for Design Education Researchers (Vol. 4, pp. 1924–1937.). Presented at the Proceedings of the 2nd International Conference for Design Education Researchers, Oslo, Norway: ABM Media. Edvartsen, Y. (2013.) Kan jeg låne en bok med mobiltelefonen? Master Thesis in progress, Oslo. Eriksson M., Niitamo V., Kulkki S. (2006.) State-of-the-art in utilizing Living Labs approach to user-centric ICT innovation - a European approach. Retrieved from http://www.vinnova.se/upload/dokument/verksamhet/tita/stateoftheart_livinglabs_eriksson2005.pdf Følstad, A. (2008a.) Towards a living lab for the development of online community services. Electron J Virtual Organ Network, 10(47). Følstad, A. (2008b.) Living Labs for Innovation and Development of Information and Communication Technology: A Litterature Review (No. 10). eJOV. Hoholm, T., Araujo, L. (2011.) Studying innovation processes in real-time: The promises and challenges of ethnography. Industrial Marketing Management, 40(6), pp. 933–939. doi:10.1016/j.indmarman.2011.06.036 Lashinsky, A. (2013.) Inside Apple: how America’s most admired, and secretive, company really works. New York: Business Plus. Living lab - Wikipedia, the free encyclopedia. (2013.) Retrieved August 3, 2013, from http://en.wikipedia.org/wiki/Living_lab Markopoulos, P. (2001.) Towards a Living Lab research facility and a ubiquitous computing research programme. Matheson, N. W. (1995.) The idea of the library in the twenty-first century. Bulletin of the Medical Library Association, 83(1), pp. 1–7. Moggridge, B. (2007.) Designing Interactions (1st ed.). The MIT Press. Norway - New Media Trend Watch Europe. (2013.) Retrieved August 3, 2013, from http://www.newmediatrendwatch.com/markets-bycountry/10-europe/77-norway Olaisen, J., Løvhøiden, H., Djupvik, O. A. (1995.) The Innovative Library: Innovation Theory Applied to Library Services. Libri, 45(2), pp. 79–90. Polaine, A., Løvlie, L., Reason, B. (2013.) Service design: from insight to implementation. Reistad, H. B., Choi, J., Drevsjø, L., Imtiaz, S., Slang, T. (2012.) Student Project Bookworms. Retrieved from http://www.uio.no/studier/emner/ matnat/ifi/INF2260/h12/projects/library-projects/Bookworms/ Rowlands, I., Nicholas, D., Williams, P., Huntington, P., Fieldhouse, M., Gunter, B., Tenopir, C. (2008.) The Google generation: the information behaviour of the researcher of the future. Aslib Proceedings, 60(4), pp. 290–310. Sætre, A. B., Litovchenco, E., Grina, M. G., Bjørneberg Castro, R., Jongsathitsathian, S. (2012.) Student Project Minesweiper. Retrieved from

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http://www.uio.no/studier/emner/matnat/ifi/INF2260/h12/projects/library-projects/minesweeper/final-presentation-03.12.2012.pdf 29. Saffer, D. (2010.) Designing for interaction: creating innovative applications and devices. Berkeley, CA; London: New Riders ; Pearson Education [distributor]. 30. Schumacher, J., Feurstein, K. (2007.) Living Labs – the user as co-creator (pp. 27–32). Presented at the 13th international conference on intelligent communities for Europe, Lingen. 31. Sharp, H., Rogers, Y., Preece, J. (2007.) Interaction Design: Beyond Human-Computer Interaction (2nd ed.). Wiley. 32. Stevenson, H., Jarillo, J. C. (1990.) A Paradigm of Entrepreneurship: Entrepreneurial Management (SSRN Scholarly Paper No. ID 1505897). Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=1505897 33. Student Projects. (2011.) Student Projects 2011 (in Norwegian). Retrieved from http://www.uio.no/studier/emner/matnat/ifi/INF2260/h11/ prosjekter/ 34. Thiesen Winthereik, J. C., Malmborg, L., Andersen, T. B. (2009.) Living Labs as a Methodological Approach to Universal Access in Senior Design. In Proceedings of the 5th International Conference on Universal Access in Human-Computer Interaction. Addressing Diversity. Part I: Held as Part of HCI International 2009 (pp. 174–183). Berlin, Heidelberg: Springer-Verlag. 35. Von Hippel, E. (1986.) Lead users: a source of novel product concepts. Manage. Sci., 32(7), pp. 791–805. doi:10.1287/mnsc.32.7.791 36. Von Hippel, E. (2005.) Democratizing innovation. Cambridge, Mass.: MIT Press. 37. Wagner, T., Compton, R. A. (2012.) Creating innovators: the making of young people who will change the world. New York: Scribner.

DETAILS ABOUT AUTHORS: ANDREA ALESSANDRO GASPARINI PHD RESEARCH FELLOW DEPARTEMENT OF INFORMATICS AND UNIVERISTY LIBRARY, UNIVERSITY OF OSLO OSLO, NORWAY andreg@ifi.uio.no ALMA LEORA CULÉN ASSOCIATE PROFESSOR DEPARTEMENT OF INFORMATICS, UNIVERSITY OF OSLO OSLO, NORWAY almira@ifi.uio.no

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MULTIDISCIPLINARY APPROACH BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY ŽARKO PAVIĆ ZORAN KALINIĆ

ABSTRACT

Our development strategy of the health management education contains two interactive functions: Health Management Education System (HMES) and Health Policy Development Program (HPDP). We prepared the original undergraduate, graduate and doctoral degree proposal in the field of the health management with the three master- (Health Policy, Health Care Payment Systems and Quality Improvement Models in Health Care) and two PhD topics (Health Policy, Health Economy). Development strategy of the HMES contains of the objectives in the area of education, medical science and technology, improvement of the organization and status of the medical profession, organization and functioning of the public health and enhancement of the ethical and bioethical principles of the medical profession. HMES is a specific education subsystem within public health sector which serves to accomplish the collaboration between health professionals and community, as well as doctors and patients. Advancement of professional collaboration, formation of teams, managerial network and research activities represent the basic components of systemic approach to work of the Department for Health Management. Personalization of the health management profession in health care system and leadership of the health managers in the decision making processes are basic goals of the HPDP. Key point factors of our action plan monitoring are the time, human resources, material resources and expenses required for realization of HMES and HPDP. The implementation of this strategy implies the control and evaluation of success of accomplished goals and development guidelines. To overcome the problems the following actions are needed: to design more effective and transparent health systems, to adjust the new standards and norms, to implement new technologies, to build a health management expert network for support of strategy, to improve the effectiveness of communication, to institute the rational access to resources and to define the better system of stimulation. Fundamental mission of the HMES and HPDP in preserving the dignity of medical profession may be completed only through management of the long-term visions of the common European health care system development strategy with clear political and financial support, legality of procedure and socio-cultural consensus. KEYWORDS: health management, education, health policy, development strategy, professional collaboration, expert network.

1. INTRODUCTION Development strategy of the health management education contains two interactive functions: Health Management Education System (HMES) and Health Policy Development Program (HPDP). We suggest the following undergraduate, graduate and doctoral degree proposal in the field of the Health Management Education: Undergraduate Studies in Health Management: A. The Basic Principles of Health Management Lectures: 1.

Health Management Definition

2.

Functions of the Health Management

3.

Communication Systems

4.

Monitoring, Control and Evaluation

5.

Decision Making And Problem Solving

6.

Conflict Management

7.

Interpersonal Coordination in the Health System

8.

Management and Motivation

9.

Definition of the Successful Manager

10.

Strategic Planning and Management

11.

Management of the Science in the Health System

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Workshops: 1.

Health Care Reform

2.

Leadership

3.

Policy Making Analyses

4.

Opportunity and Obstacles in the Health Development

5.

Public Private Partnership

B. Health Policy Management Lectures: 1.

Goals and Strategy of the Health Policy

2.

Organization of the Health System

3.

Health Financing

4.

Integrated Health Care

5.

Management of the Integrated Delivery Services

6.

Control Knobs of the Health System

7.

Health Promotion, Prevention and Social Marketing

8.

Management of the Profit and Non-profit Organization in the Health Sector

9.

Criteria of the Health System Management

10.

Public Health Research and Development

11.

International Coordination, Globalization and Health

Workshops: 1.

Strategy Drafting

2.

Development Programs and Projects

3.

Models of the Integrated Health Care

4.

Information Technology in the Health Sector

5.

Disease Management

Professional, Master and PhD Studies in Health Management Professional (7 topics): •

Primary Health Care Management

Hospital Management

Public Health Management

Nursery Management

Pharmaceutical Management

High Technology Assessment

Human Resources Management

Master (3 topics): •

Health Policy

Health Care Payment Systems

Quality Improvement Models In Health

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PhD (2 topics): â&#x20AC;˘

Health Policy

â&#x20AC;˘

Health Economy

Health policy development strategy is very closed connected with the development of the HMES in each countries of the European region (Busse, R, 2000, Busse, R, Wismar, M, 2002, Kickbusch, I, 2002)). The management of our development strategy is guided by objectives, health care reform and leadership in our health care system. Development objectives of the HMES include activities that are necessary for a new and modern role of the health system which have to be accomplished by our governmental and non-governmental sector. Objectives are the following 1.

Objectives in the area of education.

2.

Objectives in the area of medical science and technology.

3.

Objectives in the area of improvement of organization and status of medical profession.

4.

Objectives in the area of organization and functioning of public health.

5.

Objectives in the area of enhancement and fostering of the ethical and bioethical principles of profession.

Strategic framework of the HMES implies the organization of the education system generally consisted of the following functionally and conceptually interconnected segments: structure, system, process, culture and human resources. HMES structure implies the next development parameters: 1.

Efficiency and functionality.

2.

Decentralization.

3.

Network of health and education authorities.

4.

Geographical distribution.

5.

Public-private-partnership.

HMES is a specific education subsystem within public health sector which serves to accomplish the collaboration between health professionals and community, as well as doctors and patients. Advancement of professional collaboration, formation of teams, managerial network and research activities represent the basic components of systemic approach to work of the Department for Health Management. The reform of public health system allows for transparency and interconnecting of all intended activities in organizations, institutions and societies. Optimal results of planned activities in the process of work of the HMES are accomplished by formal and informal connections between health and education system. Key points are feasibility of the health management study and knowledge applicability in practice. Cultural approach of the HMES depends on tradition, demographic changes and socio-economic environment (Klein, R, 1989). European Medical Societies try to take over the leading position in transformation of cultural milieu, with a special aspect not only to health but also to political, sociological and educational culture. Special phenomena of health culture development are the culture of strict values in public health, culture of selection of top-quality personnel, culture of knowledge, culture of innovation, culture of approach to health care and culture of rapport with patients. Personalization of the health management profession in health care system and leadership of the health managers in the decision making processes are basic goals of the HPDP (Ritsatakis, A, et al., 2000, Van de Water, HPA, Van Herten, LM, 1998). That assume the establishment of institutional and personnel authorities and values in the public health care at all levels. Hierarchy of values, demands and responsibilities is closely associated with the position of health authorities in relation to health care system, where knowledge and talent represent irreplaceable values of HPDP and development strategy of the health management. implementation of this strategy implies the control and evaluation of success of accomplished goals and development guidelines. Basic factors of action plan monitoring are the time, human resources, material resources and expenses required for realization of HMES and HPDP. The problems that may arise regarding the implementation of the strategy are the consequence of disproportion between HMES requirements and future prospects of the health system reform development. To overcome the problems the following actions are needed:

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to design more effective and transparent health systems,

to adjust the new standards and norms,

to implement new technologies,

to build a health management expert network for support of strategy,

to improve the effectiveness of communication,

to institute the rational access to resources,

to define the better system of stimulation.

Fundamental mission of the Health Management Experts in preserving the dignity of medical profession may be completed only through management of the long-term visions of the European health care system development with clear political and financial support, legality of procedure and socio-cultural consensus in the European region (Wismar, M, Busse, R, 2002).

INTEGRATION AND COLLABORATION BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY SYSTEM Management and leadership are important for the delivery of good health services. Although the two are similar in some respects, they may involve different types of outlook, skills, and behaviours. Good managers should strive to be good leaders and good leaders, need management skills to be effective. Leaders will have a vision of what can be achieved and then communicate this to others and evolve strategies for realizing the vision. They motivate people and are able to negotiate for resources and other support to achieve their goals (Jago, A, 1982, Kotter, J, 1990, Kirkpatrick, S, Locke, E, 1991, Lenway, S, Rehbein, K, 1991). Managers ensure that the available resources are well organized and applied to produce the best results. In the resource constrained and difficult environments of many low – to middle-income countries, a manager must also be a leader to achieve optimum results. Leaders often, but not necessarily always have a sense of mission, are charismatic, are able to influence people to work together for a common cause, are decisive and use creative problem solving to promote better care and a positive working environment (Bass, BM, 1990). In most health systems, health facilities are linked to the national health system through the district and therefore are accountable to district management teams. All operational health system activities are implemented via the district including drugs and commodities procurement, human resources, infrastructure, and technical support. Local facility managers and district managers must have clear lines of communication, and ensure optimal off-site support and supervision, and that reporting to districts is accurate. Facility managers must communicate all challenges to the district level to make sure there is continued service delivery at facility level. District managers should communicate new policies and management tools to local managers to ensure compliance. A strong relationship between the two levels is key to sustained service delivery at the facility level (Abdelhak, M. et all, 2001). Health facilities exist for the sole purpose of providing health services to patients in communities. Therefore managers need to ensure that client satisfaction is of utmost importance. This is why all staff must be trained to understand patients’ rights. Staff should not be judgmental and must provide information to patients so they can make informed decisions regarding treatment options, as well as lifestyle and behavior modifications that may be required to improve their health status. Staff must also be able to assist patients to understand their responsibilities, including: 1. to live a healthy lifestyle, 2. not to participate in risky behavior, 3. to participate in their care by attending appointments, asking questions, and playing a part in their own health improvement, 4. to be open and honest about the problems they face, 5. to have the best health outcome by adhering to treatment regimes. The attitude of staff towards patients influences patients’ willingness to obtain access to and continue care, to treatments, and to accept and follow health promotion messages. Negative staff attitudes reduce patients’self esteem and motivation, reducing their will to seek services.

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Appropriate tools should be used by the health centre and district supervisors to assess patient satisfaction, or to assess how patients perceive the health establishment in general (Grant, C, 1989, Kongstvedt, PR, 1996, Preuss, KL et all, 2002). These include: 1.

Client satisfaction surveys,

2.

Suggestion boxes,

3.

Community consultation committees.

The concrete measures ensure patients’ voices are heard. Anonymous mechanisms for eliciting suggestions should be encouraged, such as a “suggestion box” placed in the waiting area (with paper and pen), in which patients can put anonymous messages. Successful managers/leaders use calendars and to-do lists to structure time demands and to ensure that no important tasks are forgotten. Important tasks and events are best kept on a yearly wall calendar, on which each line represents one month, with each day having one field. As a manager and/or leader, you should include the following information on this planner (De Cenzo, D., Robbins, S.P., 2010, Dessler, G., 2011):

• Important dates on which action on contractual issues is needed, absences of team members (participation in training, • • • •

vacation), a time slot for a yearly patient satisfaction survey, time for supervisory visits and community health committee meetings. Managing information: time slots for preparation of routine patient monitoring reports, due dates for progress reports, dates of important meetings with partners. Managing finances: budget preparation and reporting deadlines, financial monitoring visits. Managing hardware: hardware inspection dates, maintenance dates, ordering deadlines for supplies and hardware. Managing care: review and revision of current care and prevention routine, time slots for checks on adherence to patient and staff safety policies

Integration and collaboration in public health sector is a part of the modern multidisciplinary approach to the health management development from health care institutions to different actors in public health systems, from formal organizations to informal and virtual organizations like alliances, networks and partnerships and from organizational structures to processes of organizing within and between different organizations. Collaboration generally can be: 1. 1. 1. 1.

Inter-disciplinary: between different fields of activities and specialties. Inter-professional: between different occupational groups and professions. Inter-organizational: between different authorities and organisations. Inter-sectorial: between different sectors of the society with different orientation and different ownership.

Health sector as a very sensitive area of the human services has 4 different fields of collaboration: •

between different clinical specialties (care pathways),

between primary care and secondary/tertiary care,

in rehabilitation and

in care of the elderly, psychiatric care and other forms of community care.

Communication skills, good understanding of the health system management, problem solving and decision making experience and leadership capability are the basis of all integration and collaboration processes. Using collaboration advantages during health system reform we can improve implementation outputs, outcomes, the access, quality and continuity of different services, and, finally, we can counteract the fragmentation of the system due to increasing specialization and professionalization and use existing resources in a more efficient way. Collaboration is difficult and problematic, especially in the countries with political system and economy in transition. Critical points are great investments in time and energy, both to establish and to maintain collaboration, and collaboration costs before it pays off .

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There are many structural, cultural and individual barriers to collaboration: •

Different rules and regulations, responsibilities and budgets,

Different professional and organizational cultures, languages etc.,

Different attitudes, values and comitment to collaboration,

Territoriality: defending and fighting for non-physical territories.

We can talk about different models of collaboration like meetings for coordinated planning and exchange of information, agreements on clinical guidelines, treatment programmes, care pathways, co-operations between case managers, liaison functions, coordination groups, multidisciplinary teams, different working and expert groups and consensus meetings regarding co-location, financial coordination, common information systems etc. So, we have continuum of collaboration from autonomy till fusion of all the activities (Broesskamp-Stone, U, 2002, Schwartz, FW, 2003). For the improvement of the collaboration in public health is very important to think about the next facts: •

Health is created and maintained mainly outside the health sector.

There are many other sectors of the society that are important for health.

In order to improve public health, it is necessary to increase intersectoral collaboration.

There are many evaluations, more or less scientific, of different forms of collaboration. Most of these have evaluated the process rather than the results of collaboration.The process evaluations show positive effects on the commitment and competence of the professionals involved. Some evaluations show positive results for the patients/clients, while others show no improvements, at least in the short run. Integration in public health is a part of the on-going integrated processes in the health care systems in European region. The goals of integration in health sector are quality improvement, patient safety, better cooperation between different health care levels, rationality in the health economy, reduction of the positions in health system and establishing of the efective link between medical and nonmedical flow in the health sector. Regarding some kind of hierarchy, health market and network we can spaek about vertical and horizontal integrated processes. Vertical integration is integration through control and coordination and horizontal through voluntary collaboration. Among them we know 4 functions:

• • • •

Cooperation, Collaboration, Coordination, Contracting.

CONCLUSION In conclusion is important to emphases again the very active role of the integration and collaboration in the modern Health System Policy Development. For the future the following will be crucial: 1. The importance of a more holistic view of the patients or clients. 2. The importance of knowing the tasks and the competence of other professions and organizations involved. 3. The importance of being able to compromise and even give up parts of the professional or organizational territory for a better total result.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Busse, R. (2000), Health care systems in transition: Germany. European Observatory on Health Care Systems. WHO Copenhagen. Busse, R, Wismar M. (2002), Health target programmes and health care services-any link? A conceptual and comparative study. Health Policy. 59:209-221. Kickbusch, I. (2002), Perspective on health governance in the 21st century. In: Marinker. M. Health Targets in Europe: Polity, Progress and Promise. BMJ Books.206-229. Klein, R. (1989), The politics of the NHS. 2nd ed. London-New York: Longman. Ritsatakis, A, Barnes, R, Dekker, E, Harrington, P, Kokko, S, Makara, P.(2000) Expoliting Health Policy Development in Europe. WHO. Regional Office for Europe.Copenhagen. Van de Water, HPA, Van Herten, L.M. (1998), Health Policies on Target? Review of Health Target and Priority Setting in 18 European Countries. Leiden, TNO. Wismar, M, Busse, R. (2002), Outcome-related health targets: Political strategies for better health outcomes- A conceptual and comparative study. Health Policy.59:223-241. Jago, A. (1982), Leadership: Perspective in Theory and Research. Management Science, March, 315-336. Kotter, J. (1990), A Force for Change: How Leadership Differs from Management. Free Press. New York. Kirkpatrick, S, Locke, E. (1991), Leadership: Do Traits Matter? Academy of Management Executive. 48-60. Lenway, S, Rehbein, K. (1991),Leaders, followers and free riders: an empirical test of variation in corporate political involvement. Academy of Management Journal. November. 893-905. Bass, BM. (1990), Bass & Stogdill`s Handbook of Leadership: Theory, Research and Managerial Applications. 3rd ed. Free Press. Riverside. NewYork. Abbdelhak, M, Grostick, S, Hanken, MA, Jacobs, E. (2001), Health Information: Management of a strategic resource. Philadelphia. W.B. Saunders. Grant, C. (1989), Management Development for Health care: An International Perspective. European Health Care Association. Dublin. Kongsvedt, PR. (1996), The Managed Health Care Handbook. 3rd ed. Gaithersburg, MD: Aspen. Preuss, KJ, Raebiger, J, Sommer, J. (2002), Managed Care. Stuttgart. Schatauer Verlag. De Cenzo, D.A., Robins, S.P. (2010), Human Resource Management. John Wiley & Sons. Inc. Dessler, G. (2011), Human Resource Management,. Pearson. Broesskamp-Stone, U. (2002), Assessing inter-organizational Networks for Health Promotion. Framework and Examples. WHO. Geneve. Schwartz, FW. (2003), Gesundheit und Gesundheitswesen. Urban unfd Fischer Verlag. Muenchen-Jena. 243-268.

DETAILS ABOUT AUTHORS: PAVIĆ ŽARKO MD, PHD, FULL TIME PROFESSOR, RECTOR OF THE UNIVERSITY zarkopavic@yahoo.com KALINIĆ ZORAN PHD, FULL TIME PROFESSOR, ADVISORY BOARD PRESIDENT kaliniczoran@gmail.com FOR BOTH AUTHORS: INDEPENDENT UNIVERSITY BANJA LUKA BANJA LUKA, BOSNIA AND HERZEGOVINA

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CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS DEŠA RATHMAN KATARINA VAREZ

ABSTRACT

Research on the successful performance of small and medium-sized enterprises, reports on the success of their business as well as regulatory acts related to small and medium-sized enterprises show that in the analysis and presenting of data and recommendations it is emphasized that business success depends greatly on the efficiency of the management system. Controlling and quality management are indispensable processes in making business decisions, therefore the assumption that there is a strong correlation between their synergy action and business performance. Value-oriented management concept has derived from modern dynamic and globalized business environment and the requirements that it imposes. Such management aims at long-term financial stability, market positioning and continuous improvement of the level of competitiveness, taking into account the parameters of sustainable development. In order for the principles of continuous improvement to be considered in practice, it is necessary to dispose of a well-organized system of business management.Controlling and quality management system are control subsystems that emphasize value-oriented management concept. These two control processes are complementary and if they are properly positioned in the enterprise, they may result in significant positive synergy. These functions are in small and medium-sized enterprises, although important, often neglected, primarily due to the wrong perception of the management regarding their purpose and contents. This is especially important if taken into account that about 95 percent of business activities are carried out in this business sector. KEYWORDS: controlling, quality management system, SMEs, business efficiency, value-oriented management concept, management process.

1. INTRODUCTION Research on the successful performance1 of small and medium-sized enterprises2, reports on the success of their business3 as well as regulatory acts related to small and medium-sized enterprises4 show that in the analysis and presenting of data and recommendations it is emphasized that business success depends greatly on the efficiency of the management system. Controlling and quality management are indispensable processes in making business decisions, therefore the assumption that there is a strong correlation between their synergy action and business performance.

Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), pp. 41–45, p. 43, Hrvatska gospodarska komora, sektor za industriju, Malo gospodarstvo, Zagreb, kolovoz, 2010., http://www2.hgk.hr/en/depts/industry/Malo_gospodarstvo_10_web.pdf,Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010.,Osmanagić Bedenik, N., Uvođenje i primjena kontrolinga u malim i srednjim trgovačkim društvima, RRiF, Zagreb, 6/2005., str. 115-120.,Osmanagić Bedenik, N., Kontroling u malim poduzećima, Poslovana analiza i upravljanje, 5, 6-7/1997., str. 20.-29., 21.-28.,Osmanagić Bedenik, N., Komparativna analiza prakse kontrolinga u Hrvatskoj, Zbornik Ekonomskog fakulteta u Zagrebu, 5/2007., str. 361.-385.,Osmanagić Bedenik, N., Realnost kontrolinga u Hrvatskoj – preliminarni rezultati empirijskog istraživanja, Zbornik Ekonomskog fakulteta u Zagrebu, 1/2003., str. 178.-198.,Šestanj, Perić, T., Specifičnosti kontrolinga u malim i srednjim poduzećima, Sveučilište u Zagrebu, Zagreb, 2010., magistarski rad, Vidučić, Lj., Mala i srednja poduzeća, financijski, računovodstveni i pravni aspekti osnivanja i poslovanja, Ekonomski fakultet u Splitu, Split, 2004 2 Istraživanja, izvještaji i regulacijski akti odnose se na malo i srednje poduzetništvo. U radu se uzimaju u obzir samo društva kapitala, kao najčešći oblik trgovačkih društava, Vidučić, Lj., Mala i srednja poduzeća, Ekonomski fakultet u Splitu, Split, 2005, p. 154 3 Are EU SMEs recovering from the crisis? Annual Report on EU Small and Medium sized Enterprises 2010/2011,http://ec.europa.eu/enterprise/policies/sme/ fhttp://ec.europa.eu/enterprise/policies/sme/fhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/supportingdocuments/2010-2011/annual-report_en.pdf (30.04.2012.), Observatory of European SMEs, 2007, Bruxelles, Europska komisija, http://ec.europa.eu/enterprise/policies/sme/files/analysis/doc/2007/02_summary_en.pdf (30.04.2012.),SMEs: Commission report notes economic climate threatens performance; SME Week 3-9 October, European Comission, Press Release, 2011, Brussels, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1149&format =HTML&aged=0&language=EN&guiLanguage=en (30.04.2012.), HUB analize, Financiranje malih i srednjih poduzeća u krizi – između želja i mogućnosti, 2010 4 Europska povelja o malim poduzećima, Poslovni forum, http://www.poslovniforum.hr/about/europska_povelja.asp (30.04.2012.), EU recommandation. 2003/361/EC, 2003, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:EN:PDF (27.04.2012.), Zelena knjiga – Poduzetništvo u Europi, Europska komisija, Bruxelles, 2003., poglavlje B/iv http://www.scribd.com/doc/29402664/Poduzetni%C5%A1tvo-Zelena-knjiga (30.04.2012.) 1

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Value-oriented management concept5, has derived from modern dynamic and globalized business environment6 and the requirements that it imposes. Such management aims at long-term financial stability, market positioning and continuous improvement of the level of competitiveness, taking into account the parameters of sustainable development. In order for the principles of continuous improvement to be considered in practice7, it is necessary to dispose of a well-organized system of business management. Modern science and management practice which are based on ISO standards consider that organisation quality8 can be valorized only with proved satisfaction of all five stakeholder partners.9

2. SMALL AND MEDIUM-SIZED ENTERPRISES Economic subjects are divided into categories according to their size and defined criteria related to number of employees, annual turnover and assets value. (Table 1)10. Additional requirement is business independence, which according to the cited law means that other physical or legal persons, which are also not small enterprises, individually or jointly, are not the owners of more than 25% of ownership share or decision right in the small-sized enterprise.11 Table 1. Categorization of economic subjects in Croatia according to size Category of economic subjects according to size

Number of employees

Annual turnover (HRK)

Value of fixed assets (HRK)

Micro

Less than 10

Up to 16 mln

Up to 8 mln

Small

Less than 50

Up to 60 mln

Up to 30 mln

Medium

Less than 250

Up to 216 mln

Up to 108 mln

Source: Processed according to the Law on the promotion of SMEs, Articles 1 and 2 (Official gazette “Narodne Novine“ 29/02, 63/07)

European Commision has defined criteria of categorization of small and medium-sized enterpreneurship in the European Union (Table 2).12 Table 2. Categorization of economic subjects in the European Union according to size Category of economic subjects according to size

Number of employees

Annual turnover (HRK)

Value of fixed assets (HRK)

Micro

Less than 10

Up to 2 mln

Up to 10 mln

Small

Less than 50

Up to 10 mln

Up to 43 mln

Medium

Less than 250

Up to 50 mln

Up to 108 mln

Source: Processed according to European Commission, Small and medium-sized enterprises (SMEs), What is an SME?, http://ec.europa.eu/enterprise/ policies/sme/facts-figures-analysis/sme-definition/index_en.html

Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., p. 52-53, Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 177, Value-Based Management: A System for Building an Ownership Culture, Presented at the ESOP Association 21st Annual Conference - May 20-22, 1998 - Washington, D.C. („VBMje poslovna filozofijai sustav upravljanjazaučinkovitofunkcioniranjena globalnom tržištu, na temelju stvarne vrijednosti, te integracije i uključivanja svakog zaposlenika,kupca idobavljača.Kao filozofija usredotočena na kupca,Value-Based Management (VBM) temelji se na zajedničkomskuputemeljnih vrijednosti. Kao sustav upravljanja, VBMnudilogičkiokvirza izradu organizacijske strukture i procesa tvrtke kojiomogućujeorganizaciji učinkovit odnos prema misiji i ciljevima“) 6 Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., Popović, Ž., Vitezić, N., Revizija i analiza, op. cit., Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998., Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), pp. 41–45, p. 43, 7 ISO 9000:2008 - temeljna načela i terminološki rječnik, HZN, 2008., ISO 9001:2009 – zahtjevi, HZN, 2008., ISO 9004:2010 - upravljanje s ciljem održivosti poslovanja 8 ISO 9001:2009 – zahtjevi, op.cit., pog. 4., ISO 9000:2008- temeljna načela i terminološki rječnik, op.cit. 9 Zainteresirane strane: kupci, dobavljači, zaposlenici, vlasnici, društvo, ISO 9000:2008- temeljna načela i terminološki rječnik, Vidučić, Lj., Financijski menadžment, peto nadopunjeno izdanje, RRiF-plus d.o.o., Zagreb, 2004., p. 15 10 Zakon o poticanju razvoja maloga gospodarstva, NN 29/02,63/07, članak 1. i 2. 11 Ibidem 12 EU recommendation, 2003/361/EC, 2003. 5

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In dynamic globalized conditions of today’s businesses it is important to possess innovation, dynamism and flexibility, as well as the internationalization of business. Small and medium-sized enterprises are holders of development of national economies. 95 percent of business activities in the world occur within this sector.13 In Croatia, the SMEs account for about 99.5 percent of total number of registered companies and they employ about 66 percent of work force.14 In the European Union the SMEs represent share of about 99.8 percent of all companies and 60 to 70 percent of employees.15 Basic problems the sector of small and medium-sized enterprises in the European Union is facing refer to: • Limited demand, • Administrative restrictions, • Lack of skilled work force, • Problems with infrastructure, • Limited access to financing, • The application of new technologies and organizational structures. According to the European Charter on small enterprises, measures to encourage entrepreneurship relate to creation of regulatory, fiscal and administrative framework, ensuring market access, facilitating access to high-quality research and technology, improvement of access to finance sourcing and strengthening of the spirit of innovation and entrepreneurship. 16 Laws that determine the conditions for entrepreneurship and SMEs in Croatia are: • The Law on Promotion of Small Enterprise Development (NN 29/02, 63/07) • Programme for Small and Medium Enterprises (2008-2012) • Operational Plan for the Promotion of Small and Medium Enterprises (2009). Limitations on the operations of small and medium-sized companies in Croatia are accompanied by non-profitability of the sector of small and medium-sized enterprises, unequal regional development, uncoordinated policies that affect business environment, underdevelopment of financial markets and corruption.17 In addition to restrictions that are part of the business environment, organizations that belong to the small and medium enterprises are often faced with internal problems that are primarily related to management system. Focusing on pre-set goals of long-term sustainable development requires a well-organized management and all of its functions: planning, organizing, staffing, leading and controlling.18 Often mixing of the roles of owners and entrepreneurs, as well as lack of awareness of need for action at strategic level, often lead to neglecting of management system. Forms of business organization are individual ownership, partnership and corporation.19 According to the Companies Act we distinguish:

• Sole trader, a physical person who independently carries out any economic activity and • A company, a legal entity that can be set up to carry out economic or other activities.20 According to their basic features, companies are divided into company of persons and capital companies. There are two basic forms of capital companies: limited liability companies and joint stock companies.

Limited liability company Limited liability company is a form of business activity which may be established by one or more persons or legal entities investing fundamental role in the pre-agreed share capital.22 Owners are not personally liable for the company’s liabilities, but only to the extent of their shares and are entitled to receive revenue payment. This is the most common form of activity of small businesses.23 Ownership is separated from Paunović, Z., Prebežac, D., Internacionalizacija poslovanja malih i srednjih poduzeća, Tržište, Vol. XXII, 2010., br. 1., str. 57.-76., str. 62. HGK, http://www.hgk.hr/wps/portal (08.05.2012.) 15 Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010., p. 82 16 Europska povelja o malim i srednjim poduzećima, http://euqualen.progetti.informest.it/hr/radne_grupe/europska_povelja_o_malom_i_srednjem_ poduzetni%C5%A1tvu.pdf 17 Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010., p. 83 18 Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 116 19 Vidučić, Lj., Financijski menadžment, RRif-plus d.o.o., 2004., p. 9 20 Zakon o trgovačkim društvima, NN 111/93., 34/99., 52/00, 118/03 21 Vidučić, Lj., Mala i srednja poduzeća, Ekonomski fakultet u Splitu, Split, 2005., p. 154 22 Zakon o trgovačkim društvima, NN 111/93., 34/99., 52/00, 118/03 23 Vidučić, Lj., Mala i srednja poduzeća, op. cit., p. 161 Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 186 13 14

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management, but in practice it is often the case that a member of the board is the company’s CEO. Therefore, performance objectives of this company are formed in accordance with the concept of increasing the value of invested capital, i.e. the wealth of the owner. A limited liability company is established by a declaration on founding or articles of association and the governing bodies are the management and the assembly.

Joint Stock Company Joint stock company may be established by one or more persons or legal entities involved by their stakes in the share capital divided into equal shares, stocks. Shareholders are not personally liable for the liabilities of the company, but only up to the value of shares. Ownership of shares is depersonalized, i.e. they are subject to traffic at primary and secondary markets. The basic act of the company is the document of articles of association and the governing bodies are supervision board, assembly and management. A shareholder is entitled to attend the assembly and is entitled to vote in accordance with shareholding. Ownership is separated from management and a few concepts occur in which the managers form the objective function. Specifically, the benefit for the manager is not always in line with the benefit of shareholders and the concept of increasing shareholder value is often replaced with the concept of increasing company wealth which is closer to the interests of managers because it means growth. Regardless of chosen concept within which business goals are set, modern business philosophy, formed in response to the dynamic business environment, dictates the need for taking into consideration all stakeholders: employees, customers, suppliers, owners and society. In order to meet these requirements and align business operations with sustainable development parameters, it is necessary to dispose of a well-organized management system. Quality management and controlling are functions that improve the performance of this system. From a set of small and medium-sized enterprises that are the subject of this research will exclude micro enterprises (Table 1 and Table 2).

2.1. Performance indicators of SMEs Performance (effectiveness, efficiency) of business operations is associated with business goals and profit realization as primary goal, as well as goals such as increasing in relation to base period, exceeding of the plan in terms of earnings, revenues, quantity of realized products.24 In modern market economies success of a business organization is based on basic economic principle relating to the favorable ratio of input and output. Business success, unlike production success, refers to the placement of effects and is characterized by different variants of understanding business success, as well as different criteria for its measurement. The most commonly used indicators relate to economics25, liquidity26 and profitability.27 The modern management theory, there is a departure from traditionally accepted concept of profit maximization as the basis for defining business goals. The concept of profit maximization is a short-term concept and it ignores the dynamics and risks of expected returns, financial risk, cash flow and long-term stability of business. An alternative concept would be to increase the value of invested owner’s capital or long-term-oriented concept of maximizing the owner’s wealth.28 Complete modern concept of integrated management is based on pre-management by actively preventing risks and using opportunities. In this sense, the sequence of goals is defined as: liquidity provision as a form of ongoing existence, security and optimization of profits, and the construction and creation of new resources as a form of permanent existence of enterprises.29 Long-term oriented concept of integrated management is based on the principle of continuous improvement, in addition of meeting the requirements of all stakeholders, as a necessary condition for continued business success. Socially responsible business is aimed to establishing a balance between monetary and short-term goals of the company, on one

Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 186 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 26 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 27 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 28 Vidučić, Lj., Financijski menadžment, četvrto dopunjeno izdanje, RRiF-plus d.o.o., Split., 2004., p.14 29 Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 163 24 25

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hand and social, environmental, long-term goals of the community in which it operates, on the other hand.30 In the context of modern concept of business “management based on values”, added value has become the main indicator of the quality of business process. Consequently, revenue ceases to be primary business goal for the benefit of growth in economic value, or constant value-adding to the existing and thus creating potential success. The added value is an indicator of organization success that assesses the ability of the company to ensure continuous improvement of created value. From the position of observing the development and strategy implementation, the aim is to set the assessment of increase / decrease of the value of invested capital.

2.1.1. Success of business organization and financial performance indicators Analysis using financial indicators shows that the company operated in the previous period, and how it can improve the result in the future. It is a prerequisite for rational business management. Starting from the principle of rationality as basic economic principle, the quality of business process and its effectiveness can be assessed only as a ratio between two sides of business process - performance and investment. There are three aspects of performance (output): the amount of realized products (services), revenue and financial results. Input or investment occurs in the form of using fixed and current assets, materials, labor etc. and costs. The ratio of a given visual input with a certain aspect of output makes it possible to establish a set of indicators of business performance. For the purposes of this research, for measuring the success of small and medium-sized enterprises (dependent variable), the following financial indicators will be used: • Economic Added Value (EAV) Economic Added Value (EAV) Economic added value is net profit from operations plus interest and less cost to own and others’ funds. EAV is calculated as operating income minus income tax deduction of the expenses of invested capital (own and others’). It is based on the assumption that, if the remaining net profit which is obtained from EAV budget is a positive size, investors realize higher profits than those that would be achieved from alternative investments in relatively unrisky job, i.e. higher profits than the market capital cost. If EAV calculation remaining net profit is a negative size, investors realize losses despite profits in relation to the profits they could realize from alternative investments.31

2.1.2. Business performance with respect to business management goals Comprehensive and integrated organization management system that provides successful business must be based on the function of planning as a basic management function.32 Planning involves the selection of mission and objectives, along with actions to achieve them. Goals are set for the entire organization and then for each organizational unit. Hierarchy of goals is defined from general to specific, where the overall goals must be supported by lower-level goals.33 Goals must be verifiable in order to assess the effectiveness of management at the end of a period. Therefore, the goals are the basis of management functions and business performance can be verified on the basis of goal management. Goal management refers to defining achievable measurable goals and the achievement of goals. The modern management philosophy has evolved and the “management by objectives“ 34 as a management system that integrates many key activities in management, is focused on effectively achieving organizational and individual goals. Manner of management is focused on achieving goals that are defined and established by managers and associates. The goals are set for each part of the company, from the work place, across organizational units to the company as a whole.35

Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010 http://www.kognosko.hr/?Nova/Alati_i_metode_kontrolinga 32 Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 118 33 Weihrich, H., Koontz, H., Menadžment, op. cit., p. 143. 34 eng. Management by objectives (MBO) 35 http://www.kognosko.hr/?Nova/Alati_i_metode_kontrolinga (02.05.2012.), Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 149 30 31

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3. CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS Controlling and controlling concept, as well as quality management system and TQM (Total Quality Management) are linked and mutually conditioned, within each value-oriented business organization. These two business philosophies support each other and are complementary. Areas of their interest almost entirely overlap. Both concepts emphasize constant continuous improvement as well as early detection of threats and opportunities, and to maximize the added value for customers and achieve competitive advantage, and therefore a better economic outcome. Criteria and parameters of action thereby are the requirements of all stakeholders; customers, owners, partners, employees and society. The issue of product placement extends beyond the issue of product quality and now includes a new quality dimension that relates to the overall quality of organization and potential success. Corporate social responsibility and sustainable development imposed as a condition of market positioning and competitiveness. Dynamics and intensity of changes dictate the need for efficiency and flexibility of the organization to enable it to operate in accordance with the requirements. Demanding conditions of service formed controlling as management support in order to increase the efficiency of business processes and ensuring long-term stability. In response to these conditions business quality management develops as a set of coordinated actions for management and supervision of organization with regard to quality. The feedback system is crucial as a fundamental value and basis for creating competitive advantage.

3.1. Controlling Controlling as a contemporary function is developed to support management in business conditions described as a dynamic business environment. Accelerated processes and changes in the market, strong competition and market saturation condition the need for better efficiency of business processes. Focus on the customer as a condition of competition includes not only product design in accordance with the requirements and expectations, but also the quality and vitality of the entire business process. Such defined business philosophy is based on accepting the requirements of all stakeholders, customers, suppliers, owners, employees and the environment. It is a requirement for achieving long-term sustainable development of enterprises. The complexity of the management process grows in parallel with the complexity of its application. The flexibility and efficiency of business system are crucial in described conditions. It is testified as a possibility of quick adjustments to changed requirements and conditions for early realization of needs to adapt. In this matter the most important role is design of system elements and their synergic interaction. Management system process, which is implemented through the functions of organizing, staffing, planning, management and control in new, more and more extreme conditions should be supported in terms of formation of appropriate information bases and active approach to establishing feedback links at all levels. Why is controlling necessary for the management? • Controlling interprets economic and social elements of the environment based on which planning factors are formed • Controlling interprets existing and potential factors in the success of companies and proposes guidelines • Controlling analyzes brought plans and set goals at all levels and ensures that the values areaccurately carried out through a hierarchy of goals • Controlling aims at arranging the system elements and their interaction in a way that a change at the level of one element or system can be interpreted through changes in other elements or system levels • Controlling reduces the uncertainty in which management system exists. These are the primary tasks of the controller in the organization. Broadly understood, interest and area of operation of controlling extends to organizational foundation and understanding and adapting the totality of organisation functioning according to the principles of uniformity of communication and decision-making channels.

3.1.1.Basic principles of controlling and controlling concept Controlling is a process that occurs as a result of coordinated efforts by the management (individual and team) and the controller, in order to achieve the set target for the company. Controlling concept is a system of harmonized performance of all functions that are planned, measurable and objective-oriented.36 Sense of contemporary controlling is the perception and understanding of the totality of business process, all elements of the system and their interactions, and consequently, drafting the arguments action to improve the situation (Figure 1). 36

Luković, T., Lebefromm, U.: Controlling, koncepcija i slučajevi, Prva knjiga, Sveučilište u Dubrovniku, 2009

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Its purpose is realized by coordinating management function and ensuring the establishment of feedback: planning → executing → controlling → improving / revising the objectives. In order to improve the performance management system, controlling takes into account all the elements of business system: resources, policies, processes, partners, organisation and information system. Developing mechanisms and tools of controlling assumes compliance of the horizontal and vertical sense, between hierarchical levels, among functions within a process and between processes. Elements of the organization must be designed in such a way as to allow both the early recognition of the need for action, quick action and managing all elements of the organization. System objectives, system plans and successfully parsing and lowering targets higher order in aims, their suitability to the level of decision making, as well as feedbac , optimal communication channels and lines of decision-making in the interests of the controlling. This is a value-driven and value- oriented concept of controlling and management, the basis of which the association aims to network targets at all levels and centers of interest, which is a pyramid of increasing the value of a business entity.37 Sub-targets at the operational level must be measurable and comparable in order to serve as a managing mechanism.

3.2. Quality Management System Quality is the degree to which a set of inherent characteristics fulfills requirements.38 Quality management consists of coordinated activities (management) for directing and control of an organization in regards to quality. This term is related to Deming circle39 that defines the basic principles of management: planning, organizing and conducting planned control of what is being implemented, improving the level of quality achieved. It is the basis of implementing feedback in the function of continuous improvement. The Quality Management System is a set of interrelated and interdependent elements geared towards quality objectives. Quality objectives are measurable values pursued in the need for continuous improvement and the ongoing work to increase the ability to satisfy the requirements. Since the ability to satisfy the requirements, the condition to achieve business efficiency and effectiveness, as well as long-term financial stability, successfully set quality goals are aligned with business objectives. From this it turns out that the function of controlling and quality management functions in the organization are working in the same direction. These two functions operate at the same principles, which suggests the same hierarchical position within the organizational structure, due to their scope of activities related to all elements of the organization. Quality is achieved through the quality requirements of the organization. Quality requirements are the requirements of all stakeholders. Compliance with all stakeholders is a prerequisite for business efficiency (short-term) and financial stability (long term). Therefore, the quality management system, which has evolved into TQM condition for controlling the functionality and business philosophy that supports, encourages and emphasizes controlling concept. TQM is also: • Attitude, philosophy (as controlling concept) • The process that emphasizes personal responsibility of all employees and strives to constant, continuous improvement • The system consisting of organizational, administrative and technical processes, methods and tools TQM is associated with the controlling concept because quality objectives create the basis for success of the business. This assumption, as described , is referring to the satisfaction of all stakeholders. Process approach, as one of the primary links, means the application of processes within an organization along with their identification and interaction, as well as managing them. The process is a set of activities and / or operations that certain inputs are converted into outputs.40 The advantage of the process approach is the ongoing management which is provided through connections between the individual processes within the system processes, as well as over their combination and interaction. Process approach bridges the boundaries between processes and this is the basis for the integration and coordination of system elements, as well as to build a functional management information system. Allowing directly overlooking the relationship between input - output, process organization is the foundation of continuous operation and continuous improvement as the basic principles of controlling concepts and TQM. Research conducted in 2003 a representative sample of companies in Croatia shows the structure of enterprises by enterprise size and Implementation of International ISO standards (Table 3). According to the research of managers towards quality management system depends significantly on the size of the organization, and this system has a much higher proportion represented in medium and large than in small organizations.40 Luković, T., Lebefromm, U.: Controlling, koncepcija i slučajevi, Prva knjiga, Sveučilište u Dubrovniku, 2009 ISO 9000:2000; Sustavi upravljanja kvalitetom-Osnovni pojmovi i rječnik: ISO Geneve 2000 39 ISO 9000:2000; Sustavi upravljanja kvalitetom-Osnovni pojmovi i rječnik: ISO Geneve 2000 40 Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, year 2, No. 1, 2004, p. 64 37 38

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Table 3. Structure of the companies according to size and ISO norm implementation Companies by size

Companies with certificate according to ISO norm

Companies getting consultant services for ISO implementation

Others

Number of respondents

105

75

370

Small companies (15 to 50 employees)

26%

38%

40%

Medium-sized companies (50 to 250 employees)

41%

33%

39%

More than 250 employees (large companies)

33%

29%

21%

Total

100%

100%

100%

Source: Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, year 2, No. 1, 2004, p. 64

4. Synergic action of controlling and quality management as management sub-systems From the definition of controlling and controlling concept the broadness and generality of these terms is obvious. As such, they do not necessarily overlap with other economic disciplines and business philosophies. In order to identify the function of controlling, its study and implementation, it is necessary to distinguish from related functional areas. Relationship of controlling, quality management and management Characteristics

Controlling

QM

Basic concepts

Controlling concept, Socially responsible controlling

TQM - Focus on the expectations Value-oriented manageof all stakeholders (customers, ment concept shareholders, suppliers, the community, employees)

Activity direction

Business goals and the requirements of customers and all interested parties

Business objectives and the requirements of customers and all interested parties

Business goals and the requirements of customers and all interested parties

Activity object

All system elements

Management system

Performance system

Activity mode

Creating information base and formulation of guidelines, harmonization and coordination

Creation and application of models / systems, object of activity is management and operational level

Planning Leadership Organization Control

Purpose

Increase the level of certainty Manage the business system of conditions in which the man- with regard to quality agement operates

To manage business system

Activity area

Total business process

Total business process

Total business process

Relation to the principle of feedback and continuous improvement

Realizes and improves

Creates a surface / builds a model for its action

Realizes and manages

Process approach

This is the basic principle upon which the system is developed.

The system built in this way best suits for the establishment of PDCA, i.e. controlling functionality

Supported by the value concept

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Characteristics

Controlling

QM

Management

Relation to vision, mission and business goals

Responsibility for directing the contents and creating a highquality information basis

Responsibility for the preparation Responsibility for bringand application of procedures, as ing, the contents and well as compliance with quality implementation objectives

Activity type and level

Concretized activities, subject of activities is management level (alignment of all functions of management)

Creation and application of models / systems, object of activity is management and operational level

Managing activities

Relation towards expert knowledge

Need, usage and application of expert knowledge, especially in accounting, finance, business organization

Less emphasized need for expertise, but information on certain specific areas

Less emphasized need for expertise

Relation towards process definition

Advisory role in relation to the content / process flow in the context of totality of the organization

Responsibility for documentation, applicability, implementation and measurability of processes

Responsibility for the implementation of quality system, deciding on the structure and other elements of the system

Relation towards indicators formation system and reporting system

Advisory and /or managing role in relation to information system and indicators system

Responsibility for documentation, applicability and implementation

Decision-making / usage

Source: Processed for the needs of this research

The issue of demarcation of two functions is most directly related to their purpose and the object of their activity. The purpose of controlling function of the company is increasing the knowledge of management system on system performance to enable it to be more manageable. The object of controlling is the management system and coordination and harmonization of its subsystems; values, planning, organization, control, information and human resources management (Figure 2). Figure 2. Controlling as management subsystem

MANAGEMENT VALUES ORGANIZATION PLANNING CONTROLLING HUMAN RESOURCE MANAGEMENT CONTROL INFORMING

Controlling creates an organized information basis that reduces the degree of uncertainty of the environment in which the management operates. Indirectly, the interest of controlling is the quality management system because it provides necessary basis for successful implementation of this function. The role and nature of controlling is advisory. The issue of responsibility of controlling relates to providing accurate, timely and quality information and the effects relate to harmonization, coordination and integration of the management system. Unlike controlling, the object of management is performance system, the role is managing and responsibility is related to decision making. The object of quality management represents all elements of business system, organization procedures, processes, resources, policies, information systems and relationship with the partners. The purpose of quality management system is arranging the conditions for the functioning of feedback and continuous improvement, while controlling activates and enhances feedback and confirms the functionality of the quality management system. The responsibility of quality management system is very broad and refers to appropriate organizational and documentary background adapted to system functioning according to the principles of quality management.

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CONCLUSION It is undoubtful that controlling41 and quality management system42 are control subsystems of business management which contribute to the improvement of its performances. They are, however, insufficiently researched and under-recognized in small and medium-sized corporations. As control subsystems that are the basis of value-oriented concept of management derived from the needs of modern globalized business environment. They are the basis of successful and efficient operation of any business system. Every business entity that seeks long-term success faces the challenge of successful design and positioning of these functions.

LITERATURE Books and articles 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

Albert, M.: Kapitalizam protiv kapitalizma, Školska knjiga, Zagreb, 1995. Ambroz, M. (2004). Total quality system as a product of the empowered corporate culture. The TQM Magazine, Vol. 16. No. 2, p. 93-104 Avelini Holjevac, I., Vrtodušić Hrgović, A.M: Kontroling i menadžment kvalitete, 9. simpozij o kvaliteti Hrvatskog društva menadžera kvalitete: Kvaliteta i promjene, Zbornik radova, OSKAR, Centar za razvoj i kvalitetu, Zagreb, 06. – 08. 11. 2008, Plitvice Avelini Holjevac, I., Analizom do poslovne odluke – ključ poslovne uspješnosti, Računovodstvo, revizija i financije, Zagreb, svibanj, 2004. Babbar, S. and Aspelin, D. (1994). J. TQM it is as easy as ABC., The TQM magazine, Vol. 6, No. 3, p. 32-38. Black, S. And Porter, L. (1996). Identification of critical factors of TQM. Decision Sciences, Vol. 27, No. 1, pp. 1-21. Byars, L. L. - Rue, L. W. - Zahra S. A.: Strategy in Changing Environment, Irwin, Times Mirror Higher Education Group, Inc. 1996. Breyfogle, F.W. “Implementing Six Sigma”, John Wiley & Sons, 1999. Buble, M., Menadžment, Ekonomski fakultet, Split, 2000. Buble, M. i dr., Strateški menadžment, Sinergija, Zagreb, 2005. Copeland, T. - Koller, T. - Murrin, J.: Valuation – Measuring and Managing the Value of the Company, McKinsey & Company, Corporate Finance Practice, John Wiley & Sons, New York, 1990. Crosby, B.P., Kvaliteta je besplatna, Binoza press d.o.o., Zagreb, 1996. Dumčić, K., Knego, N., Melvan, P., Okruženje kao mjera kvalitete i poslovne izvrsnosti, Poslovna izvrsnost, Zagreb, god.I (2007.), br.1. Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, godina 2, broj 1, 2004. Drljača, M., Kvalitete sustava upravljanja u Hrvatskoj u odnosu na Europsko okruženje, 18. savjetovanje Nedelja kvaliteta, Kvalitet, Poslovna politika, Vol. 19, Br. 1-2, Beograd, 2009, str. 44-49 i 123. Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, Zbornik radova I. naučno-stručnog skupa POLITEHNIKA - 2011, U susret evropskim integracijama u oblasti kvaliteta, zdravlja na radu i zaštite životne sredine, Visoka škola strukovnih studija Beogradska Politehnika, Beograd, 2011, str. 41-45. Drljača, M., Mala enciklopedija kvalitete, Oskar, Zagreb, 2004. Edvinson, L.: Corporate Longitude. Navigating the Knowledge Economy, Differo d.o.o., Zagreb, 2003. Elkington, J.: Cannibals with forks – The Triple Bottom Line of 21st Century Business, Capstone Publishig Ltd, Oxford, 1999. Fitzroy, P., Strategic menagement: creating valu in a turbulent world, London, Wiley, 2005. Goetsch, S.B., Davis, S.B., Quality management: Introduction to Total Quality Management for production, Processing and Services, Prentice Hall, New Jersy, 2006. Heilbroner, R. L. - Thurow, L. C., Ekonomija za svakoga - Kad tržišta nisu uspješna, Mate, Zagreb, 1995. Heinz, W., Koontz, H., Menedžment, Mate, Zagreb, 1993. Horvath, P., Controlling, Universitat Stuttgart, Munchen, 2003. Injac, N., Mala enciklopedija kvalitete, Oskar, Zagreb, 2001. Injac, N., Bešker, M,, Metodologija izgradnje poslovnih procesa u sustavu kvalitete, Oskar, Zagreb, 2001. Kotler, L.: Društveno odgovorno poslovanje, M.E.P. Consult, Zagreb, 2009, pp. 22. Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010. Lazibat, T., Baković, T., Poslovna izvrsnost, Zagreb, 2007/1, 2007., str. 55.-67. Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., str. 52., 53. Mikić, M., Upravljanje troškovima u malim i srednjim proizvodnim poduzećima, Zbornik ekonomskog fakulteta u Zagrebu, godina 7, br.1., 2009., str. 161.-176. Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998. Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010. Osmanagić Bedenik, N., Uvođenje i primjena kontrolinga u malim i srednjim trgovačkim društvima, RRiF, Zagreb, 6/2005., str. 115-120., Osmanagić Bedenik, N., Kontroling u malim poduzećima, Poslovana analiza i upravljanje, 5, 6-7/1997., str. 20.-29., 21.-28., Osmanagić Bedenik, N., Komparativna analiza prakse kontrolinga u Hrvatskoj, Zbornik Ekonomskog fakulteta u Zagrebu, 5/2007., str. 361.-385., Osmanagić Bedenik, N., Realnost kontrolinga u Hrvatskoj – preliminarni rezultati empirijskog istraživanja, Zbornik Ekonomskog fakulteta u Zagrebu, 1/2003., str. 178.-198. Pande, P.S., Što je Šest Sigma?, Zagreb, Mate, 2006. Paunović, Z., Prebežac, D., Internacionalizacija poslovanja malih i srednjih poduzeća, Tržište, Vol. XXII, 2010., br. 1., str. 57.-76. Porter, L.J., Assessing business excellence: a guide to business excellence and self-assessment, Amsterdam, Elsevier, 2005.

Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, str. 10. – 29., Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998., Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010., Avelini Holjevac I.:, Kontroling, Sveučilište u Rijeci, Hotelijerski fakultet Opatija, Opatija,1998 42 Lazibat, T., Upravljanje kvalitetom, Znanstvena knjiga d.o.o., Zagreb, 2009, Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), p. 41–45, ISO 9000:2008- temeljna načela i terminološki rječnik, pog. 2.12., 3.2.2. 41

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41. 42. 43. 44. 45. 46.

Sikavica, P., Novak, M., Poslovna organizacija, Informator, Zagreb, 1999. Šestanj, Perić, T., Specifičnosti kontrolinga u malim i srednjim poduzećima, Sveučilište u Zagrebu, Zagreb, 2010., magistarski rad Truscott, W., Butterworth, H., Six Sigma-Continual Improvement for Businesses, 2003. Vidučić, Lj., Financijski menadžment, četvrto dopunjeno izdanje, RRiF-plus d.o.o., Split., 2004., 14. Poglavlje, Mala i srednja poduzeća Vidučić, Lj., Mala i srednja poduzeća, financijski, računovodstveni i pravni aspekti osnivanja i poslovanja, Ekonomski fakultet u Splitu, Split, 2004. Vrdoljak, R.I., Specifičnosti metodoloških pristupa mjerenju uspješnosti poslovanja kvantitativnim pokazateljima, Poslovna izvrsnost, Zagreb, br. 2/2010, Zagreb, 2010. str. 107.-118. 47. Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, str. 118. DETAILS ABOUT AUTHORS: DEŠA RATHMAN, M.SC. PLOČE PORT AUTHORITY desa@port-authority-ploce.hr KATARINA VAREZ, M.SC. DUBROVNIK PORT AUTHORITY dpa.katarina@portdubrovnik.hr

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COMBINATION OF PROCESS MANAGEMENT AND SIX SIGMA METHODOLOGY IN THE ECONOMY OF VOJVODINA ZORAN CIRIC IVANA CIRIC JELENA BIROVLJEV

ABSTRACT

Business Process Management hasn’t methods for removing steps in processes which are identified in analysis as inefficient or ineffective. Tools and techniques from Six Sigma are borrowed for those tasks. Truly optimized business process initiatives start with a strong process improvement methodology, to design or re-engineer a process for eliminating, perhaps greatly reducing, steps that cause the greatest number of errors or represent the highest cost for the enterprise. The ultimate goal is to develop a process improvement solution that aligns the proven methodology of Six Sigma with the firm’s strategic goals. Six Sigma methodology is focused on defining, measuring, analyzing, improving, and controlling business processes. Six Sigma provides a tool-set to make and sustain improvements to business processes. When Business Process Management and Six Sigma are used in combination, they provide the basis for improved performance and growth, as well as a truly customer focused enterprise. Process Management tools, and the problem solving methodology of Six Sigma, have come together to increase the efficiency, effectiveness, and ongoing control of a process to levels of performance. This paper will attempt to provide answers and defining tasks: • How Six Sigma-based process improvement initiatives can be used on processes across the enterprise, not just manufacturing processes. • How Six Sigma and BPM combined offer one of the most powerful process improvement solutions possible. • Defining steps delineated below to integrate BPM and Six Sigma. • Defining the tasks for managers in Vojvodina in the future. Some of those tasks could be for example: identifying the processes from beginning till the end, give a picture about the process approach in the economy of Vojvodina, application of business concepts, apply some of the instruments of analysis, in the second phase or at the second level of business process management maturity. KEYWORDS: Business Process Management, Six Sigma Methodology, Process Improvement

1. INTRODUCTION Business Processes Management (BPM) has been applied mostly in paper intensive industries such as health care, insurance, finance, utilities and government. These businesses rely on human knowledge, information databases, and process flows to produce an end result, such as a home loan or business license. These paper-based businesses rely on forms that must be completed and information gathered to produce the expected output. Business processes exist in three forms. First are processes that are executed via computers, such as e-Business, ERP, and CRM. These are also called information workflow or system-to-system processing. Next are the more traditional human value-added processes, also called human-to-human workflow processes. These two forms of processes co-exist and interact, creating the third form, where human workflow is augmented by information workflow.[16] Business process management is a management discipline that treats business processes as assets that directly contribute to enterprise performance by driving operational excellence and business agility. As with other assets, determining the right level of investment in the resources needed, proper performance monitoring of the process, sound maintenance of the process and management of the process life cycle can drive operational excellence (Figure 1.). The most critical disciplines for BPM success are related to nontechnical issues, such as changing people’s attitudes and assumptions based on building a new frame of reference or perspective (that is, the process perspective) for evaluating business performance of government agencies. These essential elements consist of:

• • • •

Comprehending processes through business process modelling for visualization Evaluating process performance through attention to the right process metrics Generating options for performance improvements through process analysis Gaining the willingness to change the processes from the stakeholders involved.[5]

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Together, these disciplines provide a fresh approach to improving the performance of business processes. A BPM effort may be initiated from a business unit, the IT organization or an internal operational unit that may focus on innovation, transformation, organizational development, change management, enterprise architecture, government delivery services, audit/compliance and so on.[15] Figure 1. BPM -five step business process life cycle

Source: Harrison-Broninski, K. (2010)

Trends in Business Process Management. In 2000, Gartner predicted that BPM would become the next big phenomenon. The â&#x20AC;&#x153;thought leadershipâ&#x20AC;? expressed then has been reflected in the current popularity of business modelling. By 2004, Gartner has seen demand grow from 15 percent of their client base to more than 35 percent across all businesses, regardless of their cultural tendencies. Because processes are the critical paths to progressive business change, processes are coming under intense scrutiny. According to Gartner, the need for process understanding will create significant Business Process Management activity. Gartner predicts a rising tide that will drive a growing business modelling market, including such services and technologies as Business Process Analysis (BPA) and Enterprise Architecture.[5]

2. THE SIX SIGMA METHODOLOGY Six Sigma can be defined as a structured approach that recognizes problematic areas of the business, defines improvement projects, and delivers breakthrough-level solutions in a predictable and repeatable manner. A problem is generically defined as the inability of a process or business characteristic to meet its requirements. In many cases, a near intuitive or logical solution is available; these types of solutions are one of the many benefits derived from a process management activity. However, when the situation is complex, spans several process activities, and may include the interaction of several inputs, a more powerful problem solving method is required. Six Sigma uses a five phase methodology, known as DMAIC, that applies a fundamental formulaic approach that defines an output as a function of the inputs, stated as Y=f(X). In this equation, the Y is the process output that needs improvement, and the Xs are the inputs or root causes of the problem. DMAIC stands for Define, Measure, Analyze, Improve, and Control (Figure 2.).[2] Each phase is comprised of various analytical tools designed to find the root cause(s) of almost any problem. The problem solving process is augmented by software tools to handle the data, modeling, simulation and associated statistical analysis that lead to an improvement action. A hallmark of Six Sigma is its ability to institutionalize and sustain an improvement. This is the objective of the control phase. New technologies have recently become available that enable process execution management. This type of tool provides computerized monitoring, control, and management of processes that have been optimized by a Six Sigma project.

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Trends in Six Sigma. Six Sigma first appeared in 1987 when Motorola initially launched it. Motorola Chairman Bob Galvin decided that traditional process performance levels, about 3 to 4-sigma, simply were not sufficient.[13] Motorola set a new standard for excellence and began developing the means to achieve it. Enamored by Motorola’s success, other leading companies, such as Texas Instruments (now Raytheon), began a similar pursuit. But it wasn’t until 1993 that Six Sigma really began to transform business. That’s the year that Allied Signal’s Larry Bossidy adopted Six Sigma. And this time there was something different; Six Sigma began to take shape as more than just a quality system - it began to look like a management system. At Allied Signal, an entire system of leadership and support systems began to form around the statistical problem solving methods developed by Motorola.[13] Not long after Allied Signal began its pursuit of Six Sigma quality, Jack Welch, then Chairman and Chief Executive of General Electric (GE), began to study Six Sigma. After a little time and a great deal of contemplation, Welch made the decision to apply Six Sigma. GE applied Six Sigma with rigor and with enthusiasm. As a result, GE’s annual reports claim savings of billions of dollars with Six Sigma.[2] Since introduction by Motorola, Six Sigma has evolved from a product-oriented problem solving methodology into an enterprise wide approach for managing improvements. One good way to assess the adoption of a method, idea, or product is through trend analysis. In trend analysis we look at the rate of adoption over a period of time. Six Sigma trend analyses for U.S. companies with annual revenues greater than $200 million show that over 25% of US based companies in this category have adopted Six Sigma. The adoption rate is expected to exceed 80% by 2010.[19] Figure 2. DMAIC Roadmap

Source: IBM Business Process Manager

Six Sigma Provides a Method for Improving Business Processes. In its strict definition, Six Sigma is the application of statistical methods to business processes to improve operating efficiencies and return dollars to the profit of an organization. Here’s the basic theory: Sigma is a letter in the Greek alphabet used to denote the standard deviation of a process. Sigma quality level is sometimes used to describe the output of a process. A Six Sigma quality level is said to equate to 3.4 defects per million opportunities.[11] In practice today, however, the term is used to denote more than simply counting defects. In today’s businesses, Six Sigma is a methodology for pursuing continuous improvement in customer satisfaction and profit that goes beyond defect reduction to emphasize general business process improvement. This includes revenue improvement, cost reduction, cycle-time improvement, increased customer satisfaction, and any other metric important to the company. It implies an entire culture of methodologies to improve the overall health of the organization. The customers that form the base of today’s world market are demanding higher-quality products at lower costs with greater responsiveness, also in Vojvodina. Six Sigma helps an organization achieve these objectives when leveraged with other initiatives as part of a thorough business strategy. The ultimate goal is to develop a process improvement solution that aligns the proven methodology of Six Sigma with the corporation’s strategic goals.

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3. IMPROVING THE PROCESS Many companies in Vojvodina, have made extensive investments in their software systems, and have approached process improvement with automation tools that route data from one system to another, such as automated interfaces between ERP, CRM, and SCM applications. But, executing a project to improve business processes often requires more than just tying together systems to create a “lights out” automated process. Not all complex business processes can be fully automated, because:

• People are an integral part of the process. • Mistakes and exceptions occur within the process. • Complex process steps are not easily reduced to digital business rules.[17] The Six Sigma project, for example, might produce a recommendation to replace or enhance an out-of-date system, crosstrain employees, or improve the layout of a production line. The key is to implement a solution in which the ideals of Six Sigma continuous process improvement can be executed quickly and consistently, without additional expenses of retooling, recoding, or replacing the company’s existing enterprise software. BPM: The Platform for Process Improvement Solutions The TeamWorks BPM platform automates processes when possible, and includes people in the process exactly when their knowledge is required — the most efficient formula for improving business processes. In this software environment, processes can be designed, executed, monitored, and analyzed, allowing companies to take the processes they’ve reengineered using the Six Sigma methodology, and implement them in the most efficient way possible. BPM coordinates business processes between people and the data in IT systems, giving the data context and turning it into meaningful business information, rather than just automatically routing it from system to system. It delivers contextual information to participants in the process, so they can make well researched, informed decisions in the most efficient way. From a management perspective, it gathers and analyzes process metrics, such as process duration and cost savings, so that performance and value can be accurately tracked. The TeamWorks BPM platform monitors business activity across multiple software systems. When changes to normal operations occur, TeamWorks determines whether the event requires human decision, and either launches automated processes or prompts employees to respond by guiding them through their participation in the process. TeamWorks also delivers executive scoreboards that report up-to-the-second on how processes are performing, how those processes are affecting the business and how the processes can be improved further (Figure 3.). Figure 3. Monitoring and Responding to Business Events

Source: Silver, B. (2010)

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The BPM platform includes: • An authoring environment for defining business processes • A monitoring capability that watches processes for circumstances that fall outside of defined business rules, and launches sub-processes to address those circumstances • An execution environment for managing those processes so that humans are included in the process when necessary • A scoreboard that helps executives monitor and react to business events, providing a mechanism for continuous process improvement.[18]

4. APPLYING SIX SIGMA AND BPM TO ENTERPRISE BUSINESS PROCESSES The process oriented initiatives has been present for a long time. Total Quality Management (TQM) and Business Process Reengineering (BPR), for example, advocated similar philosophies as Six Sigma: Continuous process improvement is critical to long-term business success. But they have gradually fallen out of favor — not because they were necessarily misguided methodologies, but because they had no direct link to bottom-line profitability, nor any correlating technology to support the ideals of continuous process improvement across the corporation. The combination of Six Sigma and BPM is a natural pairing for making process-oriented initiatives successful. While the Six Sigma methodology is based on proven business principles that integrate corporate goals into process improvement efforts, BPM software provides a flexible technology as the sound foundation for designing and executing these ideals throughout the enterprise. Business Process Management enhances the Six Sigma methodology by providing data access, process metrics, business rules, graphical process modeling, and process automation that directly support the Six Sigma Design, Measure, Analyze, Improve, and Control (DMAIC) model for restructuring business processes. At this point, it’s important to remember that getting stuck on reaching “zero defects” or “zero errors” can be discouraging if you approach it from the myth-perspective that a Six Sigma initiative is a complex and costly undertaking. This is why this paper advocates using the right metric to drive the right activity, rather than relying on defect reduction as the only metric. The path of striving for Six Sigma and using the Six Sigma ideals when analyzing and improving processes will show quick benefits along the way because the methodology focuses on continuous, ongoing improvement. Table 1. The combination of Six Sigma and BPM provides a synergistic approach that delivers the most powerful process improvement solution possible. Six Sigma

BPM

Approach

Focus on Analysis

Focus on Automation and Optimization

Data

Analytical strategy for generating finan- Automation and optimization environment for gencial value through process improvement erating financial value through process improvement

Process

Leverages statistical analysis of key met- Accesses data from enterprise systems to enable starics to identify improvement opportuni- tistical analysis ties

Improvement

Process improvements gained through Provides visual design environment used to graphifocus on root-cause analysis. System cally define process flow and people/system interacchanges achieved through collaboration tions with IT.

Design

Document recommended changes and Improved process automated and integrated with measurement techniques existing IT investments

Process Improvement

Control charting measures continued Scoreboards measure continued trends of key protrends of key metrics cess metrics and business value impact

Execution

Execution

Execution

Measurement

Measurement

Measurement

Source: Rasmusson, D. (2006)

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The TeamWorks BPM platform is designed to facilitate ongoing process improvement initiatives in two ways: provide a graphical process authoring environment in which to quickly and easily define and modify processes, and provide a flexible software environment in which to execute processes.[15] The authoring environment allows even non-technical business process owners to model and configure their business processes for execution in the platform. Thus, a black belt in Six Sigma, for example, could design a Six Sigma process without extensive involvement from software technicians. In addition, TeamWorks gathers process metrics as process events happen, delivering to executives the information they need to analyze, modify, improve, and control processes in real time. Together, the Six Sigma methodology and BPM software can improve a company’s processes without huge, complex initiatives (Figure 4.). Six Sigma and BPM: Common Goals for Improving Business Processes Consider the common goals of Six Sigma and BPM software: reduced costs, increased profits, and improved customer relations through business process improvement. Now, consider the challenges facing today’s enterprises: data housed in disparate transaction-based systems throughout the organization and manual processes that lack standardization and, therefore, cannot easily be monitored or improved. Figure 4. Adding Value to Six Sigma Strategies

Source: authors

The analytical approach of Six Sigma, combined with the automation and optimization approach of BPM, provides the solution to a corporation’s process and technology challenges, while tying the solution directly with the corporation’s financial goals. Data Monitoring The typical Fortune 500 company must manage and optimize 300+ core processes and more than 2,000 related sub-processes, plus all of the corporate data that run its business. It has spent millions of dollars acquiring enterprise-wide systems aimed at planning, budgeting, forecasting, managing, and analyzing its business, and it has spent additional time and money training its employees to use these systems.[19] The challenge is that many processes and correlating data span multiple transactional systems, making metrics-gathering and analyzing cumbersome, and sometimes even impossible, despite all of the previous investments in technology. TeamWorks has “undercover agents” that monitor business conditions in any system related to a process. It looks for business events that fall inside or out of defined business rules, and launches sub-processes that respond to those business events. In addition, TeamWorks has integration components that allow it to integrate with other applications, pushing and pulling data between any application and itself. These two features allow a company to extend its Six Sigma-based processes across the enterprise, despite where the process or the associated data and people are located.

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BPM provides access and visibility into applications and data needed for Six Sigma analysis and process restructuring. In addition, it is the environment in which business rules can be defined and executed as part of automated processes. For example, analyzing a collections process to reduce day sales outstanding may require access to the order systems and customer and receivables records to determine the payment time of invoices. For statistical validity, the sample size may be every invoice and payment from the last three years. BPM application connectors provide access to the data and enable business rules to consolidate it (Figure 5.). Figure 5. Data Monitoring

Source: Rasmusson, D. (2006)

5. INCREASING THE EFFICIENCY OF PROCESSES IN SMALL AND MEDIUM ENTERPRISES IN VOJVODINA One of the challenges of increasing the efficiency of processes is that they often span multiple IT systems. As a result, increasing the efficiency of processes requires improving the multiple applications that the process spans. But, changing large applications can be prohibitive — requiring money and time piled on top of the resources already spent on initial implementations. To overcome this challenge, people tend to get heavily involved in the process with inconsistent and inefficient manual work-arounds. The opportunity for errors and process lags mount as people choose email, fax, and phone communication, and multiple, manual data entries when processes cannot properly bridge across applications. The TeamWorks BPM platform solves this problem by designing and executing processes that reach across multiple applications. It allows the process to bridge across applications, gathering data as needed, regardless of its source. In addition, TeamWorks monitors the process for any business event that falls outside of its normal execution. When one of these business events occurs, it uses defined business rules to either launch an automated sub-process, or bring a person into the process by sending that person a task. Attached to the task is an electronic “process coach” that delivers the contextual information and process steps that the person needs to keep the process on track. For example, a process coach for a deduction management process might include the following elements: • • •

General information on invoices, purchase orders, delivery verifications, customer history, value of outstanding deductions, etc. Access to research, such as the disposition of the last 10 deductions, typical customer service resolution times, etc. Recommended actions to resolve or complete the process.[9]

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This feature keeps the process moving, allowing people to make informed decisions when business events occur without needing to access multiple systems, or resorting to time consuming manual methods. It fosters the Six Sigma process improvement ideal throughout the organization by integrating the efficient execution of processes into daily business. Measurement: Scoreboards When the correct data has been located and put into the context of a business process, it must be measured and analyzed so that it becomes meaningful information that managers and executives can use to make informed decisions about the business. In addition, new data must be created about the performance of the process itself so that executives can determine where processes are lagging, and where they have been successfully improved. This is critical for continuous improvement because it gives specific information about processes to the decision-makers in an enterprise, arming them with the information they need to strategically respond to changing business conditions. TeamWorks provides a “time/date” stamp on every step related to a process, and captures this data in a table that is updated continually. This data can then be displayed for a complete picture of business processes on a regular basis. A company’s first TeamWorks solution may even be the first time certain metrics have been available to a company’s executives (such as the new information that Company A received about its shipping company not living up to its service level agreement, in the following case study), giving them insight and control that was previously impossible.[17] This capability gives executives the metrics needed to make decisions about ongoing process improvements.

CONCLUSION Six Sigma’s analytical approach to continuously increasing the efficiency of processes across the corporation — not just manufacturing processes — can be enhanced even further by using BPM software, such as Lombardi Software’s TeamWorks, to design and execute the processes. While companies often attempt process improvement by automatically routing data from system to system, TeamWorks brings a more comprehensive approach to the table:

• Monitors systems for business events, and pulls relevant data from various systems, presenting the information • •

to the appropriate person at the right time, so that processes are executed quickly and consistently, and errors are greatly reduced Provides graphical authoring environment so that Six Sigma-based processes can be quickly and easily defined or modified and deployed by non-technical business process owners Gathers metrics as process events happen, delivering to executives the information they need to analyze, modify, improve, and control processes in real time

A strategic approach that combines the proven effectiveness of the Six Sigma methodology with the power of TeamWorkscan be the most effective solution for increasing the efficiency of business processes. Together, Six Sigma and TeamWorks will enhance the speed and agility of an enterprise’s operations and improve the company’s bottom line. Small and medium enterprises are the backbone of the economy in Vojvodina. In order to be successful and have sustainable growth, they need help in continuously increasing the efficiency of processes. Knowledge and experience, supported by modern software tools should be provided through training and education. Process Management tools, and the problem solving methodology of Six Sigma, can together increase the efficiency, effectiveness, and ongoing control of a process to levels of performance.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

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Andersen, B. (1999) Business process improvement toolbox. ASQ Quality Press, New York Antony, J. (2006) Six Sigma for service processes. Business Process Manage Journal 12(2):234–248 Conger, S., Landry, B. (2009) Problem analysis: when established techniques don’t work. In: Proceedings of the 2nd annual IRM conference, Dubai, May 19–24, 2009 Dorgan, SJ., Dowdy, JJ. (2004) When IT lifts productivity, The McKinsey Quarterly, Boston, MA: Mckinsey Company 4, pp 9–11 Hammer, M. (2010) What is business process management? In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 1. Springer, Heidelberg Harmon, P. (2010) The scope and evolution of business process management. In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 1. Springer, Heidelberg Harrison-Broninski, K. (2010) Dealing with human-driven process. In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 2. Springer, Heidelberg http://www.google.rs/search?q=six+sigma&client=firefox-a&hs=F5i&rls=org.mozilla:en-US:official&tbm=isch&tbo=u&source=univ&sa=X&ei=W ZCGUaiNI8qS4ASHrYCgDw&ved=0CFAQsAQ&biw=1440&bih=793 Accessed 03.05.2013. IBM Business Process Manager, http://www-01.ibm.com/support/docview.wss?uid=swg21473894 Accessed 30.04.2013.

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10. iSixSigma staff, Sigma performance levels – One to Six Sigma. iSixSigma.com. http://www.isixsigma.com/library/content/c020813a.asp. Accessed 30.04.2013. 11. Johannsen, F., Leist, S. and Zellner, G. (2010) Implementing six sigma for improving business processes at an automotive bank. In: vom Brocke J, Rosemann M (eds) Handbook on business process management, vol 1. Springer, Heidelberg 12. Kaplan, RS., Norton, DP. (2001) The strategy focused organization. Harvard Business School Press, Boston 13. Motorola (2009) About Motorola University: the inventors of Six Sigma, Motorola Corporation. http://www.motorola.com/content. jsp?globalObjectId=3079 Accessed 30.04.2013. 14. Rasmusson, D. (2006) The SIPOC picture book: a visual guide to the SIPOC/DMAIC relationship. Oriel Incorporated, Madison, WI 15. Silver, B. (2010) Uniting Process Architecture and Execution, http://www.mega.com/en/c/resource/p/white-papers/a/resource-wp0007 Accessed 03.05.2013. 16. Ulrich, W. (2010) Business Architecture: From Value Proposition to Business Transformation, http://www.mega.com/en/c/resource/p/whitepapers/a/resource-wp0005 Accessed 03.05.2013. 17. vom Brocke, J., Recker, J. and Mendling, J. (2010) Value-oriented Process Modeling: Integrating Financial Perspectives into Business Process Redesign. Business Process Management Journal (BPMJ), 16(2):333–356 18. vom Brocke, J; Rosemann, M. (Eds.) (2010) Handbook on Business Process Management 1, Introduction, Methods, and Information Systems, Springer. 19. Weske, M. (2012) Business Process Management, Concepts, Languages, Architectures, Springer, 2nd ed. DETAILS ABOUT AUTHORS: ZORAN CIRIC PROFESSOR FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA czoran@ef.uns.ac.rs IVANA CIRIC PhD STUDENT ECONOMIC HIGH SCHOOL SUBOTICA, SERBIA civana87@hotmail.com JELENA BIROVLJEV PROFESSOR FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA jelenab@ef.uns.ac.rs

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QUALITY CONTROL IMPROVEMENT USING THE SIX SIGMA METHODOLOGY ZORAN STANKO ROBERT OBRAZ MIRNA VARLANDY SUPEK

ABSTRACT

Quality control is central to any manufacturing company. From the manufacturer’s point of view, quality is related to technological design and the making of the finished product the purpose of which is to meet the consumer’s needs. From the consumer’s perspective, quality is often related to value, usefulness, price or the time within which a product or service can be supplied. Each quality control process can be improved in the course of time in order to enhance its quality as well. In the global market, with all the uncertainties and fierce competition, companies need to change and adjust their business strategies very fast in order to meet the customers’ preferences. Faced with educated customers and new competitors, manufacturing companies have to continuously consider their methods of production and change them if they want to make sure they will survive in the market. A very efficient way to continuously improve business processes is the application of the Six Sigma methodology. The Six Sigma methodology is a business strategy as well as a quality control methodology, which represents the application of formalized systems with the purpose of achieving maximum customer satisfaction at minimum total cost. This paper is based on the hypothesis that the application of the Six Sigma methodology can improve the existing quality of finished products and reduce quality control costs. The hypothesis has been tested in a company competing in the highly competitive global market for motor vehicle spare parts. Due to the application of the DMADV approach, the brake discs manufacturer managed to accelerate the process of final control of finished products by 35%, and reduce quality control costs by 50%. The entire quality control process was analysed using the project approach, and in five stages of the DMADV approach a new automated plant for quality control of finished products was designed and set up. Control automation has removed the need for manual labour, and productivity has risen by 48%. The new quality control process is resistant to internal variability and is to a high degree tied to consumers’ demands. KEYWORDS: quality control, the Six Sigma methodology, quality costs

1. INTRODUCTION Quality control is central to any manufacturing company. From the manufacturer’s point of view, quality is related to technological design and the making of the finished product, the purpose of which is to meet the consumer’s needs. From the consumer’s perspective, quality is often related to value, usefulness, price or the time within which a product or service can be supplied. Each quality control process can be improved in the course of time in order to enhance its quality as well. When enhancing those processes it is a good idea to apply well-known quality management tools and methods. Most of these tools and methods are based on quality management systems, whose task is to continuously improve business processes at all levels. One of the best known tools is the Six Stigma methodology, which helps businesses regroup its strengths and resources to adjust to challenging circumstances. The aim of this paper is to prove that the application of the Six Sigma methodology can help enhance the existing quality control of finished products and reduce quality control costs. This hypothesis will be tested in a real manufacturing environment and the testing will be based on the final product quality control process for brake discs. Each motor vehicle has four such discs in its braking system and they represent the key factor of any car’s safety system. Comparative analysis and tools of the Six Sigma quality control methodology have been applied.

2. FUNDAMENTAL PRINCIPLES OF THE SIX SIGMA METHODOLOGY The Six Sigma methodology is both a business strategy and a method for continuous improvement of product or service quality.1 It represents a statistical-analytical methodology based on real data and focused on achieving a nearly perfect level of process functioning. Companies applying the Six Sigma methodology adopt a culture of continuous improvement of their operations based on teamwork. The Six Sigma initiative for business operation improvement and advance1

Lazibat, T.: Upravljanje kvalitetom, Znanstvena knjiga, Zagreb, 2009, p. 236.

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ment consists of two components: managerial and technical.2 The managerial component focuses on the selection of appropriate metrics for analysing existing business processes, the selection of the right projects and people who will implement them. The technical component of the Six Sigma methodology focuses on continuous improvement of business processes at all levels using the DMAIC and DMADV methodologies.

2.1. DMADV methodology While the DMAIC approach is favoured for the improvement of existing business processes, the DMADV approach is used for designing new processes, the aim of which is to deliver flawless products. The name DMADV is an acronym for the English terms describing individual steps of this approach: Define, Measure, Analyse, Design, Verify. The main purpose of this methodology is to allow businesses to characterise, quantify and reduce risk in all stages of product, process and service development using a number of strategies, techniques and tools. The overall objective is to design products and services to consistently meet consumer expectations.3 Further in the paper the methodology of the DMADV approach is described on a specific example from business practice. The DMADV approach has been used for designing an automated process of final quality control of finished products, which introduced a new control technology and led to sizeable cost cuts in the operation of the observed company. Before tackling the DMADV methodology itself, it is necessary to describe the existing process of final quality control of finished products as well as all the issues related to the quality control process that resulted in delayed delivery of finished products – brake discs.

3. DESCRIPTION OF THE QUALITY CONTROL PROCESS Brake discs are parts of the safety braking system in any motor vehicle, their chief function being speed reduction or bringing the vehicle to a standstill in risk situations. Brake discs are cast and then machined to the prescribed dimensions. After that the discs are subject to final quality control consisting of checking the product’s final dimensions, checking the structure of the material and labelling the finished brake disc. This process is shown in Chart 1. Chart 1 – Quality control process for brake discs

Product input

Dimension check of discs tr = 20 s

Ultrasound defectoscopy of material tr = 21 s

Additional dimension check

Recycling of brake discs

Labelling of brake discs tr =23 s

Product output

Source: IBM Business Process Manager

SChart 1 shows the process of final quality control of brake discs. The control is implemented in three workplaces by quality controllers who are trained and qualified for product quality control. In the first workplace shown in Chart 1 dimensions of brake discs are checked. Dimensions of finished products are established by measurement, and they need to be within the defined tolerance limits. Discs are placed on the table manually, the measurement sensor approaches the brake discs automatically and the measuring begins. If the dimensions lie within tolerance limits, the disc is placed on another band conveyor and is transported to the next workstation. If the dimensions exceed the tolerance limits, the disc is placed on another band conveyor and undergoes additional control. The time spent on the initial work operations is 20 seconds. In the second workplace ultrasound defectoscopy of material is performed. This is done manually – the worker places the disc in the holder and the ultrasound probe automatically approaches the disc. This check involves measuring the response time of the ultrasound signal in the brake disc and comparing the obtained signal with previously defined refer2 3

Ibidem Conti, T.,Kondo, Y.,Watson, G.H.: Quality into the 21st Century: Perspectives on Quality and Competitiveness for Sustained Performance, ASQ Quality Press, Milwaukee, USA, 2003, p. 229.

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ence signal. Motor vehicle safety requires absolute homogeneity of braking material, and each brake disc with homogeneity aberration is sent to recycling. Discs with no flaws are transported by the band conveyor to the third workstation. The time required for manual ultrasound defectoscopy of material is 21 seconds. After the dimension and ultrasound checks the brake discs are labelled. This work operation is performed in the third workplace, where standardised product identification labels are placed on the product. Brake discs labelling is conducted by rolling and imprinting the label into the disc material using special tools, and the time needed for performing this work operation is 23 seconds. A quick review of the production process suggested that it is in the final quality control of finished products where the majority of finished products dwell and that this is the production segment that needs improving. The management of the observed company was quick to address the problem. They set up a Six Sigma team who were given the task to come up with an optimal final quality control process for finished products applying continuous supervision of the quality control process and DMADV project approach.

4. DMADV PROJECT-PROCESS APPROACH The DMADV project-process approach of the Six Sigma methodology involves seeking the best solutions to specific problems. In this case, in order to find the best solutions, the Management selected three members to be the core of the Six Sigma team. The team members were supposed to have appropriate competencies, and each member of the team was assigned a specific role within the team in accordance with their level of education, position and experience. Associate members of the team were employees from various functional departments, who supported the implementation of the project in a variety of ways; most of the time their task was to collect information in workplaces. Fifteen employees were involved in the Six Sigma project, and they acted in accordance with a strict delegation chain. Delegation and information flow followed a pyramidal structure. After establishing the managerial component of the Six Sigma methodology, which was applied to select the right metrics for the analysis of the existing process and the people who will implement it, the technical component was next to be established. This component focused on the DMADV project-process approach, which will be used to advance and improve the existing process of the final control of finished products. All team members were informed about individual approach stages and were assigned tasks and activities to complete within the project. Project timeline was defined and a formal document, preliminary project plan describing the ultimate goal of the project - shorter delivery time of finished products - was adopted.

4.1. STAGES OF THE DMADV APPROACH The paper will next present the five stages of DMADV technology. For each stage tasks and activities to be performed and steps to be taken in order to move on to the next stage are described. In each stage of the project an analytical approach based on the main quality management tools is applied. The project of improving final quality control for brake disks started with the first stage – the problem definition stage.

4.1.1. PROBLEM DEFINITION In the initial stage of the DMADV approach the problem has been clearly defined. Its solution will be sought through the enhancement project. In the case of brake discs the main problem was delayed delivery of finished products. Motor vehicles manufacturer applies the „just in time“ business philosophy and its monthly delivery times have been defined in a contract. Brake discs have to be delivered on time to the transit warehouse in order to be able to assemble motor vehicles according to previously defined deadlines and agreed annual production plan. As one of its tasks, the Six Sigma team used a survey to collect accessible data on the causes of delay in the production of brake discs. All indicators suggested that it is the final quality control process that was the „bottle neck“ in the production of brake discs. The best visual proof of this was the pile-up of brake discs in the final quality control of finished products. The Six Sigma team immediately focused on the final quality control process for brake discs. All the data collected through the survey were classified and processed according to the rules of the Six Sigma methodology and are shown in Diagram 1, which is a cause and effect diagram of the quality control process for finished products.

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The cause and effect diagram has a fishbone shape and is an easily recognized quality management tool. It is also called the Ishikawa diagram after its creator, Kaoru Ishikawa4, and it allows a logical analysis of all the problems related to the final control process for finished products. Most importantly, this diagram unambiguously points to the main cause of the problem, in this case – delayed delivery. Diagram 1 – Cause and effect diagram of the existing quality control process

Source: made by authors using the StatSoft Statistica 7 software

Diagram 1 consistently presents all the problems related to the quality control process. Analysis was conducted for the five chief problems-causes. They include: the equipment, the process, the employees, the work environment and the organisation of work.5 The diagram shows that the equipment used for the final product quality control is worn out, technologically out-dated and susceptible to failure. Besides frequent glitches, problems are caused by spare parts, which are increasingly difficult to find in the market. The very quality control process is carried out manually and is physically straining for quality control people as they have to lift and lower discs weighing 2.8 kilograms. This is why it is necessary to rotate employees every 20-30 minutes during a shift in order to alleviate concentration lapses caused by fatigue. The work is repetitious and monotonous, leading to frustration and lack of motivation in the workplace. Another problem is alienation, which leads to increased staff turnover in quality control positions. Diagram 1 shows that these jobs are performed by a total of 16 employees – 4 of them work in each of the three shifts and 3 employees work in packaging and as substitutes for employees on annual or sick leaves. The total includes the head of final quality control, who is at the same time the foreman for this part of the production line. The work environment where quality control of finished products is carried out is located in the section of the plant which is exposed to flying particles of dross and dust, draught, noise, vibrations and poor lighting, which is unacceptable from the point of view of safety at work. As for the organisation of work, problems can be seen in the uneven production flow and work in three shifts. Productivity is the highest in the morning shift when the foreman is at work. In the afternoon and night shifts the workers are not supervised, and the productivity level proportionally decreases towards evening hours. Serious problems have been noticed in the organisation of the maintenance service which is, due to lack of knowledge and involvement in the maintenance of other production segments, also to be blamed to some extent for frequent glitches. The cause and effect diagram has helped the Six Sigma team to analyse and have a more in-depth and complete picture of the issue of final quality control process for brake discs and, consequently, prepare the bases for process measurement, which will be used in the next stage of the DMADV approach.

4 5

Kaoru Ishikawa (1915-1989) – Japanese quality management expert. Yang, K., El-Haik, B.: Designing for Six Sigma – A Roadmap for Product Development, McGraw-Hill, New York, USA, 2003, p. 358.

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4.1.2. PROCESS MEASUREMENT Measuring the final quality control process for finished products involved measuring the time spent working in each workplace, a list of all the work activities performed in the workplaces, developing a diagram showing the course of the final control of finished products and videotaping the process. The time of work was measured by a stop watch throughout ten working days applying the methods of the Six Sigma methodology. Measurement results were entered in the previously prepared bases, which clearly showed all the work activities by each workplace and the time spent on each. A flow chart was used to define the process boundaries (where the quality control process for finished products starts and finishes within the brake discs production process), to break the process down into activities and to define the order of activities. For each activity inputs, outputs, work operations and the logic of their interconnection as well as responsibility were identified. The flow chart defines individuals in charge of each activity as well as those who perform them. The final quality control process was videotaped for further analyses in regular meetings of the Six Sigma team. All the measurement results have been computer processed and bases for analysing measurement results in the next stage of the Six Sigma projects were prepared.

4.1.3. PROCESS ANALYSIS After measuring the final quality control process for brake discs, the Six Sigma team conducted a detailed analysis of all measurement results obtained in the previous process stage using analysis methods and tools. The most important tool was the Pareto diagram, which is one of the basic tools in quality management. It is a bar chart where the length of the bar represents the frequency of occurrence or cost.6 Pareto analysis has been applied to the recorded work time in the product quality control process, and its results are shown in Diagram 2. The x-axis shows all the work operations participating in the quality control process, and the y-axis shows their participation (percentage) in the total work time. Diagram 2 â&#x20AC;&#x201C; Pareto analysis of work time on the quality control line

Source: Made by authors using the StatSoft Statistica 7 software.

The work time by work place data in Diagram 2 show that it takes 20 seconds or 31.25% of total quality control time to perform the dimension check. The second work operation requires 21 seconds or 32.81% of total time, and the third, according to the Pareto analysis, takes 23 seconds or 35.94% of total time. Diagram 2 suggests that the most time in the final quality control is spent on labelling brake discs, and this is the work operation which, according to Diagrams 1 and 2 sets the work6

Pande, P. S., Holpp, L.: Ĺ to je Ĺ est Sigma?, Mate, Zagreb, 2006, p. 60.

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ing stroke of the line for quality control of finished products. Based on the graphs and presented results the working stroke for this process is 23 seconds. Work operations in the first and second work places are performed faster from the working stroke of the entire line by a few seconds, and the overall quality control process is well balanced from the design point of view. However, if we want to accelerate the quality control process, it is the difference between the time of the line’s working stroke and the time required for the second and third operations that reveal the unused time that can be used for the improvement and advancement of the process. In order to accelerate the quality control process the work time in each work place needs to be aligned in each work place to cancel out the 3 second difference. Such an approach would help speed up the working stroke of the line to 20 seconds and increase productivity of the overall production cycle and at the same time the agreed delivery times for finished products would be met. Another cause and effect diagram was used following the Pareto analysis. Unlike the previous diagram (Diagram 1), which listed factors causing the problem, this diagram focused on desired results – shorter delivery times for products. Whereas Diagram 1 started establishing the problems we wanted to solve, the new one, Diagram 3, starts defining the situation we want to achieve. Apart from the cause and effect diagram the brainstorming method was used, which revealed the key factors that would lead to the desired project goal, i.e. shortening the delivery time for finished products. Diagram 3 – Cause and effect diagram for the new quality control process

Source: made by authors using the StatSoft Statistica 7 software.

Diagram 3 represents a new cause and effect diagram following a detailed analysis of all causes- problems shown in Diagram 1. Another analysis was conducted of the five major causes-problems. They included the equipment, the process, the employees, the work environment and the organisation of work. Here we analysed what needed to be changed in the existing quality control process for brake discs in order to come up with an optimal quality control process that will eliminate all the existing problems shown in Diagram 1. Diagram 3 also provides guidelines that should be followed in the design of the new final quality control process in order to reach the desired goal – shorter delivery times of finished products. Diagram 3 clearly indicates that the existing equipment needs to be completely replaced with new, more modern and automated machines. Automation and new technology require IT literate staff, which is why younger employees willing to receive further education and training will be favoured. When designing the new quality control process the so-called „micro-balancing of the process“ will be carried out in order to bring the quality control process closer to 20 seconds. This, as well as a significant reduction of manual labour, would increase the overall productivity of the existing brake discs production process. The work environment will be organised to concentrate the quality control process in the smallest possible work surface

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that will be enclosed in a transparent Plexiglass booth. This booth, being made into a closed unit, will isolate the quality control process for finished products from the dust and dirt in the plant. At the same time it will prevent people from entering the robot operation zone, which could be fatal and dangerous for employees, and safety at work measures will be implemented in compliance with rules and regulations. As the existing maintenance service is not capable of maintaining the new quality control technology, the jobs of preventive and current maintenance of the automated plant will be outsourced to the production line manufacturer. All work places will be fully automated, and the existing disc labelling technology will be replaced by a new engraving technology. Upon the process analysis stage, all the obtained data were systematised and the stage of designing a more modern final quality control process for finished products began.

4.1.4. DESIGN OF THE NEW QUALITY CONTROL PROCESS In the designing stage of the new quality control process guidelines and recommendations from the previous stage were used in order to design a process in compliance with the requirements. Designing of the new quality control process involved using CAD7 computer programs, which enabled modelling a number of different variations of the final control process for brake discs. Several production processes were designed; they were first analysed in detail in blueprints and then implemented as computer simulation in the SIMUL 8 software. Computer simulations unambiguously pointed to a specific process as the optimal quality control process in compliance with the requirements set in the project. Simulation results showed that an optimal quality control process for finished products will be obtained by changing the order to the existing work operations. Thus the first work place will involve material defectoscopy, the second work place will be in charge of disc labelling and the dimension check of finished products will be performed in the third workplace. After defining the sequence of the work operations a method had to be devised for transporting and placing 2.8 kg brake discs on the measurement station without completely eliminating manual labour. One of the concepts suggested manipulating brake discs by a robot unit with six degrees of freedom of movement, which can truly simulate the movements and precision of workers performing quality control jobs. As this idea proved to be extremely interesting, the Six Sigma team brought in automation experts working for Sinel d.o.o. from Labin, who took an active part in subsequent designing of the quality control process for finished products. In a joint effort, the previously designed optimal sequence of work operations was then demonstrated in the virtual three-dimensional ABB Robot Studio environment. Simultaneous simulation of the optimal quality control process and the robot unit for manipulating brake discs yielded a computer model of the new quality control process. Simulation results showed that the new sequence of operations and replacement of the existing labelling technology with electromagnetic engraving technology will reduce the time of the product quality control process from todayâ&#x20AC;&#x2122;s 23 seconds to 20 seconds. After all the required parameters were obtained in the simulation, it was time to start engineering and the calculation of switches for the new automated plant. The entire new plant with all its parts was shown in the three-dimensional environment of the Pro/Engineer modelling tool. The final isometric representation of the three-dimensional model of the automated plant is shown in Figure 1. It shows the final version of the automated plant for the final quality control of brake discs. The input of products is on the left and the output of products that have undergone quality control is on the right. In the centre of the plant there is the robot unit, which services three work places shown in front of the operator and the control device.

7

engl. CAD, Computer Aided Design

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Figure 1 â&#x20AC;&#x201C; Isometric representation of the automated quality control process

Source: Authors in collaboration with Sinel d.o.o.

Figure1 shows that the entire automated plant is enclosed in a Plexiglass booth in order to isolate it from the aggressive atmosphere in the production plant. A model of a worker managing the final quality control plant is shown in front of the control device. The worker is completely free of manual labour, his job being reduced to supervising the operation of the automated plant and dealing with possible glitches during shift work. After all the necessary components and parts were provided, the automated plant was constructed following the computer model shown in Figure 1. Subsequent optimisation of the robot unit trajectory enabled the working stroke to be shortened by 3 more minutes. So, upon trial operation, the working stroke of the quality control line went down to 17 seconds. At the end of the design stage of the new quality control process, the work time of the automated plant for quality control of brake discs was measured again. The measurement results were subjected to the Pareto analysis and the obtained results were presented in Diagram 4. Diagram 4 shows the results of the Pareto analysis of the new quality control process for finished products. It clearly indicated that all the work operations shown in the x-axis require 17 seconds. Work operations are fully co-ordinated with the working stroke of the line, and all the work places are fully utilized. There is no waiting time in individual work places, i.e. each work place operates for 17 seconds and after that a new product arrives to be checked.

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Diagram 4 – Pareto analysis of the new quality control operation time

Source: Made by authors using the StatSoft Statistica 7 software.

A more even course of quality control with no wait time suggests that the quality control process for finished products has been well-balanced from the production line point of view.

4.1.5. PROJECT VERIFICATION Post-implementation project check suggests that the working stroke is down to 17 seconds after the automated quality control process has been introduced in the production process. This information is of utmost importance as it can be used to compare and verify the process before and after the implemented improvements and to rationalise all the project activities. Activity rationalisation was conducted using one of the methods of economic evaluation of projects from the group of methods evaluating individual unit profitability – the return of investment method. This traditional method is based on return time, which is defined as the period of time required for the investment income to equal capital expenditure necessary for the investment.8 Evaluation of the quality control enhancement project applying this method suggests that the return of investment will take place in 0.4 years. A shorter period to return is desirable because the sooner the amount of investment is returned the sooner it will be available for new or other needs. A short ROI period also diminishes the risk that the changed economic circumstances will prevent the return of investment.

4.2. PROJECT RESULTS The completion of the final verification stage in the DMADV approach marked the completion of the project of enhancing final quality control for bake discs. The implementation of technology and the education of the staff were successfully carried out in a short period of time. The Six Sigma team met for the last time in November of 2012 to conclude the project. To summarise, these are the most significant project results:

• • • • • • • • • 8

The working stroke of the quality control process has been brought down from 23 seconds to 17 seconds Quality control time has been reduced by 35% due to the new technology Staff has been reduced by 56% (from 16 to 7 people) Annual quantity of finished products has increased from 822,000 to 1,200,000 pieces Output has increased by 48% on an annual basis Transportation path of the products has been reduced by 80% (from 70 to 10 metres) ROI time is very short – 0.4 years Introduction of the new quality control technology and staff cutting resulted in 50% lower quality control costs per yea According to sigma measurement units the quality control process has increased from 3.2 to 5.1 Perić, T., Radačić, Ž., Šimulčik, D.: Ekonomika, Fakultet prometnih znanosti, Zagreb, 2000, p. 126

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The above stated results of the project of enhancing quality control for finished products suggest that this project is cost effective. This conclusion derives from the fact that the application of the DMADV methodology helped design a completely new, more modern final quality control process for finished products, which uses all the existing resources efficiently, ensures high returns on investment in a short period of time and complies with the Safety at Work Act. The new quality control process is resistant to variability within the process and is largely tied to consumer demands (low product price, short production time, short product delivery times).

CONCLUSION In the introduction of this paper a hypothesis was made assuming that the Six Sigma methodology can be applied to enhance the existing quality control process for finished products and reduce the quality control costs. The first part of the hypothesis has been proved by presenting the five stages of the Six Sigma project where it focused on the wants and needs of the consumers – short delivery times. Applying a consistent approach and the DMADV methodology a new process was designed, which accelerated and enhanced the existing quality control process for finished products. The new quality control process has been fully automated by the introduction of a robot unit, which completely eliminated the need for manual labour. The introduction of the new quality control technology and the change in the sequence of work operations increased the production productivity level by 48%. Due to the quality control „bottleneck“ when applying the former brake discs production process, it was possible to produce only 822,000 pieces per year. The new quality control technology allowed the production of 1,200,000 pieces per year with fewer staff. Staff reduction and the use of modern technology resulted in lower annual quality control costs by almost 50%. This also confirmed the other part of the hypothesis assuming that the application of the Six Sigma methodology may cut quality control costs. These conclusions suggest that the Six Sigma methodology, although relatively unknown in this region, may serve as a powerful instrument for correcting mistakes and dealing with „bottlenecks“ in production processes that are carried out throughout longer periods of time. Continuous application of the Six Sigma methodology empowers manufacturing companies, which at the same time develop their survival abilities in turbulent and uncertain times. Also, the Six Sigma method helps businesses achieve business excellence and competitive advantage in the global market.

LITERATURE 1. 2.

Basu, R., Wright, N. J.: Quality Beyond Six Sigma, Elsevier Science, Oxford, UK, 2003. Conti, T., Kondo, Y., Watson, G. H.: Quality into the 21st Century: Perspectives on Quality and Competitiveness for Sustained Performance, ASQ Quality Press, Milwaukee, USA, 2003. 3. Finster, M.: From continuous improvement to continuous innovation, Quality Management Journal, 2001., Vol.8, No.4., ASQ, USA. 4. Larson, A.: Demystifying Six Sigma, AMACOM, New York, USA, 2003. 5. Lazibat, T.: Upravljanje kvalitetom, Znanstvena knjiga, Zagreb, 2009. 6. Pande, P. S., Neuman, R. P., Cavanagh, R. P.: The Six Sigma Way, McGraw-Hill, New York, USA, 2000. 7. Pande, P. S., Holpp, L.: Što je Šest Sigma?, Mate, Zagreb, 2006. 8. Perić, T., Radačić, Ž., Šimulčik, D.: Ekonomika, Fakultet prometnih znanosti, Zagreb, 2000. 9. Stamatis, D. H.: Six Sigma Fundamentals – A Complete Guide to the System, Methods and Tools, Productivity Press, New York, USA, 2004. 10. Yang, K., El-Haik, B.: Design for Six Sigma – A Roadmap for Product Development, McGraw-Hill, New York, USA, 2003. DETAILS ABOUT AUTHORS: ZORAN STANKO MS, SENIOR LECTURER LIBERTAS BUSINESS SCHOOL ZAGREB ZAGREB, CROATIA zstanko@utilus.hr ROBERT OBRAZ UNIV.SPEC.OEC, MBA, QA MANAGER KLIMAOPREMA D.D. SAMOBOR, CROATIA robert.obraz@zg.t-com.hr MIRNA VARLANDY SUPEK BA, LECTURER VERN’ UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA mirna.varlandy-supek@vern.hr

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RISK ATTITUDE ASSESSMENT STUDY: CROATIAN CASE JOSIP KERETA KATARINA LUKETA MIRNA VARLANDY SUPEK

ABSTRACT

Contemporary business conditions are characterised by the dynamics and complexity of the environment and increasing company differentiation. Such conditions impede the transparency of future events and increase uncertainty in every segment of business operation. As a result, the target function of the company, i.e. enhancing the company’s worth, is increasingly exposed to various forms of risk. This is why the issue of risk management is getting more and more attention. The fundamental problem of any form of management, including risk management, is creating appropriate circumstances, which assumes that there is a high level of correspondence between required and available information and knowledge. This requirement suggests that risk management conditions result from the relationship between the risk as the object and the decision maker/manager as the subject of risk management. The attitude to risks assumes knowledge, understanding and application of appropriate procedures for spotting and recognizing risk. Attitude to risks can be measured and assessed indirectly, by measuring and assessing the level of current and relative success of the company’s operation, and directly, by measuring and assessing the knowledge and application of appropriate risk management procedures. In this study we have applied the following methods: survey, mathematical and statistical methods as well as methods of researching and studying available literature including analysis, synthesis, deduction and induction. We have also used theoretical and practical experience of developed Western countries that companies in countries in transition, including Croatia, should lean on in their future economic development. The results of the study conducted in a company operating in the real sector confirm that it is possible to measure and assess the attitude to risks both indirectly and directly, and that there is correlation between these two types of assessment. If managers recognize risks and are familiar with the risk management process, this will lead to successful company operation and vice versa, lack of knowledge and failure to manage risk will lead to inadequate business results. KEYWORDS: Management, Risk, Risk Management

1. INTRODUCTION Contemporary business conditions are characterised by the dynamics and complexity of the environment. Such conditions impede the transparency of future events and increase uncertainty in every segment of business operation. This is why the issue of risk management is getting more and more attention. The paper investigates assumptions on assessing the attitude to risk. Criteria and procedures for establishing attitudes as well as measurements for the assessment of attitudes to risk have been designed. They result from management dimension assumptions, risk scope assumptions and process nature assumptions. Risk attitude can be measured and assessed directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge and application of an appropriate risk management process. The attitude to risks contributes to the situation and position of the company and can therefore also be assessed through indirect measurement, by assessing the level of relative and absolute success of the company through a number of performance indicators. In order to research this topic we have applied the following methods: survey, mathematical and statistical methods as well as methods of researching and studying available literature including analysis, synthesis, deduction and induction. We have also used theoretical and practical experience of developed Western countries that companies in countries in transition, including Croatian companies, should lean on in their future economic development.

2. ANALYSIS OF THE RISK ATTITUDE STRUCTURE Risk is a word used in daily life as people frequently face risks. We may strive to minimise them but we cannot fully avoid them. One definition of risk defines it as “the chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood.”1 Alternately, risk could be defined by another definition that may pertain to the company and its function and purpose of existence: Risk is the likelihood that something will not happen in the intended manner – the result may be better or worse than expected.

1

Strathfield, 1999.p. 2 http://www.zakon.hr/z/427/Zakon-o-ekolo%C5%A1koj-proizvodnji-i-ozna%C4%8Davanju-ekolo%C5%A1kih-proizvoda, 23.03.2013

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Risk is necessary and all efforts should not be directed towards minimising it. Risk can also be positive and desirable for shareholders if it is managed and used for making a profit, when it is perceived as an asset. The degree of risk is a combination of the likelihood and consequences of a given risk. Risks include failure to recognise and use opportunities, failure to achieve objectives, client dissatisfaction, unwanted publicity, threat to physical safety, breach of security, breach of legal and contractual accountability, fraud, flaws in financial controls and reporting.

2.1. Management and risk management The term management, originally an English word, has been used in most languages across the world. It has several meanings as it refers to both the process and the activity, to masterminds as well as executors and is multidisciplinary as it is related to economics, organisation, psychology, philosophy, history and ethics. Todayâ&#x20AC;&#x2122;s manager has to know how to motivate, co-ordinate and connect different individuals from both the core and the non-core business and other departments. This means that modern managers, having won the battle in their surroundings and with their competitors, need to "return" to their company and devote themselves to co-ordinating the relationships within the company. When classifying the diversity of managerial functions, the decision-making function seems to be taking the prominent position. Thus today the term decision-making is mostly used as a synonym for managing because it is through the decision-making process that the management fulfils its role. Making decisions and taking responsibility for them represents one of the cornerstones of managerial work. Indeed, unless managers make decisions they are not managers in the first place.2 Decision-making actually represents the core of the system and process of management and is one of its key elements. The relationship between the functions of managing and decision-making can be shown as in Figure 1.3 Figure 1: Decision-making and managerial functions MANAGEMENT Planning -----------------------------------------------Organising Decision-making Supervision ----------------------------------------------------- Leadership Source: authors' research

The managerial function is closely related to decision-making, i.e. decision-making represents its very essence. Managerial decisions are made in conditions of certainty, risk or uncertainty. Managing, i.e. decision-making takes place in favourable and/or unfavourable circumstances that may have a strong impact on the success of managing or decision-making. In favourable circumstances decision-making is, undoubtedly, safer in terms of assessing expected results.

2.2. Basic characteristics of the risk attitude Risk is part of any human activity and thus all types of business activities, be it manufacturing, providing services or developing software. Unforeseen problems often occur leading to failure to meet the agreed deadline, exceeding the budget or delivering inadequate products. These problems cannot be entirely eliminated, but some of them may be more controlled by taking appropriate preventive actions. Risk management is an area of management which deals with such hazards before they occur, i.e. risk management is discipline for work/life under risk4. Companies may avoid most of these problems if they apply systematic procedures and risk management techniques at the start of a project, a business process or any other activity. The modern way and conditions of business operation involve too many risks and thus cannot be treated with ad hoc methods, they often exceed the managerâ&#x20AC;&#x2122;s abilities and skills to deal with them intuitively, they require communication with other people and cannot be ignored on a subjective basis. The risk management system has to provide answers to questions about where the opportunities lie, how to reach them and how to avoid traps on the way to success. All projects involve risk and some risks will occur. Risk management is an investment in the future as it costs less to make an effort to avoid potential threats than to deal with them when they occur. When doing this it is important to know where the risk areas are and focus oneâ&#x20AC;&#x2122;s attention to major risks. Ritchie, D. Marshall: 1993., p. 48 J. Gordon, R.W. Mondy, A.Sharplin, S.R. Premeaux 1990., p. 173. 4 H. F. Kloman: 2000. 2 3

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Risk management is a logical and systematic process that needs to be used when making decisions on increasing the efficiency and effectiveness of business operation. It is a means to an end, and not the end itself and needs to be part of daily work. Risk management means identifying and using opportunities for improving business operation, but also avoiding or reducing the odds that something might go wrong. The question may be raised as to when there is a need for risk management. Risk has to be managed all the time as all decisions involve managing one risk or another. In conclusion, by managing risks we can avoid some, but by no means all potential risks. The participants have to see the goals and risks in a realistic way. Risk management has to be supported by top management in order to be carried out consistently and often enough to yield results. Despite the development of many risk management methods and approaches, we need to be aware of the limitations, many of which are serious. It is necessary to select risk management methods that are in accordance with oneâ&#x20AC;&#x2122;s own needs and start with simple ones that may increase profits and thus win over those who resist the introduction of a risk management system.

3. ASSESSMENT FRAMEWORK ASSUMPTIONS The ability to spot, recognise and adequately treat risk can be viewed at different levels of management. However, a basic problem occurs at all levels of management in general, and thus of risk management as well â&#x20AC;&#x201C; creation of adequate conditions for solving problems, which can be seen as the relationship between required, necessary and available information. Figure 2: Necessary, required and offered information5

2 1 3

7 5

6

4

Source: authors' research

LEGEND 1. 2. 3. 4. 5. 6. 7.

Necessary information which is neither required nor offered Necessary and offered information, but not required Necessary and required information, but not offered Required information that is neither necessary nor offered Offered and required information, but not necessary Offered information that is neither required nor offered Necessary, required and offered information

Risk attitudes can be measured directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge and application of an adequate risk management process. Attitude to risks contributes to the condition and position of the company, and may be also assessed through indirect measurement and the assessment of the level of relative and absolute company performance through a system of indicators.

5

J. Tintor: 2000., p.155 J. Tintor: 2000., p. 312

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3.1. Indirect assessment Risk management contributes to successful operation of a company; the management’s attitude to risks can be indirectly assessed by measuring and assessing the relative and absolute success of the company, which can be accomplished by calculating indicators: individual indicators or a system of indicators. Indicators are defined as numbers which in a concentrated form comprise quantitatively expressed conditions.6 They are used to describe a company, i.e. they serve as the starting point for diagnosing the situation in the company and thus need to be made as precise as possible, and they can be an absolute or relative number. Indicators carry information that is necessary for making decisions and managing, i.e. their formation and calculation create the information basis for decisions, which suggests their significance. Groups of indicators include the following: debt indicators, liquidity ratios, activity indicators (turnover ratio), efficiency ratios, profitability indicators, investment indicators. Investment ratios are primarily designed for potential investors in the company as they measure the success the company has achieved for its owners. This group of indicators includes the following:

• Earnings per share indicator (EPS) is calculated as the ratio between net income minus dividends on preferred stock and the number of average outstanding shares.

• Dividend per share indicator (DPS) is calculated as a part of the net income reserved for dividends and the number of outstanding shares. DPS reflects the dividend distribution policy, but may also point to future business operation.

• Dividend Yield is calculated as the ratio between annual dividend per share and the price per share.

These investment indicators are highly developed and are widely used in countries with developed market economy, where capital markets are also fully developed. However, as Croatia, as well as other countries in transition, has not sufficiently developed its capital market, these indicators cannot be applied for assessing the success of companies and thus it is not possible to assess the attitude of managers to risks on the basis of these indicators. In conclusion, if there is no strong link between successful operation, financial reports and the capital market; profitability indicators (earning power) and the investment indicators are two sides of the same coin.7 However, due to previously mentioned limitations of investment indicators in Croatian circumstances, in most companies these indicators cannot even be calculated, and in companies where they can, their applicability is questionable due to the undeveloped capital market and thus its lack of transparency. Regardless of all the deficiencies, there is, nevertheless, the need to measure the company’s performance and compare it to other companies, to the industry averages or to the averages for the entire economy. It is fair to say that for companies in transition, and thus for Croatian companies, indicators such as ROE may be the most appropriate, especially ROA as the peak indicator which reflects the company’s fundamental goal. They can prove the (in) ability of the management to use available assets appropriately and manage them in a way that allows making appropriate net profits.

3.2. Direct assessment Managerial attitude to risks can also be measured and assessed directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge, perception and application of appropriate risk management procedures and processes. The quality of management is considered to be one of the most important factors of company efficiency, particularly its decision-making style. In other words, it is the quality of decision-making as the central function of management representing the core of the management system and process that is in the focus of attention. Consequently, it is the managers who are in charge of managing business risks as they generally make decisions including those on risks. As risk is part of any decision, when making decisions, managers at the same time manage risks. Given the functions and essence of management, any research should include the following variables: planning and setting goals; organisation and communication; motivation; leadership; decision-making; control. Goals are defined as the desired future situations in the company, and planning is an activity involving setting desired goals and establishing ways of achieving them. Managers at all decision-making levels plan and set various goals applying one of 6 7

J. Tintor: 2000., p. 336 J. Tintor: 2000., p. 336

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the usual approaches: top-down, bottom-up or a combination of the two. The top-down approach to setting goals is typical of a centralised decision-making system and an autocratic leadership style, where it is difficult to ensure appropriate motivation for achieving goals. On the contrary, with the bottom-up approach, planning and setting goals starts at lower levels, everybody participates in setting goals and thus have less difficulty accepting them. This approach is appropriate for organic, decentralised organisational structures. In order to find out which approach is applied by managers of Croatian companies it is necessary to investigate how goals are set and whether people resist them. The managerâ&#x20AC;&#x2122;s attitude to risks may also be measured and assessed by investigating their knowledge of, respect for and application of risk management processes, which involves their knowledge and application of process stages in the right order, and their knowledge and application of risk management instruments and methods. Elements of the risk management process include the following: context setting, identification, analysis, assessment, risk treatment and supervision and control.

4. RESEARCH FINDINGS In accordance with the previously developed concept and method for assessing and measuring the managerial attitude to risks, research has been conducted in company "X". Indirect measurement of risk attitudes has been carried out by measuring the realisation of the profitability indicator in the period 2008-2011 on the basis of data from the Profit and Loss Account and the Balance Sheet. The following indicators have been calculated: return on assets (ROA); return on equity (ROE); gross profit margin; net profit margin; net profit. The following table shows the realisation of indicators in the monitored period: Table 1: Profitability indicators for company "X" in 2008-2011 No

Indicator

2008

2009

2010

2011

1.

ROA %

2.98

1.00

0.53

-4.35

2.

ROE %

3.65

1.23

0.63

-4.68

3.

gross profit margin % 6.47

2.21

1.33

-11.55

4.

net profit margin %

6.88

2.49

1.76

-9.95

5.

net profit /loss

11,639

3,913

2,011

-14,920

Source: authors' research

The achieved indicators suggest continuous fall in the monitored period. As the gross profit margin indicates the efficiency and ability of the management to manage sales prices, costs, the scope of activities, and the net profit margin, apart from already mentioned, indicates managing interest (cost of financing), the table suggests that in the monitored company the managers do not manage the stated areas efficiently, which leads to the decline in net profit and thus the decline in the worth of the company. ROA indicates the ability of the management to use the available assets economically, and ROE indicates their efficiency in using available capital, thus realising the interest of the owners. The realised indicators suggest that the management failed to use the available assets economically and that they failed to use the available capital efficiently, which resulted in loss, and, consequently, a decrease in the worth of the company. Thus the management managed to achieve the opposite of the target function of any company, i.e. the increase in the companyâ&#x20AC;&#x2122;s worth. The inability of the management to manage the entire operation of the company efficiently leads to their failure to achieve expected business results, i.e. suggests relative and absolute inefficiency of operation. This is clearly shown in the following graphs.

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Graph 1: Profitability ratios in company "X" in 2008-2011

Source: authors' research

Graph 2: Net profit/loss made by company "X" in 2008-2011

Source: authors' research

Direct measuring of the managerial attitude to risks was carried out through a survey based on a structured questionnaire distributed to twenty-one managers at all levels of management in company "X". Based on their answers to individual questions, the following conclusions about management can be drawn:

• • • • •

young (71.4% aged 31-40); mostly married (76.2%); well-educated (81.0% have a bachelor’s and the others a master’s degree); slightly more women (57.1%) than men (42.9%); mostly economists (66.7%), specialising predominantly in marketing (52.4%).

Questions which measure risk attitudes directly may be grouped in the following way:

• questions focusing on recognising the management’s views on the existing organisational structure of company "X" • •

were supposed to help identify the level of objectivity in the management’s awareness and knowledge of the distribution of authority, and thus the established management functions in the company; questions focusing on the decision-making process and the process of spotting, recognizing, evaluating and analysing risks were supposed to reveal the characteristics of management in relation to the extent of risk and the nature of the risk management process; questions focusing on informal or private risk inclinations were supposed to confirm or model the parameters obtained in previous groups of questions.

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Even though, judging by the answers to the question about their position, all levels of management seemed to be equally represented, the answers to the next question about how many organisational levels they are away from the top differed a lot. Namely, as many as 57.1% believe they are three or more levels away, and none of them thinks he/she is just one level away, which suggests a complex and complicated organisational structure, where it is not quite clear who is at what level of management. Such answers suggest that authorities and responsibilities are not clear and transparent either. The respondents have been in their present position for 4.3 years on average, which indicates relatively slow recruitment change, and the majority of managers previously worked as clerks (38.1%) or heads of department (28.6%) for 6.1 years on average. When asked to define their authorities to make independent decisions, 47.6% says they are authorised for making decisions about some operational costs 28.6% say they have no authorities, which leads to the conclusion that the decision-making system is rather centralised and that there is virtually no management as we know it, as those who make no decisions can hardly be called managers. Asked about the risk level of daily decisions, 66.7% of respondents say that certain decisions are risky 33.3% claim that they are not in charge of making risky decisions, whereas none of the respondents says their decisions involve taking risk, which suggests that they lack understanding of and do not perceive risk as such because every decision some degree of risk. This conclusion is also supported by answers to the question about risk taking circumstances, where none of the managers recognizes risk as using a potential opportunity and the majority (57.1%) sees risk, as something negative, a loss to be avoided. Looking at and measuring some variables ranging from –3 to +3 it is obvious that the majority believes they are personally inclined to taking risk (average grade of +1.5), and that it is the company that is not willing to get involved in risky ventures (average grade of –0.3), which would suggest that the company is run by some other managers and not themselves. The level of necessary information is also highly rated (+1.7), and their own speed of making decisions is rated the highest (average grade of +2.0), which may also indicate making rash decisions. This claim is additionally reinforced by answers about ranking individual stages in the risk management process (which, actually, correspond to the decision-making stages), where the risk analysis, next to establishing context, received the lowest average grade of 3.0 on a scale of 1 to 5. With answers related to delegation, it is significant that a mere 19.0% of managers delegates decisions, and the others either make decisions themselves (42.9%) or cannot answer this question (38.1%), even though the majority of 90.5% say they use a combined approach to planning. The fact that 2/3 of managers are prepared to postpone decisions is also indicative. As regards the stages of the risk management process, the respondents mostly perceive them and evaluate them with grades from 2.9 to 3.95 on a scale from 1 to 5, which means that all risk management stages are highly rated, the highest grade being given to the risk assessment stage and the supervision and control stages, and the lowest to the stages of establishing context and analysing risk. Answers to the questions about private, informal inclinations to risk suggest that the managers are generally not inclined to taking risk. A majority of 71.4% have life insurance, and 81.0% of them do not take out travel insurance nor invest in securities. Additional investments are mostly reduced to real estate (85.7%), which is one further variable indicating risk awareness. The majority (66.7%) only occasionally takes bets, while others never do it, 57.1% of them sometimes play the lottery, while none of them gambles. The conducted measurements have confirmed that the attitude to risks can be recognized from the relationship/ratio between the level of necessary information resulting from the nature of risk on the one hand and required and available information on the other.

5. CONCLUSION The company operates inefficiently with a downward future trend. Based on this fact and the results of indirect measuring and assessment of the managers’ attitude to risks, we may conclude that the management does neither know nor understand, and thus cannot apply appropriate procedures for perceiving and acknowledging risk. To summarise, the management does not have risk management skills and, consequently, has no attitude to risks. Also, based on the researched sample and direct assessment of their risk attitudes we may draw the conclusion that the management in this company does not perceive risk as an opportunity but mostly as a loss, i.e. managers neither perceive nor acknowledge risk nor do they recognise the stages of the risk management process. The company’s corporate culture does not encourage entering uncertain, risky deals. This has resulted in current inefficiency, which has been proved through indirect assessment. Thus the results of the direct assessment of risk attitudes coincide with those of the indirect assessment, i.e. there is correlation between the two, which confirms the initial hypothesis that it is possible to measure and assess risk attitudes both directly and indirectly.

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REFERENCES 1. 2. 3. 4. 5. 6. 7.

J. Gordon, R.W. Mondy, A.Sharplin, S.R. Premeaux: "Management and organizational behavior", Allyn and Bacon, Boston, 1990 H. F. Kloman: "Risk Management Reports", article "Global Risk Management Standards and Definitions", September 2000 H. F. Kloman: "Risk Management Reports", article "Iconoclastic View of Risk", December 2000 H. F. Kloman: "Risk Management Reports", article “The Risk Spectrum”, March1998 B. Ritchie, D. Marshall: "Business Risk Management", Champan&Hall, London, 1993 Standards Associations of Australia, "Risk Management (AS/NZS 4360:1999)", Strathfield, 1999 J. Tintor: "Poslovna analiza: koncepcija, metodologija, metode", HIBIS, Zagreb, 2000

DETAILS ABOUT AUTHORS: M.SC. JOSIP KERETA TRIGLAV OSIGURANJE D.D., ZAGREB josip.kereta@triglav-osiguranje.hr KATARINA LUKETA, MF UNIVERSITY OF APPLIED SCIENCES VERN’ – ZAGREB katarina.luketa@vern.hr MIRNA VARLANDY SUPEK, B.A. UNIVERSITY OF APPLIED SCIENCES VERN’ – ZAGREB mirna.varlandy-supek@vern.hr

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KNOWLEDGE MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS DAGMAR LESAKOVA

ABSTRACT

Complexity of knowledge services in business requires involvement of various competencies. Hence, many services are offered nowadays by networks. As a consequence, individual firms can concentrate on their distinctive competencies and by combining them with the distinctive competencies of partner firms, such a network is able to offer complex knowledge services of high quality and with acceptable prices. The success of such a network depends mainly on the effective and efficient combination and use of the distinctive competencies of the network partners. The ability to combine and to employ distinctive competencies represents the core competency of the network as a whole and can be seen as a management task in knowledge sharing. Engaging in a network brings certain problems with it, especially the leakage of knowledge that can ultimately erode the network´s core competency. Such a threat can be faced by clearly identifying the phases of the service production process and developing solutions to the particular problems during each phase. The objective of our paper is to indicate the problems evolving in the process of knowledge generation, knowledge transferring, knowledge storage and knowledge adaptation in knowledge service networks. Recommendations on how to reduce and eliminate problems arising among partners in the network have been developed in the personal, technological, organizational and cultural aspects. The research was conducted in the framework of the project VEGA 1/0612/12. KEYWORDS: knowledge services, knowledge management, knowledge service network, distinctive competence.

1. INTRODUCTION The nature of knowledge has been explored in many different disciplines, such as philosophy, sociology, psychology or business sciences. Gradually, two concepts of the nature of knowledge have emerged: a cognitivist and a constructionist concept. The cognitivist concept understands knowledge as a representation of the world that consists of a number of objects or events, which are represented in the human brain. In this concept knowledge is explicit and objective, and can therefore be stored or transferred between persons or organizations relatively easy. The constructionist concept, based on new ideas from neurobiology, cognitive science and philosophy, understands knowledge not as an act of representation, but as an act of subjective creation of reality by an individual person. Michael Polanyi, who has set fundamentals to research about knowledge and knowledge management is using a constructionist concept of knowledge. Polanyi describes knowledge as something manifestly personal, consisting of two complementary parts: „What is usually described as knowledge, as set out in written words or maps, or mathematical formula, is only one kind of knowledge; while unformulated knowledge, such as we have of something we are in the act of doing, is another form of knowledge“ (Polanyi, 2009). Polanyi later explained this distinction between explicit and tacit knowledge with his famous, often cited statement „We know more, than we can tell“, describing the tacit part of knowledge (Polanyi, 2009). It is important to note that knowledge is never completely tacit or completely explicit.In our article we use knowledge as an individual subjective construction based on information and experience in order to solve problems. The management of knowledge is often seen as a process. This process of knowledge management incorporates the phases of knowledge generation, knowledge dissemination, knowledge use and knowledge storage. Considering a network structure, this means that the knowledge of all network partners must be identified in order to combine it to a desired result. Missing parts of knowledge have to be developed internally or obtained from outside the network. Besides combining the distinctive competencies, transfer of knowledge is another crucial task for the network knowledge management. Knowledge held by individuals or by small groups of individuals within the network could be transferred, while organizational knowledge of the network partners could not be transferred. Organizational knowledge does not seem to be transferable, because it cannot be grasped as a whole by an individual.

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2. MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS The core competence of the knowledge service networks consists in the ability to combine the distinctive competencies of the network partners with the external factors in order to produce unique services for the customer. It can take a form of a simultaneous combination of (asymetric) competencies of the network partners at the time when the service is produced or a transfer of knowledge that enables the network partners to execute needed tasks. Examples for knowledge services provided by networks can take a form of various councelling and advisory business services, focused on management consultancy, and provided by a network through the combination of distinct capabilities. The ability of the network to combine the distinctive competencies of the network partners in order to produce special services for the customer can be seen as the core competency of such a knowledge service network. For instance in the business merger / acquisition projects, or internationalisation projects, experts in management, law, finance and international business work together by sharing their knowledge in order to successfully execute certain tasks. Specialized knowledge (e.g. knowledge about finace and markets of the merging companies, knowledge about international relations and so on) is necessary for successfully completing the process. This knowledge is often individually provided by management consultants, financial institutions and law firms. These firms sometimes cooperate together on contract basis, but sometimes these specialized firms build a network, in which they work together with each other. An example for knowledge service network, with intensive transfer and multiplication of knowledge can be found in franchise networks. The franchisor and the franchisee are working on a long term contractual basis, providing services. The knowledge of the franchisor is multiplied, when the franchisee is providing the same service in different regions. The transfer of knowledge needed to provide these services is the major task in order to enable this service business model.

3. PROBLEMS ARISING IN KNOWLEDGE SERVICE NETWORKS Management in knowledge network is faced with several problems in its attempt to combine the distinctive competencies of participating network partners.

3.1 Knowledge generation Knowledge is a critical input that helps individuals and, on a higher level, organizations to solve problems and to be competitive. A knowledge service network intends to solve complex problems in order to provide unique services to the customers. The quality of the output depends much on the transparency of existing knowledge ownership within the service network. The optimal combination of individual knowledge and external information from the customer can only be achieved if every network partner (if possible every individual in the network, depending on the size of the network) reveals his capabilities. This revelation does not mean that knowledge has to be revealed completely. But parts of the existing knowledge should be codified explicitly in order to get a clear picture of the abilities, which an individual or a network partner has. The mere revelation is in this sense the necessary condition. The creation of transparency between partners is the condition for an effective combination, transfer and application of knowledge. The importance of the identification of knowledge resources and capabilities is the fundamental factor for effective partner selection. (Barney, 2002). Ignorance regarding the knowledge resource identification was identified as a main barrier for not transferring knowledge within the firm. On the one hand the knowledge holder did not know, that his knowledge is needed, and on the other hand, the knowledge seeker did not know, that somebody else had the particular knowledge, which he was looking for. Therefore it is an essential task for a network management to identify existing knowledge resources in the network. As a result all partners involved in the service production process must have an overview of the knowledge-base of the network. In order to achieve this task, network management has to overcome several barriers. One problem could be â&#x20AC;&#x17E;hiding of knowledgeâ&#x20AC;&#x153;, meaning that individuals or organizations do not reveal their capabilities, trying only to profit from the knowledge of other network partners. The other extreme is an overestimation of own capabilities. Organizations can declare to be capable of doing something or having some kind of knowledge resource in order to become a member of the network. If not all necessary (in order to fulfill the task) knowledge is existent within the network, the missing knowledge must be generated either by transferring knowledge from outside the network or by developing new knowledge internally. Generating knowledge requires from the network management to overcome some barriers. Typical transfer problems include motivational problems concerning the motivation of the knowledge owner (knowledge source) to make knowledge available. Additionally, the nature of the knowledge could cause problems, especially for the recipient, who must be able to learn, and to use the transferred knowledge.

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3.2 Knowledge transfer Successfull transfer of knowledge can multiply capabilities within the network, because the partner providing knowledge does not lose the transferred knowledge, while the recipient can build up a useful new capability for the network. Franchise networks rely on the simple transfer and replication of knowledge. On the other hand the transfer of specialist knowledge is demanding, expensive and time consuming, or sometimes impossible because of the tacitness of individual knowledge and organizational knowledge in particular. Additionally, the transfer of specialist individual or organizational knowledge could endanger the competiive advantage of organizations because the core competency can be imitated. As mentioned before, a fundamental condition of knowledge transfer is the knowledge holder´s (an individual) willingness and motivation to share his knowledge. Secondly, the individuals must be able to reveal their knowledge (knowledge holder) on the one hand and to integrate and adapt knowledge (knowledge seeker) on the other hand. If the transfer of knowledge is not suitable, the goals could be achieved through the collaboration between individual knowledge holders. Through combination of the distinct competencies of the network partners the network can provide superior service based on a unique combination of capabilities and resources within the network. Management of knowledge service network therefore has to find the right mix between combination and transfer of knowledge within the network.

3.3 Knowledge application The duty of the management in knowledge service networks is to ensure, that the transferred knowledge is applied and the collaboration is working smoothly. Problems concerning the application can result from the distrust among partners. The distrust syndrome describes the situation, when the knowledge recipient does not trust the qualities of the network partner, believing that his own capabilities are superior. Unfortunately, there is no objective method of measurement, which could provide arguments to convince the recipient about the superiority of the knowledge delivered. Serious problems could also arise from misunderstanding and problems in the collaboration between the network partners. Collective knowledge comes from individuals working together. Through collective working, shared knowledge and understanding, the network is capable of solving problems, which an individual alone would not be able to solve. Therefore network knowledge management has to support a smooth collaboration in order to develop collective knowledge.

3.4 Knowledge storage and embodiment The main task for network management during the last output phase of the management process is to reduce or eliminate the threat of losing core competencies. On the level of the network partners, every network partner tends to acquire as much knowledge as possible from the collective knowledge and from the partners capabilities, and to give back as little knowledge as possible from its own organization. In the working process during the collaboration it is possible that network partners imitate or copy the distinctive competencies of other partners. A successful imitation could lead to the loss of competitive advantage of the particular network partner. The knowledge network management has also to deal with the knowledge â&#x20AC;&#x17E;storageâ&#x20AC;&#x153; problems. The network partners can fluctuate over time; some of them can leave the network. Therefore it is the management task to guarantee that knowledge and capabilities developed during the collaboration can be continuously used, independent from the presence of the individual partner.

4. MANAGEMENT OF KNOWLEDGE NETWORKS Positive effects of knowledge transparency could be achieved by two different approaches: signaling and screening. Signaling means that each network partner is responsible for explicating his knowledge. Positive effects of signaling are low administrative costs. However, there is no guarantee that the method alone can lead to initiating the explication of all relevant and valuable knowledge. On the other hand screening means that the manager within the network has the duty and is responsible for constantly screening the knowledge base. In spite of the fact, that this approach is more costly, knowledge screening proved to be more efficient than knowledge signaling and is therefore the preferable solution. Only a screening process can provide the complete revelation of knowledge form the partners in the network.

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The principal task of the network management is to develop routines for processes, to build and hold actual database about the competencies and abilities existing within the network. Network management has to create an environment that motivates sharing of knowledge between the network partners. Knowledge seekers must be able to get in contact with knowledge holders. The exchange of knowledge could be fostered by technology, and by technological solutions, like e-mail, intranet and appropriate search and retrieval software, which are known as facilitators of knowledge sharing. These technological solutions can help people to get in touch with each other and to exchange information. It should be the task of the network management to develop motivating situations, so that knowledge holders are willing to transfer their knowledge to knowledge seekers within the network. The motivation of a network partner could be either extrinsic motivation or intrinsic motivation. Extrinsic motivation occurs when a partner is able to satisfy his needs indirectly, through monetary compensation. (Larsson, R., Henriksson, K., Sparks, J., 1998). On the other hand, intrinsic motivation results from an activity which is satisfying the provider by itself. Intrinsic motivation is valued for its own sake. Besides the intrinsic motivation at the level of network partners, a balanced use of incentives and sanctions is beneficial. It might be useful to implement an evaluation system in which all network partners can evaluate each other. A positive assessment by other partners can function as a basis for financial benefits. Continuously negative assessment can lead to exclusion from the network. Even if the motivation and coordination problems are solved, it is possible that the knowledge transfer process will fail. The reason for this can be the inability to adapt the knowledge received. The receiver of knowledge has to modify or adapt the transferred information. This process of adaption is a learning process. A learning-friendly culture should be established and maintained by the network management in order to support the transfer of knowledge within the network. If the transfer of knowledge is too difficult because of the tacitness of knowledge, because of learning problems, or because of motivational problems from source or recipient of knowledge, the rotation of personnel as another form of knowledge combination could be an effective way of applying the knowledge within the network. The rotation of personnel can be a very effective means of facilitating pesonal knowledge. By bringing together people with different experiences and abilities, network management can foster a common understanding as well as new innovative knowledge combinations in order to develop and sustain competitive advantage for the network as a whole. Experience indicates that individual knowledge holders have a tendency to resist towards using knowledge created elsewhere (i.e. by their network partners), since they do not trust the quality of the shared knowledge. In this context the main problem facing network management is to find solutions for the syndrome of distrust.Three possible approaches to solving this problem can be identified: influencing the culture in the network, providing the right infrastructure for knowledge sharing and introducing appropriate incentives at the network level. Trust towards the quality of the knowledge provided by the network partners is the basis of overcoming this type syndrome. Culture of trust is of highest importance to knowledge networks. Since distrust often comes from not knowing the knowledge provider, it is necessary for the network management to support to know each other better. That can be done by organizing informal meetings or by job-rotation.

CONCLUSION Knowledge is the key to developing and sustaining competitive advantage, especially in knowledge service networks. The task of knowledge network management is difficult. It is even more difficult, when the object of implementation is a network instead of an individual firm. It is documented that networks have substantial advantages compared to firms, especially in the provision of knowledge services: in uncertain environment it is a necessity nowadays to cooperate between firms in a network. Such a network combines the distinctive competencies of the network partners in order to produce an outstanding network core competency. Engaging in a network brings certain problems with it, especially the leakage of knowledge that can erode the network´s core competency. Such a threat can be faced by clearly identifying the phases of the service production process and developing solutions for the particular problems during each phase. Solutions include personal aspects, technological aspects as well as organizational and cultural aspects. Personal aspects are relevant to guarantee efficient transfer and application of knowledge on the individual level. Organizational and cultural aspects are relevant to enable smooth cooperation between network partners on an organizational as well as individual level. Technological aspects have an influence in systems of sharing and use of knowledge. The role of network´s management in these processes and in ensuring an effective knowledge network functioning is essential.

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LITERATURE 1. 2. 3. 4. 5. 6. 7.

Barney, J. (2001). Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view. Journal of Management, Vol. 27, No. 6, p. 643-650. Barney, J. (2002). Gaining and sustaining competitive advantage. 2nd Ed., Upper Saddle River. Borgatti, S.P.-Cross, R. (2003). A Relational View of Information Seeking and Learning in Social Networks. Management Science, Vol. 49, No. 4, April 2003, p. 432-445. Jarillo, J.C. (1998). On strategic networks. Strategic Management Journal, Vol. 9, p. 31-41 Larsson, R. - Bengtsson, L.- Henriksson, K. - Sparks, J. (1998). The Inter- organizational Learning Dilemma: Collective Knowledge Development in Strategic Alliances. In: Organization Science, Vol. 9, No. 3, May-June 1998, p. 285-305. Lesáková, D. (2010). Rozhodovanie manažérov v procesoch internacionalizácie malých a stredných podnikov. Journal of Economics, Vol. 58, No. 10, p. 1026-1038. Polanyi, M. (2009). The tacit knowledge. The Chicago University Press, 2009, USA.

DETAILS ABOUT AUTHORS: DAGMAR LESAKOVA PROFESSOR UNIVERSITY OF ECONOMICS BRATISLAVA, DEPARTMENT OF MARKETING BRATISLAVA, SLOVAK REPUBLIK dagmar.lesakova@euba.sk

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SYSTEMS CONCEPT OF EXPERIENCE IN TOURISM ROMANA LEKIĆ MARTINA MAJIĆ NATAŠA MANCE

ABSTRACT

Customers and tourists searching fulfillment of psychological and emotional desires nowadays have an enormous freedom of choice. As a result, it is difficult to catch the eye of the consumer. New methods of communication are needed to attract and create long-lasting relations with individuals and target groups. In a world where people are increasingly driven by self-expression, rather than survival-related values, we need a novel way of engineering. We need Imagineering, engineering for imagination, to realize the challenges of the experience economy. Imagineering is about managing relations with the customer, based on an integral experiential concept that affects ‘fans’ in the heart; it is about experiences at all contact moments with the guest; it is about using experiences that can permanently reach, touch, affect, and fascinate the guest. Imagineering has three elements: story, vision, and guidance. Imagineering combines story and vision, infusing them with guidance that gives people what they need to make the story a reality - motivation and rationale, role models, compelling drama, realistic situations, appropriate value struggles, all necessary instructions and precautions, to help their beloved product of imagination blossom in the world around it. In this paper Imagineering will be presented as a model for a powerful solution for tourist destinations to create long-lasting emotional bonds with individual guests. The objective of this paper is to explain how to create an experience-based systems concept to attract new tourists and to create memorable experiences with consumers. KEYWORDS: communication, experience economy, Imagineering, integral experiential concept, tourist destination.

1. FROM MASS TOURISM, TO RESPONSIBLE AND SUSTAINABLE TOURISM The Internet expansion damaged the place and credibility status of the narrative in tourism, the division to true and false, to reality and fiction. This change is reflected in the hyperconsumer society and is prompted by taste diversification, aesthetics and the way of life. The development of tourism began in the 19th century and its leisure philosophy followed the technological development by becoming the market for more leisure. The hyperconsuming society expands in the name of happiness, which makes tourism a mass phenomenon. Although there is more production and more consumption, Lipovetsky (2008) claims that we are sinking deeper into the crisis of the materialistic culture of happiness. Environment-related fears grow, there are calls for a different type of economic development, new religious movements and new spiritual aspirations. Tourism responds to the race for production growth and material pleasures by creating new interest centres through new types of tourism and special-interest tourism. These new prospects are increasingly directed towards responsible consumption as opposed to destructive consumption of mass tourism, so that they encourage life and become the instrument of its subjective adoption. Responsible sustainable toursim is a reaction to an insane race for production and material, oriented gains, towards pleasures and immediate interests, indifferent to long-term consequences such as destructive environmental pollution, degradation of biodiversity and global warming. In responsible tourism, the tourist is marked as a subject deserving of information and education, for he is given the task of utmost importance: saving the planet by changing everyday habits. The responsibility principle is a group category and concerns the makers of tourist experience and the consumers of such events. That is a response to the macroeconomic level of tourist industry, which is in the service of big business: touroperators as travel organizers, big hotel chains and transport companies. They exert pressure and excercise their power through hypermediation and digital reality. Various actions and control mechanisms affect individual behaviour through organisation models, schemes and plans. That is a method of direct behaviour configuration: learning, modification, education, guidance and control of individuals, along with directing the flow of emotions, emotional investment and organisation of events which appeal to senses. Tourist industry, at the macroeconomic level, identifies with the macropolitical level, and they act in a united manner through social practice and social order in which such practices exist. More specifically, at the level of tourist destination, that means manipulation by engaging masses, by synchronizing tastes, moving individuals and provoking emotions. This

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new individualisation is particularly apparent in tourism, as a kind of ‘second life’ and an exhibiton. We could say that, in practice, taht is the narrative method of profiling the consumer-tourist with entertainment and tourist attraction frequently being abused and hidden under the mask of heritage in tourism. The principle of entertainment selection and attraction in tourism often replaces the principle of authenticity, excellence and professionality. Irrespective of the econmic significance of creative industries, creativity is today recognized as a tool which makes it possible to make a creative experience in order to try to influence human behaviour. Managing experiences and moods of tourists within a tourist destinaton is of extreme importance. With his baggage, the guest brings expectations, and takes away memories. Disregarding its aesthetic values, creativity based on heritage today includes the creation of different attitudes and values and establishes emotional ties to a product, which is conducive to responsible tourism. By acceeding to the EU, Croatia enters directly into the process of cultural globalisation. Expectations include the disappearance of borders between the artistic and the commercial, between the unique and the industrial, the authentic and the imported. According to Castells and Himanen (2002), globalisation brings along the establishment of new cultural borders which are conditioned by the availability of new technologies, differences between urban pop-cultures and the multidimensional transformation into information societies. Many contemporary views on the future of technology and business put the individual and his experience first. The rising affluence and growing transience of people, places, things that created the material basis for today’s global, informational and networked society, it is argued, has led to an even greater change that occurs deep inside people’s minds that is slowly affecting society and the economy at large: The existential view of life is shifting from a largely externally oriented view towards a more and more internally oriented view. It no longer affects only the outside world, but also our inner selves, our experience that is driving our decisions and therefore shaping our consumption patterns. The economy transforms into an experience economy in order to support more and more people in their need of psychological selfdetermination and wellbeing. In a creative economy there is a growing need for high-level professionals who can create and innovate value from the experience position. Nowadays, people are driven more by values of self-expression than by those of rudimentary survival. They have a deep need to make sense of their lives in ways that are unique and personal. One of the most distinct ways in which this is manifested, is the new individual’s consumption pattern - by means of their choices they create their own identity. In our society, consumption is an absolute necessity, not a luxury. Experience management is seen as the way to remain competitive in markets where global competition and the Internet technology have turned products and services into commodities, bought and sold on price alone. There is also a growing research interest in understanding the individual consumer’s experience, drawing on behavioral, sociological and ethnographical approaches. Both the managerial and consumer perspectives see the goal of extraordinary experiences as personal growth and fulfillment. It is by providing a stage or space for this to happen that a company can attract and retain its customers. The growing relation between “market share” and “heart share” forces companies to formulate a “split vision”: simultaneously focusing on information and imagination, on reason and emotion. The addition of emotional possibilities expands the scope for competition.

2. EXPERIENCE MANAGEMENT – EXPERIENCE AS A BUSINESS OPPORTUNITY Pine and Gilmore (1999) say that sustainable competitive advantage can only be gained by giving the customer a unique and memorable experience. This is done through treating ‘work as theatre and every business a stage’. As this paper will show, this draws on Schechner’s (1988) Performance Theory and the service-as-drama metaphor of Grove, Fisk and Bitner (1993). Their approach has led to a growing number of management books on how to make the customer experience the centre of the organization’s strategic planning, marketing and operations (Shaw, 2005; Smith and Wheeler, 2002). The growth of Experiential Marketing is also significant for our sectors through the increased use of corporate hospitality and events, sports and arts sponsorship to associate brands with memorable experiences involving the senses and the emotions. Some writers (Nijs, 2003; Prahalad and Ramaswamy, 2004) has criticized the emphasis on staging performances as superficial and product-centered and call for a more strategic approach based on shared values, allowing the customer to create their own experiences in a search for personal growth. In this way the management strand is converging with the consumer strand. Experience can truly constitute a business opportunity. Any well-designed, managed, organized, marketed and finally successfully sold experience is a sound business opportunity. Pine and Gilmore (1999) stress the importance of the consumer in the very creation of the experience. Whenever a company intentionally involves and engages consumers, experience occurs. Moreover, this same experience connects all involved consumers, but each can experience it in a

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different way. The reason for that is that each consumer, each individual, has his or her own interaction with that experience, which depends on his/her emotions, interpretations, relationships, and the like.

3. TOURIST DESTINATION – THE SPACE OF CREATING EXPERIENCES Tourist destination has to make it possible to tourists to be more than observers, to become the protagonists of their travel, by establishing social contact with the local population. Since the tourist conveys his spirit and culture, such exchange enhances mutual understanding. A closeness that develops in such a way can be called ‘existential tourism’ (Dimanche and Ferry, 2003: 426-429). Travel (and tourism in general) touch all and leave noone indifferent, because everyone deals with emotion, memories, intimacy. Every individual will carry with himself the emotions experienced while travelling, which enrich and determine him. When selecting a destination and visiting a place, tourists seek intimacy. They want to see and know everything and feel a true bond. This wish makes it possible for a tourist to feel less foreign, and even feel a part of a tourist destination. If centerstage is taken by people, societies and culture, they cannot be discussed without considering their very essence. The human ‘territory’ is where tourism takes place. People and their environment make up a tourist destination. One does not exist without the other (Dimanche and Ferry, 2003: 426-429). According to Iso-Ahola (1980), personal and interpersonal motivation prevail in case of travel. He thinks that meeting new people in new places is an important part of tourist experience. Crompton (1979) adds that the ‘escape from everyday surroundings’ is a relevant tourist motivation. This means that tourists seek something different and that they are prepared to accept dangers arising from it: meet new people, change own attitudes, change the self-image. Tourism is really capable of being a privileged experience in which tourists not only express their personality, but can also change it and enrich it in relations with the local population they meet in the course of their travel (Dimanche and Samdahl, 1994). A tourist destination, as can be seen in the image (Figure 1), thus becomes an open system through the interaction with the environment and collective behaviour is a sum of individual behaviours. In such tourist destination interaction and evolution move in a non-linear manner and small change can result in a cascading effect. Figure 1: A Holistic Presentation of a Tourist Destination

Source: Elba Tourism Network, R. Baggio, 2010

If we observe a tourist destination as a stage, it is necessary to emphasize a dynamic component of tourism, especially the interaction that occurs when the tourist meets the destination in which there are people who live and work there. Tourism is, actually, a group of relations and phenomena and numerous factors impact upon the formation, behavior and consumption of participants in the tourism market. The destination is the point of convergence. Not only tourists, but all who meet them and provide for their needs and own needs, meet them culturally and establish

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social relations whith tourists, are the subjects of tourism. These can be individuals, institutions, organizations, etc. The space in which the experience is consumed is the Space of experience (Lorentzen and coll., 2007). Within that space, in the network of service providers and guests, there are resources, along with products and services based on them, and enriched by experience (Bieger and Wittmer, 2006). Experiences are mostly limited to particular parts of space and destination (Zouni and Kouremenos, 2008). However, within the framework of management of values for the consumer, i.e. management of moods, in the densely knit network of attractions, products and events (Lange and coll., 2008), events reach accross the entire destination. In such a way, it is possible, as defined by Pine and Gilmore (1999), to create a continuous positive experience charged with energy, which, due to its features, surpassed the limits of the existing geographical space. Atmosphere can be defined as one of the determining elements. The quality of experience should not be measured exclusively at attraction points, but in the entire space that tourists circulate in during their stay at the destination. This space can be marked as destination miles. The true challenge is to convert the space resource into the experience resource (Lange, Herntrei and Pechlaner, 2008). Thus, the experience chain has a special effect. It indicates that the experience does not need to consist of an uninterrupted chain of emotional experiences with no negative impressions that could interrupt the chain. Based on these continuous emotional moments, the mental system will produce the so called state of the mind (Groetsch, 2001). A tourist destination will, in the process of creating the tourism environment, use all resources it has at its disposal with the purpose of shaping the environment, i.e., shaping its offer. Furthermore, after the environment has been physically shaped, it will work on creating an impression, i.e., creating prerequisites for positive emotional reaction to its tourist environment. This presuposes the enrichment of offer with elements that directly affect the emotional structure of the tourist and encourage emotions that will surely lead to satisfaction. The destination that produces the emotional structure, or the appropriate tourist environment, will enable the visiting and staying tourist to feel and express his/her own satisfaction. According to Crompton (1979), a tourist destination serves as a medium which satisfies the social and psychological needs of the tourist. The elements of the tourist space, most of all the cultural landscape of the destination, are appropriate for the improvement or maintenance of the quality of life of an individual, because of focusing on the consumption of the tourist destination. The integral experience is the element of the landscape visited by tourists as the tourist environment (Michalko and Ratz, 2006), and can bring about changes in awareness that affect the quality of life. In the context of tourist destination, emotions provide to the tourist the navigation through the tourist destination, the dynamic experience of its offer, and finally serve as criteria for its evaluation. If the destination environment proactively affects the tourist and his emotional consumption experience during his stay, the tourist’s satisfaction is ensured. A positive emotional reaction, together with a sufficient intellectual stimulus, can result in a total experience and generate a new visit and profit.

4. ‘STORYTELLING’ AND THE ‘SCHECHEREZADE STRATEGY’ IN THE IMPLEMENTATION OF HERITAGE INTO THE TOURIST PRODUCT Twitchell James (2005), the author of the Branded nation said that ‘one of the most important discoveries of modern times is the fact that human beings relate to products through stories. That is why our everyday life is impregnated by stories’. In order to sell a tourist destination and enhance its competitiveness at the global market, in the public space satiated by information, and for the tourist offer to reach the target group, almost every piece of information is presented as a story. The image of a tourist destination cannot be left to chance, it becomes the object of narrative construction. Each personal memory of a tourist, each feature of the character, each experience, becomes a particle of a coherent narrative which is reflected in the brand of a tourist destination. In that context, the ‘invention of tradition’ (Hobsbawm, 1983), heritage in tourism, becomes a means to an end, a strategy for the collective unconscious, in which, like in a mirror, fragmented narrative elements get recomposed through the offer of a tourist destination. In order for the heritage to acquire the desired status of a brand, it is not sufficient any more to pour commercials over passive viewers. One has to provide a unique experience. Commercials are watched, brands are lived. Realistically, heritage often becomes abused, as a quest for the romanesque, in which the reality show becomes a stage. On this stage, heritage gets tagged as a tourist attraction and identified as desirable, thus determining its content, making it uniform, giving it a role, aspect and ideology. The tourist is turned into a mirror-man who only reflects things, without living them, thus becoming alienated and lonely. That is how a tourist destination becomes a stylist, a directora and the narrator for itself. Through a superficial implementation of the system of tourist attractions, in practise, we reach a paradox in which a tourist destination invents itself, by glorifying its own competitive values (struggle, strength, success). The aura of the

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heritage it is reflected through gives it an aliby to act honourably. Here, we encounter the fundamental problem of the man of the consumer society: he uses things, beings, phenomena, everything around himself, because the need to have, and not to be, has been imposed upon him. Michel Faucault points to the fact that in neoliberalism man is not perceived as a consumer, but as a producer, and that the aspiration is to replace the homo economicus – the ‘partner in exchange’ be replaced by the homo economicus – the self-entrepreneur. By putting the heritage concept into the context of a tourist destination, this means more than just ‘having a story’. Through the strategy of destination management and marketing, from the very start, special plots get built and identity is given - a mirror in which various groups of tourists will recognise themselves, in search of added value and emotional experience. In such context, heritage gets the function of division of narrative, through the system of presentation of tourist attractions. Techniques such animation increasingly uses, for the deconstruction of myth, for example, are found in the sphere of pedagogical and therapeutical work. It is a fact which does not justify, but provides a broader picture, that for a tourist destination the same rule applies as for a successful company. It has become increasingly dependent on how tourists, sponsors, public opinion, investors and shareholders perceive it. The decrease in the number of overnights is just as dangerous as the fall on the stock exchange. The rating of a tourist destination is the foundation for many other climbs at the market of political values in Croatia, because the success of a tourist destination is increasingly identified with the success of a tourist board, whose president is the Lord Mayor or the County Prefect. Cosmetics thus become more important than coherence, and beauty becomes synonimous of flexibility and adaptability, establishing the system of seduction signs, with the power of visualisation of information playing the central role in the cognitive processes of recognititon. We witness heritage being used as a story, often so that it is embellished and wrapped up to be presented to tourists. For that purpose, mechanisms of ‘storytelling’ (Salmon, 2011a) and the ‘Schecherezade strategy’ (Salmon, 2011b) are used. They integrate four functions: 1. Represent the heritage through a story which should construct the narrative identity of a destination (storyline), 2. Place the story in the time of the tourist season, manage the rhythm and narrative tension in the course of the entire season (timing), 3. Frame the message of the destination (framing), i.e. indicate tourist attractions as the main feature. 4. Create a network on the Internet and in the field, a hybrid and contagious community which will attract the attention and structure the desirable market niche of tourist (networking). The story provides focus and awareness of the relationship between the place and the theme. The experience of ‘the story’ can become the focal point in the development of a place. The ‘message’ is often placed in the forefront of the intended communication. Attractions have to be based on provoking a ‘change in view and attitude’ in a visitor. The ‘story’ is far more than a mere access to information. It enables visitors to identify with a place and the story which is offered exclusively in that place. The story has its purpose or objective and is not a purpose unto itself. An attraction will be successful only if it warns of something unusual or out of the ordinary. There is a strong need for that, and if it fails to achieve it, visitors can shape their own interpretation, invent their own stories based on their ideas, expectations and concepts. History does not derive from the past in a spontaneous manner, so that we can say that stories are a key instrument for the development of interpretative strategies. A fruitful cooperation between the ‘guardians of the past’ and tourist operators, on producing a cultural-tourist product can result in a powerful concept of communicating with visitors. The use of interpretation techniques at historical locations is crucial to providing a better understanding of particular historical remains to the visitor. Interpretation determines the rate of satisfaction of the visitor. It is important to stress that themes and stories do not limit further development. They need to be observed as the instrument of coherence in the tourist or recreational offer. Apart from that, it is important to have an integrated offer of facilities and experiences for visitors, which will make the rare and fragile remains of the collective past physically and intelectually accessible. Such discourse of tourism, as a cultural process, takes into account the subjective interpretation of the significance of individual tourists and the active construction of the experience in which the tourist takes part as an interactive factor and an active participant (Ateljević and Doorne, 2005; McIntosh and Prentice, 1999; Selby, 2004). Today’s tourist wishes to get familiar with the particularities of a tourist destination he or she is visiting. The intangible heritage is a part of that, and the tourist wants to experience it, but does not wish to be presented with the artificially created identity and product, with the ‘ideally depicted population and destination’ (Jelinčić, 2006:165). He wants a direct ‘contact with the local population’ (Kušen, 2002:13) and the current, actual situation at the destination. The insistence on certain selective phenomena imposed by others than the local community is often based on the particular historical moment which gets petrified and presented devoid of new meanings. It usually represents a burden for the tourist and for the community itself, which then becomes an object of presentation. The opposite of this is the feature of intangible heritage manifested in the changeable character of the identity of the community and the destination, which

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should be taken into account when shaping the tourist destination. Due to many factors, as has already been said, like globalisation, and IT-introduction as a part of it, changes in the earning patterns and view of the world and the society, the change of taste and aesthetics related to customs and tradition, the influence of neighbouring places, regions etc., the community, and especially its intangible heritage, are prone to change. ‘Identity is constructed and incessantly changed depending on social and cultural dynamics’ (Govers and Go, 2004:173). That is why ‘careful planning is called for in order to provide an experience to tourists, an authentic experience (Kušen, 2002:13), so that they absorb the true identity of a place’ (Govers and Go, 2004:173). That is why it happens that with the change in the structure of the population of an area, especially if the new inhabitants do not feel the existing identity as their own, the identity of a tourist destination changes, because ‘everything that arrived into a culture of a nation, that is left and preserved on the territory where it lives, belongs to the culture of that nation’ (Jelinčić, 2006:167).

5. CONSUMER EXPERIENCE VS. TRANSFORMATIONAL EXPERIENCE On the consumer side, a focus on experiences has appeared in response to the limitations of seeing consumer behaviour purely in terms of cognitive information processing. As Holbrook and Hirschmann (1982) said, experiences are subjective, emotional states laden with symbolic meaning. Consumption is hedonic, not utilitarian, particularly in leisure situations. A distinction is often made between everyday and extraordinary experiences (Abrahams, 1986). Many of the products in tourism and leisure involve skilled consumption (Scitovsky, 1976), physical or intellectual challenge and the sharing of experience with a community of like-minded people (Beard and Ragheb, 1983). The desired effect is the state of absorption in the activity (Csikszentmihalyi, 1976) called Energy Flow and motivation is a complex mixture of escapism, socialization and self-actualization (Ryan, 1997). Where the managerial and consumer perspectives converge is in their view of consumer satisfaction as something that emerges over the course of the whole experience, rather than as a response to individual attributes of the service. This requires new forms of research such as Experience Mapping (Schmitt, 2003) or theatrical scripting (Harris et al., 2003) of the critical moments of truth (Carlzon, 1987). Ethnographic and narrative research (e.g. Arnould and Price, 1993) are more likely to provide insights than quantitative methods. As the ecology in biology is complicated and multidimensional, so is the ecology of producing human experiences and transformations. We need to understand the different dimensions and parameters to manage and produce successful transformational experiences. To do this we need a clear conceptualization and frameworks of both the temporal and spatial context of the transformational offerings and processes. The transformative goals must consist of emotional, cognitive and behavioral transformations towards a sustainable lifestyle and sustainable values. This transformational experience has to be based on tourist participation and involvement in the experience product development process according to the by Boswijk et al (2007) suggested co-creation and self-direction development of experience production.

6. EXPERIENCE PYRAMID - IMPLEMENTATION OF TRANSFORMATIONAL EXPERIENCE PRODUCTION (TEP) Tourism and leisure industry in general, were faced with an emotion demand at the time of their initiation. The specific set of instruments that is applied in the world of tourism to respond to the emotion demand is referred to as “imagineering” and “engineering” for “imagination”. Imagineering is the art of management to combine soul and professionalism into “inspiring” business operations. Similar to marketing, it is a set of instruments that can be used to achieve commercial and social objectives. Contrary to marketing, it is not the customer/guest who constitutes the starting and end point, but a “creative thought” or a “vision statement” (the soul) of the company or organization.

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Figure 2: Integrating Maslow’s human needs into Experience Production and Experience Pyramid

Source: Modified after Maslow (1954) and Tarssanen and Kylänen (2007)

Instead of using Maslow’s hierarchy of needs for understanding guest Experiences Gelter (2007, 2008) proposed using his concept in a production perspective. In taking account all the levels of the “Pyramid of Needs”, the Experience Producer approaches a “Total Experience” concept when incorporating not only human need dimensions but also human dream dimensions (as proposed by Jensen, 1999). Using this theoretical concept for Experience production, the producer can easily construct a check-list for each level at each dramaturgical stage of the production, a kind of TEM protocol for Experience Production. This TEM-model also gives a base for the diagnosis of aspirants for personal transformation offerings which according to this model are based both on basic needs such as security, thrust, esteem etc. as well on personal dreams, goals of learning and changing. Thus when designing a transformational offering, this TEM concept can be useful. The next model is based on synthesis of various previous writings concerning the topic (see Tarssanen and Kylänen, 2007). The Pyramid approach suggests that the product should include six elements to be experiential: individuality, authenticity, story, multi-sensory perception, contrast and interaction. Through these elements customer’s experience proceeds from motivational level to physical, intellectual and emotional, even spiritual levels. This model represents an ideal type – the ‘perfect product’ in which every element of experience is reflected on the motivational, mental and physical levels. It is an explicit tool for finding critical points, qualities or deficiencies in the product. With the model service provider can analyze one’s product and discover ways to develop it (Tarssanen and Kylänen, 2007). Experience Pyramid has been successfully applied when developing various tourist experiences in Finnish Lapland and in Norway. It is currently used as a main framework in LCEEI’s product development services.

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CONCLUSION This paper attempts at making a further effort that will assist us in celebrating the project of self-possession, self-fashioning, self-expression; a project that sees all life as a constant achievement and all agreed-upon practices as techniques for simultaneously amplifying and questioning what it is we have agreed to in our own little groups. Thus “experience” and its associated vocabulary are elevated to the realm of the new holy word and not only in tourism. In this social dispensation, individuals may find a new redemption -- or at least a validation -- in the world of the here and now, even if it is no longer attached to a divinely sanctioned plan. Experience contains ordinary acts, from the casual to the most eventful occurrences. It embodies both meanings and feelings, the flowering of individual response that continually gravitates toward typicality, so that afterward we can find words to talk about what happened. The project of all of the humanistic disciplines has been to discriminate between the real and the unreal, the genuine and the fake, the realistic and the sentimental or fantastic, the verifiable truth (all those things we call “the facts”) and illusions, the misleading, the mystified, and the mythical. Humanists seek insight into life as a means of living more fully themselves, of experiencing it more knowledgeably and more deeply, and thus being able to impart these techniques and this accrued knowledge and wisdom to others. In this paper the personal experiences cape is investigated in such a way that different guest experience dimensions are measured by different research approaches such as “Quality of Experience”, phenomenological, psychometrical and physiometrical approaches. Shown model measures the outcome of the Experience Production and the producer perspective of the Experience Economy with all the different dimensions of Experience Production Everyone has experiences that are both unique and typical, but sustainable tourism seems to have a way of organizing these doings so that they may be shared. Implementation of Transformational Experience Production (TEP) into tourism can open for new innovative business concept within the transformational economy and innovative development of sustainable tourism. This proposed theoretical framework of TEP needs, however, to be analyzed in detail for practical implementations, further theoretical verification and finally verified by empirical data. Hopefully, this paper can stimulate such development of the Experience Economy.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

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Abrahams, R.D. (1986) Ordinary and Extraordinary Experiences. In: The Anthropology of Experience ed Turner V. Chicago, University of Illinois Press pp 45-72 Arnould, E.J. and Price, L.L (1993) River Magic: Extraordinary Experience and the Extended Service Encounter. Journal of Consumer Research, 20 (June) 24-35 Ateljevic, I., and Doorne, S. (2005) Dialectics of Authentification: Performing ‘Exotic Otherness’ in a Backpacker Enclave of Dali, China. Tourism and Cultural Change 3 (1) 1-27 Baggio, R. (2010) Tourism and quality of life, Zbornik radova međunarodne konferencije Encuentros, 27.-28.9.2010. Portorož Beard, J. and M. Ragheb. (1983) Measuring Leisure Motivation. Journal of Leisure Research. Vol. 15, No. 3. pp Bieger, T. and Wittmer, A. (2006) Integrierte strategische Planung von Attraktionspunkten. In: Pechlaner H., Bieger T. i Weiermair K. (eds.), Attraktions-Management. Fuehrung und Steuerung von Attraktionspunkten, Wien, Linde Boswijk, A., Thijssen, T. and Peelen, E. (2007) The Experience Economy – a new perspective. Amsterdam: Pearson Prentice Hall Carlzon, J (1987) Moments of Truth. HarperBusiness; Reprint edition Castells, M. and Himanen, P. (2002) The Information Societ y and the Welfare State: The Finnish Model. Oxford: Oxford University Press Crompton, J.L. (1979). Motivation for Pleasure Vacation. Annals of Tourism Research, 6(4), 409-424 Csikszentmihalyi, M. (1976) Flow: the classic work on how to achieve happiness. Rider paperbacks Dimanche, F. and Ferry, M. (2003) Shaping tourism destinations: Back to the basics. Tourism Dimanche, F. and Samdahl, D. (1994) Leisure as Symbolic Consumption: A Conceptualization and Prospectus for Future Research. Leisure Sciences, 16 Gelter, H. (2007) A story of interpretative guiding and experience production. pp. 26-59. In: IGU – Internordic Guide Education Project Report. Intereg EU Regional development Project. Lappia, Tornio Finland: Vocational College. Gelter, H. (2008) Interpretation and Total Experience Management (TEM) as innovative methods for sustainable nature based tourism – A benchmarking Analysis. Conference paper for the 17th Nordic Symposium in Tourism and Hospitality Research, Lillehammer, 25-27 September 2008 Govers, R., and Go, F. M. (2004) Stvoreni, zamišljeni i doživljeni identiteti: tri problema u modelu stvaranja imidža turističke destinacije. Turizam: 52 (2), 17 Groetsch, K. (2001) Psychologische Aspekte von Erlebniswelten. U: H.H. Hinterhuber, H. Pechlaner and K. Matzler (eds.) IndustrieErlebnisWelten – Vom Stiort zur Destination (pp. 69-85). Berlin: Erich Schmidt Verlag Grove, S.J. Fisk, R.P., Bitner, M.J. (1992) Dramatizing the service experience: a managerial approach in Advances in Services Marketing and Management (Swartz, T. A. Brown, S. and Bowen, D. eds) Greenwich, CT. JAI Press Inc. [Reprinted in: Gabott, M and Hogg, G. (1997) Contemporary Services Marketing: a reader. Dryden Press] Harris, R., Harris, K. and Baron, S. (2003) Theatrical service experiences, International Journal of Service Industry Management, Vol. 14, No. 2: pp. 184-19 Hirschman, E. and Holbrook, M. (1982) Hedonic consumption: emerging concepts, methods and propositions, Journal of Marketing, vol. 46, no. 3, pp. 92-101 Hobsbawm, E. and Ranger T. (1983) (ur.). The Invention of tradition, Cambridge:Cambridge University Press Iso-Ahola, S. (1980) The social psychology of leisure and recreation, Dubuque, IA:W.C. Brown Jelinčić, D. A. (2006) Turizam vs. identitet: globalizacija i tradicija. Etnološka istraživanja, 11, 161-207. Jensen, R. (1999). The Dream Society. How the coming shift from Information to imagination will transform your business. New York: McGraw-Hill Kušen, E. (2002) Turistička atrakcijska osnova, Znanstvena edicija Instituta za turizam, Zagreb

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26. Lange, S. Herntrei, M. and Pechlaner, H. (2008) From mobility space toward experience space. Increasing the experience value in tourism destinations. Paper presented at the Consumer Behavior in Tourism Symposium 2008. Bruneck, 13.12.2008. Italy 27. Lipovetsky, G. (2008) Paradoksalna sreća – Ogled o hiperpotrošačkom društvu, Izdanja Antibarbarus, Zagreb 28. Lorentzen, A., Hansen, C.J., Lassen, C.I. (2007) Small cities in the experience economy; an evolutionary approach /International conference: Regions in Focus? In: Conference abstract volume (p. 39) April 2nd -5th, 2007. University of Lisbon, Portugal. Seaford, UK: Regional Studies Association 29. McIntosh, A. J. and Prentice, C. (1999) Affirming authenticity: Consuming cultural heritage. Annals of Tourism Research, 26, 589-612 30. Michalko, G. and Ratz, T. (2006) The Role of the Tourist Milieu in the Social Construction of the Tourist Experience. In XVI Congress of Sociology: The Quality of Social Existence in a Globalising World, CD-ROM. Madrid: International Sociological Association 31. Nijs, D (2003) Imagineering: Engineering for Imagination in the Emotion Economy. In: Creating a Fascinating World, Breda, The Netherlands, NHTV 32. Pine, B.J. and Gilmore, J.H. (1999) The experience economy: work is theatre and every business is a stage. Boston Mass: HBS Press 33. Prahalad, C.K. and Ramaswamy, V. (2004) The Future of Competition: Co-creating unique value with customers. Boston, Harvard Business School Press 34. Ryan, C (Ed.) (1997, 2002) The Tourist Experience, Thomson 35. Salmon, C. (2011a) Storytelling: ili pričam ti priču, Clio, Beograd 36. Salmon, C. (2011b) Strategija Šeherezade, Clio, Beograd 37. Schechner, R. (1988) Performance Theory. Routledge. 38. Schmitt, B (1999) Experiential Marketing: How to Get Customers to sense, feel, think, act and relate to your company and brands. Free Press 39. Scitovsky, T. (1976) The joyless economy, Oxford University Press, Oxford 40. Selby, M. (2004) Understanding Urban Tourism: Image, Culture and Experience. I.B. Tauris: London 41. Shaw, C (2005) Revolutionize Your Customer Experience Basingstoke, Palgrave Macmillan 42. Smith, S. and Wheeler, J. (2002) Managing the Customer Experience: turning customers into advocates. Harlow, FT Prentice Hall 43. Tarssanen and Kylänen (2007) A Theoretical. Model for Producing Experiences: A Touristic Perspective, Lapland University, http://www.ulapland. fi/contentparser.asp?deptid=8073 44. Twitchell, J.B. (2005) Branded Nation: The Marketing of Megachurch, College Inc., and Museumworld, Simon & Schuster DETAILS ABOUT AUTHORS: ROMANA LEKIĆ, PHD HEAD OF TOURISM DEPARTMENT romana.lekic@vern.hr MARTINA MAJIĆ, PROF. CHAIR OF TOURISM STUDIES martina.majic@vern.hr NATAŠA MANCE, M.A. LECTURER - TOURISM STUDIES natasamance@hotmail.com FOR ALL AUTHORS: VERN’ UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA

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GENDER AS A SIGNIFICANT BUT PROHIBITED RISK FACTOR IN LIFE INSURANCE JANA ŠPIRKOVÁ MÁRIA SPIŠIAKOVÁ

ABSTRACT

There are significant differences between females and males in their accident risk and mortality risk. The costs of providing insurance products that cover these risks, including motor insurance, private medical insurance, life insurance and pension annuities, differ between men and women. Gender is used in addition to, and in combination with other risk factors and, for some products, gender is, after age, the second most important risk factor. This paper brings analysis of the ban of the use of gender as of a risk factor in life insurance, with special stress on premiums for life insurance and pension annuities, according to the requirements of the European Court of Justice. Premiums and annuities are modeled by life tables for both genders and unisex in the conditions of the Slovak Republic. KEYWORDS: Risk Factor, Gender, Entry Age, Interest Rate, Life Expectancy.

1. INTRODUCTION According to the Official Journal of the European Union (EU) of 13 January 2012, Article 5 of Council Directive 2004/113/ EC of 13 December 2004 guarantees equal treatment between men and women in the access to and supply of goods and services, regulates the use of actuarial factors related to sex in the provision of insurance and other related financial services. It contains an exemption allowing member states to permit the use of gender in the calculation of premiums and benefits. Subsequently, Council Directive 2007/43/EC, Article 5(1) provides that for new contracts concluded after 21 December 2007, the use of sex as an actuarial factor in the calculation of premiums and benefits must not result in differences in individuals premiums and benefits (the unisex rule). Article 5(2) provides for derogation from this rule by allowing member states of the EU to maintain proportionate differences in individual premiums and benefits, where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data. However, on 1 March 2011, the Court of Justice of the European Union declared Article 5(2) invalid with effect from 21 December 2012. ECJ declared Article 5(2) incompatible with Articles 21 (non-discrimination) and 23 (Equality between men and women) of the Charter of Fundamental Rights of the European Union. National governments of member states will be obliged to change their laws accordingly by this date. For more information see . Insurers will no longer be able to use a person’s sex as a factor in calculating the cost of their insurance. This paper is organized as follows: Section 2 explains the basic actuarial formulas for evaluation of net annual premiums of the basic life insurance products. Section 3 brings graphical illustrations of a dependence of net annual premiums for term life and endowment insurance according to entry age regarding gender and unisex. Moreover, this section illustrates the size of monthly annuities regarding gender and age of retirement. At the end, we give some remarks and schemes of our next investigation.

2. PRELIMINARIES Life insurance and annuities will be affected by the ruling because they are based on life expectancy, which currently takes gender into account. Women live longer than men – their life expectancy is higher, compared with men – which means that women pay higher premiums than men because the pension fund will have to last longer whereas men’s annuities generally cover a shorter time period. Women generally pay less for life insurance – in the case of death, but more for insurance in the event of survival. Women generally pay more than men for income protection insurance, because the rates of disability are higher for women than for men. We recall the main actuarial formulas for deeper understanding of our work. It can be written as follows. Below, you can find the mentioned formulas, expressed by commutation functions, for example in (Gerber, 1997; Sekerová, et al. 2007; Špirková, et al. 2012).

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At the beginning we recall the basic notations which are used on an evaluation of mentioned products. They are: i - a technical interest rate; q - an accumulated factor, q = 1 + i; w - a discounting factor, v = 1 / q; m - a number of paid, resp. paid out annuities within one year; y - a start saving age; x - a retirement age; n - a number of years of saving on personal pension account, n = y = x; A - an yearly annuity during the period of saving; l - a number of living at age x; d - a number of deaths at age x; ω - a maximum age to which a person can live to see (regarding used life tables is here ω = 100; p - a programed withdrawal from an accumulated value at the beginning of retirement time (in percent); z - a quotient of the m-thly paid out pensions within r years (in percent); r - a number of years of payment of a quotient of the certain pensions.

2.1. Insurance for the case of survivor Insurance for the case of survivor (endowment insurance) is a policy under which its face value is payable only if the insured survives to the end of the stated endowment period; no benefit is paid if the insured dies during the endowment period. The standard formula for calculating net annual premium Px,n̅ for an x-aged insured with the insured sum in the amount of | one monetary unit is given by [1]

where [2]

is a single net premium of Endowment insurance on one monetary unit of the insured sum, and

represents a net single premium of yearly annuities in the size of one monetary unit payable in advance during n years; expressed by corresponding commutation functions Dx = lx ·vx,

[3]

2.2. Insurance for the case of death Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Net annual premium of the term life insurance for an x-aged insured during the insured period of n years is given by [4]

where

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represents the net single premium of term life insurance.

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2.3. Insurance for pension annuities The basic formulas related to evaluation pension annuities are as follows. The net single premium of the yearly term life annuities in advance in the size of one monetary unit for an x-aged insured is given by (3). The net single premium of the yearly whole life annuities in advance in the size of one monetary unit for an x-aged insured is given by [5]

The net annual premium of whole life annuities and also other actuarial functions are usually evaluated for integer ages and terms, assuming that cash flows are payable annually. However, annuities are very often paid more frequently than annually, namely monthly, quarterly, but also semi-yearly. In various sources, we can find well known formulas for evaluating of certain and expected annuities which are paid more frequently than annually. The present value of m-thly paid annuities , and its extension influence the size of future pension annuities. In our model we evaluate the accumulated value of certain annuities in advance as a future accumulated value of funds from which pension annuities will be paid out. We introduce a model of basic formulas for determination of monthly annuities from the third pillar pension. Monthly pension annuities can be determined as follows [6]

,

where the accumulated value of temporary certain annuities of 1/m monetary unit ing n years is as follows

which are payable in advance dur[7]

where q = (1+i) is an accumulated factor with a technical interest rate i = 2.5 % p.a. and [8]

is the expected present value of the whole annuity of one per year, payable to the entry aged x with 1/m at the beginning of each m-thly period, where is the present value of the whole life yearly annuities in the amount of 1 monetary unit. A is a yearly payment of annuities during n years, represents a real accumulated value over duration time n, p represents the first higher pension (in percent). Remark 1. For more precise evaluation we can apply a precise formula for -thly pension annuities, which is given by [9]

where [10]

represents extended version of the formula (8), where μx as the force of mortality for an individual age x. The value δ = ln(1+i) represents the so-called force of interest. For more information see (Špirková, Spišiaková, 2012), (Špirková, Urbaníková, 2012).

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Remark 2. m-thly paid pension annuities can be modified according to the requirements of clients. For example, they can be expressed as follows

where is the coefficient of the survivor´s pension arrangements during years, the value is the net single premium of the whole life insurance for an -aged client with the policy value of one monetary unit. It can be expressed by commutation functions as follows

where

and

number of deaths at age x.

. Commutation function Cx is the discounted

3. LIFE EXPECTANCY AND PREMIUMS According to the latest World Health Organization (WHO) data published in April 2011, life expectancy in Slovakia recently is 71.7 for men, 79.7 for women and total is 75.6 years, which gives Slovakia a World Life Expectancy ranking of 53. (Figure 1.) Figure 1: Life expectancy according to entry age (Slovak Republic, 2011)

Source: authors

The investigation covers three of the main products, where such a differentiation applies in the European insurance sector: endowment insurance, term life insurance, pension insurance. In our analysis, we assume an insurance on the policy sum in the amount of the 1,000 euros and insurance duration years. We calculate net annual premiums by life tables of the Slovak Republic separately for male, female and unisex tables, which were determined with respect to a technical interest rate 2.5 % p.a., (Mortality tables, 2012).

3.1. Net annual premium for the case of death Since statistically women live longer than men, life insurance in the case of death had historically been cheaper for women than the equivalent cost of a policy for men of the same age.

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With unisex pricing, there would be large differences between the expected lifetime benefits from term life insurance policies for men and women, as men have a higher mortality risk for any given ten year period than women. Figure 2 shows graphs of dependence of net annual premium for term life insurance according to entry age with respect to male, female and unisex life tables. Figure 2: Net annual premium for term life insurance (in the case of death)

Source: authors

Policies for men are now cheaper and those for women are more expensive. Based on the data available for the Slovak Republic, women (aged 20 to 40 years) could see a rise in net annual premiums of around 87.45 % on average; men could see a premiums reduction of around 32.06 % on average with respect to unisex. (Figure 3.) Figure 3: Percentual change in net annual premium for Life insurance with using unisex life tables

Source: authors

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3.2. Net annual premium for the case of survivor Statistically, women live longer than men. Figure 4 shows the dependence of the net annual premium for endowment insurance according to the entry age of the insured person. Based on the data available for the Slovak Republic women (aged 20 to 40 years) could see a reduction in net annual premiums of around 5.14 % or more on average; men could see a premiums rise of around 6.18 % or more on average in comparison with unisex. Figure 4: Net annual premium for Endowment

Source: authors

In Figure 5 we can see the rise (reduction) of net annual premium for endowment insurance with using unisex life tables according to entry age. Figure 5: Percentage changes in net annual premiums for endowment with using unisex life tables

Source: authors

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3.3. Monthly pension annuities In our model we assume that an insured person at the age of 18 saves 30 euros monthly in a pension company during the whole duration time until retirement. In Figure 6, you can see the dependence of the amount of monthly pension according to entry age separately for male, female and unisex according to (6). Based on the data available for the Slovak Republic with a technical interest rate 2.5% p.a., men (aged 55 and more) could see a reduction in pension income from pension annuities of around 12 % or more on average; women (aged 55 and more) could see pension income rise by around 8 % or more on average. Moreover, additional costs could arise from insurers applying a gender mix risk premium due to the risk of adverse selection. There could also be additional marketing costs due to a ban on the use of gender. Figure 6: Monthly annuities according to retirement age

Source: authors

4. CONCLUSION According to Van Dijk Reinder (2012) on average, insurance actuaries expect the difference in male and female life expectancy in Europe to persist in future. Thus, there will continue to be a difference in life expectancy for new customers of life products and hence with gender based pricing, premiums will better reflect the personal risk of each insured individual than in the case of a single unisex premium. Now, insurers will not be allowed to use claims data highlighting that young male drivers have considerably higher accident rates and claims costs than young women when setting premiums. A male driver under 21 is twice as likely to have an accident as a woman of the same age. This will mean that women drivers under the age of 25 will see their premiums rise, while their male counterparts should see their rates decline. There has been some speculation that insurers will maintain high premium levels for young men and raise rates for young women drivers to match these. In our next investigation we want to determine so called common unisex life tables by aggregation of male and female life tables with respect to different weights for individual sexes. All values and graphs were evaluated and constructed by VBA MS Office Excel 2010 system.

ACKNOWLEDGEMENTS The authors were supported by the Project: Mobility - enhancing research, science and education at the Matej Bel University, ITMS code: 26110230082, under the Operational Program Education co-financed by the European Social Fund.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

10.

In order to Gerber, Hans.U. et al. (1997). Life Insurance Mathematics. Springer-Verlag, Berlin Heidelberg New York. Mortality tables. (2012). 10 Mar. 2012. <http://portal.statistics.sk/showdoc.do?docid=2464>. Official Journal of the European Union. (2012). “Information from European Union institutions, bodies, offices and agencies.” 13 Jan. 2012. 10 Aug. 2012. <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2012:011:0001:0011:EN:PDF>. Sekerová, Viera., Bilíková, Mária. (2007). Insurance Mathematics (in Slovak). Bratislava: Ekonóm. Špirková, Jana, Spišiaková, Mária. (2012). Gender and Extended Actuarial Functions in Pension Insurance. StatistikaStatistics and Economy Journal No. 4/2012. Špirková, Jana, Urbaníková, Marta. (2012). Actuarial Mathematics-Life Insurance (in Slovak). Bratislava: Iura Edition, spol s r.o. Urbaníková, Marta. (2008). Financial mathematics (in Slovak). Nitra: Constantine The Philosopher University. Van Dijk, Reinder. (2011). ”The impact of a ban on the use of gendre in insurance on consumers.” 10 Sep. 2012. <http://www.gdv.de/wp-content/uploads/2011/12/Oxera_Praesentation_Impact_of_ban_of_gender_in_insurance_2011.pdf>. World Health Organization (2012). 10 May 2013. <http://www.worldlifeexpectancy.com/slovakia-life-expectancy>.

DETAILS ABOUT AUTHORS: JANA ŠPIRKOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA, SLOVAKIA jana.spirkova@umb.sk MÁRIA SPIŠIAKOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA, SLOVAKIA maria.spisiakova@umb.sk

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ECONOMIC AND PSYCHOLOGICAL APPROACH TO THE STUDY OF HUMAN RATIONALITY ALEKSANDAR MOJAŠEVIĆ

ABSTRACT

In this paper, the author analyzes the assumption of human rationality from the perspective of the neoclassical economic theory and the behavioral economics theory, with specific reference to the rationality of litigants. In particular, the author focuses on exploring whether the assumption of human rational behavior, which has been used for developing the standard models of neoclassical economic theory, is realistic, and whether the findings stemming from these models are accurate and reliable. Seeking answers to these questions, the author focuses on the empirical findings of Behavioral Economics, a new theory developed primarily by cognitive psychologists. The comparison of these two theories has opened new perspectives in understanding human rationality and raised the issue of future development of Economics, as a science of rational economic choice, and the Economic Analysis of Law, as a discipline that uses economic methodology to study certain legal phenomena, such as rational behavior of litigants. Hence, the author discusses whether the impact of psychological research leads to redefining the methodology of neoclassical economics and the standard economic analysis of law. KEYWORDS: psychology, economics, law, rationality, litigants

1. INTRODUCTION The general public as well as experts from various scientific fields (lawyers, economists, psychologists or members of other social disciplines) may be baffled by the name of the scientific discipline called Behavioral Law and Economics. The perplexity stems from the established habits and practice in the domestic academic community to draw conclusions about the subject matter and the method of a scientific discipline from the name of the scientific discipline. Considering that the first term (behaviorism) is commonly encountered in psychological literature whereas the remaining two terms (law and economics) are used in legal or economic literature (respectively), there is a dilemma: why are the three distinctive terms contained in the name of a single discipline? In order to address this question, there is a need to determine the method and the subject matter of the discipline which has been given such an elaborate name: Behavioral Law and Economics (BLE). This question is particularly significant given the fact that the BLE is not a widely recognized discipline in the local academic community, particularly in the legal community which the author of this work belongs to. In standard dictionaries of psychology,1 the term behaviorism (derived from the English word behavior) is defined as an approach in the contemporary American psychology. The main proponent of this approach was a well-known behaviorist J. B. Watson who explicitly defines psychology as a scientific study of [human and animal] behavior. Yet, the underlying question is: is there any connection between human behavior and the subject matter of legal science or economics? First, there is an obvious correlation between human behavior and the subject matter of economics (or economic analysis) since economics is defined2 as the scientific study of human behavior, providing that: 1) the resources for satisfying various human needs are scarce; 2) human needs are indefinite and individuals face different choices; and 3) individuals demonstrate rational behavior, i.e. their behavior is determined by maximizing (or minimizing) a certain value. In this standard definition of economics (or economic analysis), there are some terms which are commonly encountered in the psychological literature: (human) behavior, human needs, rationality, etc. The correspondence of these standard terms in two different sciences (psychology and economics) reflects certain correlation between them. But, the focal point of interest in this paper is the rationality of human behavior. As previously noted, the assumption of rationality (rational human behavior) requires precise definition because it is the necessary requirement for ensuring the “full legitimacy” of the economic science.3 In that context, it is inevitable to address a number of questions. What kind of

See: Trebješanin, Ž. (2001.) Rečnik psihologije, Stubovi kulture, Beograd, p. 50. The definition of economics taken from: Begović, B. (et al.). (2008.) Ekonomija za pravnike, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd, p. 36. A similar definition can be found in: Nikolić, Lj. (2011.) Osnovi ekonomije, Centar za publikacije Pravnog fakulteta u Nišu, Niš, p. 16. 3 The rational behavior is a methodological assumption, and economics is defined as the science of rational choice. Any other kind of (irrational) behavior would be the subject matter of other disciplines. See: Begović, B. (et al.). (2008.) op. cit., pp. 37-38. Obviously, rationality (rational behavior) is the conditio sine qua non of the economic science. On the one hand, it is a sustainable behavior which guarantees human existence and, on the other hand, it is a dominant behavior of economic entities (individuals and companies alike). See: ibid., p. 38, fn. no. 18, and p. 41, fn. no. 21. 1 2

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human behavior does the notion of rational behavior imply, and is such methodological assumption sustainable? How does the science of psychology define human rationality, and does it cast a different light on this notion which is the “cornerstone” of neoclassical economics?

2. NOTION OF RATIONALITY LIn foreign literature on economic analysis of law,4 rationality is basically defined as a purposeful choice of an individual. In domestic literature,5 rational behavior is defined as maximizing behavior, i.e. the behavior which maximizes some value (such as, utility enjoyed by individuals), which subsequently generates other maximizations (e.g. the maximization of profit). In domestic theory of economic analysis of law,6 rational behavior is defined as behavior that maximizes some goals for the given costs or behavior that minimizes costs for the given goals. Therefore, these definitions indicate that the notion of rationality is primary associated with the notion of maximization, which implies7 that, given a set of available alternatives, an individual will prefer the one that generates the highest utility value. The notions of rationality and maximization are always associated with the individual who chooses or the individual who makes a decision. This assumption, which is primary used in economic science, is known as methodological individualism; it implies that an individual and his/her preferences are the subject matter of analysis and observation rather than the collectivity (state, society). Yet, it implies a specific theoretical construct of perceiving an individual as homo economicus, an abstract human being characterized by a set of distinctive features. First of all, homo economicus has stable and well-organized preferences, as well as an ability to make rational decisions by taking into account alternative actions (options). Second, for any given goal, homo economicus uses the available resources in a manner that ensures their minimum wastage. This kind of use has an instrumental value, for which reason rationality is reduced to instrumental rationality.8 Instrumental rationality is the most efficient and effective way of achieving a specific goal and, as such, it is the axiom of maximizing behavior.9 Third, the goal of a rational agent need not necessary be egoistic and focused on self-satisfaction (although it is usually such10); this theoretical construct may also refer to an individual who may wish to pursue some interests other than one’s own. Last but not least, the concept of homo economicus is based on the following premises: more is better than less; the law of diminishing marginal value; and the demand for goods drops as costs rise. 11 Despite the appeal of elaborating on the concept of homo economicus in more detail, the presented characteristics will be sufficient for the purposes of this article; hereinafter, homo economicus will be regarded as a rational utility maximizer. Yet, this concept gives rise to a couple of questions: what is the significance of behaviorism (as a psychological discipline) in explaining rational behavior, and what are the implications of that explanation to the current status of economic science? Furthermore, how are behaviorism and economics related to the legal science? In the author’s opinion, these general issues can best be observed by exploring modern psychological research findings that question the rationality of litigants. In the course of addressing these issues, the author will critically reflect on the rationality assumption and deviations from rational behavior in certain social situations, with specific reference to the litigation proceedings and the rational choice between a trial and a settlement.

This definition is taken from: Schäfer, H., Ott, C. (2004.) The Economic Analysis of Civil Law, Edward Elgar Publishing, Cheltenham, UK, Northampton, MA, USA, p. 51. 5 It is textbook literature. See: Begović, B. (et al.). (2008.) op. cit., p. 37. 6 See: Jovanović, A. (1998.) Uvod u ekonomsku analizu prava, Savet projekta Konstituisanje Srbije kao moderne pravne države, Centar za publikacije Pravnog fakulteta u Beogradu, Beograd, p. 18. 7 See: Schäfer, H., Ott, C. (2004.) op. cit., p. 52. 8 Apart from the opinions where rationality is interpreted in terms of efficiency, there is the subjective meaning of instrumental rationality. For critical standpoints on both concepts, see in: Gaus, Dž. (2012.) O filozofiji, politici i ekonomiji, Službeni glasnik, Beograd, pp. 19-24. For the purposes of this paper, we will stick to the meaning of rationality interpreted in terms of efficiency. 9 According to Robert Nozick, the theory of instrumental rationality is the basic theory of rationality, i.e. “the basic state“, which is not required to prove, unlike other theories of rationality which must be proven. See: Nozick, R. (1993.) The Nature of Rationality, Princeton University Press, Princeton, New Jersey, p. 133. 10 The theory recognizes the so-called weak and strong form of egoism. The strong form of egoism usually refers to the homo economicus who is incapable of feeling either simpathy or antipathy to others, and who is interested only in maximizing his/her own utility. This form of egoism comes down to the maximization of wealth. 11 See: Gaus, Dž. (2012.) op. cit., pp. 31-39. 4

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3. CRITICISM ON THE RATIONALITY ASSUMPTION At this point, it may be worth noting that the rationality assumption has been criticized not only by the theorists originally belonging to non-economic scientific disciplines (such as psychology) but also by those belonging to the body of Economic Analysis of Law (hereinafter: EAL).12 For example, Ronald Coase, one of the founders of EAL, called into question the basic assumption of rational behavior which has been the cornerstone of subsequent experimental research of certain (cognitive) psychologists.13 This indicates that EAL theorists do not share the same theoretical position14 and that the concept of rationality assumption is one of the basic points of contention.15 In this part of the paper, the author draws attention to the fundamental criticism on the model of rational behavior.16 At the same time, it is essential to make a clear distinction between the critique on the rationality assumption and the critique concerning the rational behavior of an individual in specific circumstances. The first form of criticism questions the basic assumptions of neoclassical economics and calls for its modification; the second form of criticism draws upon a series of experimental studies in order to point out to the presence of behavioral anomalies. The criticism on the model of rational behavior may be traced back to the mid-20th century and linked to the work of the Nobel prize-winning economist Herbert A. Simon. 17 Simon shook the foundations of the neoclassical economic theory, based on the model of rational maximizing behavior or homo economicus (whom Simon designated as an economic man or administrative man), by introducing the concept of bounded rationality.18 In that way, he promoted the idea that individuals, as decision-makers, have limited cognitive abilities, insufficient mental capacity, as well as a lack of knowledge and information to maximize their utility. Instead of maximization, in pursuit of the best possible choice, this author recommends the concept of a satisfactory choice or a good-enough choice.19 But, today, there is a theoretical debate20 over the question whether the concept of a satisfactory choice is an alternative to the concept of maximizing (i.e. the concept of the best choice), and whether the concept of a good-enough choice is only a strategy of maximization. Arthur Leff21 also pointed out to the unrealistic feature of the rationality assumption, which is the basic feature of the standard economic models. His idea is governed by the fact that it is necessary for a further development and promotion of the neoclassical EAL to redefine its methodological assumptions by looking for support in other social disciplines, such as psychology and sociology.22

In the author’s opinion, Economic Analysis of Law or Law and Economics is no longer an unknown teaching discipline in Serbian law schools because it has been included in the law school curricula; however, as a scientific discipline, it has not been sufficiently promoted and presented to the academic audiences. For the purposes of this work, it will suffice to say that the EAL is a scientific discipline which, roughly speaking, correlates two different disciplines (Law and Economics) by “borrowing” the methodology of the economic science and the subject of the legal science. As these two scientific fields are indisputably intertwined, the objective of this paper is inter alia to highlight and promote the interdisciplinary approach to the study of social phenomena. 13 More information on the importance of Coase’s scientific work for the development of the EAL and criticism on his theoretical position, in: Jovanović, A. (2004.) Ronald Kouz. Ekonomski anali, No. 161, pp. 233-242. 14 It can be said that the EAL scientific body is very democratic, given the fact that there are different EAL schools and approaches. This discrepancy of opinions may shake the foundations of the existing EAL as a theoretical discipline (which is actually underway), and may have a considerable impact on its future methodological profile. In fact, the explanation of the subject matter and methodology of the BLE, as one of the numerous approaches within the EAL, is aimed at elaborating on the future course of development of the EAL. More information on different schools and approaches within the EAL in: Jovanović, A. (2008.) Teorijske osnove ekonomske analize prava, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. 15 The neoclassical theory of EAL recognizes the rationality assumption, which is used for modeling the rational behavior of individuals in different social contexts. For example, there are well-known economic models of litigation used for testing the rational behavior of litigants and other participants in the civil procedure. That behavior depends on the incentives created by different legal rules. See, for example, Miceli, T. (2004.) The Economic Approach to Law, Stanford University Press, Stanford California. 16 Here, we do not wish to undermine the findings of neoclassical economic models derived from the assumption of human rationality but to point out to the tendency in the EAL theory aimed at modifying this basic assumption. The author’s opinion on this controversial issue will be provided later on in this paper. 17 The scientific opus of Herbert Simon speaks for itself. He is a scholar who has pushed the boundaries in various scientific fields: economics, psychology, computer science, etc. His most prominent scientific contribution is the development of the theory of decision making in business organizations, for which he received the Nobel Prize. See: Aleksić, A. (2007.) Herbert Sajmon – inovator u oblasti poslovnog upravljanja i organizacije. Ekonomski anali, No. 172, pp. 128-138. 18 See: Simon, H. (1955.) A Behavioral Model of Rational Choice. Quarterly Journal of Economics, Vol. 69, Issue 1, pp. 99-118. 19 The introduction of the concept (model) of satisfactory choice is based on the psychological premise, i.e. the degree of aspiration which an individual adjusts based on his/her experience in order to satisfy some desire which is the driving force of individual actions. In analogy, an individual reaches a certain degree of satisfaction of utility, just as the company achieves a certain level of profits, a certain share in the market or in the sale of goods. See: Simon, H. (1959.) Theories of Decision Making in Economics and Behavioral Science. The American Economic Review, Vol. 49, No. 3, pp. 262-265. 20 See: Gaus, Dž. (2012.) op. cit., pp. 39-40. 21 For his extensive criticism on the premises of the neoclassical economic analysis of law which are contained in the famous book of Richard Posner Economic Analysis of Law, see in: Leff, A. (1974.) Economic Analysis of Law: Some Realism about Nominalism. Virginia Law Review, Vol. 60, pp. 451-482. 22 Ibid., pp. 469-474. 12

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The concepts of bounded rationality and opportunistic behavior23 have been accepted by the New Institutional Economics (NIE), as a new school of EAL, which started developing in the 1960s after the publication of the revolutionary article of Ronald Coase.24 Since the assumption of rational behavior is the basic premise of the Chicago School of EAL, its abandonment by the other direction of EAL supports the thesis of its gradual rejection or modification in accordance with the evolutionary development of the discipline. In fact, the rationality assumption gave impetus to researchers (mostly psychologists) to question its legitimacy in different social situations. Following these studies, EAL theorists gradually started accepting the new findings and incorporating them into their models, which eventually led to the development of a new direction of EAL, or a new and independent discipline, the Behavioral Law and Economics (BLE), whose subject matter and methodology are presented in this paper.

4. QUESTIONING SOME ASPECTS OF THE COASE THEOREM Any work of this nature and content must necessarily highlight the researches of two prominent behaviorists: Daniel Kahneman and Amos Tversky. Their theory, the so-called prospect theory,25 has expanded horizons in understanding human rationality in decision-making, challenging the findings of the standard expected utility theory. Generally speaking, this descriptive theory describes the choice between several risk-involving options, under the assumption that the individual is aware of the likelihood of different outcomes. In this regard, Kahneman and Tversky suggest26 that in the real world individuals tend to rely on simple rules generated through the evolutionary process or learning, which serve as a guide in (individual) decision-making processes. In theory, there is the so-called cognitive heuristics, an experience-based technique which is used in order to speed up the process of finding a favorable outcome.27 Using this technique of cognitive heuristics, individuals may rank the expected outcomes they encounter. More specifically, an individual ranks the expected outcomes on the basis of the so-called reference point,28 which serves as a demarcation line between the outcomes which are assessed as favorable outcomes (gains) and the outcomes which are assessed as unfavorable outcomes (losses). The process of coding the expected outcomes has an impact on the individual’s behavior by driving his/her behaviour towards chosing a particular option. According to the above cognitive heuristics criterion, there are several decision making effects. The first effect is designated as loss aversion,29 which implies that individuals are prone to negatively assess a loss from a specific reference point. For example, a house-owner would be willing to sell the house (which is perceived as a loss) at a much higher price than he/she would actually be willing to purchase the same house (which is perceived as a gain). In this case, it is obvious that the willingness to pay for some asset differs from the willingness to accept compensation in the event of revoking title to the same asset (endowment effect).30 This finding is inconsistent with the findings of the Coase theorem; the findings show that, regardless of the initial allocation of property rights, the outcome of the exchange of goods will be identical, providing that the transaction costs are low. In other words, according to Coase, it is irrelevant whether a legal system assigns a specific (property) right to Person A or to Person B (as participants in the exchange); given the assumption of low transaction costs, the parties will get involved in direct negotiations and efficiently transfer the property right under any legal regime. Consequently, at the normative level (which implies devising preferable legal rules), the Coase theorem implies that it would be good to choose a legal rule only by following the criterion of minimizing the transaction costs of the exchange (or maximizing the welfare of the parties involved), given the fact that transaction costs are the key obstacle to efficient exchange.31

A behavioral assumption of opportunistic behavior can be described as the behavior of an individual guided by self-interest, at the detriment of another; as such, it is usually manifested in confusion, lies, deceit and the like. In order to exhibit an opportunistic behavior, the individual has to externalize the costs of such behavior to another. Opportunism is a result of bounded rationality and incomplete information. See: Jovanović, A. (1998.) op. cit., pp. 46-47. 24 See: Coase, R. (1960.) The Problem of Social Cost. Journal of Law and Economics, Vol. 3, pp. 1-44. 25 See: Kahneman, D., Tversky, A., (1979.) Prospect Theory: An Analysis of Decision under Risk. Econometrica, Vol. 47. 26 See: Kahneman, D., Tversky, A., (1973.) On the Psychology of Prediction. Psychological Review, Vol. 80, No. 4, pp. 237-251. 27 More in: Shanteau, J. (1989.) Cognitive Heuristics and Biases in Behavioral Auditing: Review, Comments and Observations, in: Accounting, Organizations and Society 14(1/2), pp. 165–177, available at: http://www.k-state.edu/psych/cws/pdf/aos89.PDF 28 For the role of reference points in the context of negotiations, see: Kahneman, D. (1992.) Reference Points, Anchors, Norms and Mixed Feelings. Organizational Behavior & Human Decision Processes, Vol. 51, Issue 2, pp. 296-312. 29 Ibid., p. 298. 30 More about it in: Kahneman, D. (et al.). (1990.) Experimental Tests of the Endowment Effect and the Coase Theorem. The Journal of Political Economy, Vol. 98, No. 6, pp. 1325-1348. 31 Rule A is preferable to Rule B in case it provides for a greater maximization of parties’ welfare. According to Coase, the choice between the two rules depends on the evaluation of theirs effects (ex ante evaluation), which is based on the criterion of maximizing welfare or minimizing transaction costs. But, the problem arises because the presence of the endowment effect calls into question this evaluation; namely, the BLE researchers determined that the value of an asset may sometimes vary depending on whether it is owned or not. If an individual owns a particular asset, he/she will put a higher value on it, which may eventually hinder the exchange. However, researches show that the presence and impact of this effect largely depend on the context. See, for example, Plott, C., Zeiler, K. (2005.) The Willingness to Pay-Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations, American Economic Review, Vol. 95, No. 3, pp. 530–545. 23

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However, the abovementioned BLE finding changes this kind of perception on the choice of preferable legal rules, thereby changing the character of the legal policy at the normative level, which must take into account that the final outcome of the exchange depends on the initial allocation of property rights. This practically means that it would be good to find another criterion for the selection of preferable legal rules. The BLE theory32 specifies two selection criteria: the selection based on the impact of the selected legal rule on a third party (rather than on the parties involved in the exchange), and/or the selection based on the circumstances in which the revealed preferences of the participants in exchange present a more favorable basis for normative assessment. Another equally important consequence of decision-making processes based on the reference point is the fact that individuals are more willing to take risk to avoid a sure loss, while they would refuse to take such a risk to achieve a gain of equal amount.33 For example, an individual were asked to chose between a sure gain of 4,900 dinars (RSD) and a 50% chance to get 10,000 dinars, he/she would choose a sure gain of 4,900 dinars, regardless of the fact that the other option is (rationally speaking) more justifiable because it has a higher expected value (5,000 dinars). On the other hand, if an individual were asked to choose between a sure loss of 500 dinars and a 50% chance of losing 1,000 dinars, he/she would choose the risktaking option, regardless of the fact that both options have an identical expected value (500 dinars). The example shows that individuals are systematically more inclined to assign more value to the current situation (status quo) than to change it, regardless of the fact that the change may generate a higher expected value. Also, the prospect theory seems to indicate that the process of devising options (alternatives) which individuals may encounter, such as a gain or a loss (the so-called framing effect), may have an impact on their decisions, their attitudes towards risk and the behavior stemming thereof. This finding has important implications for litigants, particularly in terms of the dilemma involving the choice between resolving a dispute in a court of law or by settlement. These issues will be discussed below.

5. OTHER BEHAVIORAL ANOMALIES AND THEIR IMPLICATIONS In addition to the aforesaid behavioral anomalies that impose certain limitations to the functionality of the Coase theorem, the BLE theory has identified some other deviations from rational behavior. Considering that a comprehensive overview of all behavioral anomalies would go far beyond the scope of this paper, the author provides an overview of the most representative behavior anomalies identified by BLE theorists. Another behavioral anomaly is related to the criterion governing the assessment of costs and benefits in decision-making processes. It is usually considered that a rational person relates that criterion only to future costs and benefits. But the BLE theory34 criticizes that kind of conventional reasoning and emphasizes that individuals exhibit a tendency to make a decision based on the costs that have already been sustained (sunk costs). Ignoring these costs can lead to erroneous predictions.35 Also, when assess the value of certain assets, individuals often exhibit an inability to calculate the highest missed gain stemming from its alternative use (ignoring opportunity costs).36 Furthermore, researches37 show the tendency to miscalculate probability, especially in case of assessing the occurrence of a low-probability event, which is frequently underestimated. It seems unnecessary to explain what kind of implications this (wrong) assessment may have on the decision to take precautions in certain social situations (for example, in traffic). Furthermore, researches38 show that people exhibit a strong tendency to overestimate the likelihood of a particular outcome pro futura, once they experienced the same outcome in the past (the so-called hindsight bias). This occurs because people believe that their past predictions were more accurate than they actually were. Owing to this tendency, their future predictions may be inaccurate, or overestimated. Psychological studies39 explain this phenomenon by the action of three independent mental processes: the first is related to the impression of inevitability, the second one pertains to the impression of predictability, and the third one refers to the distortion of memory (incorrect memorization). The BLE researchers also indicat40 a tendency towards exaggerated optimism (the so-called optimism bias). Individuals believe that the probability of occurrence of bad events is lower than

See, for example, Jolls, C. (2006.) Behavioral Law and Economics, Public Law and Legal Theory, Research Paper No. 130, John M. Olin Center for Studies in Law, Economics, and Public Policy, Research Paper No. 342, pp. 6-8. Available at: http://ssrn.com/abstract=959177 33 See: Kahneman, D. (1992.) op. cit., pp. 297-298. 34 See: Jolls, C. (et al.). (1998.) A Behavioral Approach to Law and Economics. Stanford Law Review. Vol. 50, pp. 1482-1483. 35 According to the conventional view, it follows that the price at which buyers are willing to buy a thing would be equal to the price at which the seller is willing to sell the same. Studies show that this view is erroneous since the relationship between the sale price and the purchase price is at least two to one. See: ibid. 36 See, for example, Sch채fer, H., Ott, C. (2004.) op. cit., pp. 60-61. 37 See: Ibid., p. 62. 38 See, for example, Goodwin, P. (2010.) Why Hindsight Can Damage Foresight. The International Journal of Applied Forecasting. Available at: http://www. forecasters.org/pdfs/foresight/free/Issue17_Goodwin.pdf 39 See: ibid., pp. 6-7. 40 See, for example, Jolls, C. (2006.) op. cit., p. 14. 32

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it actually is. In certain social situations (e.g., air travel), this kind of belief can obviously have disastrous consequences. Because of this anomaly, the state prescribes a mandatory health insurance and social security. Another anomaly worth noting is related to the interpretation of information in accordance with one’s own interests (the so-called self-serving bias)41, which is particularly evident if there is a dispute between two or more parties. It seems redundant to further elaborate on how this anomaly can jeopardize the efficient dispute resolution by direct negotiations.

6. THE SIGNIFICANCE OF BLE IN UNDERSTANDING BEHAVIOR OF LITIGANS Roughly speaking, the standard economic models of litigation42 suggest that rational litigants prefer to go to a settlement rather than a trial43 because it puts them in a better position which is reflected in saving transaction costs of litigation, primarily the cost of legal services (e.g. lawyer’s fee). Along with the gradual development of the EAL, these economic models are augmented with variables that disrupt the conventional economic logic of litigants regarding the choice between a trial and a settlement;44 these variables may include: different information that the litigants possess on the probable outcome of the court proceeding,45 the strategic behavior of litigants,46 and other variables. With these variables, the economic models of litigation become more realistic. But a vast number of economic models (both basic and extended) assume that litigants are capable of rational judgment, which is predominantly expressed in evaluating various outcomes (a settlement or a trial) on the basis of their expected values. The creators of these economic models have not questioned the assumption of human rationality, i.e. the presumption of rationality of litigants in the context of civil proceedings. However, as mentioned above, Kahneman and Tversky, the creators of the prospect theory, have challenged this assumption by calling into question the implications arising from the economic models as well as the conclusions thereof. According to this theory, if a settlement offer is a sure gain, and the amount that is expected on the basis of a court judgment is an uncertain gain,47 individuals (litigants) will choose a sure gain (even if it is lower than the uncertain gain). But the question is how the litigants will behave if they evaluate one of the two potential outcomes (settlement or trial) as a loss. In this regard, some studies48 suggest that plaintiffs often evaluate the settlement payment as a gain, while defendants evaluate such payment as a loss. According to the prospect theory, it follows that the defendant will be more willing (than the plaintiff) to proceed with a lawsuit until the end of the civil proceedings. In other words, the defendant will be more willing to take risk in order to avoid a sure loss. All this indicates that the final outcome of the litigation proceeding largely depends on the litigants’ assessment of the expected outcomes. In addition, this assessment is largely subjective and clearly deviates from the standard economic reasoning based on the assumption of rationality of litigants. Another important implication is that the framing of outcomes as a gain or a loss can affect individuals’ behavior and decisions. It follows that the decision-making process is not as simple as the standard neoclassical economic theory postulates. There are many factors that influence the decisionmaking process of individuals (litigants). For example, in one experimental research,49 individuals preferred to accept the settlement amount that exceeded the amount of actual damage even though the probability of winning in trial and the amount of awarded damages received under the judgment remained unchanged (constant). This has challenged the assumption that individuals only want to maximize the wealth. This study, essentially, confirms the existence of psychological barriers in decision-making which ultimately affect one’s decision on the choice between a trial and a settlement. Individuals are not driven only by rational logic; for example, if a settlement amount has been offered by a party who is perceived to be immoral, the other party may reject the settlement offer, despite the non-profitability of the act of rejection.50

Ibid., pp. 14-15. The economic modeling of litigants’ behavior, and particularly the analysis of the choice between trial and settlement has been explored by Shavell, Cooter, Miceli and other (more or less known) American theorists of the economic analysis of law. See, for example, Shavell, S. (1982.) Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs. Journal of Legal Studies, Vol. 11, pp. 55-81, or Miceli, T. (1997.) Economics of the Law – Torts, Contracts, Property, Litigation, Oxford University Press, New York, Oxford, pp. 156-180, or Cooter, R., Rubinfeld, D. (1989.) An Economic Analysis of Legal Disputes and their Resolution. Journal of Economic Literature, Vol. 27, No. 3, pp. 1067-1097. 43 Assuming that the civil proceeding has already been initiated by filing a claim. 44 The standard economic logic implies that the plaintiff will initiate a civil proceeding if and only if the cost of filing a claim is lower than the expected value of the claim. In addition, the plaintiff can expect a certain gain (payoff) from the claim on the basis of an agreed settlement or a court judgment. For example, on the basis of a mathematical calculation, a rational plaintiff estimates that the expected value of the settlement is positive, and it follows that he will agree to settle at that stage of the litigation process. Similarly, if the complaint is filed, a rational plaintiff can calculate the expected value of the trial in the first instance, or in the second instance court. See: Cooter, R., Ulen, T. (2004.) Law & Economics, Fourth Edition, Pearson Addison Wesley, Boston, San Francisco, New York, London, Toronto, Sydney, Tokyo, Singapore, Madrid, Mexico City, Munich, Paris, Cape Town, Hong Kong, Montreal, pp. 392-396. 45 See, for example, the model of asymmetric information created by Miceli: Miceli, T. (2004.) op. cit., pp. 248-250, or Savell’s model of asymmetric information: Shavell, S. (1996.) Any Frequency of Plaintiff Victory at Trial is Possible. Journal of Legal Studies, Vol. 25, pp. 493-501. 46 See, for example, the model of strategic behavior of litigants: P’ng, I.P.L. (1983.) Strategic Behavior in Suit, Settlement, and Trial. The Bell Journal of Economics, Vol. 14, No. 2, pp. 539-550. 47 We may accept that this is a fairly realistic presupposition taking into account the many variables that affect the litigation, including both the measurable ones (such as: the average duration of civil proceedings, the amount of litigation expenses) and the subjective ones which are difficult to measure (such as: bias and lack of knowledge of judges, incompetence and lack of professionalism of lawyers, and others). 48 See in: Rachlinski, J. (1996.) Gains, Losses, and the Psychology of Litigation. Southern California Law Review, Vol. 70, pp. 130-149 et seq. 49 See in: Korobkin, R., Guthrie, C. (1994-1995.) Psychological Barriers to Litigation Settlement: An Experimental Approach. Michigan Law Review, Vol. 93, pp. 107-192. 50 See in: ibid., pp. 109-110. 41 42

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Furthermore, the standard economic models focus on the outcomes, i.e. on the amount of money received from a settlement or a judgment. Yet, the question is whether the well-being of individuals (litigants) is determined only by the money generated from a settlement or a judgment. In other words, there are other factors that may have a considerable impact on the individuals’ well-being, such as the possibility to participate in the civil proceeding. Litigants may prefer going to trial because it gives them the opportunity to exercise certain interests that are not necessarily economic in nature; in that case, the encouragement to resolve the dispute by settlement may be perceived as a threat to their interests. Moreover, litigants may perceive the settlement-promoting policy as a constraint which deprives them of the basic values of the judicial system, such as the belief in the authority of the judiciary, impartial administration of justice, etc.51 On the whole, it follows that the assumption of rationality of individuals in their different social roles and, specifically, in the role of litigants is not so realistic; hence, the conclusions arising from the economic models should be accepted with some reservation.

7. THE DEFENCE OF THE MODEL OF RATIONAL BEHAVIOR On the other hand, there are opinions that justify the model of rational behavior. Generally, they assert that the rationality assumption is only an approximation or simplification of reality.52 Yet, Richard Posner,53 one of the most prominent EAL thinkers, has probably gone furthest in criticizing the BLE and (thereby) defending the neoclassical assumptions of homo economicus. Аt this point, we will present his most important arguments which consistently support the neoclassical economic analysis of law even though he admitted54 that his research included some findings of behavioral economics and behavioral law and economics. First, Posner points out55 that the name of discipline Behavioral Law and Economics is wrong, and he supports the proposal of Rachlinski that a more appropriate term for this discipline would be Law and Psychology as it clearly distinguishes the new discipline (BLE) from Law and Economics (Economic Analysis of Law). Second, Posner considers56 that the behaviorists have a propensity toward something he calls “the tendency to caricature the rational model of human behavior”; he argues that the BLE premises are, in fact, an integral part of the theory of rational choice. Third, Posner blames the behaviorists for advocating a non-theoretical position. He argues that behavioral economics “is undertheorized because of its residual, and in consequence purely empirical, character. Behavioral economics is defined by its subject rather than by its method, and its subject is merely the set of phenomena that the most elementary, stripped-down rational-choice models do not explain”.57 Fourth, Posner criticizes the behaviorists for failing to construct their theoretical position on the principles of evolutionary biology, which may be explained by the fact that the behaviorists advocate the ideology of political liberalism, according to which the instinct for justice is rooted in altruism, not in revenge (as explained in evolutionary biology). Relying on this hypothesis, the behaviorists attempt to build a society based on collectivism rather than on the predominance of the free market.58 Finally, Posner criticizes59 the empirical side of behaviorism, which has a number of methodological problems, as well as the normative side of behaviorism60 given the fact that behaviorists have not offered proposals aimed at reforming certain legal phenomena which reflect the aforesaid behavioral anomalies. In this regard, some scholars criticize61 the normative side of Behavioral Economics or Behavioral Law and Economics, warning that its findings may be used as grounds for excessive government intervention and restriction of personal freedoms.

See in: Bronsteen, J. (2009.) Some Thoughts about the Economics of Settlement, Fordham Law Review, Vol. 78, p. 112, where noted by: Frey, B., Stutzer, A. (2002.) Happiness and Economics: How the Economy and Institutions Affect Well-Being, pp. 149-150. 52 See: footnote no. 3. 53 Posner’ argumentation is taken from: Posner, R. (2002.) Behavioral Law and Economics: A Critique. Economic Education Bulletin, published by American Institute for Economic Research, Great Barrington, Massachusetts, Vol. XLII, No. 8. 54 Ibid., p. 1. 55 Ibid., p. 34, footnote no. 2. 56 Ibid., pp. 1-2, and elsewhere. 57 Ibid., p. 12. 58 Ibid., p. 13. 59 Ibid., pp. 22-32. 60 Ibid., pp. 32-33. 61 See: Wright, J., Ginsburg, D. (2012.) Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty. Northwestern University Law Review, Vol. 106, No. 3, pp. 56-57. 51

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CONCLUSION In this paper, we examined the relationship between cognitive psychology and neoclassical economics; to be more precise, we explored the part of cognitive psychology which is referred to as behavioral decision theory and the neoclassical economic analysis of law. The author addressed the following key issues: has Behavioral Economics (Behavioral Law and Economics) developed as a result of spontaneous integration of different kinds of knowledge from various disciplines, or has this discipline developed as a result of an “undue” impact of psychological research in traditional neoclassical economics (the neoclassical economic analysis of law)? Namely, Arthur Leff pointed out to the nonrealistic feature of the assumptions of rationality and the need to redefine the methodological assumptions of neoclassical EAL by relying on the “assistance” of other social disciplines, such as psychology and sociology. Of course, he is not the original author of this idea which was originally promoted much earlier by Herbert Simon, who emphasized the need for integrating psychology and economics. Given the fact that the Economic Analysis of Law has been affirmed in the meantime as a scientific discipline based on neoclassical economics, criticism on the rationality assumption has expanded from the field of economic science to the economic analysis of law. Thus, Leff focused his critical remarks on the neoclassical economic analysis of law and the ideas promoted by Richard Posner as the most outstanding proponent of EAL. On the other hand, this idea is contested by the apologists (like Posner) who perceive the influence of other disciplines (such as cognitive psychology) into economics and the economic analysis of law largely as a threat. Yet, there is an issue whether this kind of attitude is justifiable at present, particularly considering the developments in these social science disciplines (psychology, economics and legal science) over the past several decades. Does the answer to this question reflect a response to another more substantial question about the necessity of integrating the findings of different disciplines? Do these conflicting views, despite being based on rational and logical argumentation, entail an ideological defense of a specific scientific discipline, or are they a mere reflection of conservative views on the status of the scientific discipline? Do the conflicting views of these two sets of scholars reflect the ideological clash of American political liberalism and political conservatism in the broadest sense of the word? There are no definite answers to all these questions which still remain open but the answers to some of them (at least) may be inferred. Behavioral economics certainly exhibits some weaknesses that may potentially lead to unnecessary “psychologizing“ of some other assumptions of neoclassical economics; we may also observe certain commercialization of research findings of behavioral economics which undermines the serious nature of this discipline. But, all scientific disciplines go through a similar formative process which includes initial weakness, evolutionary development and final recognition as a legitimate scientific discipline. In the author’s opinion, the specified psychological researches (and many others) support the hypothesis on the complementary approach to the study of human behavior, which implies a compatibility of the standard neoclassical economic theory (neoclassical economic analysis of law) and the behavioral theory dealing with the study of decision-making processes. The complementary approach to the study of human behavior may yield more accurate and reliable results in comparison to the currently existing body of knowledge which is the result of the standard economic modeling of the individual’s behavior. Any attempt to impose rigid constraints on a scientific discipline may jeopardize its very subsistence. There are times when fear may prove to be justified but, essentially, it is necessary to provide for a further development of Behavioral Economics (BE)/Behavioral Law and Economics (BLE) and promote human knowledge through its empirical findings. After all, Richard Posner is definitely right in asserting that the prospects of this discipline may not be quite bright without a clearly constructed theoretical position. Only time will tell if Behavioral Economics (BE)/Behavioral Law and Economics (BLE) prove noteworthy in terms of its origins and subsequent development. Until then, our knowledge will be promoted through the findings of the neoclassical EAL; in spite of facing numerous challenges and criticism,62 the very presence of this discipline indicates to the necessity of integrating the findings of different scientific disciplines. The greatest resistance to Behavioral Economics (or Behavioral Law and Economics) does not come from the traditional psychologists, economists and lawyers who might be expect to oppose the integration of the scientific disciplines they originally come from but rather from the proponents of neoclassical economics and neoclassical EAL (such as Richard Posner), whose intellectuals are most vocal exponents of this resistance.63 It remains to be seen whether the integrative development of law and economics will be preserved at the level of built (and recognized) theoretical position of EAL, or whether some other disciplines (such as cognitive psychology) will continue to exert their influence which will eventually generate the final theoretical profile of this new disciplines. The credibility of empirical findings of Behavioral Economics as well as the gradual acceptance of this theory by some EAL scholars goes in favor of the latter assertion. Anyway, we hope that this integration of social sciences will not be confined only to the traditionally See a summary of critical comments on the Chicago School of EAL, which is the most dominant school within the EAL, in: Јовановић, A. (2008.) op. cit., pp. 97-102. 63 The conflict between the two disciplines is also reflected in the US politics given the fact that the current US administration uses the findings of behavioral law and economics as a basis for implementing its regulatory program; in the past (during Reagan’ administration), the economic analysis of law was used as the basis for accomplishing rather different political goals. Read more about it in: Wright, J., Ginsburg, D. (2012.) op. cit., pp. 48-56. 62

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related disciplines, such as law and economics, given the fact that economics is inseparable from other social sciences; hopefully, there will be no abuse of the BE (or BLE) findings in terms of reducing personal freedoms and using excessive state intervention. In a nutshell, the key message of this intellectual reflection on the integration of different scientific disciplines may be briefly expressed by the following quotation: “There is only one social science“.64

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

Aleksić, A. (2007.) Herbert Sajmon – inovator u oblasti poslovnog upravljanja i organizacije. Ekonomski anali, No. 172. Begović, B. (et al.). (2008.) Ekonomija za pravnike, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. Bronsteen, J. (2009.) Some Thoughts about the Economics of Settlement, Fordham Law Review, Vol. 78. Coase, R. (1960.) The Problem of Social Cost. Journal of Law and Economics, Vol. 3. Cooter, R., Rubinfeld, D. (1989.) An Economic Analysis of Legal Disputes and their Resolution. Journal of Economic Literature, Vol. 27, No. 3. Cooter, R., Ulen, T. (2004.) Law & Economics, Fourth Edition, Pearson Addison Wesley, Boston, San Francisco, New York, London, Toronto, Sydney, Tokyo, Singapore, Madrid, Mexico City, Munich, Paris, Cape Town, Hong Kong, Montreal. Ellickson, R. (1989.) Bringing Culture and Human Frailty to Rational Actors: A Critique of Classical Law and Economics. Chicago Kent Law Review, Vol. 65. Gaus, Dž. (2012.) O filozofiji, politici i ekonomiji, Službeni glasnik, Beograd. Goodwin, P. (2010.) Why Hindsight Can Damage Foresight. The International Journal of Applied Forecasting. Available at: http://www.forecasters. org/pdfs/foresight/free/Issue17_Goodwin.pdf Jolls, C. (2006.) Behavioral Law and Economics, Public Law and Legal Theory, Research Paper No. 130, John M. Olin Center for Studies in Law, Economics, and Public Policy, Research Paper No. 342, pp. 6-8. Available at: http://ssrn.com/abstract=959177 Jolls, C. (et al.). (1998.) A Behavioral Approach to Law and Economics. Stanford Law Review. Vol. 50. Jovanović, A. (1998.) Uvod u ekonomsku analizu prava, Savet projekta Konstituisanje Srbije kao moderne pravne države, Centar za publikacije Pravnog fakulteta, Beograd. Jovanović, A. (2004.) Ronald Kouz. Ekonomski anali, No. 161. Jovanović, A. (2008.) Teorijske osnove ekonomske analize prava, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. Kahneman, D. (1992.) Reference Points, Anchors, Norms and Mixed Feelings. Organizational Behavior & Human Decision Processes, Vol. 51, Issue 2. Kahneman, D. (et al.). (1990.) Experimental Tests of the Endowment Effect and the Coase Theorem. The Journal of Political Economy, Vol. 98, No. 6. Kahneman, D., Tversky, A., (1973.) On the Psychology of Prediction. Psychological Review, Vol. 80, No. 4. Kahneman, D., Tversky, A., (1979.) Prospect Theory: An Analysis of Decision under Risk. Econometrica, Vol. 47. Korobkin, R., Guthrie, C. (1994-1995.) Psychological Barriers to Litigation Settlement: An Experimental Approach. Michigan Law Review, Vol. 93. Leff, A. (1974.) Economic Analysis of Law: Some Realism about Nominalism. Virginia Law Review, Vol. 60. Miceli, T. (1997.) Economics of the Law – Torts, Contracts, Property, Litigation, Oxford University Press, New York, Oxford. Miceli, T. (2004.) The Economic Approach to Law, Stanford University Press, Stanford California. Nikolić, Lj. (2011.) Osnovi ekonomije, Centar za publikacije Pravnog fakulteta u Nišu, Niš. Nozick, R. (1993.) The Nature of Rationality, Princeton University Press, Princeton, New Jersey. P’ng, I.P.L. (1983.) Strategic Behavior in Suit, Settlement, and Trial. The Bell Journal of Economics, Vol. 14, No. 2. Plott, C., Zeiler, K. (2005.) The Willingness to Pay-Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations, American Economic Review, Vol. 95, No. 3. Posner, R. (2002.) Behavioral Law and Economics: A Critique. Economic Education Bulletin, published by American Institute for Economic Research, Great Barrington, Massachusetts, Vol. XLII, No. 8. Rachlinski, J. (1996.) Gains, Losses, and the Psychology of Litigation. Southern California Law Review, Vol. 70. Schäfer, H., Ott, C. (2004.) The Economic Analysis of Civil Law, Edward Elgar Publishing, Cheltenham, UK, Northampton, MA, USA. Shanteau, J. (1989.) Cognitive Heuristics and Biases in Behavioral Auditing: Review, Comments and Observations, in: Accounting, Organizations and Society 14(1/2), pp. 165–177, available at: http://www.k-state.edu/psych/cws/pdf/aos89.PDF Shavell, S. (1982.) Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs. Journal of Legal Studies, Vol. 11. Shavell, S. (1996.) Any Frequency of Plaintiff Victory at Trial is Possible. Journal of Legal Studies, Vol. 25. Simon, H. (1955.) A Behavioral Model of Rational Choice. Quarterly Journal of Economics, Vol. 69, Issue 1. Simon, H. (1959.) Theories of Decision Making in Economics and Behavioral Science. The American Economic Review, Vol. 49, No. 3. Trebješanin, Ž. (2001.) Rečnik psihologije, Stubovi kulture, Belgrade. Wright, J., Ginsburg, D. (2012.) Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty. Northwestern University Law Review, Vol. 106, No. 3.

DETAILS ABOUT AUTHORS: DOC. DR ALEKSANDAR MOJAŠEVIĆ ASSISTANT PROFESSOR UNIVERSITY OF NIŠ, FACULTY OF LAW NIŠ, SERBIA mojasevic@prafak.ni.ac.rs 64

See: Ellickson, R. (1989.) Bringing Culture and Human Frailty to Rational Actors: A Critique of Classical Law and Economics. Chicago Kent Law Review, Vol. 65, p. 55, where is noted by: Hirshleifer (1985.) The Expanding Domain of Economics, The American Economic Review, Vol. 75, No. 6, p. 53.

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INTERGENERATIONAL CONNECTEDNESS AND SOLIDARITY MAJA MEŠKO ZLATKA MEŠKO ŠTOK

ABSTRACT

Population ageing has become a characteristic feature of demographic development in the world and require a new solidarity between generations. The aim of the study is to review the current situation of intergenerational connectedness and suggest activities that could bring together different generations. The questionnaires were designed for young and old people separately. The Questionnaires were distributed to seniors and young people in Slovenia. The data were processed with the Microsoft Excel 2007 and SPSS 19.0. Descriptive statistics and ANOVA was applied as a method. We found out that there is a positive groups’ attitude toward each other, but seniors and young people are looking for more intergenerational activities. Recommendations for establishing a good intergenerational cooperation or improving the existing one were framed. KEYWORDS: Intergenerational relationships, Intergenerational connectedness, Intergenerational solidarity

1. INTRODUCTION The ageing of people has become a characteristic feature of demographic development in the world. “Developments in society such as geographic mobility, divorce, and nuclear families have led to an increasing gap between the old and young and minimized the opportunities for children to interact with grandparents or other older people (Kupetz, 1993)”. As Bernard and Phillips (2000) explain “the situation of older people is becoming an increasingly important element in social policy debates” and the urgent need for “an integrated social policy which addresses the broad needs of an ageing society”.

1.1. Population ageing Since the end of the 20th century, life expectancy, which causes ageing of population, has increased sustantially. The number of people above the age of 60 has increased by more than 60 million (Ramovš 2003, 225). By the average variant of population projection EUROPOP 2008, the share of population aged above 65 will have increased from 16% to 33.4% by the year 2060, and the share of population aged 80 and above will have increased from 3.5% to 14.1% (www.stat.si/pub.asp). According to the World Population Prospect Report (2008), »in the more developed regions, the population aged 60 or over is increasing at the fastest pace ever and is expected to increase by more than 50 per cent over the next four decades, rising from 264 million in 2009 to 416 million in 2050. Compared with the more developed world, the population of the less developed regions is ageing rapidly. Over the next two decades, the population aged 60 or over in the developing world is projected to increase at rates far surpassing 3 per cent per year and its numbers are expected to rise from 473 million in 2009 to 1.6 billion in 2050.« Each individual’s appearance is determined in a unique way and their appearance cannot be the same at the same age. Not all individuals look the same despite sharing the same age. The rate or pace of ageing depends on an elderly person’s thoughts and actions or their wilful decision on how they would like to grow old and what they are prepared to do for leading a quality life (Hojnik Zupanc 1997, 1). To assure the quality of life in all generations, the elderly generation must not be separated from the middle and young generation. If elderly people do not socialize with the young and middle generation, their life is unhappy and it is not a quality one (Ramovš 2003, 47). Today’s elderly people are different from those of the past and future. Nowadays they want to grow old actively also after their retirement, i.e. they want to be constantly active in the economic, social, cultural and civil area by participating in new kinds of activities that are beneficial to society (www. stat.si/pub.asp).

1.2. Intergenerational Connections Feelings of loneliness, needlessness, isolation (being pushed away) in elderly people who live in homes for the aged, since the middle generation is at work and the young generation is not around, have spurred the need to connect generations.

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Thus, the purpose of intergenerational connections are (Majhenič 1999, 98):

• to preserve the autonomy and individuality of the elderly since this promotes responsibility, creativity and indepen• • • •

dent life; to preserve the contacts with families, neighbours and peers (people of the same age); to provide for accessibility of information on the topics significant to the elderly; to promote the development of adolescents’ self-confidence and their own initiative to function independently; to encourage adolescents to learn the ethical dimension of interpersonal relations.

The results of intergenerational connections are passing on experience from the elderly to the young and bringing cheerfulness and joy to the elderly. This involves resuming and fostering or cultivating the basic relations among people. Such relations provide security and stamina, passing on the elderly generation’s legacy – experience and wisdom – and on the other hand bringing young people’s awareness of the importance of quality ageing (Postružnik 1999, 82). Interpersonal communication and profound experiencing or understanding is valuable and absorbing to the young generation. Intergenerational solidarity and the connectedness of generations are the basis for every society and its sustainable development. Nowadays, the networks of intergenerational programmes provides for generational connectedness (connecting generations), quality ageing and awareness of existence and organization of the networks of intergenerational programmes and projects at a local level. Example of such project is post-doctoral project Intergenerational Relations and Cooperation, which were the source for our investigation conducted by means of questionnaires. The post-doctoral project’s aim is to study and analyse intergenerational connectedness and suggest activities and programmes that would bring together different generations. The purpose of the research is to review the current situation of intergenerational connectedness in some European countries. On the basis of the survey conducted, activities that could bring together different generations are suggested.

2. METHODS 2.1. Participants Our sample includes 166 young and 77 elderly people, living in the area of 23 communities in the Celje Region: Celje, Štore, Vojnik, Dobrna, Laško, Radeče, Slovenske Konjice, Vitanje, Zreče, Šentjur, Dobje, Šmarje, Kozje, Podčetrtek, Rogaška Slatina, Rogatec, Bistrica ob Sotli, Žalec, Braslovče, Polzela, Prebold, Tabor and Vransko. The young are defined as persons aged 15 to 29, while the elderly are defined as persons aged 60 and above. The group consisting of young people includes 32 males and 134 females – among them there are 13 secondary school students, 49 graduate students, 81 employed persons and 23 persons who are either unemployed or taking part in professional training before employment. Their average age is 22.8 (SD = 6.17). 82 young participants are from the countryside and 83 from towns. Among 77 elderly participants, 26 of them are male and 51 are female, 7 of them are employed and 70 are retired. Their average age is 65.6. Among 77 elderly participants, 35 are from towns and 42 from the countryside.

2.2. Questionnaire and Procedure We designed a questionnaire adapted by the questionnaire in the »My Story« Project and by other international projects on the topic of intergenerational cooperation. A survey was conducted, employing two methods: mainly via the world wide web by using the web programme 1ka (enabling us to acquire the required number of completed questionnaires quite easily), and by means of personal survey (used above all with the elderly participants). The survey was conducted between 28th March 2013 and 14th April 2013. The questionnaire includes four parts:

• • • •

general part, questions enquiring opinions about the young and the elderly generation questions on intergenerational cooperation and an open-ended question to suggest types of cooperation.

After the completed survey, the data was processed by means of the software programme: SPSS 18.0.

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3. RESEARCH RESULTS AND DISCUSSION The current state analysis, i.e. the description of the young and elderly generation’s opinions about each other and opinions about intergenerational cooperation was performed considering both target groups in our research (the elderly and the young). The research deals with the young and the elderly separately. By employing questionnaires designed separately for the young and separately for the elderly, we acquired the data about their opinions and the data on intergenerational cooperation. On the basis of our methodology of data collection, we collected the list of the needs and requests of both target groups and, further on, by employing the appropriate methodological analysis framed a proposal for establishing and promoting successful intergenerational cooperation or enhancing the already existing one. In Table 1, the young generation’s opinions about the elderly generation are presented. The young assessed the characteristics of the elderly on the 1–5 scale, where 1 signifies the lowest rate of a certain characteristic and 5 the highest rate of a certain characteristic. Table 1. Assessment of the characteristics of the elderly generation Assess the characteristics of the elderly generation on the 1–5 scale (1 – the lowest rate and 5 – the highest rate) Questions

Answers

Valid

No.of items

Average

Standard deviation

1

2

3

4

5

Skupaj

Having the ability to understand (comprehensive)

14 (10%)

38 (26%)

60 (42%)

24 (17%)

8 (6%)

144 (100%)

144

166

2.8

1.0

Capable

0 (0%)

17 (12%)

60 (42%)

52 (36%)

14 (10%)

143 (100%)

143

166

3.4

0.8

Experienced

1 (1%)

3 (2%)

10 (7%)

51 (36%)

78 (55%)

143 (100%)

143

166

4.4

0.8

Not willing to do anything

23 (16%)

46 (32%)

49 (35%)

22 (15%)

2 (1%)

142 (100%)

142

166

2.5

1.0

Overburdened

13 (9%)

45 (32%)

43 (30%)

31 (22%)

10 (7%)

142 (100%)

142

166

2.9

1.1

Possessing a vision

16 (11%)

46 (32%)

48 (34%)

24 (17%)

8 (6%)

142 (100%)

142

166

2.7

1.1

Sociable

2 (1%)

13 (9%)

61 (43%)

52 (37%)

14 (10%)

142 (100%)

142

166

3.4

0.8

Stubborn

1 (1%)

14 (10%)

46 (32%)

49 (35%)

32 (23%)

142 (100%)

142

166

3.7

1.0

Predictable

3 (2%)

6 (4%)

59 (42%)

55 (39%)

19 (13%)

142 (100%)

142

166

3.6

0.9

Economical

0 (0%)

3 (2%)

25 (17%)

57 (40%)

58 (41%)

143 (100%)

143

166

4.2

0.8

Embittered

9 (6%)

26 (18%)

60 (42%)

38 (27%)

9 (6%)

142 (100%)

142

166

3.1

1.0

Critical

2 (1%)

16 (11%)

42 (30%)

60 (42%)

22 (15%)

142 (100%)

142

166

3.6

0.9

Hard-working

2 (1%)

13 (9%)

40 (28%)

59 (41%)

29 (20%)

143 (100%)

143

166

3.7

0.9

Slow

4 (3%)

29 (20%)

49 (35%)

43 (30%)

17 (12%)

142 (100%)

142

166

3.3

1.0

Responsible

0 (0%)

7 (5%)

32 (23%)

67 (47%)

36 (25%)

142 (100%)

142

166

3.9

0.8

Pretentious

5 (4%)

20 (14%)

58 (41%)

37 (26%)

21 (15%)

141 (100%)

141

166

3.3

1.0

Strong-headed

4 (3%)

20 (14%)

47 (33%)

41 (29%)

31 (22%)

143 (100%)

143

166

3.5

1.1

Activist

16 (12%)

38 (27%)

64 (46%)

19 (14%)

2 (1%)

139 (100%)

139

166

2.7

0.9

Source: authors

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The young believe that the characteristics of the elderly generation include, above all, experience (M=4.4), economy (parsimony) (M=4.2), responsibility (M=3.9), diligence (M=3.7) and stubbornness (M=3.7). The elderly generation is considered more economic than the young generation, who used to live in the era of prosperity (http://www.financnitrgi.com/radar/9-modrih-nasvetov-na-katere-mlada-generacija-pozablja), and this may be the reason that the young people see the elderly generation as more economic. The elderly generation is considered to be the generation of workaholics as work is of great importance to them (http://www2.arnes.si/~gzver/arhiv%202012/Peta%20stran/ Monika%20Horvat/generacije.html). The elderly are considered more experienced by the young since they are older and more experienced, and therefore possess more knowledge. Reviewing the analysis of the answers to other questions related to cooperation between the two generations, we established that the young believe that the experiences of the elderly are beneficial to the society and that the elderly help preserve traditional values. The young assess work with the elderly mainly (59 %) as positive since they believe that it presents an important experience in young peopleâ&#x20AC;&#x2122;s life. 27% of the young respondents believe that work with the elderly encourages the elderly people to solve their problems independently. Most of the young (59 %) would like to spend more time in the company of the elderly, spending their free time doing variety of activities, preferably going for a walk and doing some sport (114 answers) as well as taking part in social games (61 answers). The young generation suggests that the intergenerational cooperation should take place in workshops where the elderly would teach the young such skills and activities that used to be practiced in the past: crochet, needlework, bobbin-work, baking, manual skills; in educational seminars (where the elderly could tell the young what life used to be like, and by doing so they teach the young to be grateful for what they have now), on the other hand the young could help the elderly with the use of information technology; by active socialising during various activities (hiking, trips, social events, cultural events or performances, etc.); in debate clubs discussing various topics; in courses (e.g. photography, drawing, foreign languages, etc.). It is also suggested that regular meetings of local districts (quarters) should be called, where all members of a community could take part and where the goals shared by all community members and fulfilling their needs (also the need for intergenerational cooperation) should be set or determined, and the budget should be allocated. In Table 2, the opinions of the elderly generation about the young are presented. The elderly assessed the young generationâ&#x20AC;&#x2122;s characteristics on the 1â&#x20AC;&#x201C;5 scale, where 1 signifies the lowest rate of a certain characteristic and 5 the highest rate of a certain characteristic.

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Table 2. Assessment of the characteristics of the young generation Assess the characteristics of the young generation on the 1–5 scale (1 – the lowest rate and 5 – the highest rate) Questions

Answers

Valid

No.of items

Average

Standard deviation

1

2

3

4

5

Skupaj

Having the ability to understand (comprehensive)

0 (0%)

3 (4%)

14 (19%)

35 (49%)

20 (28%)

72 (100%)

72

77

4.0

0.8

Capable

0 (0%)

2 (3%)

15 (21%)

35 (49%)

20 (28%)

72 (100%)

72

77

4.0

0.8

Not willing to do anything

17 (24%)

18 (26%)

25 (36%)

8 (11%)

2 (3%)

70 (100%)

70

77

2.4

1.1

Overburdened

4 (6%)

12 (17%)

20 (28%)

27 (38%)

9 (13%)

72 (100%)

72

77

3.3

1.1

Possessing a vision

2 (3%)

11 (15%)

21 (30%)

27 (38%)

10 (14%)

71 (100%)

71

77

3.5

1.0

Sociable

3 (4%)

6 (8%)

21 (30%)

28 (39%)

13 (18%)

71 (100%)

71

77

3.6

1.0

Stubborn

4 (6%)

9 (13%)

23 (32%)

22 (31%)

14 (19%)

72 (100%)

72

77

3.5

1.1

Predictable

2 (3%)

17 (24%)

32 (44%)

16 (22%)

5 (7%)

72 (100%)

72

77

3.1

0.9

Economical

8 (11%)

27 (38%)

21 (30%)

11 (15%)

4 (6%)

71 (100%)

71

77

2.7

1.1

Embittered

8 (11%)

11 (15%)

32 (44%)

17 (23%)

5 (7%)

73 (100%)

73

77

3.0

1.1

Critical

2 (3%)

11 (16%)

21 (30%)

27 (39%)

9 (13%)

70 (100%)

70

77

3.4

1.0

Hard-working

2 (3%)

8 (11%)

42 (59%)

13 (18%)

6 (8%)

71 (100%)

71

77

3.2

0.9

Responsible

4 (6%)

11 (15%)

36 (50%)

16 (22%)

5 (7%)

72 (100%)

72

77

3.1

0.9

Pretentious

3 (4%)

9 (13%)

16 (22%)

36 (50%)

8 (11%)

72 (100%)

72

77

3.5

1.0

Strong-headed

2 (3%)

6 (9%)

25 (36%)

27 (39%)

10 (14%)

70 (100%)

70

77

3.5

0.9

Activist

5 (7%)

18 (25%)

23 (32%)

23 (32%)

4 (5%)

73 (100%)

73

77

3.0

1.0

Source: authors

The elderly mainly believe that the young generation is, above all, characterised by the ability to understand (AS=4.0), capability (AS=4.0), sociability (AS=3.6), pretentiousness (AS=3.5) and stubbornness (AS=3.5). According to some sources, the young are very self-confident, strong-headed, self-trusting, prone to experimenting in their sex life as well as with drugs. Most of them were born in the era of the internet, computer and other technology. They adore electronic music and they are also very tallented and innovative (http://www2.arnes.si/~gzver/arhiv%202012/Peta%20 stran/Monika%20Horvat/generacije.html). The elderly generation also see the young as capable, able to understand and strong-headed. They believe the young are our future, and the future should be different from the present. Reviewing the analysis of the answers to other questions related to cooperation between the two generations, we established that the young are considered by the elderly as our society’s future, the future which should be different from the past. They relate them to energy, beauty and health, hankering for independence, dependence on modern technology as well as with a difficult economic situation. Work/engaging with the young is assessed or considered as positive by the majority of the elderly (61 %) since they believe that work with the young represent an important investment. 23 % of the elderly believe that work with the young encour-

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ages the young to solve their own problems. The majority (66 %) would like to spend more time in the company of the young, and they would like to spend their free time in various ways, most willingly going for a walk and engaging themselves in sports activities (46 answers), going on holidays (28 answers) and educating themselves (26 answers). The elderly generation suggests that the intergenerational cooperation should take place within various sports activities (e.g. hiking); trips; various workshops and courses; debate clubs; camps; social games; by the young generation providig help with every-day chores, e.g. taking the elderly by car when they go on errands, helping with their work in the garden, keeping in touch on a daily basis, etc.

CONCLUSION Intergenerational cooperation contributes substantially to solidarity, tolerance and quality of interpersonal relations, both, from a wider social viewpoint as well as from a narrower family viewpoint. Therefore, it is of utmost importance to devote more attention to education for coexistence/cohabitation, solidarity and cooperation of all generations in the long-lived society. The mode or way of family life has changed, and young and elderly generations do not live together (cohabit) any longer. This is due to the lack of intergenerational dialogue. Moreover, the years of service (period of employment) is getting longer and the number of elderly people in the society is getting higher. Consequently, there is more and more tension between generations. The young are busier and busier and they cannot find any proper support to improve their quality of life. On the other hand, elderly people are isolated and lonely. It is necessary to establish what the new relations and relationships between generations are, since sustainable development is feasible only in a genuine contact and coexistence of all generations. To coexist or cohabit peacefully and to lead a quality life, a positive communication and willingness between generations to achieve this goal, as well as a more active role of neighbourhood, local and other communities are required. Coexistence and solidarity depends on the cooperation of all three spheres, i.e. the state, which possesses power instruments, the market, which possesses capital, and the civil society, which possesses the quality of solidarity. To exit the crisis, the roles of all the above mentioned spheres and the roles of the young and the elderly generations should be balanced. As the society is becoming more and more aware of this important fact, it encourages intergenerational cooperation and coexistence by implementing various programmes for the young and for the elderly, by which it enhances the active role of the elderly, develops the creativity of the young and connects generations since the quality of life and the future of the coming generations depends on these activities.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

Bernard, M., Phillips, J. (2000.) The challenge of ageing in tomorrow’s Britain. Ageing & Society 20(1), pp. 33-54. Finančni trgi, B.U. (2011). 9 modrih nasvetov, na katere mlada generacija pozablja!. Http://www.financnitrgi.com/radar/9-modrih-nasvetov-nakatere-mlada-generacija-pozablja (13. 4. 2013). Hojnik-Zupanc I. (1997.) Dodajmo življenje letom: Priprava na upokojitev in starost, Gerontološko društvo Slovenije, Ljubljana 1997. Horvat, M. (2012). Generacije mojega življenja. Http://www2.arnes.si/~gzver/arhiv%202012/Peta%20stran/Monika%20Horvat/generacije.html (13. 4. 2013). Kupetz, Barbara N. (1993.) Bridging the gap between young and old. Children Today, 22(2), pp. 10-13. Majhenič M. (1999.) 2. Slovenski kongres prostovoljcev: Prostovoljno delo s starimi, za stare in skupaj z njimi, Socialna zbornica Slovenije, Ljubljana. Postružnik A. (1999.) 2. Slovenski kongres prostovoljcev: Prostovoljno delo srednješolcev in osnovnošolcev – medgeneracijsko povezovanje, Socialna zbornica Slovenije, Ljubljana. Ramovš J. (2003.) Kakovostna starost, Inštitut Antona Trstenjaka, Ljubljana. RS Statistični urad RS. (2010.) Starejše prebivalstvo v Sloveniji, Ljubljana, september 2010 www.stat.si/pub.asp.

DETAILS ABOUT AUTHORS: MAJA MEŠKO ASSISTANT PROFESSOR FACULTY OF MANAGEMENT, UNIVERSITY OF PRIMORSKA KOPER, SLOVENIA maja.mesko@fm-kp.si ZLATKA MEŠKO ŠTOK ASSISTANT PROFESSOR FACULTY OF MANAGEMENT, UNIVERSITY OF PRIMORSKA KOPER, SLOVENIA zlatka.stok@fm-kp.si

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ESTIMATION OF UNPAID WORK VALUE IN THE SLOVAK HOUSEHOLDS ALENA KAŠČÁKOVÁ ĽUBA KUBIŠOVÁ GABRIELA NEDELOVÁ

ABSTRACT

The aim of the contribution is to describe possible ways of the unpaid work value estimation in households in Slovakia. For the computation, we use method of time mapping household members´ activities. As the Statistical Office of the Slovak Republic does not collect the data necessary for these calculations, the relevant data were gathered by primary research. Processed data from the preliminary research were divided into groups according to the number of household members. Each activity was assigned the average gross nominal monthly wage based on the occupational category in the national economy. After recalculating the unpaid work values in the groups of households and their weighing it was possible to establish the value of unpaid work in Slovak households as well as its share on the GDP. The final results for the years 2011 and 2012 were then compared. KEYWORDS: households, unpaid work, Time Use Survey, input method

1. INTRODUCTION The amount of unpaid work of household members varies in national economies as a result of several different factors. As many studies in the fields of economics and mainly sociology show, women do more unpaid work in households than men. Unpaid work in the broad sense includes a wide range of activities taking place outside the official labour market and without remuneration. A significant portion of human needs is actually satisfied by the results of unpaid work. Unpaid work includes activities that use economic resources to satisfy human needs, such as domestic work, childcare, caring for other dependants, volunteering, help in the family business etc. National economies do not differ only in the amount of unpaid work; in fact there is a variety of methods and procedures to measure it. In most cases, the source of information about the amount and structure of unpaid work is statistical Time Use Survey (TUS). In the beginning of 1990-s, the Eurostat began to lay the foundations of harmonisation of similar surveys in the European countries. By the end of the 1990-s these efforts were successfully concluded and in 2000 a final version of the proposal for the unified structure of surveys was published. At present, 15 European countries participate in this survey (HETUS – Harmonised European Time Survey). In Slovakia, work on this type of surveys only began several years later. In 2005, the implementation of the pilot project was prepared using the Time Use Survey (TUS) methodology provided by Eurostat and based on the terms specified in the Council Regulation (EC) No. 322/97. The task was to prepare time use survey in the selected households in the Slovak Republic that would be most representative of a variety of households in terms of the way of living, employment, size of households and the age category of household members and thus warrant comprehensive time use survey implementation to take place in 2008 – 2010. The pilot project was implemented in 2006 and it included 200 private households in the survey. The project ended in November 2006 and further surveys were cancelled. With view of the fact that there is no relevant source of information about the size and structure of the unpaid work in Slovakia, the issue is dealt with by a primary survey through questionnaires within the research projects VEGA 1/1141/11 and VEGA 1/0935/13 conducted at the Faculty of Economics, Matej Bel University.

2. NOTION OF RATIONALITY From analytical point of view, the day time of a human can be divided into nonworking and working time. The first category comprises nonworking activities including individual self-care and leisure activities. Working time consists of time an individual spends on activities for which he/she is remunerated based on a contract. On the contrary, unpaid work consists of activities that an individual is not remunerated for. In connection with the methodology of national accounts it is possible to divide the unpaid work into two groups, that is economic (put simply, its results can be placed on the market) and noneconomic. In accordance with the Eurostat definitions, the following types of activities can be considered as unpaid work in the household (Hirway, 1999).

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Table1. Type and description of the activities connected with household and family care classified as unpaid work Type of activity

Brief description of the activity

1

Food management

Food preparation, Dish washing, Food serving and other specified food management

2

Household upkeep

Unspecified food management, cleaning, heating and water, cleaning and maintenance of the yard around the house, other household upkeep

3

Making and care for textiles

Laundry, ironing, care for textiles, shoes, making textiles, handicraft and other making and care for textiles and shoes

4

Gardening and pet care

Gardening, tending domestic animals, caring for pets etc.

5

Construction and repairs

House construction and renovation, repairs of dwelling, furniture, vehicle repairs and maintenance, making equipment, other construction and repairs

6

Shopping and services

Purchases of goods and capital, commercial, administrative, healthcare, veterinary and other personal services and other shopping

7

Childcare

Physical care and supervision, reading, playing and talking with children, teaching and accompanying child, taking to and from school, nursery, other childcare activities

8

Help to an adult family member

Physical care of and help to a dependent (disabled) adult family member, other help to such person

9

Volunteering

Volunteering is a freely chosen activity in favour of others performed with no financial gain involved.

Source: Eurostat, 2006.

Noneconomic group of unpaid work activities in the household includes meal preparation, household upkeep – cleaning, making and care for textiles, growing foliage plants, caring for pets, repairs and maintenance of a flat and a car, shopping and services, childcare, caring for adult family members and volunteering. Economic activities within unpaid work fall into production boundaries of the SNA national accounts. This group of unpaid domestic work activities that can be valued on the market consists of growing subsistence plants, tending domestic animals and construction and repairs (Považanová - Paľa, 2011). When quantifying the value of unpaid domestic work, we will further distinguish between unpaid work in total and unpaid work excluding market activities.

3. CRITICISM ON THE RATIONALITY ASSUMPTION Measuring the value of unpaid work is based on the idea of financial valuation. To measure the financial value, we can use both input and output methods. When using the output method, the financial value is assigned to the domestic production produced by unpaid work. The valuation uses the market prices of the substitutes of goods and services produced by households available on the market. Due to the lack of data regarding the amount of outputs produced by the households as well as the problem of expressing the results of some services (bringing up children, for example), we will not use this approach in our measurements. Using the input approach, it is necessary to assume that the value of goods and services produced within a household equals the costs of their production. In spite of the fact that the production of households that is not offered on the market requires also other inputs, not only labour, the valuation includes only labour that is consequently valued (Považanová - Paľa, 2011) Out of the input methods, the one used most often is the method of market-replacement cost based on valuation of the performed unpaid work by comparison with the price (cost) of respective (substitute) of unpaid work, i.e. remuneration for this labour. When using a generalist approach, the remuneration of a person doing household upkeep professionally is taken into account, whereas the specialist method uses the remuneration of the persons specialised at a specified kind of activity (a cook, cleaner, carer etc.) The amount of unpaid work can then be calculated as follows: Where N - is the size of the sample, Xi - extrapolation factor (weights used to generalize the value of the sample), tj - number of activities of unpaid work in the group j,

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Hij - number of hours spent on unpaid work from the group of activities j per one time unit (period) corresponding to an individual i, Wj - average wage of specialized occupations in the group j, Wjk - wage of the specialized position k in the group j. (Poza – Smith, 1999).

4. PILOT SURVEY IN SLOVAK HOUSEHOLDS Questionnaire survey designed to determine the volume of unpaid work in Slovak households was implemented in 2 stages – the pilot survey and the main survey. The goal of the pilot survey was to test the questionnaire, its structure, completeness and intelligibility of the questions, to verify the coverage of the area in the SR and validate both economic and noneconomic hypotheses. It was necessary to clarify and unify some definitions, determine the statistical sample and select the variables to be collected through the questionnaire. The decision was made to collect the data in the way of personal in-home surveys with the help of volunteers –students of the Faculty of Economics. The volunteers were properly trained and could use the guidance and consultations of experts in the process. The pilot survey took place at the end of 2011, from 21. 11. – 13. 12. 2011 and included 233 households with 763 persons in all regions of the SR. The questionnaire contained questions for two statistical units – 8 questions were aimed at individual members of the household and 4 at the household as a whole. The questions were aimed at social and demographic characteristics of respondents – both individual and households, amount of time used weekly for activities classified as unpaid work by household members, information about paid work, volunteering, help with unpaid work, motivation factors, respondents’ estimations regarding the extent of unpaid work in the future, their relation to unpaid work etc. After the evaluation of the data collected in the pilot survey we concluded that the acquired sample of responses was not representative according to some important characteristics, such as space (distribution across regions) and a number of household members. It also became clear that it is necessary to ensure the representativeness of the sample based on gender, as we assumed that it was one of the key determinants affecting the amount of unpaid work in households. The structure of the questionnaire proved to be adequate but it was necessary to make some small changes. Some questions were excluded due to their low response rate. The key question about the amount of unpaid work was extended with options indicating the length of the season for seasonal activities. Some questions received more answer options, some explanatory notes to the choice of answers and their coding were added and some changes to the form of the questionnaire were made as well. The results of the pilot survey have already been published (Kaščáková, Nedelová, 2012). The main survey was planned for the spring 2012.

5. RESULTS OF THE MAIN SURVEY IN THE SLOVAK HOUSEHOLDS With view of the pilot survey results and following the recommendations of the experts from the Statistical Office of the SR we made some adjustments in both the contents and the form of the questionnaire and also in the way of administering the questionnaire. The questionnaire was divided into 12 modules: 7 modules for household members

• • • • • •

Social and demographic characteristics How many hours a week on average do respondents spend on each category of unpaid work Information on paid employment/jobs Who helps most often with unpaid work in the household Estimation of the unpaid work in the future Motivation to do unpaid work

5 modules for household

• • • • •

Care for pre-school aged children Type of household Type of municipality Region Explanatory notes to the questionnaire

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The main survey was implemented in the period of 22. 2. â&#x20AC;&#x201C; 2. 4. 2012. In total, 1564 households with 4 435 members were approached in all regions of the SR. It had two main objectives: to verify both the economic and noneconomic hypotheses and quantify the amount of unpaid work in the Slovak households. This required a representative sample of the households so that processing of the questionnaires would not produce distorted results. The research team consulted the experts of the Statistical Office of the SR and their experience with arranging similar surveys prior to setting the main criteria of representativeness, such as those based on spatial distribution (in every region), number of household members and gender. Collected data were processed with the SPSS software (PASW Statistics 18). The hypotheses were tested using the chi-squared goodness-of-fit test with the 0.05 significance level. The representativeness verification results are shown in Tables 1 â&#x20AC;&#x201C; 6. Tables 1 - 2 Verification of the sample representativeness according to spatial distribution (regionality) Region Observed N

Expected N

Residual

1

488

495,3

-7,3

2

428

455,5

-27,5

3

503

486,5

16,5

4

555

566,1

-11,1

5

567

566,1

,9

6

541

539,6

1,4

7

696

667,8

28,2

8

649

650,1

-1,1

Total

4427

Tests statistics Kraj Chi-square

3,747a

df

7

Asymp. Sig.

Source: output SPSS

,808

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 455,5.

Tables 3 - 4 Verification of sample representativeness according to the number of household members Number of household members Observed N

Expected N

Residual

1,00

368

384,7

-16,7

2,00

343

358,2

-15,2

3,00

323

292,5

30,5

4,00

333

334,7

-1,7

Chi-square

5,00

197

193,9

3,1

df

Total

1564

Tests statistics no. of members_sk 4,614a 4

Asymp. Sig.

Source: output SPSS

,329

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 193,9

Tables 5 - 6 Verification of the sample representativeness according to gender Tests statistics

Gender Observed N

Expected N

Residual

1

2108

2150,0

-42,0

Chi-square

2

2325

2283,0

42,0

df

Total

4433

Source: output SPSS

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Asymp. Sig.

1,594a 1 ,207

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 2150,0

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The results of representativeness verification show that the sample is representative at all commonly used levels of significance in all three chosen characteristics – region, number of household members and gender. After ensuring the representativeness it was necessary to focus on selection of only the relevant and comparable data. With respect to the valid legislation, the calculation of the total amount of unpaid domestic work in Slovakia as well as per individual activities, we considered only work of respondents over 15 years of age. The respondents also stated the seasonality of some activities throughout a year. Further calculations required comparable data for calculating the amount of unpaid work for the whole year of 2012. The amount of time spent on seasonal activities was thus recalculated to such a value that would apply if the activity was performed all year round. At describing the sample of respondents we focused mainly on the second module dealing with the amount of time the respondents devote to individual activities of unpaid domestic work. When following the structure of these activities based on gender, we found significant differences between men and women in the time they spend on food preparation, cleaning, care for textiles, care for foliage plants, childcare and care for adults. In all cases there was significantly higher proportion of time spent on these activities by female population. Conversely, in case of repairs and maintenance it was the male population who spent significantly more time on these activities. Total average time spent in housework weekly was 21.41 for males and 35.58 hours for females. The collected data and calculated standard deviation showed quite high variability of answers to the question about the amount of time spent on all types of unpaid work activities within a household. Detailed results are presented in the Table 7. On the whole, in the sample of our respondents, an average weekly amount of unpaid work was 25.8 hours per person, which accounted for a daily amount of approximately 3.7 hours (222 min), i. e. a value comparable with the value measured in TUS in some other European countries. In one-member households, the average weekly time spent on unpaid domestic work per member was 26, in two-member households it was 34.1 hours, in three-member households it was 23.9 hours and in four-member households 20.9 hours, always per one member of the household. Table 7. Descriptive characteristics of weekly time spent on individual activities of unpaid work as well as total unpaid work in the household excluding market activities, by gender. Gender

Food management

Household upkeep

Making and care of textiles

Gardening – growing foliage plants

Pet care

M Valid Missing Mean Std. Dev.

1831 14 3,28 3,735

495,3

1831 14 ,48 1,206

1831 14 ,80 2,874

1831 14 1,68 4,982

F

2115 9 8,53 6,592

455,5

2115 9 2,87 3,352

2115 9 1,41 2,624

2115 9 1,75 5,023

Construction and repairs

Shopping and services

Child care

Adult care

Volunteering

M Valid Missing Mean Std. Dev.

1831 14 2,06 3,261

486,5

1831 14 3,29 9,585

1831 14 ,68 3,240 6

1831 14 ,39 2,053 6

F

2115 9 ,26 ,810

566,1

-2115 9 6,96 19,016

2115 9 1,50 7,973

2115 9 ,38 2,894

Valid Missing Mean Std. Dev. Gender

Valid Missing Mean Std. Dev.

Source: output SPSS

When comparing differences between males and females, there was also a difference in time spent in paid work. Weekly amount of time spent in paid work was 43.8 ± 12.7 hours for males and 39.7 ± 13.8 hours for females.

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It is also interesting to compare the average weekly amount of unpaid work in households living in different types of municipalities. 283 households living in regional administrative centres (largest towns in the region) had average of 56.34 hours spent on unpaid work weekly, 654 households in other towns had average of 71.63 hours weekly and 622 households in other municipalities (villages) spent on average 86.11 hours on unpaid work weekly. The situation regarding unpaid work also differed in different regional administrative units. The highest amount of weekly unpaid work was calculated in the households of Žilina region (88.84 hours per household), followed by the Nitra region (86.26 hours), Trnava region (81.79 hours), in the Prešov region (79.23 hours), Banská Bystrica region (72.38 hours), Košice region (70.88 hours), Trenčín region (69.79 hours) and in Bratislava region (54.99 hours).

6. UNPAID WORK IN HOUSEHOLDS IN RELATION TO GDP We chose the input method and generalist approach to calculate the amount of unpaid work in Slovak households and its share on GDP. Firstly, it was necessary to value all activities within unpaid work category by assigning them gross wage for comparable activities in the national economy of SR in 2011. For that we used Standard Classification of Occupations. Volunteering was valued with an average hourly wage of all activities included in unpaid domestic work. Gross monthly wage was recalculated to average gross hourly rate for individual occupations. In the calculation, we used average monthly number of working hours in 2011, i. e. 171.67 hours. Weekly amount of time devoted to individual activities in the household in hours was multiplied by gross hourly wage. The value of unpaid work for all activities and all respondents was aggregated for households with the same number of members. The types of households based on the number of their members were weighted according to their representation in the sample and after reweighting, the value of unpaid work was calculated for each type of household based on the number of its members. Weekly value of unpaid work was multiplied by the number of weeks in 2011 and its year value was divided by the GDP value in 2011 published by the Statistical Office of SR in the amount of 63,906 million €. Using the computation method described above we found that the proportion of unpaid work on GDP generated in the SR, excluding market activities, was 27.43% in 2011. In case we included market activities in the value of unpaid work (like tending domestic animals, growing subsistence plants, construction and renovation), the share of unpaid work produced in households would rise to 30.94% of GDP generated in 2011.

CONCLUSION The outcomes of the research confirmed our expectations regarding relatively high weekly volume of unpaid work in households (on average, more than 20 hours per household member over 14 years of age) and differences in the volume of unpaid work done by males and females taking into consideration variations depending on the kind of activity. Knowing about substantial differences between unpaid domestic work done by males and females in Slovakia (on average, women do weekly 14 hours more unpaid domestic work then men) and differences in time spent at paid work (men spend more time at paid work than women) may give an answer to the question why women earn less in paid work. Men, who normally do few domestic jobs and little childcare, can work overtime. On the contrary, women have to do their best to balance family and working life and so they try to use their time most effectively and efficiently, which applies to working time too. So if the evaluation at work takes into consideration only the number of hours worked and the overtime but the individual differences in efficiency and productivity are ignored, the women may be disadvantaged (Pietruchová, 2007). The findings also suggest that there is a potential market for supply of services that would substitute the unpaid domestic work. One of the ways how to encourage the households to use the services on the market would be to allow employees to use the mandatory contributions from employers for regeneration to cover part of the expenses connected with household upkeep, or to implement a new scheme to support working parents by enabling them to buy the services rather than do all the domestic work on their own. That, in turn, would generate more employment in the service sector. his resistance.63 It remains to be seen whether the integrative development of law and economics will be preserved at the level of built (and recognized) theoretical position of EAL, or whether some other disciplines (such as cognitive psychology) will continue to exert their influence which will eventually generate the final theoretical profile of this new disciplines. The credibility of empirical findings of Behavioral Economics as well as the gradual acceptance of this theory by some EAL scholars goes in favor of the latter assertion. Anyway, we hope that this integration of social sciences will not be confined only to the traditionally related disciplines, such as law and economics, given the fact that economics is inseparable from other social sciences; hopefully, there will be no abuse of the BE (or BLE) findings in terms of reducing personal freedoms

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Antonopoulos, R. 2009. The Unpaid Care Work – Paid Work Connection. Working Paper No. 86. International Labor Organizationa. pp. 2-9. ISBN: 978-9221218074. [online]:http://www.ilo.org/wcmsp5/groups/public/---dgreports/---integration/documents/publication/wcms_119142.pdf Antonopoulos, R. Hirway, I. 2010. Unpaid Work and the Economy. Palgrave Macmillan, pp. 1-14. ISBN 978-230-21730-0. Bútorová, Z. at al. 2008. Ona a on na Slovensku. Inštitút pre verejné otázky, 2008, pp. 235 -241. ISBN: 978 − 80 − 89345 − 10 – 6. [online]: http://www.ivo.sk/buxus/docs//Plus_pre_zeny_45/Ona_a_on.pdf European Communities. 2009. Harmonised European time use surveys. 2008 guidelines, pp. 193-193. ISBN 978-92-79-07853-8. [online]: epp.eurostat.ec.europa.eu/cache/ITY.../KS-RA.../KS-RA-08-014-EN.PDF Hirway, I. 1999. Time Use Studies: Conceptual and Methodological Issues with Reference to the Indian Time Use Survey Paper presented at the International Seminar on Time Use Studies, 7 - 10 December 1999, Ahmedabad, India (source courtesy of UNESCAP), pp. 30-32. [online]:http://www.undp.org/content/dam/india/docs/time_studies_conceptual_methodological_issues_reference_indian_time_survey.pdf Kaščáková, A., Nedelová, G. 2012. Možnosti odhadu veľkosti neplatenej práce v domácnostiach SR. In : Forum statisticum slovacum, Bratislava 2012, VIII (5/2012), pp. 66-70. ISSN 1336-7420 Martinkovičová, M., Kika, M. (2012.) Socio-kultúrne aspekty neplatenej práce. [Socio cultural aspects of unpaid work]. Ekonomika a spoločnosť, 13(2), pp. 125-136. Paľa, J., Považanová, M. 2011. Metódy merania monetárnej hodnoty neplatenej práce. In : Nové trendy – nové nápady 2011. Znojmo: Súkromná vysoká škola ekonomická Znojmo s.r.o. 1. Vyd. September, 2011. ISBN 978-80-87314-20-3. Pietruchová, O. 2007. Nedocenená práca žien. In: http://pietruchova.wordpress.com/2008/04/10/nedocenena-praca-zien/ Poza, A.S, Schmid, R.W.H. 1999. Assigning monetary values to unpaid labor using input-based approaches: The Swiss case. Nr. 59 der Reihe Diskussionspapiere des Forschungsinstituts fur Arbeit und Arbeitsrecht an der Universitat St. Gallen, 1999, p. 5. Stiftung, H. Böll. 2002. Na ceste do Európskej únie. Sprievodkyňa nielen pre ženy. ISBN 80–85549-39-5. Vydalo Záujmové združenie žien Aspekt, p. 8. System of National Accounts 2008. 2009. European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank. ISBN 978-92-1-161522-7, p. 98. Uramova, M., Tuschlová, M. 2012. Špecifiká trhu práce na Slovensku a v Banskobystrickom kraji. In : Kitekintés – Perspektive. Magyar-románszlovák periodika, Szent István Egyetem, Gazdasági, Agrár-és Egészségtudományi Kar, Békéscsaba-Szarvas-Gyula, Békéscsaba 2012, XVI, (18), pp. 24 - 28. ISSN 1454-9921

DETAILS ABOUT AUTHORS: ALENA KAŠČÁKOVÁ Ing. PhD. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF QUANTITATIVE METHODS AND INFORMATICS BANSKÁ BYSTRICA, SLOVAKIA alena.kascakova@umb.sk ĽUBA KUBIŠOVÁ Mgr. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF FOREIGN LANGUAGES BANSKÁ BYSTRICA, SLOVAKIA luba.kubisova@umb.sk GABRIELA NEDELOVÁ RNDr., PhD. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF QUANTITATIVE METHODS AND INFORMATICS BANSKÁ BYSTRICA, SLOVAKIA gabriela.nedelova@umb.sk

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THE EFFECT OF EXCHANGE RATE ON ECONOMIC GROWTH SUNA KORKMAZ

ABSTRACT

Since ancient times, humans have exchanged goods continuously to meet their needs. As the economy progresses, transport and communication networks develop the exchange between countries expands beyond its own borders. In a globalized World, countries are producing and exporting goods that they have an advantage over in the production power and importing goods that they need. Money has been the tool used in this trade. In this study, exchange rate systems were mentioned; by using annual data of the 2002-2011 period from nine randomly selected European countries, if there is a relationship between the exchange rate and economic growth has been tested by doing panel data analysis. As a result of the study, it has been found that there is causality from exchange rate towards economic growth for the nine European countries. KEYWORDS: Exchange Rate, Economic Growth, Panel Data Analysis

1. INTRODUCTION National economies had local characteristics in the 14th century. Trade was performed within the country. As a result of the economic depression which emerged in the 17th century, they started to follow a different foreign trade policy. They sought to have foreign trade surplus which is similar to today’s economy. In other words, they started to take some measures restricting import in order to reduce import while promoting export. Particularly upon the emergence of the Classical economics opinion, a different understanding was adopted in trade. Along with the theory of comparative advantages, countries specialized in products which are manufactured for less cost and exported them to other countries, and they started to consider the opinion that they will have more profit by importing the products which are manufactured more expensively by them from the country which manufactures for less cost would be more dominant. Before economy developed, gold and silver was being used as means of payment in trade. As economy developed and became more complicated, the countries started to use money due to the ease provided in interchange. Foreign exchange rate, which is the value of the money of a country in the currency of another country, is an important factor in determining the real value of the money of a country. Foreign exchange rate can deeply influence the economy of a country. Furthermore, as foreign exchange rate regimes are considered one of the important factors in the occurrence of financial crises, which foreign exchange rate to apply also becomes important for policy makers. Although the crisis in the countries may have different reasons, high value losses have been seen in the nominal rates as a result of the crises. The exchange rate regime which will be chosen by the countries based on their own economical structure will reduce their fragility towards the crises. The economic factors which influence the foreign exchange rate include balance of payments, economic growth, money supply, inflation rate, unemployment rate etc. The sustainability of growth depends on the foreign exchange rate. That is to say, one should consider the source of growth. If growth is provided by public expenditures and current deficit is given to provide this, one cannot talk about a complete growth in an economy. If the source of growth is investments (especially foreign investments) and export, the money of the country will increase in value and growth will be possible.

Exchange rate regimes In the late 1980s and early 1990s, and after a period of relative disfavor, rigid nominal exchange rates made a comeback in policy and academic circles. Based on time-consistency and political economy arguments, a number of authors argued that fixed, or predetermined, nominal exchange rates provided an effective device for guiding a disinflation program and for maintaining macroeconomic stability. According to this view, an exchange rate anchor was particularly effective in countries with high inflation—say, high two-digit levels—that had already tackled (most of) their fiscal imbalances. By imposing a ceiling on tradable prices, and by guiding inflationary expectations, it was said, an exchange rate nominal anchor would rapidly generate a convergence between the country’s and the international rates of inflation (Edwars, 2003: 33). Many theories of the international transmission of real and monetary shocks predict that the transmission process depends critically on the exchange rate system (Baxter and Stockman, 1989: 378). Each of the major international capital market-related crises since 1994- Mexico, in 1994, Thailand, Indonesia and Korea in 1997, Russia and Brazil in 1998, and Argentina and Turkey in 2000-has in some way involved a fixed or pegged exchange rate regime. At the same time, countries that did not have pegged rates-among them South Africa, Israel in 1998, Mexico in 1998, and Turkey in 1998-avoided crises of the type that

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afflicted emerging market countries with pegged rates. Little wonder, then, that policymakers involved in dealing with these crises have warned strongly against the use of adjustable peg and other soft peg exchange rate regimes for countries open to international capital flows. That warning has tended to take the form of the bipolar, or corner solution, view, which is that countries need to choose either to peg their currencies hard (for instance, as in a currency board), or to allow their currencies to float, but that intermediate policy regimes between hard pegs and floating are not sustainable (Fischer, 2001: 3). The exchange rate system is an important topic in international economic policy. A fixed exchange rate regime occurs when the exchange rate does not move while reserves are allowed to fluctuate. A crawling peg corresponds to the case where changes in the nominal exchange rates occur with stable increments (i.e. low volatility in the rate of change of the exchange rate) while active intervention keeps the exchange rate along that path (Levy-Yeyati and Sturzenegger, 2005: 1606). A system of pure floating (or flexible) exchange rates can be thought of as an exchange rate band with in-finite bounds, while a system of pure fixed (or pegged) rates is a band with zero bounds (Stockman, 1999: 1484). By a floating exchange-rate regime, a regime in which no government agency intervenes in the foreign exchange market for the sake of intervention (Helpman, 1981: 876). The exchange rate is pegged to a fixed par-value to a single foreign currency. Similar to single currency peg, except that the currency is pegged to a basket consisting of two or more currencies. Basket can be designed according to country-specific criteria or be a composite currency. Cooperating central banks agree to keep the bilateral exchange rates of their currencies within a preset range of each other. Policy instruments include adjustment of domestic monetary policy as well as (joint and coordinated) intervention. Arrangement can impose constraints on monetary policy, the severity of which depends on the relative position of the various currencies (Ghosh et all., 2002: 40-41). There are four advantages of fixing: providing a nominal anchor to monetary policy, encouraging trade and investment, precluding competitive depreciation, and avoiding speculative bubbles. There are four advantages of floating: giving independence to monetary policy, allowing automatic adjustment to trade shocks, retaining seigniorage and lender-of-last-resort capability, and avoiding speculative attacks (Frankel, 2003: 9). The advantage of choosing fixed exchange rates consists in â&#x20AC;&#x2DC;importingâ&#x20AC;&#x2122; the inflation rate of a virtuous country, or, in other words, overcoming a time-consistency problem; the disadvantage consists in relinquishing the possibility of using monetary policy as a stabilization tool, when the economy faces supply shocks (Milesi-Ferretti, 1995: 1383). A country that allows a floating exchange rate may pursue a number of very different monetary policy strategies: for example, targeting the money supply, targeting the inflation rate or a discretionary approach in which the nominal anchor is implicit but not explicit. But regardless of the choice of monetary regime, in many emerging market economies, exports, imports and international capital flows are a relatively large share of the economy, so large swings in the exchange rate can cause very substantial swings in the real economy. Even a central bank that would prefer to let the exchange rate float must be aware that if the countryâ&#x20AC;&#x2122;s banks have made loans in U.S. dollars, then a depreciation of the currency versus the dollar can greatly injure the financial system (Calvo and Mishkin, 2003: 101). Marston (1981) has emphasize that if wages are sufficiently sensitive to exchange rates, flexible rates will exhibit much the same variability of output as a fixed exchange rate regime. Foreign wage behavior is also of key importance, since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behavior, while for other economic disturbances it is the relative degree of wage flexibility that determines the desirability of flexible rates. A country will have a pegged exchange rate; for simplicity, assume that pegging is done solely through direct intervention in the foreign exchange market (Krugman, 1979: 311). The pegged-exchange-rate system provides a convenient way for households and enterprises to rebuild their real money balances after a bout of high inflation. At the start of stabilization, economic agents find themselves desiring to hold higher real money balances. Under pegged exchange rates, these desires are satisfied automatically through the balance of payments, as agents repatriate their offshore capital and convert it into domestic currency (Sachs, 1996: 149). The advantages of hard pegs, especially of currency boards, have been discussed extensively in recent years. They provide a nominal anchor that helps keep inflation under control by tying the prices of domestically produced tradable goods to those in the anchor country, attenuating the inertial component of inflation that feeds into wages and prices of nontradable goods, and making inflation expectations converge to those prevailing in the anchor country. Hard pegs reduce and, in the limit, eliminate the currency risk component from domestic interest rates thus lowering the cost of funds for the government and the private sector and improving the outlook for financial deepening, investment, and growth. Hard pegs provide an automatic adjustment mechanism for the money supply that helps mitigate the time-inconsistency problem of monetary policy (Mishkin and Savastano, 2001: 417). Ozyildirim and Muslumov (2003) mention that some of the disadvantages of hard pegs deemed in the literature are; loss of flexibility since the monetary policy is relinquished or tightly restricted, loss of seiniorage as a result of the dependence of monetary policy, relinquishing lender of last resort feature of central bank, and vulnerability to external and internal real shocks.

Literature Review MacDonald (2000) emphasizes one key feature of flexible exchange rates is that they are highly volatile and such volatility

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may affect growth through the channels of trade and investment. He also considers the links between sectoral and aggregate growth and the exchange rate, using the Balassa-Samuelson and Houthakker-Magee-Krugman hypotheses. The main conclusion of its paper is that the current exchange rate arrangements for the euro-zone area, both internal and external, are likely to stimulate economic growth. Chen (2012) studies the role of the real exchange rate in economic growth and in the convergence of growth rates among provinces in China. Using data from 28 Chinese provinces for the period 1992–2008 together with dynamic panel data estimation, He find conditional convergence among coastal provinces and also among inland provinces. The results reported there confirm the positive effect of real exchange rate appreciation on economic growth in the provinces. Hua (2012) denominate by proposing a real exchange rate augmented Cobb-Douglas production function, it is demonstrated that the real exchange rate exerts multiple effects on economic growth. If a real appreciation has negative effects on growth by deteriorating international competitiveness in the tradable sector and by causing job losses, at the same time it exercises positive effects on economic growth by favoring capital intensity, human capital and by exerting pressure for efficiency improvements. The function is estimated by using the GMM system estimation approach and a panel data for the 29 Chinese provinces over the period from 1987 to 2008. The results show that the real exchange rate appreciation had a negative effect on economic growth, which was more marked in coastal provinces than in inland provinces, contributing to a reduction in the difference in GDP per capita between the two kinds of provinces. F. McPherson and Rakovskipaper (2000) their paper which had discussed the relationship between economic growth and exchange rate in Kenya. Based on data for the period 1970 to 1996, they analyze the possible direct and indirect relationship between the real and nominal exchange rates and GDP growth. The results show that there is not a statistically significant direct relationship between the two variables. Razmi et al. (2012) paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. Their model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis. Kogid et al. (2012) study attempts to investigate the effects of the exchange rates on economic growth in Malaysia using time series data spanning from 1971 to 2009. Both exchange rates, nominal and real, are considered to have similar effects on economic growth. The results of ARDL bounds test suggest that long-run cointegration exists between both nominal and real exchange rates and economic growth with a significant positive coefficient recorded for real exchange rate. In addition, the results of ECM-based ARDL also reveal that both exchange rates have a similar causal effect towards economic growth. Aman et al. (2013) study is an attempt to explore the relationship between exchange rate and economic growth in Pakistan for period 1976–2010. Using simultaneous equation model, employing two, three stage least square (2SLS and 3SLS) techniques and found that exchange rate has a positive association with economic growth through the channel of export promotion incentives, enlarging the volume of investment, enhancing FDI inflow and promoting import substitute industry. Although, exchange rate is positively affecting economic growth, yet it can’t be used as a policy tool. Tarawalie (2010) main focus is to examine the impact of the real effective exchange rate on economic growth in Sierra Leone. He used quarterly data and employing recent econometric techniques, the relationship between the real effective exchange rate and economic growth is then investigated. A bivariate Granger causality test was also employed as part of the methodology to examine the causal relationship between the real exchange rate and economic growth. The empirical results suggest that the real effective exchange rate correlates positively with economic growth, with a statistically significant coefficient. The results also indicate that monetary policy is relatively more effective than fiscal policy in the long run, and evidence of the real effective exchange rate causing economic growth was profound.

Data and Methodology In this study, it was analyzed whether or not exchange rate had effect on macro variable economic growth (GDP) for 9 randomly-selected European countries (France, Germany, Greece, Hungary, Italy, Spain, Turkey, Poland and United Kingdom) by using the annual data of 2002-2011. Exchange rate definition was used effective exchange rates (indices 2005=100). GDP definition is used annual growth rates (%). Exchange rate datas were taken from OECD Outlook’s internet environment and GDP datas were taken from World Bank data internet environment. Exchange rate datas were taken to reduce the logarithm of the datas. Panel data analysis was used as a method. Forecasts were made with Eviews 7.0 program.

Panel Unit Root Tests Doing unit root test in time series studies is becoming common among researchers and increasingly gaining importance in the field of econometrics. However, as it can be seen in the studies by Levin and Lin (1992), Im et al (2003), Haris and Tzavalis (1999), Maddala and Wu (1999: 636), Choi (2001), and Hadri (1999), the application of unit root tests in the panels is quite new. Apart from this, Bhargava, Franzini& Narendranathan, Boumahdi and Thomes, Breitung and Meyer and Puali

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suggested a new test in the fixed effective dynamic model. In this suggestion, they recommended Durbin Watson statistics as a newly modified form of the test statistics based on fixed effect residues and differentiated Least-Squares method residues. While N goes to forever they recommended their own DW statistics in micro panels. Besides these, Quah (1994) suggested unit root test in the panel data model where N/T ratio is fixed, N and T values go to infinite and do not have fixed effects. Levin and Lin (1992), on the other hand, developed this model to allow fixed effects, individual determinant trends and heterogeneous correlation errors in series. Levin and Lin considered that N and T values went to infinite. However, when N/T ratio goes to zero, T goes to infinite in higher ratio when compared to N. Even though this literature was developed from the time series and panel data, when N which refers to the number of horizontal sections and T which shows the length of the time series tend to go to infinite, this model is important in determining the asymptotic features of the estimators. A successive limit theory in which N value goes to infinite was developed by Philips and Moon. Philips and Moon (2000) also prepared a simple example which shows how consecutive limits can sometimes lead to wrong asymptotic results. A second model which was prepared by Quah, Lin and Levin, on the other hand, allows N and T indexes to pass and exceed infinite in this two-dimension order through a specific diagonal way. This way can be determined through a functional relationship which monotically increases in T= T(N) type and where N goes to infinite. Philips and Moon (2000) attributes the limit theory obtained from this approach to a T= T(N) functional relationship. This third approach, on the other hand, is a theory which is a combination of the above and allows N and T values to go to infinite simultaneously and they do not bring diagonal (transverse, cornered) limitations in their distancing from each other. Somehow controlling the relative ratio of the expansion is necessary for obtaining clearer results. According to Philips and Moon, this hybrid limit theory is stronger than diagonal way limit theory and consecutive limit theories. However, it is more difficult to produce this theory. Scientists who perform studies in relation to panel unit root tests are divided into two groups. The first group is based on the assumption that there is no dependency among the series. ADF power is weak because if there is a strong dependency among the series hypothesis refuses more than required. The studies regarding the first generation include Peron, Eliet, Kwiatowski et al (1992), Quah, Levin and Lin, Levin et al (2002), Im et al (2003), Breitung, Hadri, Maddala and Wu (1999), Choi (2001), Breuting and Pesaran. In my study, the stability of the variables were determined through the stability tests which were developed by Levin and Lin and Chu (LLC), Im and Pesaran and Shin (IPS), ADF, PP. In all tests among these tests which are one of the first generation stability tests, it is seen that FER series has only constant and it does not have a trend. It is shown that the general unit root process is in the first difference for FER series, at 1% significance level, stable for LLC, IPS, ADF-Fisher, ADF and PP-Fisher tests. The stability results are given in Table 1. Likewise, in the general unit root process of EG series, it is shown that it is stable for LLC, IPS, ADF-Fisher, ADF and PP-Fisher tests in the first difference, at 1% significance level. The stability results for EG series are given in Table 2. Table 1: FER Variable Panel Unit Root Test Results Method

Statistic

Prob.**

Levin, Lin & Chu t*

8.22810

0.0000

Method

Statistic

Prob.**

Im, Pesaran and Shin W-stat

3.54694

0.0002

Method

Statistic

Prob.**

ADF - Fisher Chi-square

49.1089

0.0001

ADF - Choi Z-stat

-4.43010

0.0000

Method

Statistic

Prob.**

PP - Fisher Chi-square

76.1438

0.0000

PP - Choi Z-stat

-6.38231

0.0000

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Table 2: EG Variable Panel Unit Root Test Results Method

Statistic

Prob.**

Levin, Lin & Chu t*

8.17759

0.0000

Method

Statistic

Prob.**

Im, Pesaran and Shin W-stat

3.64503

0.0001

Method

Statistic

Prob.**

ADF - Fisher Chi-square

49.7710

0.0001

ADF - Choi Z-stat

-4.49046

0.0000

Method

Statistic

Prob.**

PP - Fisher Chi-square

75.8232

0.0000

PP - Choi Z-stat

-6.37404

0.0000

Panel Co-integration Test Pedroni co-integration test is based on Engle-Granger method. The co-integration system is as follows;

t=1,…T ;

i=1,…N ;

!

m=1,2,…M

Here, T shows the total number of observations made during the period, N shows the total number of the individual units in the panel, and M shows the number of regression variables. In the above equity, Xi shows one item of the specific intersection; Ƴt shows the common time dummy of all items in the panel and δit determinant shows the time trend and all these pertain to individual panel members (Pedroni, 1995: 173). The presence of the co-integration relationship between the variables is tested by means of the stability of the above error terms. The equity created for non-parametric tests;

the parametric test estimation are as follows;

H0 hypothesis means co-integration is not available for all units, and H1 hypothesis means there co-integration for all units. The alternative hypothesis does not make common first order autoregressive coefficient pre-assumption for all units and its test statistics have a normal distribution.

here XN,T is the form of test statistics.µ and ν values are values corresponding the average and variance of each test respectively and they are given in Pedroni (Yilgör et al, 2012). Table 3: Pedroni Co-integration Tests (Only with Constant) Weighted Statistic Prob. Statistic

Prob.

Panel v-Statistic

-0.116571 -0.116571 -0.116571 -0.116571

Panel rho-Statistic

-0.001339 -0.116571 -0.116571 -0.116571

Panel PP-Statistic

-0.697943 -0.116571 -0.116571 -0.116571

Panel ADF-Statistic

-0.344484 -0.116571 -0.116571 -0.116571

Alternative hypothesis: individual AR coefs. (between-dimension)

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Prob.

Group rho-Statistic

1.129064

0.8706

Group PP-Statistic

-3.523283

0.0002

Group ADF-Statistic

-2.020093

0.0217

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H0 = No co-integration. H1 = Co-integration available. As the above hypothesis test statistics are higher than Z0,05=1,96, the hypothesis that there is no co-integration in H0 : Series will be rejected and the alternative hypothesis will be accepted. In other words, when I look at the possibility values, panel PP, panel ADF, Group PP will be significant at 1% and Group ADF will be significant at 5%. Therefore, I can say that there is a long run equilibrium relationship between FER and EG variables.

Granger Causality Test The series encountered in practice carry deterministic elements and they are far from being covariance-stable. It is necessary to clear the series of the deterministic elements such as trend seasonal mobility and to make transformations which do not disrupt their causality structure such as taking their logarithms and first degree differences in order to provide covariance-stability. We assume that the series which are subject to tests are past series in these processes (Erlat, 1983: 66-67).

and with equation no (5), whether X is a cause for Y is investigated by testing H0 ( X →Y ) : a12,1=.........=a12,m=0 hypothesis, and whether Y is a cause for X is investigated by testing H0 (Y → X ) : a12,1=.........=a12,m=0 hypothesis. If H0(x→y) is not rejected but H0( y→x) is rejected, if it is concluded that Y is a Granger cause for X, I conclude that X is a Granger cause for Y. If neither H0(x→y) nor H0( y→x) is rejected, it will be concluded that X and Y are independent, and if both hypotheses are rejected, it will be concluded that there is two-side Granger causality (Yilgör et al, 2012). Granger causality test results are given in Table 4. Table 4: Granger Causality Test :

Null Hypothesis

EG does not Granger Cause FER

Obs

F-Statistic

Prob.

54

0.85947

0.4955

2.52411

0.0539

FER does not Granger Cause EG H0: EG is not a cause of FER. H1: EG is a cause of FER.

In the first hypothesis, as the possibility value is higher than 1%, H0 will be accepted. So, there is no causality from EG towards FER. H0: EG is not a cause of FER. H1: EG is a cause of FER. In the above mentioned second hypothesis, as the possibility value is near 5% and lower than 10%, H0 will be rejected. Therefore, I can say that there is causality from FER towards EG.

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Results Any change in the foreign exchange rate becomes effective on the economic variables of a country. The foreign exchange, on the other hand, is affected not only by economic factors (inflation, unemployment, money supply etc.) but also by political decisions. The decision of the Central Bank of a country taken in relation to foreign exchange can affect the foreign exchange market of another country. The expectation that FED will start to withdraw the monetary support it has provided has deeply affected the foreign exchange market, too. Naturally, especially developing countries suffered more due to this. After the increase in dollars in global markets, inflation figures more than expected were encountered. The increase in the value of dollars affects Turkey in two aspects. The first one is that our foreign exchange liabilities are more than our receivables in foreign exchange, and secondly our saving percentage is very low. In order to seize a good level of growth, the percentage of investments within the national revenue should increase. The expectation of increase in the interest rates along with the foreign exchange rate influences growth and unemployment variables. If these increases become continuous, there will be a decrease in growth and an increase in unemployment rates. High interest rates especially appeals to foreign investors. In order to make use of interest gain, hot money arrives in Turkey. Upon the entrance of hot money into the market, Turkish Liras become valuable. This adversely affects external trade. Turkish goods become more expensive and there is a decrease in export. In this case, it is expected that the interest rates of the Central Bank of Turkey will decrease and foreign exchange will be bought from the market in order to increase the foreign exchange reserves. In this study, the relationship between the foreign exchange rate and economic growth variables were tested with respect to the 9 randomly selected European countries (France, Germany, Greece, Hungary, Italy, Spain, Turkey, Poland, England). It was determined that there was a long term balance relationship between the foreign exchange rate and economic growth for the 9 European countries. Granger causality test was applied and it was concluded that there was a causality from the foreign exchange rate towards economic growth

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

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Aman, Q., Ullah, I., Khan, M.I., Khan, S., 2013, “Linkages between Exchange Rate and Economic Growth in Pakistan (An Econometric Approach)”, European Journal of Law and Economics, pp. 1-8. Baxter, M. and Stockman, A.C., 1989, “Business Cycles and the Exchange-Rate Regime”, Journal of Monetary Economics, 23, pp. 377-400. Calvo, G.A and Mishkin, F.S, 2003, “The Mirage of Exchange Rate Regimes for Emerging Market Countries”, The Journal of Economic Perspectives, 17 (4), pp. 99-118. Chen, J., 2012, “Real Exchange Rate and Economic Growth: Evidence from Chinese Provincial Data (1992 - 2008)”, Paris-Jourdan Sciences Economiques Working Paper, http://hal.inria.fr/docs/00/66/74/67/PDF/wp201205.pdf. Choi, I., 2001, “Unit Root Tests for Panel Data”, Journal of International Money and Finance , 20 (2), pp.249-272. Edward, S., 2003, “Exchange Rate Regimes, Capital Flows, and Crisis Prevention”, NBER, http://www.nber.org/chapters/c9774.pdf, (28.03.2013). Erlat, H., 1983, “Nedensellik Üzerine Sınamalar”, ODTÜ Gelişme Dergisi, pp.66-67. F. McPherson, M. and Rakovskipaper, T., 2000, “Exchange Rates and Economic Growth in Kenya: An Econometric Analysis”, African Economic Policy Discussion Paper, 56, http://pdf.usaid.gov/pdf_docs/pnack375.pdf. Fischer, S., 2001, “Distinguished Lecture on Economics in Government: Exchange Rate Regimes: Is the Bipolar View Correct?”, American Economic Association, 15 (2), pp. 3-24. Frankel, J.A., 2003, “Experience of and Lessons from Exchange Rate Regimes in Emerging Economies”, NBER Working Paper, No. 10032. Ghosh, R.A., Gulde, A. and Wolf, C.H., Exchange Rate Regimes: Choices and Consequences, MIT Press, 2002, USA. Hadri, K., 1999, “Testing The Null Hypothesis of Stationary Against The Alternative of a Unit Root in Panel Data With Serially Correlated Errors”, Manuscript (Departmant of Economics and Accounting, University of Liverpol). Harris, R. D.F and Tzavalis, E., 1999, “ Inference for Unit Root in Dynamic Panels Where The Time Dimencion is Fixed”, Journal of Econometrics, 91 (2), pp.201-226. Helpman, E., 1981, “An Exploration in the Theory of Exchange-Rate Regimes”, Journal of Political Economy, 89 (5), pp. 865-890. Hua, P., 2012, “Real Exchange Rate and Economic Growth in China”, Journal of Reviews on Global Economics, 1, pp. 89-105. Im K.S, Peseran, M.H and Shin, Y., 2003, “Testing For Unit Roos İn Heterogenous Panels”, Journal of Econometrics, 115 (1), pp. 53-74. Kogid, M., Asid, R., Lily, J., Mulok, M., Loganathan, N., 2012, “The Effect of Exchange Rates on Economic Growth: Empirical Testing on Nominal Versus Real”, The IUP Journal of Financial Economics, 10 (1), pp. 1-17. Krugman, P., 1979, “A Model of Balance-of-Payments Crises”, Journal of Money, Credit and Banking, 11 (3), pp. 311-325. Kwiatkowski, D., Philips, C.B.P., Schmidt, P. and Shin, Y., 1992, “Testing the Null Hypothesis of Stationary Against the Alternative of a Unit Root: How Sure are we that Economic Time Series Have a Unit Root?”, Journal of Econometrics, 54 (1-3), pp. 159-178. Levin, A. and Lin, C. F., 1992, “Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties”, University of California at San Diego, Discussion Paper, No. 92-93. Levin, A., Lin, C-F. and Chu, C-S. J., 2002, “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties”, Journal of Econometrics, 108 (1), 1-24. Levy-Yeyati E. and Sturzenegger, F., 2005, “Classifying Exchange Rate Regimes: Deeds vs. Words”, European Economic Review, 49, pp. 1603-1635. MacDonald, R., 2000, “The Role of The Exchange Rate in Economic Growth: A Euro-Zone Perspective”, NBB Working Paper, No.9. Maddala, G.S and Wu, S., 1999, “A Comparative Study Of Unit Root Tests With Panel Data And A New Simple Test”, Oxford Bulletin Of Economics and Statistics, 61, pp. 631-652. Marston, R.C., 1981, “Wages, Relative Prices and the Choice Between Fixed and Flexible Exchange Rates”, NBER Working Paper, No. 793. Milesi-Ferretti, G.M., 1995, “The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments”, The Economic Journal, 105 (433), pp.1381-1402. Mishkin, F.S and Savastano, M.A., 2001, “Monetary policy strategies for Latin America”, Journal of Development Economics, 66, pp. 415-444.

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28. Ozyildirim, C. and Muslumov, A., 2003, “The Effects of Exchange Rate Regime Choice on Economic Performance: The Case of Turkey”, http:// papers.ssrn.com/abstract _id=2097493. 29. Pedroni, P., 1995, “Panel Cointegration : Asymptotic and Finite Sample Properties of Pooled Time Series Tests, With an Application to the PPP Hypothesis, ” Indiana University Working Papers in Economics, No. 95-013. 30. Philips, P.C.B and Moon,R.H., 1999, Linear Regression Limit Theory For Nonstationary Panel Data, Econometrica, 67 (5), 1057-1111. 31. Philips, P.C.B and Moon, R.H., 2000, “Nonstationary Panel Data Analysis: An Overview of Some Recent Developments, Econometric Reviews, 19 (3), pp. 263-286. 32. Razmi, A., Rapetti, M. and Skott, P., 2012, “The Real Exchange Rate and Economic Development”, Structural Change and Economic Dynamics, 23, pp. 151-169. 33. Sachs, D.J., 1996, “Economic Transition and the Exchange-Rate Regime”, The American Economic Review, 86 (2), pp. 147-152. 34. Stockman, A.C., 1999, “Choosing An Exchange-Rate System”, Journal of Banking & Finance, 23, pp. 1483-1498. 35. Tarawalie, A.B., 2010, “Real Exchange Rate Behaviour and Economic Growth: Evidence from Sierra Leone”, South African Journal of Economic and Management Sciences, 13 (1), 8-25. 36. Quah, D., 1994, “Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data”, Economics Letters, 44 (1-2), pp. 9-19. 37. Yilgör, M., Karagöl, T.E and Saygili, A.Ç., 2012, “Panel Causality Analysis between Defence Expenditure and Economic Growth in Developed Countries”, Defence and Peace Economics, pp. 1-11. DETAILS ABOUT AUTHOR: ASSOCIATE PROFESSOR DR. SUNA KORKMAZ BALIKESIR UNIVERSITY BANDIRMA FACULTY OF ECONOMICS AND ADMINISTRATIVE SCIENCES DEPARTMENT OF ECONOMICS skorkmaz@balikesir.edu.tr

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TOURISTS’ PERCEPTION OF AUTHENTICITY IN WORLD HERITAGE HISTORIC CENTERS ODETE PAIVA JOSÉ LUÍS ABRANTES CLÁUDIA SEABRA FERNANDA CRAVIDÃO

ABSTRACT

There is a clear ‘cult of authenticity’, at least in modern Western society (Assi, 2000). So, there is a need to analyze the tourist perception of authenticity, bearing in mind the destination, its attractions, motivations, cultural distance, and contact with other tourists (Kohler, 2009). Our study seeks to investigate the relationship among cultural values, image, sense of place, perception of authenticity and behavior intentions at World Heritage Historic Centers. From a theoretical perspective, to our knowledge, no study exists with a focus on the impact of cultural values, image and sense of place on authenticity and intentions behavior in tourists. The intention of this study is to help close this gap. A survey was applied to collect data from tourists visiting two World Heritage Historic Centers – Guimarães in Portugal and Cordoba in Spain. Data was analyzed in order to establish a structural equation model (SEM). Discussion centers on the implications of model to theory and managerial development of tourism strategies. Recommendations for destinations managers and promoters and tourist organizations administrators are addressed. KEYWORDS: World Heritage Historic Centers, cultural tourism, authenticity perception, cultural values, behavior intentions.

1. INTRODUCTION Tourism is a social phenomenon that happens at a specific location (Poria, Reichel & Biran, 2006). A place can correspond to an intense personal experience which evokes memories with specific meanings (Herbert, 1996). Cultural tourism is a kind of tourism motivated by the desire to experience places: the authentic natural, historic and cultural resources of a community or region (NCDOT, 2000). Nowadays cultural tourism in World Heritage Sites is an important market especially to urban tourists. The search for authenticity reflects the needs of urban tourists from industrial countries; when these people travel, they seek something outside their daily lives, something innovative and different, an escape (Pauchant, 2006). They want to experience new things and enjoy the sensation of being where things are real and original. They want to be able to say “I was there”. The importance of authenticity in sustainable tourism is clear: “Authenticity is synonymous with tourism that is done well” (Pauchant, 2006). An effective way of addressing research is to understand some features of cultural tourists in World Heritage Sites, their motivations, behaviors and desired experiences (Pedersen, 2002). This study tries to analyze an important experience and feeling to cultural tourists – authenticity perception. Future tourists will desire an authentic rather than false experience because they will be better educated, more sophisticated, globally aware and environmentally conscious (Yeoman, Brass & Mcmahon-Beatie, 2007). The search for authenticity and difference becomes essential to make World Heritage Sites differentiated from any other tourism places and attractions (Turok, 2009). A growing number of cities and regions are basing their tourism development strategies on the promotion of cultural heritage, and the number of cultural attractions is growing rapidly (Richards, 2005). In 2012, for the first time, the French tourists were the most visited Portugal. So, this study focused on an important market to European tourism industry. This market is difficult to quantify. Experts suggest that more research would help (Rickly-Boyd, 2012). Authenticity as an evaluative judgment may enrich the understanding of tourist experience and behavior and serve for marketing management purposes (Kolar & Zabkar, 2010). Our aim is to analyze what influences the search for authenticity in cultural tourists visiting World Heritage Sites.

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2. THEORETICAL FRAMEWORK Over recent years, a great effort has been put into adapting cultural resources as products for tourism, in preparing heritage destinations, in expanding the range of museums and in strengthening the tourism’s cultural dimension (Vinuesa & Torralba 2010). Therefore, cultural tourism is a phenomenon of interdependencies and its relationship with historic cities is multifaceted, with both positive and negative aspects (Vinuesa & Torralba, 2010). In this research we try to analyze some issues that link cultural tourists with World Heritage Sites, namely, cultural values, image, sense of place, authenticity and behavior intentions, as follows.

2.1. Cultural values Culture can be defined as the interactive aggregate of common characteristics that influence a group’s response to its environment (Hofstede, 1990). Many aspects of culture form patterns of beliefs, attitudes, norms, values, and social behaviors (Kim, 1998). Values are psychological variables that characterize people within the same culture. (Reisinger, 2009). Therefore, people with similar values belong to a similar culture. The values that permeate a culture are called “cultural values”, and they inform about what is good or bad, right or wrong, true or false, positive or negative, and about what they like (Reisinger, 2009). Cultural values are powerful forces that shape perception and individual behavior (Triandis, 2000).

2.2. Image Destination image is defined as ‘‘an attitudinal construct consisting of an individual’s mental representation of knowledge, beliefs, feelings, and global impression about an object or destination’’ (Baloglu & McCleary, 1999, p.870). Or, in a more short way, as an global perception that a individual holds from a destination (Alhemoud & Armstrong, 1996; Bigné & Sánchez, 2001). This concept is identified as a key issue in the travelling decision making process (Um & Crompton, 1990; Woodside, Frey & Daly, 1989) and is associated with a subjective interpretation of tourists’ feelings and believes towards a destination (Baloglua & McClearyb, 1999; Bigné & Sánchez, 2001). The destination image perceived in the mind of the tourist is mediated by the person’s identity – cultural background and social, personal and psychological characteristics (Govers & Go, 2005). Tourists develop both cognitive and affective responses and attachments to environments and places: the cognitive component refers to the appraisal of physical features of environments while the affective component refers to the appraisal of the affective quality of environments (Baloglu & McCleary, 1999). Several studies suggest that tourist’s cultural values are preconditions to destination image (Kim & Prideaux, 2005; Kozak, 2002). Based on this, the following hypothesis is developed: H1 - Tourist’s cultural values positively influence the World Heritage Historic Centers a) cognitive image b) affective image

2.3. Sense of Place Sense of place refers to the emotional and physical bond that an individual has towards a place (Tapsuwan, Leviston & Tucker, 2011). It is a feeling that may be derived from the natural environment, but is more often made up of a mix of natural and cultural features in the landscape (Seddon, 1972). People develop a sense of belonging, identity, and dependence on certain places (Korpela, Hartig, Kaiser & Fuhrer, 2001). The concept of place identity carries two different meanings: the first means a set of place features that guarantee the place’s distinctiveness and continuity in time; the second means “genius loci”, used to describe the impalpable but agreed upon unique character of a place (Lewicka, 2008).

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Place dependence, in contrast to place identity, refers to connections based specifically on activities that take place in an outdoor, recreational setting. It develops out of the fit between one’s intended use of an area and the area’s ability to adequately provide that use, especially relative to alternative sites. Place dependence is recognizable in the concept of resource specificity common in the recreation literature (Farnum, Hall & Kruger, 2005). Place memory can be measured by expressed interest in place history, place historical knowledge, and ethnic bias (Lewicka, 2008). Recent research shows that the concept of sense of place facilitates the comprehension of leisure behavior (Su, Cheng, & Huang, 2011). Consequently, many studies have been done to determine what antecedes sense of place as an activity and leisure involvement (Kyle & Mowen, 2005) and destination image (Prayag & Ryan, 2011). Destination image is an antecedent of place attachment (Prayag & Ryan, 2011). It influences significative and positively the attachment to a destination (Veasna, Wu & Huang, 2012), to international tourists (Prayag & Ryan, 2011 ) and residents that visit cultural sites (Hou, Lin & Morais, 2005). So, it is expected that a favorable image of a destination leads to a strong cognitive attachment to that destination (Veasna, Wu & Huang, 2012). Based on this, the following hypothesis is developed: H2a - Cognitive image of World Heritage Historic Centers positively influence tourist’s a)place identity b) place dependence c)place memory When tourists select some places and not others to visit, it is fairly obvious that some predictable factors - distance, accessibility, type of activities provided, destination image, or social influence - come to mind (Farnum et al., 2005). The new paradigm in tourism research emphasizes the understanding of emotional and symbolic subjective meanings associated with places and also the connection of people to those places (Williams & Vaske, 2003). Based on this, the following hypothesis is developed: H2b - Affective Image of World Heritage Historic Centers influences positively tourist’s a) place identity b) place dependence c) place memory A place can correspond to an intensely personal experience which evokes memories and allows them to be relived and acquire a specific meaning (Herbert, 1996). The main motivation for heritage tourists visiting a place is based on the heritage’s characteristics of the place (Poria et al., 2006). Places that have genuine links with culture can develop them, with clear advantage for the place and its visitors. Cultural meanings and values of the tourist attach themselves to similar meanings and values of the place (Herbert, 1996). The relationship between the individual values and places has been mentioned as important in heritage management (Howard, 2003). Cultural tourists that visit cultural places have a sense of meaning or emotional attachment with them (Herbert, 1996). According to this, the following hypothesis is developed: H3 - Tourist’s cultural values positively influence a) place identity, b) place dependence c) place memory In a tourism context, place dependence is described as visitors’ functional attachment to a specific place and their awareness of the uniqueness of a setting, which contributes to meeting their visitation goals (Williams, Patterson, Roggenbuck, & Watson, 1992). ”Urban reminders” the leftovers from previous inhabitants of a place, may influence memory of places, either directly, by conveying historical information, or indirectly, by arousing curiosity, and increasing motivation to discover the place’s forgotten past (Lewicka, 2008). People aware of the place’s history express more interest in the place’s past and in their own roots than people with fewer emotion bonds to a place (Lewicka, 2008).

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This mode of being is based on events that happened during our life, one can develop a connection to a destination due to activities that he/she develops or to what the place itself symbolizes (Yuksel, Yuksel & Bilim, 2010). Or that took place before we were born and therefore belong to the history of the family, ethnic group, state, or the world (Lewicka, 2008). In the latter cases, what we remember depends not on personal experience but on oral traditions, cultural transmissions or own motivation to do the detective work in discovering the past (Lewicka, 2008). So, we advance the following hypothesis: H4 - The tourist’s place memory of World Heritage Historic Centers is influenced by a) Place identity b) Place dependence

2.4. Authenticity Authenticity is a complex concept that is central in tourism research (Rickly-Boyd, 2012). Authenticity can be approached in two different perspectives: object based (Wang, 1999; Steiner & Reisinger, 2006) and events considered as real and genuine (Steiner, Reisinger, 2006), and based on the touristic experience (Wang, 1999), like a human being’s attribute meaning one’s true essence (Steiner & Reisinger, 2006). Image, as said before, is an important component of tourism destination marketing because it influences tourists’ behavior by stimulating multiple creative activities and experiences (Nicoletta & Servidio, 2012). Image, as one of the most influential factors affecting tourist perception and consequent behaviors, is a mixture of various feelings about attitudes toward and ground for an overall evaluation of an object (Lee, O’Leary & Hong, 2002). Heritage, tourism and authenticity become a powerful part of the destination image (Frost, 2006). Tourist may enter in World Heritage Sites with some predetermined conception encouraged by the area’s destination image (Farnum et al., 2005). So, we advance the following hypothesis: H5 - Tourist’s perception of authenticity experienced at World Heritage Historic centers is influenced by a) cognitive image b) affective image Values give some things significance over others and thereby transform some objects and places into heritage (Avrami, Mason & Torre, 2000). Labeling something as heritage is a value judgment that distinguishes that object or place from other objects and places for particular reasons, and as such, the labeling adds new meaning and values (Avrami, et al., 2000). An important characteristic of heritage is authenticity that identifies traditional cultures and their origins as genuine, real and unique, establishing a strong connection with the communities’ heritage (Sharpley, 1994). The understanding of authenticity plays a fundamental role in all scientific studies of the cultural heritage, in conservation and restoration planning, as well as within the inscription procedures used for the World Heritage Convention and other cultural heritage inventories (ICOMOS, 1994). Typologies of tourist experiences have shown that the quest for authenticity on vacation is a function of stratification and emphasizes the multiplicity of personal identities (Waitt, 2000). Based on this, the following hypothesis is developed: H6 - Tourist’s cultural values positively influence the perception of authenticity of the touristic experience on World Heritage Historic Centers. Places involve meanings and values that facilitate intimate connections with particular geographical areas (Tuan, 1977). Especially in high-profile places/World Heritage Sites visitors may come to areas with preconceived notions of what their experience should consist of, and what types of encounters are needed in order to have an authentic experience (Farnum et al., 2005). So, we propose that: H7 – Tourist´s perception of authenticity who visit World Heritage Historic Centers is positively influenced by a) place identity b) place dependence c) place memory

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2.5. Behavior intentions The concept of human behavior is multidisciplinary and as a result it has different meanings in each discipline. In tourism, some concepts that define tourist behavior have been borrowed from several disciplines, such as from recreation, geography, urban and regional planning and education, among others (Reisinger, 2009). Behavior intentions in tourism refer to the set of tourists’ attitudes after their visit experiences. Thus, each distinct and favorable experience will positively influence future behavior, for example in the subsequent evaluation of the destination, the future intentions to return or to recommend the visited place (Bigné & Sànchez, 2001). “Images guide and shape behavior’’ (Barich & Kotler 1991, p.95) providing a cue for information processing (Nadeau, et al, 2008). They are knowledge structures that can be used as mental short-cuts for processing information in decision-making processes (Kotler & Gertner 2002). Destination image exerts a significant influence on destination choice but also preconditions tourist destination behaviors and attitudinal consequences (Lee & Lee, 2009). So a broader conceptualization of image can show the way to greater understanding of touristic intentions on recommendations and on visiting it again (Nadeau, Heslop, O’Reilly, Luk, 2008). Image of the destination positively affect an intention to revisit it in the future (Court & Lupton, 1997). The more favorable image of a destination, the higher the probability that the tourist will return and will recommend it (Bigné & Sànchez, 2001). Based on this, the following hypothesis is developed: H8 - Behavior intentions towards World Heritage Historic Centers is positively influenced by a) cognitive image b) affective image Authenticity is a subjective experience and deals not only with facts but also with myths and imagination (Jewell & Crotts, 2001). Authenticity as an evaluative judgment may enrich the understanding of tourist experience and behavior and serve for marketing management purposes (Kolar & Zabkar, 2010). Tourists’ authentic experiences are not “object-and-contextfree” (Reisinger & Steiner, 2006). So, cultural and heritage tourists are looking for experiences, based on the tangible remains of the past (Herbert, 2001). According to this, the following hypothesis is developed: H9 - Tourist’s Perception of experienced authenticity positively influence the behavior intentions towards World Heritage Historic Centers. A place can be valued by an individual because it is a good place to undertake a particular activity, or it is seen as special for emotional or symbolic reasons (Kyle & Mowen, 2005). Cultural and heritage tourists are looking for a sense of place, a connection to a place, with their traditions and customs (Jewell & Crotts, 2001). Sense of place is a significant predictor of skiers’ loyalty and allows establishing the intentions to return and recommend a specific touristic destination (Prayag & Ryan, 2011). A strong place attachment may lead to repeatedly returning to a special place (Farnum et al., 2005). In line with this, we can advance that: H10 - Behavior intentions towards World Heritage Historic Centers is positively influenced by a) place identity b) place dependence c) place memory Cultures represent a complex whole of value systems that potentially affects tourists’ behavior intentions (Woodside, Hsu & Marshall, 2011). The background of each person provides them with different culture (Hofstede, 1994). So, understanding people means to consider their background, from which their present and future behavior can be predicted (Hofstede, 1994). Values are related to decision making, further, there is evidence that values impact behavior (Parks & Guay, 2009). Some tourists like to travel to destinations that share the same cultural background, but the opposite is also true, cultural differences, rather than similarities, can also attract tourists to different destinations (Hottola, 2004; Reisinger, 2009). In consequence, the tourist’s culture influences and contributes to explaining the tourist’s behavior (Reisinger, 2009). According to this we propose:

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H11 - Cultural values positively influence behavior intentions towards World Heritage Historic Centers. In sum, we propose the following model (Figure 1):

3. METHODOLOGY A survey was applied to collect data of French tourists, in two Europeans historic centers, Guimarães in Portugal and Córdoba in Spain, classified by UNESCO as World Heritage Historic Centers. The conceptual framework was simultaneously estimated in a structural equation model using FIML estimation procedures in LISREL 8.80 Specifically; this model contains five constructs, 24 observable indicators, measurement and latent variable errors, and intercorrelations between the latent constructs. This model has a chi-square of 585.56 (239 df, p=0.00); the fit indices suggest a good fit of the model to the data (NFI=0.91, NNFI=0.96, PNFI=0.81, CFI= 0.96, IFI= 0.96, RFI=0.93, RMSEA=0.060). Several factors were eliminated from the conceptual model presenting Cronbach’s alphas less than .65 and / or for revealing no significant values when were tested to incorporate the final model. The hypotheses relating the constructs fixed in the CFA model were tested. The following are the results (see Figure 2) through measures of standardized coefficients and t-values.

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A structured questionnaire was developed and applied to collect data of French tourists, in two destinations classified by UNESCO as WHHC, Guimarães in Portugal and Córdoba in Spain. The data is composed by 400 questionnaires collected between July and August 2012. This final sample allowed us to have a proportion of 5 observations for each indicator - 78 variables (see Bentler, 1989 in Westland, 2010). The final model represents a 16:1 proportion - 24 observable indicators. Measurement scales: 28 items were operationalized from Hofstede, Hofstede, Minkov and Vinken (2008), 21 items of cognitive and affective image were operationalized from Kim and Richardson (2003); 15 items of sense of place were adopted from Williams and Vaske (2003) and Lewicka (2008); 10 items of experience authenticity were operationalized from Kolar and Zabkar (2010), Poria, Reichel and Biran (2006); 4 items of behavior intentions were adopted from Kolar and Zabkar (2010). The measured was based on a 5 point Likert scale – 1 = strongly disagree to 5 = strongly agree. The hypotheses relating the constructs fixed in the CFA model were tested with significant results. After the CFA test the conceptual framework was simultaneously estimated in a structural equation model using Full Information Maximum Likelihood (FIML) estimation procedures in LISREL 8.80. This model contains five constructs, 24 observable indicators, measurement and latent variable errors, and intercorrelations between the latent constructs. This model has a chi-square of 585.56 (239 df, p=0.00); the fit indices suggests a good fit of the model to the data (NFI=0.91, NNFI=0.96, PNFI=0.81, CFI= 0.96, IFI= 0.96, RFI=0.93, RMSEA=0.060). The following are the results (see Figure 2) through measures of standardized coefficients and t-values.

4. RESULTS AND DISCUSSION This study tried to better understand what influences cultural French tourists’ perception of authenticity and the future intentions to return or recommend the visit at World Heritage Historic Centers. The empirical investigation revealed that tourist’s cultural values influences cognitive and affective image of World Heritage Historic Centers. Affective and cognitive image impacts sense of place, specifically place dependence and memory. An important conclusion of this study is that French tourist cultural values don’t influence directly the experienced authenticity. Cultural values do influence authenticity indirectly trough affective image. Behavior intentions are impacted by cultural values, sense of place and authenticity. Our model gives an extended and integrated vision of what influences authenticity perception and behavior intentions. When marketers understand how cultural tourists react to authenticity, they can create more effective campaigns to influence consumers’ expectations and decisions. From a theoretical perspective, to our knowledge, no study exists with a focus on the impact of cultural values, image and sense of place on authenticity and behavior intentions. Now, that marketing researchers are challenged to provide research with practical implications, it is believed that this theoretical framework may be used as a basis to pursue service-oriented destination and business strategies

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

Alhemond, A., & Armstrong, E. (1996). Image of tourism attracting in Kuwait. Journal of Travel Research, 34 , 1-4. Assi, E. (2000). Searching for the concept of authenticity: implementation guidelines. Journal of Architectural Conservation, 6 , 60-69. Avrami, E., Mason, R., & Torre, M. (2000). Values and Heritage Conservation. Los Ageles: Research Report: The Getty Conservation Institute. Baloglu, S., & McCleary, K. (1999). A model of destination image formation. Annals of Tourism Research, 26, 4 , 868-897. Bigné, J., & Sanchez, J. (2001). Tourism image, evaluation variables and after purchase behaviour inter-relationship. Tourism Management, 22, , 607–616. Court, B., & Lupton, R. (1997). Customer Portfolio Development: modeling destination adopters, inactives and rejecters. Journal of Travel Research , 35-43. Farnum, J., Hall, T., & Kruger, L. (2005). Sense of place in natural resource recreation and tourism: an evaluation and assessment of research findings. Portland: Gen. Tech. Rep. PNW-GTR-660. Frost, W. (2006). Braveheart-ed Ned Kelly: historic films, heritage tourism and destination image. Tourism Management 27, , 247-254. Govers, R., & Go, F. (2005). Projected destination image online. nformation Technology & Tourism, 7, , 73-89. Herbert, D. (1996). Artistic and literary places in France as tourist attractions. Tourism Manegement 1 , 77-85. Herbert, D. (2001). Literary Places, tourism and heritage experience. Annals of Tourism Research, 28,2, , 312-333. Hofstede, G. (1990). Culture’s Consequences. International differences in work-related values. Abridged Edition. Hofstede, G., Hofstede, G. J., Minkov, M., & Vinken, H. (2008). VSM 08 values survey model 2008 manual. Obtido de www.gerthofstede.nl. Hostede, G. (1994). Business Culture. The UNESCO Courier , 12-17. Hottola, P. (2004). Cultural confusion intercultural adaptation in tourism. Annals of Tourism Research, 31 , 447-466. Hou, D., & Lin, C. M. (2005). Antecedents of attachment to a cultural tourism destination: The case of Hakka and non- Hakka Taiwanese visitors to Pei-Pu, Taiwan. Journal of TRavel Research, 1 , 321-350. Howard, P. (2003). Heritage: management, Interpretation, identity. Cornwall: MPG Books. Jewell, B., & Crotts, J. (2001). Adding psychological value to heritage tourism experiences. Journal of Travel and Tourism Marketing, 11(4), , 13-28. Kim, C. (1998). Cross- cultural perspectives on motivation. Annals of Tourism research, 25,4 , 202- 205. Kim, H., & Richardson, S. L. (2003). Motion picture impacts on destination images. Annals of Tourism Research, 30 , 216-237. Kim, S. S., & Prideaux, B. (2005). Marketing Implications arising from a comparative study of international pleasure tourists’ motivations, and other travel-related characteristics of victors in Korea. Tourism Management 26, , 347-357. Kohler, A. (2009). Autenticidade: origens e bases da discussão em Turismo. Turismo Visão e Acção, 3, , 282-303. Kolar, T., & Zabkar, V. (2010). A consumer-based model of authenticity: an oxymoron or the foundation of cultural heritage marketing? Tourism Management, 31, , 652-664. Korpela, T., Hartig, T., Kaiser, F., & Fuhrer, U. (2001). Restorative experience and self-regulation in favorite places. Environmental and Behavior, 33, , 572-589. Kotler, P., & Gartner, D. (2002). Country as a brand , product and beyond: a palce marketing and brand managemente perspective. The Journal of Brand Management 9 , 249-261. Kozak, M. (2002). Comparative analysis of tourist motivation by nationality and destination,. Tourism Management 23, , 221-232. Kyle, G., & Mowen, A. (2005). An examination of the leisure involvement agency commitment relationships. Journal of Leisure Research, 37 , 342-363. Lee, G., & Lee, C. (2009). Cross-cultural comparison of the image of Guam perceived by Korean and Japanese leisure travelers: importanceperformance analysis. Tourism Management 30, , 922-931. Lee, G., O’Leary, J., & Hong, G. (2002). Visit propensity predicted by destination image. International Journal of Hospitality & Tourism Administration, , 63-92. Lewicha, M. (2008). Place attachment, place identity, and place memory: Restoring the forgotten city past. Journal of Environmental Psychology, 28, , 209-231. Nadeau, J., Heslop, L., O’Reilly, N., & Luk, P. (2008). Destination in a country image context. Annals of Tourism Research 35, 1 , 84-106. NCDOC, N. C. (2000). Heritage Tourism Program. Obtido de http://www.commerce.state.nc.us/tourism/heritage/. Nicoletta, R., & Servidio, R. (2012). Tourist´s opinions and their selection of tourism destination image: an affective and motivational evaluation. Tourism Management Perspectives, 4 , 19-27. Parks, L., & Guay, R. (2009). Personality, Values and Motivation. Personality and Individual Differences, 47 , 675-684. Pauchant, E. (2006). First Tourism Summit. La part de l’authenticité dans le tourisme durable. Chamonix: www.canadatourism.com. Marketingand sales,february. Pedersen, A. (2002). Managing Tourism at World Heritage Sites: a practical manual for World Heritage Sites Manageres. World Heritage Manuls,1. UNESCO, World Heritage Centre. Poria, Y., Reichel, A., & Biran, A. (2006). Heritage Sites Management: Motivations and expectations. Annals of Tourism Research, 33 (1) , 162-178. Prayag, G., & Ryan, C. (2011). Antecedents of Tourists’ Loyalty to Mauritius: The role and influence of destination image, place attachment, personal involvement, and satisfaction. Journal of Travel Research, XX, , 1-15. Reisinger, Y. (2009). International Tourists: Cultures and Behaviour. Oxford: Butterworth-Heinemann. Reisinger, Y., & Steiner, C. (2006). Reconcptualizing object authenticity. Annals of Tourism Research, 33 , 65-86. Richards, G. (2005). Cultural Tourism in Europe. ATLAS. Rickly-Boyd, J. (2012). Authenticity & Aura - A Benjaminian Approach to Tourism. Annals of Tourism Research 39 , 269-289. Seddon, G. (1972). Sense of Place: a response to an environment. The Swan Coastal Plain, Western Australia. Sharpley, R. (1994). Tourism, Tourists & Society. Huntingdon, Cambridgeshire: ELM. Steiner, C., & Reisinger, Y. (2006). Understanding existential authenticity. Annals of Tourism Research, 33, , 299-318. Su, H., & Cheng, K. &. (2011). Empirical study of destination loyalty and its antecedent: the perspective of place attachment. The Service Industries Journal, 31 , 2721-2739. Tapsuwan, S., Leviston, Z., & Tucker, D. (2011). Community values and attitudes towards land use on system: a Sense of Place study in Perth, Western Australia. Landscape and Urban Planning, 100 , 24-34. Triandis, C. (2000). Dialectics between cultural and cross-cultural psychology. Asian Journal of Social Psychology, 3, , 185-195. Tuan, Y. (1977). Space and Place: The perspective of experience. Minnesota: The University of Minnesota Press. Turok, I. (2009). The distintive City: Pitfalls in the pursuit of differential advantage. Environment and Planning 41, 1 , 13-30. Um, S., & Crompton, J. (1990). Attitude Determinants in Tourism Destination Choice. Annals of Tourism Research, 17 , 432-448. Veasna, S., Wu, W., & Huang, C. (2012). The impact of destination source credibility on destination satisfaction. Tourism Management XXX, , 1-16. Vinuesa, M., & Torralba, L. (2010). Histoic Cities and Tourism: Functional dynamics and Urban policy. The Open Urban Studies Journal, 3 , 47-57. Waitt, G. (2000). Consuming Heritage- Perceived Historical Authenticity. Annals of Tourism Research, 27,4 , 835-862.

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55. Wang, N. (1999). Rethinking authenticity in tourism experience. Annals of Tourism Research , 349-370. 56. Westland, J. (2010). Lower Bounds on Sample Size in Structural Equation Modelling. Electronic Commerce Research and Application, 9 (6) , 476-487. 57. Williams, D., & Vaske, J. (2003). The measurement of Place Attachment: Validity and generalizability of a psychometric approach. Forest Science 49. , 830-840. 58. Williams, D., Patterson, M., Roggenbuck, J., & Watson, A. (1992). Beyond the commodity metaphor: examining emotional and symbolic attachment to place. Leisure Science 14 , 29-46. 59. Woodside, A., Frey, L., & Daly, R. (1989). Linking Service Quality, Customer Satisfaction and Behavioral Intentions. Journal of Health Care Marketing, 9 , 5-17. 60. Woodside, A., Hsu, S., & Marshall, R. (2011). General theory of cultures’ consequences on international tourism behaviour. Journal of Business Research, 64, (8) , 785-799. 61. Yeoman, I., Brass, D., & Mcmahon-Beatie, U. (2007). The Autentic Tourist. Tourism Management, 28 (4) , 1128-1138. 62. Yuksel, A., Yuksel, F., & Bilim, Y. (2010). Destination Attachment: effects on customer satisfaction and cognitive affective and conative loyalty. Tourism Management 31, 2 , 274-284. Acknowledgments: FCT, CEGOT and CI&DETS (PEst-OE/CED/UI4016/2011)

DETAILS ABOUT AUTHORS: ODETE PAIVA PHD STUDENT - COIMBRA UNIVERSITY ASSISTANT - POLYTECHNIC INSTITUTE OF VISEU; PORTUGAL ODETEPAIVA@GMAIL.COM JOSÉ LUÍS ABRANTES POLYTECHNIC INSTITUTE OF VISEU jlabrantes@estv.ipv.pt CLÁUDIA SEABRA POLYTECHNIC INSTITUTE OF VISEU cseabra@estv.ipv.pt FERNANDACRAVIDÃO UNIVERSITY OF COIMBRA

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TOURISM AND TERRORISM: STRANGE COMPANIONS CLÁUDIA SEABRA MARIA JOSÉ NOGUEIRA ODETE PAIVA MARGARIDA VICENTE JOSÉ LUÍS ABRANTES

ABSTRACT

Terrorism became an important and recurring topic in in the XXI century public discourse since in the last decades the world assisted to the growing of terrorist attacks. In its domestic and international form is practiced by revolutionary groups, being a constant in modern life (Feichtinger et al., 2001). The terrorist groups are increasingly sophisticated, dangerous and destructives. Paradoxically, international terrorism and tourism share some characteristics. They both cross national borders, involve citizens from different countries and use the new travel and communications technologies. Terrorists often use tourism to gain publicity and support to achieve their goals. Tourists are chosen as targets for their symbolic value representing Western capitalism, consumption, and values such as wealth, freedom of choice and independence (Richter & Waugh, 1986). For terrorists, the symbolism, high profile, and news coverage brought by international tourists makes them too valuable to leave to be explored (Sonmez et al., 1999). This paper tries to gather research and data based on this strange link between terrorism and tourism. KEYWORDS: Tourism, Terrorism, Safety, Risk Perception Acknowledgments: FCT and CI&DETS (PEst-OE/CED/UI4016/2011)

1. INTRODUCTION Markets are more and more global due to a combination of economic, socio-cultural, political, and technological factors (Douglas & Craig, 1995). The world is becoming a single market (Levitt, 1983), in which an increasing number of products is offered simultaneously and similarly in different countries (Swarbrooke & Horner, 1999). Tourism products are eminently global products and the globalization of tourism has led to its expansion on an international scale (Levitt, 1983).The globalization of tourism markets entails increasing global risks that are inherent to businesses that grow on a global scale. Tourism, in fact, is one of the most susceptible activities towards these global risk factors (Ritchie, 2004). Small-scale crises in a part of the world can have profound repercussions elsewhere, or events in one destination can impact other destinations. The tourist demand is particularly sensitive to the tourists’ safety, health and well-being concerns (Blake & Sinclair, 2003). So, risk in tourist markets have been mostly associated with a large number of factors, including political instability, threats to health, crime, violence, war, natural disasters and terrorism in destinations or in its surrounding area (Kozak et al., 2007). Those events dominate the discourse of contemporary media. Its impact on tourism demand started to become increasingly prominent at the same time as the importance of communication and crisis management in organizations and tourist destinations (Frisby, 2002). Despite the fact that natural disasters have a significant impact on changes in tourism demand, terrorist attacks and tourism instability is more important for tourists (Sonmez, 1998).Terrorism has become an important and recurring topic in public discourse in the XXI century. In its domestic and international form is practiced by revolutionary groups and vigilantes, and it is constant in modern societies (Feichtinger et al., 2001). Terrorists continue to select vulnerable and defenceless targets (Atkinson et al., 1987). Tourists have been examples, in recent years, of these vulnerable targets and more and more desirable for terrorists. A terrorist attack targeting tourists can help their authors to achieve several objectives: advertising, economic threat, ideological opposition to tourism, among others (Sonmez, 1998). Terrorist attacks on tourists, due to massive coverage, by the media, began to be seen, by terror groups, as having a close relationship between tourism and terrorism. This relationship has gained international notoriety in 1972 during the Berlin Olympics (Sonmez & Graefe, 1998b). The awareness of the human costs associated with the recent terrorist events and the redirection of the economic resources, presumably driven by perceived risks associated with future terrorist incidents, have led to a concentration of efforts, by various organizations, to improve their understanding on terrorism and on its consequences (Blomberg et al., 2004). The

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increased exposure to significant political, economic, social and technological forces guides tourism companies and managers to become more vigilant in order to deal with impending crises. The understanding of the terrorism phenomenon and of its impacts makes it possible to develop more effective strategies to stop or reduce the severity of their impacts both on the economy and on the society (Ritchie, 2004). It is probably impossible to control terrorism, but nations cannot ignore it. Governments, companies and tourism institutions need to focus their attention on this threat in order to create effective marketing strategies (Hall & O'Sullivan, 1996). With this work, it is hoped to make an important contribution to science and management and to analyze the phenomenon of terrorism and its connection with the tourist industry.

2. LITERATURE REVIEW Terrorism is a puzzling phenomenon that has attracted the attention of researchers in various fields of study (Sonmez & Graefe, 1998b). Hoping to understand and control these occurrences, as well as their adverse effects, governments and academic communities have begun efforts in understanding it (Schmid & Jongman, 1988). The topic is so troublesome and studied in so many perspectives that conceptually there is no universally accepted definition for it (Poland, 1988). The often quoted cliché that "for some is a terrorist, for others is a freedom fighter" shows the various views and the definition problems that this concept entails (Sonmez & Graefe, 1998b). The definition of terrorism has raised quite a buzz among researchers over the years, including the discussion between what is a terrorist and a freedom fighter. Thus, some studies advance four criteria for the definition of terrorist activity (Ruby, 2002.):

• • • •

Motivation for the terrorist act (political or otherwise); Target against which it is directed (sub-national groups or clandestine agents); Objective (creating an atmosphere of fear); Intended audience (greater than the immediate victims)

A perspective that can help clarify the term is the classification and the perception of terrorist objectives (Sonmez, 1998). Broadly, it can be classified as revolutionary (antigovernment, including the overthrow of the current government) or subrevolutionary (political changes, social or personal, for example, the release of prisoners). In a more specific way, the terrorist purposes can be considered ideological, strategic and tactical (Richter & Waugh, 1986). Their goals are usually related to issues of national struggle that are manifested over a long period of time. The tactical objectives are more affected by supremacy and legitimacy situations of more or less armed forces, involving, usually, robbery or picking crowded touristic places as target (Sonmez, 1998). The most consensual definition is, indeed, the one on the civil code of the United States: terrorism is "an act of premeditated, politically motivated violence perpetrated against unarmed civilian targets by sub-national groups or clandestine agents, which aim to influence an audience" and international terrorism as an action that "involves citizens or territory of more than one country" (U.S. Department of State, 1996).

2.1. Terrorism: A new reality Contrary to expectations, the end of the Cold War was not the beginning of peace. There has been a proliferation of armed conflicts around the world in recent years. Geopolitical changes are largely related to the evolution of terrorism we see today (Cutter & Wilbanks, 2003; Le Billon, 2001). The global configuration and geopolitics changed after the fall of the Berlin Wall. The economic, social, technological and cultural globalization also influenced the evolution of terrorism in the field of national and transnational countries. Since the late 60s, the terrorist attacks have become more severe, better organized, more specialized and violent, and more geographically dispersed (Reisinger & Mavondo, 2005). International or domestic terrorism has become a fact of modern life since the 80s. The Palestinian attack in 1972 during the Munich Olympics that caused the deaths of 11 Israeli athletes and reached an audience of 800 million viewers was seen as a success in terms of media (Schmid & DeGraaf, 1982) and catalysed terrorism to the international scene (Sonmez & Graefe, 1998b). In the 80s and 90s of last century, researchers have predicted a substantial increase of terrorist attacks in the future (D'Amore & Anuza, 1986). Experts speculated that the terrorist groups would continue to select vulnerable targets, the attacks would be more indiscriminate, and terrorism would become more institutionalized and geographically wider as a method of armed conflict. On the other hand, they argued that thanks to media coverage the public would be watching more terrorism than ever (Atkinson et al., 1987). Some authors have even said that extraordinary security measures would become a permanent way of life and that terrorism would become almost a routine and something 'tolerable' (Jenkins, 1988). Indeed, terrorism has increased from 967 incidents in 1973 to 5417 in 1983, 16831 in 1992 to 13508 in 2012. The international terrorist at-

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tacks rose from an average of 1650 per year between 1973 and 1982 to 3827 between 2003 and 2012. Presently, the public fears terrorism more than ever (see Graph 1). Graph 1. Terrorist Incidents between 1973 and 2012

Source: the authors based on University of Maryland, Global Terrorism Database (2013)

Also, there is a phenomenon of globalization, because all regions showed an increase in different periods of time in the number of attacks, the major variations were in Asia, Middle East and North Africa and Sub-Saharian Africa positively and in North and Central America and Europe negatively. When a terrorist incident involves citizens, targets, institutions or governments from another country, terrorism assumes an international nature. In this case, the actions taken in one country inflict costs to people and property on other countries (Enders & Sandler, 2004). International terrorism has been growing since the 60s. With large variations among the different regions in the world, it has occurred a spread of the phenomenon from the underdeveloped regions, such as Africa and South America, to more developed regions, such as Europe and Asia (see Table 2). Table 2. Terrorist Incidents by regions between 1973 and 2012 North & Central America

South America

Europe

Asia

Australasia

Middle East & North Africa

SubSaharian Africa

Total

1973-1982 5229

2247

5976

543

20

2048

446

16509

1983-1992 5969

11963

5242

6972

114

4211

2655

37126

1993-2002 1281

2703

3399

6736

80

4114

1873

20186

2003-2012 253

995

1323

19824

18

12661

3196

38270

Source: the authors based on University of Maryland, Global Terrorism Database (2013)

However, despite the decrease in the number of attacks, there is a substantial increase in deaths caused by those incidents. The belief of many researchers is that during the 90s the world has entered a new phase of terrorism dramatically different from the previous. It is called by some the 'new terrorism' (Jenkins, 2001), or 'new types of terrorists post-Cold War' (Hudson, 1999), 'a new type of terrorists' (Stern, 1999), a' new terrorists generation' (Hoffman, 1999), 'Terror in the name of God' (Jurgensmeyer, 2000); 'a clash of fundamentalisms' (Ali, 2002), or simply a' new wave of terrorism ' (Rapoport, 2001). Generally, the argument is the same; terrorism is changing in new ways (Bergesen & Han, 2005):

• The organization has changed to a network. Some authors argue that new terrorist organizations have left the struc• • • •

tured format with a group of members trained on a central command to move on to a more flexible and anonymous structure. Between the 60s and the 80s terrorist groups clearly took a nationality, new organizations, like Al-Qaeda, have members of various nationalities and cells outside the country of origin, constituting themselves as transnational groups. The identities of transnational terrorist groups are more difficult to identify, once not always someone claims responsibility for the attacks, the most visible example was the September 11, 2001. The terrorists’ demands are vaguer, sometimes nonexistent. There seems to be a change on terrorist motivations, before clearly political, now, clearly religious. The so-called religious terrorism or "sacred" demonstrates the prevalence of religion in the origins of the new terrorism, particularly

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Islamic fundamentalism, Christian, messianic Zionism, religious sects like Aum Shinrikyo (sarin gas release incident in the Tokyo subway). Also there seems to be an increase in groups with vaguer and ancient religious ideologies. There seems to be a more global dispersion of targets. While in the 60s and 70s international terrorism was more concentrated in Europe and the Middle East, in the 90s it spread to Africa, South America and the U.S. It is being extended to Asia since 2000. Violence seems to be happening at random. The collateral damage is higher than previously. In the 60s and 70s most of the targets were businessmen or politicians, nowadays terrorism attacks are aimed at civilians, including tourists.

2.2. Terrorism and Tourism: Strange Companions? The growth of terrorism, crime and violence in the world brought a larger problem: international terrorism which makes tourists as preferred targets of violence (Cavlek, 2002). Paradoxically, international terrorism and tourism share some characteristics. Both cross national boundaries, involving citizens of different countries and use new technologies associated with travel and telecommunications (Schlagheck, 1988; Sonmez & Graefe, 1998a). Words tourism and terrorism can be placed at opposite ends of a continuum of quality of life. Tourism suggests life, relaxation, fun, while terrorism readily recalls feelings of death, destruction, fear and panic (O'Connor et al., 2008). The target attack ensures tourists media attention and limits the ability of particular political elites to control the content of what the media covers. Tourists are regarded as having symbolic value as indirect representatives of hostile or opposed governments and, on the other hand, are easy targets concentrated in hotels and tourist attractions (Richter & Waugh, 1986). Traditional targets (politicians and embassies) are less attractive to terrorists because they are able to increase security measures, while tourists, by contrast, are soft targets (Lehrman, 1986). There are several reasons why tourists are chosen as targets (Richter & Waugh, 1986):

• They are easily identifiable: the tourists have habits, behaviors, specific dress codes which are sometimes different from the locals (Aziz, 1995),

• Usually, they carry many electronic devices (camcorders, cameras, cell phones) that identify themselves, • Attend crowded public places (museums, tourist attractions ...) • The nature of tourism services places tourists in easily attackable settings (hotels, tourist attractions, markets ...) (Brunt •

et al., 2000).

Tourism is still capitalism and consumption, so an attack on that activity means ideological opposition to Western values (Lepp & Gibson, 2003). Discrepancies, cultural, socio-economic and communication between tourists and residents can create resentment and incite violence (Aziz, 1995; Lea, 1996; Wahab, 1996). A terrorist attack targeting tourists has the potential to punish capitalist ideologies and also affect the economy. The fact that tourists are foreigners can also increase the support of locals, as there are less likely to achieve domestic targets which could endanger the terrorist organization (Richter & Waugh, 1986). Terrorists see tourists as targets for various reasons (Sonmez et al., 1999), because they allow them to achieve strategic and ideological purposes. A large number of authors have investigated the link between terrorism and tourism (Pizam & Mansfeld, 1996; Pizam & Smith, 2000; Ryan, 1993; Sonmez, 1998; Sonmez et al. 1999) and concluded that terrorist group destinations are places where you can easily manage to infiltrate; tourists are prime targets because they allow them to achieve their goals easily causing damage to the industry and ensuring international publicity. Tourists are effective tools to convey a message of ideological opposition and broader policy (Sonmez et al, 1999). An attack on a foreign tourist means a triple return to terrorists: on one hand, the international publicity caused by the attack, on the other hand, the loss of attractiveness and of income for the local government, the ideological opposition to the tourism activity (Blake & Sinclair, 2003; Sonmez, 1998). Finally, tourists are vulnerable and easy targets for terrorists because they are obvious in their behavior and appearance, move in large groups, are relaxed and not at all cautious (Ryan, 1993). Some researchers have established a symbolic parallel between tourism and diplomatic relations (Richter, 1983). According to this theory, the tourists are targeted because they are seen as ambassadors of their countries, they are easy targets and because they symbolize, indirectly, the hostile governments and not of the terrorist causes (Richter, 1983; Richter & Waugh, 1986.) On the other hand, the involvement of citizens from other countries means international coverage for the terrorist cause. When tourists are kidnapped or killed, the situation is immediately dramatized in the media, which helps make the conflict globally visible. The terrorists achieve the exposure they need and the media raise their audiences (Richter, 1983; Sonmez, 1998. Although several authors describe the goals of terrorists differently, they agree that the terrorists have much to gain by attacking tourists (Sonmez, 1998). When tourism symbolizes capitalism and they are supported by the government, then an attack on the industry is also an attack on capitalism. The tourism sector is an important economic activity, terrorist attacks

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cause a decline in foreign exchange inflows, allowing terrorists to impose indirect costs and gain political advantage on the aimed governments (Hall & O'Sullivan, 1996; Richter & Waugh, 1986). For many countries such as Egypt, Israel, Greece, Sri Lanka and Indonesia, the tourism industry is an extremely important force for the economy, that is why the terrorists have come together to stop the national economy and their governments (Aziz, 1995; & Paraskevas Beverley, 2007). In fact, in recent decades, there has been an increase of terrorist attacks having as targets the tourism industry. Touristsâ&#x20AC;&#x2122; decisions to change their plans, particularly in the choice of other destinations, may involve significant losses for the tourism industry and to the places where terrorist incidents occur (Coshall, 2005). The decline in tourist arrivals and economic effects arising from the results are well documented (Mansfeld, 1994, Hall & O'Sullivan, 1996; Wahab, 1996). Perceptions of risk, especially of terrorism, influence the tourism demand patterns, because the destination image is a key criterion when choosing a destination (Dann, 1993) (see table 3). Table 3. Destinations Dramatically Affected by Terrorist Attacks Country

Description

China

After the incident in Tiananmen Square, in Beijing, in 1989, the majority of tour operators canceled their packages and voyages to that country. Tourism revenue, that year, fell 430 million U.S. dollars (Gartner & Shen, 1992, Hall & O'Sullivan, 1996; Sonmez, 1998). Hotel occupancy fell below 30%. About 11,500 tourists canceled their visit to Beijing in 1989 (Gartner & Shen, 1992). In subsequent years, China has made great efforts to attract international tourists. Although there was an increase of 55% of foreign tourists in 1991 and 48% in 1992, the memories of that incident still remain (Hall & O'Sullivan, 1996).

Cyprus

t is the third largest Mediterranean island and very popular as a tourist destination beach for European tourists. Between 1986 and 1998 there was a very strong growth of the tourism industry in the country, meaning, in the 90s, 50% of total service revenues. The two Gulf wars caused drastic falls in international tourist arrivals in that destination (Hoti et al., 2007).

Egypt

More than 120 tourists have been targeted by Islamic terrorist attacks between 1992 and 1994. In the second half of the 90s, Egypt suffered a 22% decrease in international tourist arrivals, 30% in sales and 43% of beds in tourist revenue (Aziz, 1995; Wahab, 1996). Successive crises in Egypt led to the withdrawal of what was considered to be a good destination for tour operators. In 1992-1993, the largest European tour operator, TUI, sold 30% less travel to this country, another European operator, Tjaereborg, sold least 77%. From the mid-90s, the situation stabilized and revenues rebounded. However, after the attack in Luxor, in 1997, in which 64 tourists were killed, most operators withdraw this destination from their lists again. In the summer of 1998, the operators became to include Egypt in their programs, again, but only 1/10 of the customers picked this destination.

Spain

ETA, created in 1959, is an independence movement in the Basque region of Spain. Members of the Spanish army and government are their traditional targets; however, ETA also pointed their attacks to the tourist industry, mainly between 1984 and 1987. Hotels and travel agencies were bombarded. Over 200 letters were sent to embassies, travel agencies and foreign media grasping terrorist intentions (Enders & Sandler, 1991). In the "Summer Campaign", in 1996, ETA bombed several airports and hotels along the Gold Coast, which caused a major recession in tourism (Bar-On, 1996). Between 1970 and 1988, the estimated decline was of 140,000 tourists (Enders & Sandler, 1991). ETA continues to be engaged in terrorist activity, but their targets, recently, are politics. On March 11, 2004, an attack claimed by an arm of al-Qaeda brought about 200 dead people and more than 500 injured in the bursting of several bombs, in carriages and stations of the railway system in Madrid.

USA

One of the most significant episodes of disruption in tourism demand was the attacks of September 11, 2001 in the USA. In the following year there was a decrease of 6.8% of international tourists in that country (Qi et al., 2009). Air traffic fell about 17% in the month of September and did not grow in the first nine months of the following year (Drakos, 2004). This attack led to an overall decline in the international tourism activity. In addition, the September 11th became known as the incident which led to a global economic downturn, mainly because of the fast decrease of air transport (Drakos, 2004).

Europe

After the kidnapping of the cruise ship Achille Lauro in the Mediterranean (October 1985), the capture of the Egyptian Boeing from Athens to Cairo (November) and the attacks of armed Palestinians towards passengers at airports in Rome and Vienna (December), Europe, in generic terms was considered a dangerous and insecure destination. The number of American tourists, in 1986, going to UK and to Germany fell 20%, to Italy it fell 23% and to Greece it fell 53% (Ryan, 1993).

Fiji

At the end of the 80s, after the election of a majority foreign government, Fiji experienced two revolutions. Because the media presented these two rebellions in such a sensational manner, Australian and Neo-Zeeland authorities advised their citizens not to go to this destination (Hall & O'Sullivan, 1996; Lea, 1996, Scott, 1988). In 2000 there was another takeover and the arrivals and tourism revenues fell 28% and 35%, respectively, when compared to the previous year. Hotel occupancy declined between 25-30% when compared to the expectations they had before the takeover. The 2006 revolution resulted in even greater falls in what concerns the international tourism.

Florida

After many deaths between 1992 and 1994 foreign tourists in different parts of Florida, European tour operators have allowed its customers to replace this by another destination. Many took advantage of this opportunity causing enormous damage to tourism on this USA destination (Cavlek, 2002). British and German tourists, the main Florida European supply markets, fell 22% in 1994 (Pizam & Mansfeld, 1996).

Gambia

The bloody revolution in the summer of 1994 caused a drop in tourist arrivals and the closure of many hotels.

Global

The first Gulf War caused a decline from 21.5% (in 1990) to 3.2% (in 1991), in the global tourism revenues. In April 2002, the International Association of Air Transport estimated that the second Iraq war caused reductions in 10 billion dollars in air travel (Taylor, 2006).

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Indonesia

In the period 1997-2002 the country suffered a series of shocks that received international attention and resulted in a drastic reduction of tourist entries. Among them are the following: civil conflict after the fall of President Suharto (1997-1998), ethnic conflict, including attacks on Chinese businessmen (1997-1999); religious conflicts between Christians and Muslims (19972000); separatist movements in East Timor, Aceh and Irian Jayra (90s); the effects of El Niño; the offensive on East Timor was condemned by many countries, namely Australia, and led to a cut of businesses between them (1999-2000); terrorist attack with a disco explosion in Bali (2002) (Prideaux et al., 2003).

North Ireland

Sinn Fein, an armed movement named ‘Provisional Republican Army’ (PIRA), formed in 1969, is a legal political movement that aims to remove the British jurisdiction from Northern Ireland and unify it with the Republic of Ireland. The targets of the armed movement included British police officers in the Northern Ireland. The terrorist activity and retaliation by British troops banned the tourist activity. Between 1969 and 1999 there were 3740 (54% civilian) deaths attributed to conflicts linked to terrorism in that country. The arrival of visitors fell from 1,080,000 in 1967 to 321,000 in 1976 as a result of the negative image (insecurity) associated with this destination (Buckley & Klemm, 1993; Wall, 1996; Witt & Moore, 1992). The ceasefire, between 1994 and 1996, led to significant improvements in tourism: 11% increase of hotel occupancy, 18% of visitors from other states and 68% of tourist arrivals (O'Neill & Fitz, 1996).

Israel

Since its foundation, in 1948, Israelis and Palestinians living in the occupied territories experienced constant insecurity. In 1987, the Palestinian conflict intensified itself and the Islamic Resistance Movement (Hamas) joined the movement for restoration of an Islamic Palestinian state in Israel. The attacks by the Israelis and Palestinians caused many deaths since. Between 2000 and 2005 there were about 135 attacks which resulted in 588 deaths (Spilerman & Stecklov, 2009). The arrival of tourists, since the 70s, has fallen, especially due to the images and news provided by the media.

Libya

It is a country seriously affected by political instability and armed conflicts. Due to armed confrontation with the USA, in 1985, about 2 million Americans canceled their travel plans to the country in the following year, which resulted in a fall of 30% of total tourist holidays (Qi et al., 2009). After accusations that the Libyan government sponsored the Lockerbie attack in 1989 and the after the UN sanctions that followed, there was a serious damage to the tourism image of this country, which led to the prohibition of international tourism in and from Libya (Gray, 2000).

Mexico

From the establishment of NAFTA (Northtern American Free Trade Agreement), the Zapatista National Liberation Army launched a rebellion against the Mexican government. The first 12 days of rebellion resulted in about 500 deaths. In 1994, the death of the favorite presidential candidate Donaldo Colosia created a climate of great instability in Mexico. Some of the spots affected by the incident, and which were highly sought by the tourists, as San Cristobal in Chiapas, suffered a major decline in terms of international tourist arrivals. In the first two months of 1994, tourists decreased 70% when compared to the previous year (Pitts, 1996).

Nepal

In the 90s tourism in Nepal had an exceptional growth. In 1998 there was an increase of about 42,000 arrivals. Between 1983 and 2000 the contribution of this activity rose from 1.4% to 3.2% of GDP. In 2000 total revenues with international tourism exceeded 166 million USD. After an attempted of deviation of an Indian Airlines plane, in December 1999, and after the negative publicity of this fact, entries fell dramatically, 6% in 2000 and 22% in the following year. The Indian airline canceled flights to that country. Being India the main outbound market and an important spot on the route of American and European tourists, the entry in Nepal became compromised (Baral et al., 2003).

Peru

The Shining Path is a Maoist terrorist group, formed in the late 60s, which aims to restore the Peruvian institutions with a revolutionary government and free the territory of foreign influences. The terrorist attacks caused a decrease of international visitors. While in 1989 they were 350,000, in 1991 they were only 33,000 (Wahab, 1996).

Kenya

It is one of the most popular destinations in Africa, especially the safaris. In August 1998, a terrorist attack against the USA and Tanzania embassies, by a massive car bomb, nearly caused 231 deaths. In November 2002, new terrorist attacks with tourist targets. The attacks began with two-air missiles fired at a 757 Boeing, carrying almost 271 Israeli tourists. This attack had no victims, because the plane was diverted and landed safely. 20 minutes after three suicide bombers launched an attack in a hotel on the Kenyan coast. 15 people died in the hotel. A group named "Army of Palestine", in Lebanon, claimed responsibility for the attack. Although the number of tourists has decreased between 2000 and 2001, tourism revenues increased. The fall of tourist arrivals continued in 2002, this time accompanied by the tourism revenues (Fletcher & Morakabati, 2008).

Turkey

The PKK (Kurdistan Labor Party) a Marxist-Leninist group was formed in 1974 with the aim of establishing an independent Marxist state in southeastern Turkish territory. The PKK, initially attacked government forces and civilians. Since 1991, this party has become more active against tourist targets either by kidnapping tourists either by laying bombs on hotels. The tourist industry has been seriously damaged since. For example, between 1993 and 1994 one of the largest European operators, TUI, had a 47% sales decrease to this country. Between 1997 and 1998 there was a decrease of 11.1% of German passengers (Göymen, 2000).

3. CONCLUSIONS AND IMPLICATIONS The main objective of terror is to achieve an emotional policy, more than to achieve the target military defeat. The terrorists achieve that objective by choosing civilian targets or national society’s symbols. Therefore, while the number of casualties is lower than the number of wars, keeping structures and institutions largely intact, terrorism can generate deeper fear and anxiety, causing changes in the individual and organization’ s behavior (Spilerman & Steckov, 2009). The growth of terrorism, crime and violence throughout the world has raised a new problem: tourists as terrorism targets and criminal acts (Cavleck, 2002). Tourists are chosen as targets for their symbolic value: they represent Western capitalism, consumption, and values such as wealth, freedom of choice and independence (Richter & Waugh, 1986). For the terrorists the symbolism, high profile, and news coverage brought by international tourists makes them too valuable to be left out of their terrorist acts (Sonmez et al., 1999). On the other hand, tourists’ attacks signify attacks to their governments (Richter

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& Waugh, 1986). The social nature of violent crimes (murder, rape and armed robbery) and political crimes (terrorism, political confrontations) resulted, in many individuals, in fear of traveling, especially abroad, and specifically to destinations perceived as unsafe. The violence directly affects the image of a country internally and internationally, destroying the smooth functioning of society and interfering with the free flow of people and ideas. Few people travel to places where they feel threatened. When people are afraid of travelling isolation and xenophobia begins and cooperation and cultural exchange ends (Pizam et al., 1997). The tourist crises caused by terrorism are different from those caused by other types of disasters. Although terrorism is a political weapon since the beginning of history, this form of struggle in contemporary periods has an impact and frequency never witnessed before. Terrorism in the present day is almost a commonplace (D'Amore & D'Anuza, 1986; Richter & Waugh, 1986). Most terrorist attacks are difficult to prevent. They are different and difficult to solve with simple formulas, however, the tourist destinations should be prepared in order to build their own specific action plan. Having this device, you can save yourself time, energy and valuable resources. In light of social and global complexities, no target is immune to negative occurrences and thinking that "it only happens to others" may be dangerously immature and may be catastrophic (Sonmez, 1998). Crises resulting from terrorist attacks, which have become increasingly frequent, put enormous pressure on staff and managers (Ritchie, 2004). Marketers, especially, need to understand the behavior and decision-making mechanisms of tourists in order to pool resources with managers in an attempt to attract tourists in a world where fear is global (Yeoman et al., 2006). REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

Atkinson, S., Sandler, T., & Tschirart, J. (1987). Terrorism in a Bargaining Framework. The Journal of Law and Economics , 30 (1), 1-21. Aziz, H. (1995). Understanding terrorist attacks on tourists in Egypt. Tourism Management , 16, 91-95. Baral, A., Baral, S., & Morgan, N. (2003). Marketing Nepal in an Uncertain Climate: Confronting Perceptions of Risk and Insecurity. Journal of Vacation Marketing , 10, 186-192. Bergesen, A., & Han, Y. (2005). New Directions for Terrorismo Research. International Journal of Comparative Sociology , 46, 133-151. Blake, A., & Sinclair, M. (2003). Tourism Crisis Management: US Response to September 11. Annals of Tourism Research , 30 (4), 813-832. Blomberg, S., Hess, G., & Orphanides, A. (2004). The Macroeconomic Consequences of Terrorism. Journal of Monetary Economics , 51, 1007-1032. Brunt, P., Mawby, R., & Hambly, Z. (2000). Tourist Victimization and the Fear of Crime on Holiday. Tourism Management , 21 (6), 417-424. Buckley, P., & Klemm, M. (1993). The Decline of Tourism in Northern Ireland: The Causes. Tourism Management , 14, 184-194. Cavleck, N. (2002). Tour Operators and Destination Safety. Annals of Tourism Research , 29 (2), 478-496. Coshall, J. (2005). Interventions on UK Earnings and Expenditures Overseas. Annals of Tourism Research , 32 (3), 592-609. Cutter, S., & Wilbanks, T. (2003). The Geographical Dimensions of Terrorism. New York: Routledge. D’Amore, L., & Anuza, T. (1986). International Terrorism: Implications and Challenge For Global Tourism. Business Quarterly , 4 (November), 20-29. Dann, G. (1993). Tourists’ Images of a Destination - An Alternative Analysis. In D. Fesenmaier, J. O’Leary, & M. Uysal (Edits.), Recent Advances in Tourism Marketing Research (pp. 41-55). New York: The Haworth Press. Douglas, S., & Craig, C. (1995). Global marketing strategy. New York: McGraw-Hill. Drakos, K. (2004). Terrorism-Induced Structural Shifts in Financial Risk: Airline Stocks in the Afternath of the September 11th Terror Attacks. European Journal of Political Economy , 20, 435-446. Enders, W., & Sandler, T. (1991). Causality Between Transnational Terrorism and Tourism: The Case of Spain. Terrorism , 14 (1), 49-58. Feichtinger, G., Hartl, R., Kort, P., & Novak, A. (2001). Terrorism Control in the Tourism Industry. Journal of Optimization Theory and Applications , 108 (2), 283-296. Fletcher, J., & Morakabati, Y. (2008). Tourism Activity, Terrorism and Political Instability within Commonwealth: The Cases of Fiji and Kenya. International Journal of Tourism Research , 10, 537-556. Frisby, E. (2002). Communicating in a Crisis: The British Tourist Authority’s Responses to the Foot-and-Mouth Outbreak and 11th September, 2001. Journal of Vacation Marketing , 9, 81-88. Göymen, K. (2000). Tourism and Governance in Turkey. Annals of Tourism Research , 27, 1025-1048. Gartner, W., & Shen, J. (1992). The Impact of Thienamen Square on China’s Tourism Image. Journal of Travel Research , 30 (4), 47-52. Gray, M. (2000). The Political Economy of Tourism in North Africa: Comparative Perspectives. Thunderbird International Business Review , 42, 393-408. Hall, C., & O’Sullivan, V. (1996). Tourism, Political Stability and Violence. In A. Pizam, & Y. Mansfeld (Edits.), Tourism, Crime and Security Issues (pp. 105123). Chichester: Wiley. Hoffman, S. (2002). Clash of Globalizations. Foreign Affairs , 81, 104-115. Hoti, S., McAlee, M., & Shareef, R. (2007). Modelling International Tourism and Country Risk Spillovers for Cyprus and Malta. Tourism Management , 8, 2-13. Jenkins, B. (1988). Future Trends in International Terrorism. In R. Slater, & M. Stohl (Edits.), Current Perspectives on International Terrorism (pp. 246-266). London: MacMillan. Jenkins, B. (2001). Terrorism and Beyond: A 21st Century Perspective. Studies in Conflict and Terrorism , 24, 321-327. Kozak, M., Crotts, J., & Law, R. (2007). The Impact of Perception of Risk on International Travellers. International Journal of Tourism Research , 9, 233-242. Le Billon, P. (2001). The Political Ecology of War: Natural Resources and Armed Conflicts. Political Geography , 20 (3), 561-584. Lea, J. (1996). Tourism, Realpolitik and Development in the South Pacific. In A. Pizam, & Y. Mansfeld (Edits.), Tourism, Crime and International Security Issues (pp. 123-142). New York: Wiley. Lehrman, C. (1986). When Fact and Fantasy Collide: Crisis Management in the Travel Industry. Public Relations Journal , 42, 25-28. Lepp, A., & Gibson, H. (2003). Tourist Roles, Perceived Risk and International Tourism. Annals of Tourism Research , 30 (3), 606-624. Levitt, T. (1983). The Globalization of Marketing. Harvard Business Review , 7, 92-102. Mansfeld, Y. (1994). The Middle East Conflict and Tourism to Israel. Middle Eastern Studies , 30 (3), 646-667. O’Connor, N., Stafford, M., & Gallagher, G. (2008). The Impact of Global Terrorism on Ireland’s Tourism Industry: An Industry in Perspective. Tourism and Hospitality Reserach , 8 (4), 351-364.

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DETAILS ABOUT AUTHORS: CLÁUDIA SEABRA cseabra@estv.ipv.pt MARIA JOSÉ NOGUEIRA mjnogueira@estv.ipv.pt ODETE PAIVA odetepaiva@estv.ipv.pt MARGARIDA VICENTE margarida@estv.ipv.pt JOSÉ LUÍS ABRANTES jlabrantes@estv.ipv.pt FOR ALL AUTHORS: POLYTECHNIC INSTITUTE OF VISEU HIGHER SCHOOL OF TECHNOLOGY AND MANAGEMENT CAMPUS POLITÉCNICO REPESES, 3504-510 VISEU - PORTUGAL

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MOTIVATION AND INVOLVEMENT IN INTERNATIONAL TOURISM CLÁUDIA SEABRA MARGARIDA VICENTE CARLA SILVA JOSÉ LUÍS ABRANTES

ABSTRACT

Using a sample of international tourists travelling in Portugal, Spain and Italy, this study identifies key issues related with tourist involvement. One of the main aspects in the consumer behavior and the decision processes’ understanding is the concept of involvement (Broderick & Mueller, 1999; Dimanche et al., 1993) because it influences the decision rules used by tourists to reach the final decision (Sirakaya & Woodside, 2005). An empirical study of 600 international tourists reveals that motivation to relax influences tourists’ involvement with the trip. A structural model reveals that when tourists are motivated to relax they get directly more involved with their trip (pleasure and information seeking). The motivation to relax also influences indirectly the tourist involvement with the evaluation and quality perception of the trip through its influence on involvement with the trip planning. Discussion centers on the implications of this model to theory and managerial development of tourism and services strategies. Directions for future research are also presented. KEYWORDS: Motivation, Involvement, International Tourism Acknowledgments: FCT and CI&DETS (PEst-OE/CED/UI4016/2011)

1. INTRODUCTION Tourism decisions are considered as highly risky due to the high monetary and non-monetary costs associated (Sirakaya & Woodside, 2005), so the process of buying tourism products is very engaging, which means that tourists devotes to it a considerable effort and time (Seabra et al., 2007). Additionally depending on the product or situation, tourists may be more interested, concerned or involved in the buying decision process. In general, each buying decision process in tourism correspond to the existence of a service encounter, which typically involves interpersonal relationships between the producer and the customer. In consequence, this situation requires a higher degree of involvement by the consumer (Varki & Wong, 2003) for various reasons (Laroche et al., 2003): its production requires human interaction which introduces some uncertainty in their outcomes; the delivery, in most cases, is not possible without the participation of the consumer; there is no transfer of ownership, so the buyer cannot sell or return the product to the seller. Involvement is, in fact, the basis of the tourist purchase decision (Zaichkowsky, 1986b) and profoundly affects the perceived value of the product and its evaluation (Bolton & Drew, 1991). This concept is a central issue in the study of consumer behavior in general (Zaichkowsky, 1985, 1986a) and especially in the decision to purchase tourism products (Dimanche et al., 1991). Involvement is a key issue to explain what attracts consumers to products and how they make their buying decisions allowing distinguishing types of consumers (Kassarjian, 1981). In turn involvement study can help organizations to define strategies to influence consumers’ decisions. Research on involvement has been neglected in services context, especially in tourism. Also, research should focus on what influences involvement, namely motivations. Motivations that underlie a trip have a significant influence on tourists’ behaviors (March & Woodside, 2005; Morrison, 1996). Accordingly, the intrinsic forces that motivate tourists to travel, the push factors, will have a significant impact on tourists’ behaviors from planning to consumption and evaluation of tourism products (Moutinho, 1987). Motivation is the set of internal forces that push people to undertake certain actions to achieve an end, so it explains why individuals decide to do something, for how long and with which commitment. In short, they represent the internal forces that lead individuals to action (Schiffman & Kanuk, 1997). Motivations are an important dimension in tourism research. It is a central concept in the comprehension of consumer behavior and in the tourism decision process. Many key questions related with tourism activities can be answered

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trough motivation study, namely those of why people travel, why do they visit some destinations and choose certain activities? The understanding of those questions helps researchers to justify the comprehension of the higher or lower investment that tourists imply in their trips. Motivation measuring allows identifying and categorizing tourists, also to understand and analyze trips patterns (Fodness, 1994). Is not possible to make future decisions in marketing and promotion plans without evaluating what motivates tourists to travel and how those strengths influence their involvement on buying decision. So, it is our main goal to develop a model for measuring the importance and the influence of motivations on tourist buying involvement in an international context.

2. LITERATURE REVIEW Tourists are becoming more demanding in their travel behavior, which makes its study more complex. Also, the process of purchasing tourism products has some peculiarities (Gursoy & Gavcar, 2003):: cconsumers buy and consume the products outside the places where they live (Sirakaya et al., 1996);; the decision-making process used is longer than in much of the tangible products (Gursoy & Gavcar, 2003); more often tourists don’t receive anything tangible in return for their investment (Seabra et al., 2007); tourists deal with a high level of perceived risk due to their personal investment of time, effort and money (Teare, 1990); consumers plan and save money over a long period of time to be able to travel (Moutinho, 1987), which leads them to have a greater level of involvement in the decision making, selection and purchase of such products (Gursoy & Gavcar, 2003). The purchase of tourism products requires high involvement in the decision making process (Swarbrooke & Horner, 1999), which makes involvement a central issue to understand and explain the buying and consumption of tourism products. Tourists individual features are important variables influencing involvement with buying and decision process (Hawkins et al., 1995), namely motivations. Tourism Motivations Tourist motivation can be defined as “the global integrating network of biological and cultural forces which gives value and direction to travel choices, behavior and experience” (Pearce et al., 1998). Past research establishes that individuals are guided by socio-psychological motivations variables into making travel decisions (Sirakaya &Woodside, 2005). Travel motivation relates to why people travel (Hsu & Huang, 2008) and are an important issue in explain tourist behavior because they are the starting points of the travel decision and destination choice processes (Crompton & McKay, 1997). Travelling motivations can be divided in three major groups: knowledge, cultural and education motivations (Formica & Uysal 1996; Ryan & Glendon, 1998); social motivations (Fodness, 1994); and benefits seeking, this is escape from the daily life and sensation seeking (Mitchell, 1998). One particular reason for people travelling to other countries is to seek different experiences or lifestyles that they cannot obtain from their usual environment (Uysal & Hagan, 1993). The contact with different environments, places and people, which is an inherent characteristic of tourism, allows a strong experience of learning (Formica & Uysal, 1996), by developing and enhancing knowledge and exploring new things and places (Fodness, 1994; Ryan & Glendon, 1998, Silva, Abrantes & Lages, 2009). Many tourists seek the unknown of each place (Lee & Crompton, 1992), they travel in order to learn something new and to see beautiful objects (Hsu & Huang 2008). Tourism is a social phenomenon that also allows people to develop social interaction, to satisfy social acceptance, approval and integration needs. In tourism, the need for affiliation is often manifested in terms of need for social experience like meeting new people and having good times with others, friends and family. Tourism is a form of intercultural meeting and interaction (Ward et al., 2001). Therefore, social motivations are related with the internal needs that tourists have for social interaction by being entertained (Ryan & Glendon, 1998) and meeting different people (Ray & Ryder, 2003), building friendships and developing close relationships (Kim & Lee, 2002). This refers to social motives stimulating individuals to participate in activities that would satisfy also their desire of belonging according with the need for belongingness in Maslow’s theory of needs (Ryan & Gledon, 1998). On the 80’s arises a new stream of studies in the research on motivations in tourism, travel, leisure and recreation: the benefits sought. This current research argues that tourist behavior are mostly motivated by the benefits they