Analysis On Impact Non-Compliance With

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THE ANNAL5 OF THE
"$TEFAN CEL MARE"
UNIVER5ITY OF 5UCEAVA.
FA5CICLE OF THE FACULTY OF
ECONOMIC5 AND
PUBLIC ADMINI5TRATION
VOLUME 10, SPECIAL NUMBER, 2010
Editura Universitii tefan cel Mare din Suceava
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EDITORIAL BOARD:
Editor-in-chief: Carmen NSTASE
General editorial secretary: Adrian Liviu SCUTARIU
Editors: Elena HLACIUC, Carmen CHAOVSCHI, Mariana LUPAN, Ovidiu Florin HURJUI
SCIENTIFIC COMMITTEE:
Angela ALBU, ,tefan cel Mare University of Suceava, Romania
George P. BABU, University of Southern Mississippi, USA
Christian BAUMGARTNER, International Friends of Nature, Austria
Grigore BELOSTECINIC, ASEM, Chi inu, Republic of Moldova
Ionel BOSTAN, ,Alexandru Ioan Cuza University of Iai, Romania
Aurel BURCIU, ,tefan cel Mare University of Suceava, Romania
Gheorghe CRSTEA, Academ y of Economic Studies, Bucharest , Romania
Slobodan CEROVIC, Singidunum University, Belgrade, Serbia
Simion CERTAN, State University of Chiinu, Republic of Moldova
Carmen CHAOVSCHI, ,tefan cel Mare University of Suceava, Romania
Liliana ELMAZI, Tirana University, Albania
Cristian Valentin HAPENCIUC, ,tefan cel Mare University of Suceava, Romania
Elena HLACIUC, ,tefan cel Mare University of Suceava, Romania
Elena IFTIME, ,tefan cel Mare University of Suceava, Romania
Marian JALENCU, State University of Chiinu, Republic of Moldova
Miika KAJANUS, Savonia University of Applied Sciences, Iisalmi, Finland
Stefanos KARAGIANNIS, Institute of Tourism Research, Athens, Greece
Maria MUREAN, Academy of Economic Studies, Bucuresti, Romania
Carmen NSTASE, ,tefan cel Mare University of Suceava, Roman ia
Alexandru NEDELEA, ,tefan cel Mare University of Suceava, Romania
Ion PR]ACHI, ASEM, Chiinu, Republic of Moldova
Rusalim PETRI, ,tefan cel Mare University of Suceava, Romania
Abraham PIZAM, University of Central Florida, Orlando, Florida
Ion POHOA], ,Alexandru Ioan Cuza University of Iai, Romania
Gabriela PRELIPCEAN, ,tefan cel Mare University of Suceava, Romania
Gheorghe SANDU, ,tefan cel Mare University of Suceava, Romania
Petru SANDU, Elizabethtown College, Pennsylvania, USA
Pavlo SHYLEPNYTSYI, Bucovina State Academy of Finance, Chernivtsi, Ukraine
Doru TILIU]E, ,tefan cel Mare University of Suceava, Romania
Ion TORONCIUC, National University Yuri Fedcovici, Chernivtsi, Ukraine
Viorel ]URCANU, ASEM, Chiinu, Republic of Moldova
Diego VARELA PEDREIRA, University of A Coruna, Spain
Rzvan VIORESCU, ,tefan cel Mare University of Suceava, Romania
Valeriy YEVDOKYMENKO, National University Yuri Fedcovici, Chernivtsi, Ukraine
Text review: Alina HODOROAB, Adrian Liviu SCUTARIU. Cover design: Adrian Liviu SCUTARIU
Contact:
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The Annals of The"tefan cel Mare" Universityof Suceava. Fascicle of The Faculty of Economics and Public Administration Vol. 10, Special Number, 2010
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CONTENT
SECTION 1 - ECONOMY, TRADE, SERVICES......................................................................................................... 7
THE STRATEGIC EFFECTS OF THE RECESSION................................................................................................. 9
PhD Mr. Gheorghe VDUVA
The Christian University Dimitrie Cantemir, Bucuresti, Romania............................................................................. 9
CS I dr. Gheorghe VDUVA
The Christian University Dimitrie Cantemir, Institute for Security Studies, Bucuresti, Romania
MAKING THE DECISION ON BUYING SECOND-HAND CAR MARKET USING DATA MINING
TECHNIQUES................................................................................................................................................................ 17
Assistant PhD. Student Cristina OPREA
Petroleum-Gas University, Ploiesti, Romania
ASPECTS REGARDING THE EVOLUTION OF THE TOURIST ACTIVITY AT A REGIONAL LEVEL IN
ROMANIA, POLAND AND SLOVAKIA.................................................................................................................... 27
Professor PhD. Cristian Valentin HAPENCIUC
Assistant PhD. Student Adrian Liviu SCUTARIU
tefan cel Mare University of Suceava, Romania
DRINKING WATER, A PROBLEM OF SUSTAINABLE DEVELOPMENT OF THE CITY WE LIVE
IN. CASE STUDY........................................................................................................................................................... 36
Professor Eng. PhD. Romeo IONESCU
Stefan cel Mare University of Suceava, Romania
THE DISINFLATION PROCESS IN ROMANIA WITHIN THE CONTEXT OF THE EUROPEAN
INTEGRATION ............................................................................................................................................................. 45
Ph.D. Student Monica DAMIAN
Alexandru Ioan Cuza University, Faculty of Economics and Business Administration of Iasi, Romania
THE IMPACT OF BUSINESS LOCALIZATION ON THE INTERNATONAL TRADE..................................... 55
Lecturer PhD. Liviu-George MAHA
Professor PhD. Ion IGNAT
PhD. Student Sorin-tefan MAHA
Al. I. Cuza University of Iai, Romania
CULTURAL-CREATIVE INDUSTRIES (CCI) ECONOMIC AND SOCIAL PERFORMANCES63
Prof. PhD.Gheorghe ZAMAN
Corresponding member of Romanian Academy, Romania
Prof. PhD. Valentina VASILE
Institute of National Economy-Romanian Academy, Romania
THE ENVIRONMENTAL DIMENSION OF COMMON AGRUCULTURAL POLICY...................................... 78
PhD. Student Cristian TEODOR
Academy of Economic Studies of Bucharest, Romania
THE MIGRATION OF HEALTH CARE SKILLS IN THE CONTEXT OF THE ENLARGEMENT OF THE
ECONOMIC EUROPEAN AREA - THE CASE OF THE ROMANIAN DOCTORS - .......................................... 83
Lecturer PhD. Despina VASILCU
ECONOMETRIC ANALYSIS OF THE FLOW OF TOURISTS IN ACCOMMODATION STRUCTURES IN
ROMANIA...................................................................................................................................................................... 92
Professor PhD. Marian ZAHARIA
Petroleum-Gas University of Ploiesti, Romania
Associate Professor PhD. Rodica Manuela GOGONEA
Univeristy Assistant PhD. Student Cristina OPREA
INTEGRATED QUALITY MANAGEMENT OF TOURIST DESTINATIONS IN PROTECTED AREAS, THE
CASE OF PIATRA CRAIULUI NATIONAL PARK............................................................................................... 101
Post-doctoral researcher PhD. Adina Nicoleta CANDREA
Professor PhD. Gabriel BRTUCU
University of Transilvania, Braov, Romania
IMPACT OF ECONOMIC CRISIS ON THE TOURISM INDUSTRY IN ROMANIA. AN ECONOMETRIC
ANALYSIS OF OVERNIGHTS STAYS.................................................................................................................... 110
Ec. PhD. Candidate Alina BALAN
Associate Professor PhD. Mihaela BRSAN
Faculty of Economics and Public Administration, tefan cel Mare University of Suceava, Romania
4
THEORETICAL CONSIDERATIONS FOR SECURITIES ISSUED BY JOINT STOCK COMPANY ........... 117
Assistant PhD.Laurentiu NOVAC-DIACONU
Assistant Adrian LUPASCU
George Bacovia University from Bacau, Romania
SECTION 2 - MANAGEMENT AND BUSINESS ADMINISTRATION............................................................... 128
EMPLOYEE MOTIVATION IN THE COMPANY. STUDY CASE...................................................................... 129
Master student Andrei-Alexandru MOROAN
METHODS OF MEASURING THE PERFORMANCE OF INTERNAL AUDIT................................................ 137
PhD Assistant Cristina BOA-AVRAM
PhD Professor Ioan POPA
PhD Lecturer Cristina TEFNESCU
Babe-Bolyai University, Faculty of Economic Sciences and Business Administration, Cluj-Napoca, Romania
METHODS FOR ECONOMIC AND FINANCIAL ANALYSIS OF INTANGIBLE ASSETS............................ 147
Associate Professor Gabriel I. NSTASE Director Department of University Studies
MastersChristian University Dimitrie Cantemir
THE IMPORTANCE OF INNOVATION IN INTERNATIONAL BUSINESS..................................................... 157
Associate professor, PhD Valeriu POTECEA
Teaching assistant, PhD candidate Georgiana CEBUC
Romanian-American University, Bucharest, Romania
THE IMPLICATIONS OF CULTURAL DIMENSIONS ON BUSINESS PRACTICES AND MANAGERIAL
BEHAVIOUR WITHIN THE ORGANIZATIONS OF BIHOR COUNTY ........................................................... 162
PhD Maria-Madela ABRUDAN
University of Oradea, Faculty of Economics
Mirabela Constana MATEI
Adriana chiopoiu BURLEA
University or Craiova, Faculty of Economics and Business Administration
Doina DNIA
West University of Timioara, Faculty of Economics and Business Administration
Mirela SRBU
University or Craiova, Faculty of Economics and Business Administration Dr. Tr. Severin
Doina ROCA
University or Craiova, Faculty of Horticulture
THE EVOLUTION OF THE GLOBALIZATION AND ITS IMPACT ON THE INVESTMENT PROCESS.. 180
Lecurer PhD. Mariana LUPAN
ETHICAL ISSUES IN INTERNATIONAL BUSINESS........................................................................................... 189
Assistant Professor, PhD. Andreea-Daniela GANGONE
Constantin Brncoveanu University of Pitesti, Romania
FDI FLOWS IN THE ERA INTERDEPENDENCIES............................................................................................. 200
Assistant PhD. Student Angela-Nicoleta COZORICI
Assistant PhD. Student Simona BUTA
ECONOMICS OF LONG TAIL, A CHALLENGE FOR BRANDING.................................................................. 210
Ph.D. student Andreia Gabriela ANDREI
Ph.D. student Andrei DUMEA
F.E.A.A., University Al. I. Cuza of Iasi, Romania
KNOWLEDGE DYNAMICS AND THE CONCEPT OF BA ............................................................................ 217
Junior Assistant, PhD Student Ruxandra BEJINARU
THE GROUP AND THE TEAM IN MILITARY ORGANIZATION .................................................................... 224
PhD. Student Sofronia Petric PUIU
Alexandru Ioan Cuza University of Iasi, Romania
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THE ROLES PLAYED BY THE TEAM MEMBERS IN THE HUMAN RESOURCES PERFORMING
MANAGEMENT.......................................................................................................................................................... 231
Master Student Paul IVAN
SECTION 3 - ACCOUNTING - FINANCES............................................................................................................. 241
REFLECTIONS ON THE NATURE OF ACCOUNTING ...................................................................................... 242
Professor. Dr. Elena HLACIUC Professor. Dr. Rusalim PETRIS
THE IMPLICATION OF THE ACCOUNTING PROFESSION IN THE ACCOUNTING REGULATION FOR
MICRO-ENTITIES IN THE ACTUAL ECONOMIC CONTEXT: DEBATES AND OPINIONS .................. 260
Professor PhD. Ramona NEAG
Assistant PhD. Student Irina Doina PCAN
Lecturer PhD. Student Ema MACA
Assistant PhD. Beatrice Anemari TEFAN
Petru Maior University, Trgu Mures, Romania
THE RECONCILIATION BETWEEN NET INCOME AND EQUITY OF THE PARENT COMPANY AND
CORRESPONDING VALUES IN CONSOLIDATED FINANCIAL STATEMENTS * ...................................... 268
Professor PhD. Stefano AZZALI
Professor PhD. Luca FORNACIARI
Universit degli Studi di Parma, Italy
FINANCIAL MANAGEMENT WHEN INTERESTS ON DEBT ARE NOT FULLY DEDUCTABLE. THE
ITALIAN CASE STUDY............................................................................................................................................. 283
Assistant Professor Ph.D. MSc. Alberto LANZAVECCHIA
Assistant Professor Ph.D. Lucia POLETTI
Assistant Professor Ph.D. Beatrice RONCHINI
Full Professor Giulio TAGLIAVINI
Faculty of Economics, University of Parma, Italy
ANALYSIS ON THE IMPACT OF NON-COMPLIANCE WITH ACCOUNTING PRINCIPLES BY
COMPANIES, IN TERMS OF EXTERNAL FINANCIAL AUDIT FILTERS.................................................. 301
PhD. Associate Professor Ovidiu-Constantin BUNGET
Lecturer PhD. Student Alin-Constantin DUMITRESCU
West University of Timisoara, Faculty of Economics and Business Administration, Timisoara
A PREDICTION MODEL FOR THE ROMANIAN FIRMS IN THE CURRENT FINANCIAL CRISIS.......... 309
Dan LUPU
Andra NICHITEAN
Alexandru Ioan Cuza University of Iai, Romania
ACCOUNTING KNOWLEDGE IN FORESTRY'S DECISION SUPPORT SYSTEMS. LITERATURE
REVIEW........................................................................................................................................................................ 316
Ph.D Student Ec. Daniela I. POSTOLACHE (MALE)
Alexandru I. Cuza University of Iasi, Romania
ACCOUNTING INFORMATION IN THE CONTEXT OF GLOBALIZATION................................................. 326
PhD. Student Alexandra-Daniela SOCEA
THE STUDY ABOUT USING FINANCIAL AND ECONOMICAL ANALYSIS ................................................. 334
Ec. PhD. Student Cristina Antonela SOFRONIA
CONSIDERATIONS REGARDING THE CONTENTS AND APPLICABILITY OF FISCAL MECHANISMS
INFLUENCING THE ECONOMY IN THE MODERN SOCIETY........................................................................ 340
PhD. Candidate Marius FRUNZ
Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iai, Romania
THE GLOBAL FINANCIAL CRISIS IMPACT OVER THE REFORMATION OF THE FINANCIAL
SURVEILLANCE ARCHITECTURE IN EU: PROSPECTS AND IMPLICATIONS......................................... 350
Elena CIOBANU (SIRETEANU)
Alexandru Ioan Cuza University of Iai, Faculty of Economics and Business Administration Doctoral School of
Economics, Iai, Romania
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SECTION 4 - STATISTICS, DATA PROCESSING (INFORMATICS) AND MATHEMATICS....................... 356
MACROECONOMIC DEVELOPMENTS BASED ON THE MAIN COMPONENTS METHOD ................... 357
PhD. Mariana BLAN
Institute for Economic Forecasting NIER, Romanian Academy, Romania
Prof. univ. PhD. Valentina VASILE
Institute for National Economy NIER, Romanian Academy, Romania
CAR ACCESS USING MULTIMODAL BIOMETRICS......................................................................................... 368
Catalin LUPU
SECTION 5 - LAW AND PUBLIC ADMINISTRATION........................................................................................ 378
COMPETITION AND CONTRACT.......................................................................................................................... 379
Professor PhD. Luca DI NELLA
University of Parma, Italy
DOCTRINARY OPINIONS REGARDING THE AUTONOMY OF COMMUNITIES IN THE LOCAL PUBLIC
ADMINISTRATION MANAGEMENT..................................................................................................................... 390
University Assistant PhD. candidate Petronela ZAHARIA
Lecturer PhD. Candidate Irina BILOUSEAC
THE STAMP DUTY REGULATION IN DIFFERENT EUROPEAN COUNTRIES ........................................... 396
Assistant Bogdan-Dumitru DMBU
,,tefan cel Mare University of Suceava, Romania
SOME ASPECTS OF THE CONSTITUTIONALITY OF LAWS CONF CONTROL......................................... 403
PhD Luminita DRAGNE
Christian University Dimitrie Cantemir of Bucharest
THE DISTINCTION OF THE ADMINISTRATIVE CONTRACT........................................................................ 408
FROM OTHER TYPES OF CONTRACTS .............................................................................................................. 408
Assistant professor Ph.D. Liana-Teodora PASCARIU
University Stefan cel Mare Suceava, Romania
THE EU CHARTER OF FUNDAMENTAL RIGHTS ACCORDING TO TREATY OF LISBON ..................... 414
Lecturer Ph.D. Rzvan VIORESCU
Judge Iulius-Cezar DUMITRESCU
Suceava Appeal Law Court, Romania
COMBATING ECONOMIC AND FINANCIAL CRIMINALITY AT THE EUROPEAN LEVEL ................... 421
Research Assistant Ana PIRLAC
A STUDY ON THE ROLE OF LOCAL BUDGET PROCESS IN THE SOCIAL-CULTURAL DEVELOPMENT
OF THE NORTH-EASTERN REGION .................................................................................................................... 428
Lecturer PhD. Student Cristinel ICHIM
INSTRUCTIUNI UTILE PENTRU AUTORI / AUTHOR GUIDELINES............................................................. 439
7
5ECTION 1
ECONOMY, TRADE, 5ERVICE5
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9
THE STRATEGIC EFFECTS OF THE RECESSION
PhD Mr. Gheorghe VDUVA
The Christian University Dimitrie Cantemir, Bucuresti, Romania
vaduvageorge@yahoo.fr
CS I dr. Gheorghe VDUVA
The Christian University Dimitrie Cantemir, Institute for Security Studies, Bucuresti, Romania
vaduvageorge@yahoo.fr
Abstract:
The financial crises are big crisis, crisis of system, with chaotic and unpredictable developments. They are an
effect of creation and tendencies to autonomy of a system which goes to became dominant and sovereign, but extremely
vulnerable to the conditions variation. The analysis which we have made on some segments of these crisiss effects led
to the conclusion that their impact is and will be peculiarly strong especially on those major components of the
security1s risk management. The effects generated by the crisis are rolling on in complicated chains which trend to
multiple in uncontrollable developments, to became radical and to explode starting economic, social and military
collapses which multiplies the challenges, the defiance, the dangers and threats, amplify the vulnerabilities to these and
increase, in a significant way, the risk level, crossing a lot over the strategic security level. It is unlikely that such crisis
to evolve to a maximum of conflict called war, as it happened with 1929-1933 crisis which generated, mostly, the World
War II, but we can not exclude that these effects could still generated another king of war, more complicated and more
subtle. The effects of present crisis are still looming and it is hard to predict how they will develop in the future. NATO
is on its way to elaborate the strategic concept while EU already applies the Lisbon Treaty. Both documents, with
essential political and strategic value, are elaborated and finalized during a profound crisis which has effects on all
levels, especially in the economic, social and military fields and also regarding the geopolitical and geostrategic
reconfigurations, which are in a new dynamic of the interdependent sovereign, within a new power unbalance and
against a new possible intensification of the battle for resources and markets.
Key-words: crisis, impact, strategic, effect, regions, cash/coin
JEL Classification: H12
INTRODUCTION
The mankind is passing through a new crisis of which effects felt and felt again on all levels,
mainly on the strategic level. The crisis affects the power, not only doesnt reduce neither the gaps
nor the differences, but, furthermore, emphasis and submit them to some unpredictable evolutions.
Following the Wall Street effects, the American Government, as many other governments,
intervened through huge salvation plans, granting to the insolvent banks and assurance societies big
aids. The vertiginous decrease of the consumption expenses and the moratoria over the loans put on
the block even the strongest companies what impose, on the part of the states, again, new
interventions, new plans and other huge expenses tranches. Bt just the consumption credits with
high risk level imposed, generally, by the encouragement measures of the consumption credits,
most of them in the guise of under-bonuses (1), with high risk level, taken, maintained and even
secured by states in favor of poor stratum result in the impossibility of their reimbursement and to
the bankruptcy of some of the largest banks and assurance societies from the world. John B. Taylor
showed that, in fact, the actions and the Governments interventions, and also some weakness of
the private environment caused, extended and aggravated in a radical manner the crisis (2). Many
people request the establishment of inquiry committee regarding this crisis similar to the committee
established to analyze the causes of 9/11 events.
The classic explanation of the recession consists in the cash flows excesses which turnoff a boom
and an unavoidable crash bank. This is how it happened these days. The real estates bubble and then the
property crash caused the explosion of the real estate loans and of the assets based on those and after that
the collapse.
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There are, of course, other opinions regarding this recessions philosophy and physiognomy with
its causes and effects. Some opinions, for example, endorses that not only the non-overwrought and even
hasted intervention of the state in favor of poor stratum and support of disadvantageous credits, but also
the banks greedy, the granting without limit of some consumption credits with high risk level and the
inadequacy of present financial system to the real economy demands, of the market and life represent the
true cause of this disaster. The state, in their opinion, didnt make anything else than interfere for the
protection of a system which he, obviously, also created.
It seems like, in the train of this recession, the American economy gives up to the Milton Friedman
Model (3) and starts to flirts with the Intervention Theory (4). The ideas of Intervention of James Tobin,
laureate of Nobel Premium, start to fall into place and get support. In other words, John Maynard Keynes
come back to present. The American President Barak Obama signed a plan for economic stimulations
costing 787 billions dollars.
This recession proves one more time that, in troublous time, the rigid doctrines are not the most
suitable ones. It is requested flexibility. In the moment when the reference interest comes close to zero are
requested, according to some experts, the options of USA Federal Reserve or of American Central Bank
(Fed) for economys stimulation. The optimal employment rate, affirms James Tobin, is zero. As John
Maynard Keynes, he claims that it is necessary that the Government to interfere in economy in order to
maintain the employment rate to the free and must be made a very strict control of the money pumped
over in economy. Those who follow the Tobins line believe that the Government must interfere in
economy, inclusive through the stimulation packages of expenses. Of course, the influence of Tobins
ideas is very large at Washington, but not as large as its follower wishes. Richard Levin, president of Yale
University, affirms that, within the fiscal stimulation program of Obama Administration, it is desired to be
as less possible taxes reduction and a stronger implication in creation of new jobs. That means the opposite
of what John. B. Taylor claims.
Still, in our opinion, the recession proves one again that the financial ventures, the implementation
of rigid theories, the chaotic liberalization of market, the excessive increase of consumption, the lack of
balanced economic and social policies can go to dramatic developments, to spectacular crashes of
economic and financial power and disequilibrium hard to be managed, with multiple, complex and hard to
remove effects, inclusive over to the national and international security. The recessions effects are
numerous, but the most dramatic are those at strategic level. These creates powers unbalance and impose,
on one side, new policies, unbearable, of relocation and rebalance of the ratios between the great strategic
policy makers, with effects within the globalization and fragmentation process and, on the other side, an
excessive and confliction fragmentation of the geopolitical congruence areas and a proliferation of the
powers asymmetry.
THE POWER AND THE POWER CRISIS
The strategic balance reshaped after the end of Cold War is a restless, asymmetric and even chaotic
one. The American Superpower which remain still dominant in strategic level doesnt necessary need
an effective support, but just only by pivots, and a fitting strategic concept. The security projected and
wished by the Americans is one with variable geometry within the 3 components of Power political,
economic-financial and military interact dynamic, meaning that the effects of one of the components can
be found in the others effects, in an interactive manner. USA represents, still, a geopolitical nucleus of
stability and management of conflicts, despite the fact that the principle is of the force - through the
economic and financial power, but also through the military power. USA represents the vital centre of
world military power. The Americans invest in defense over 4 % from a huge GDP, meaning twice more
than the rest of the world.
The present recession started between in the period 2007-2008 and at the beginning of 2009 on Wall
Street, affects in a substantial way, all three components of American power. The most affected is just the
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vital center of this power Airpower the most dynamic and most important component in force
projection which, in fact, means the power projection.
Airpower is made from a forces and devices system which ensures the domination of entire
American strategic interested space of the planet. The American Airpower is made, generally, from the
USA Air Forces (USAF), Naval Forces (US Navy), the air component Naval Infantry, the air component
of Land Forces (US Army), the American Intelligence Systems, Intelligences, Surveillance,
Reconnaissance (I2SR), meaning the satellites, networks, reconnaissance devices, sensor system and other
elements which assure the rapid action and the force projection. USA, where she is placed today, is
mostly, due to its airpower. Airpower consists of USAF (3542 fighters, 180 bombardiers (5) and a lot of
transport, air-refueling aircrafts, battle and transport helicopters), 13 carriers which dominate the world
oceans, and Naval Infantry realized as an expeditionary corp. At this huge and dynamic power should be
added the strategic nuclear forces. How the recession affects this huge American power?
The Swiss Military Magazine (6) realize an interesting analysis in this direction, after a very
laborious study elaborated on November 21
st
2008 by Karim Lakjaa (7). Airpower is not only the vital
center of the greatest world military power but also the harder, flexible and most responsible core for the
strategic stability of the planet. The air park of Airpower is twice larger than the air parks of all other
countries together.
The recession limits (even stops for long time) the modernization programs of USA Airpower, and
its effects consist of ageing the aircrafts park and considerable increasing of maintenance costs.
USA injected in their bank establishments, although, on the first stage, the Congress opposes,
almost 700 billions dollars (8). This amount come close to the costs of global war against terrorism,
initiated after 9/11, of 824 billions dollars (653 for Iraq war and 171 those in Afghanistan) (9), meaning
1584 billions dollars! And the American budgetary deficit is 2000 billions dollars.
The recession affects the USA Airpower through at least 3 complementary effects: the impossibility
to maintain an air capacity always to a constant level; the significant depreciation of existent air capacity;
the creation of a too big gap between the scientific and technologic research through which were already
realized a new generation aircrafts and the effective reality of Airpower.
The first effect is materialized through the ageing of aircraft, the significant increasing of
maintenance costs and decreasing of operational potential. The cost of a flight hour with F-15 and other 14
aircraft categories notices The Swiss Military Magazine doubled in the last ten years. They grew and
still grow the production costs. The cost of a bombardier B-2B grew with 300%, while, for an aircraft F-22
Raptor, conceived to assure the domination of the air space, U.S.A.F. must pay 200 millions dollars. This
aircraft was expensive even before the recession (near 120 millions dollars). A few years ago, in USA,
started a competition among main aircraft manufacturers in order to realize a cheap aircraft, with vertical
take-off, especially for U.S.A.F. and U.S. Navy. Remain in competition 2 large manufacturers Lockheed
Martin and Boeing and won Lockheed Martin, which produces the F-35. But this aircraft costs already 90
millions dollars. These 2 super-aircrafts F-22 Raptor and F-35 should replace almost entire fighters
park but the recession doesnt allow the discharge of these huge costs, which tantamount to the amount
which the Americans expended to stop the recessions effects. U.S.A.F. must purchase 750 fighters F-22.
The too large costs of this aircraft imposed the decreasing of the amount to 183. Furthermore, USAF will
purchase only 20 pieces on year. From here result that U.S.A.F. will have a full capacity (diminished from
750 to 183) in 9 years and if it this aircraft must replace all 441 F-15 from USAF it would be necessary 26
years. From this results that 177 F-15 aircrafts must be maintained on duty till 2025. F-35, an aircraft with
vertical take-off, comes to accouter both U.S.A.F. and the 10 U.S. Navy carriers and 3 Naval Infantry
carriers. But there are not enough money to purchase him and its production goes pretty slowly. From this
reason, the aircraft F-18 resource will be prolonged with another 6,000 hours (to cover the period
necessary to implement the F-35 aircraft).
U.S.A.F. done, in Afghanistan, 12,600 raids pay out 7,000 bombs and other ammunition. In both
operation fields Iraq and Afghanistan , USAF planned and executed 130,000 missions of air aid which
consumed 375,000 flight hours. In Iraq where 300 reconnaissance, surveillance, troops air-transportation,
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fight and also for other usage aircrafts. The firmly domination of air space by USA is one of the
characteristics of both operation fields. Without this air and informational domination it wouldnt be
possible the missions fulfillment in these operation fields. These missions will continue till 2017 and even
till 2020, although, partially, the army will be redraw due to the fact that these areas are considered
dangerous.
Preserving proportions the same thing is happening with the Romanian Air Forces (FAR). Despite
the fact it was realized an hole air space surveillance integrated system and a part of the existent aircrafts
were upgraded, the delay, due to the recession, of implementation of the procurement programs (for entire
Armed Forces and not only for FAR) generates the most alarmgly effects. MiG 21 Lancer a solution for
2 decades comes to the resources exhaustion and the new aircraft, although it was chosen, it wasnt yet
purchased. Of course, it would be wonderful if the Romanian Aeronautic Industry could contribute, at
least partially, to the new aircraft realization which FAR needed but such option was long time ago
abandoned. Probably the political and strategically decision makers from our country will analyze and the
possibility of resurging, in a way or another of course in Romania Armed Forces benefit of the
Aeronautic Industry, as it used to be long time ago or how it could be sometime in future The recessions
passes but the projects, the realizations and realities remain for long time.
THE DEPRESION, THE NUCLEARE POWERS AND THE EMERGENTE POWERS
The general manager of the China Popular Bank considers that the faults of the international
monetary system can be repaired, in a certain measure, through the creation of a new coin of world
reserve. This is a controversial idea which generated many debates.
In the next years China will endow, probably, with its first carrier. It is for the first time after Ming
dynasty (10) when China will send warships to protect its commercial lines. So, recently, were sent 2
destroyers and a supplying navy in a sector located off the Somalia coast.
The BRIC countries (Brazil, Russia, India, and China) run, no long time ago, their first summit.
China is a kind of pillar of this organization which constitutes a good discussions platform with USA and
European Union about the main issues of the world, as peace, stability, durable development, climate
changes and global warming. This is another strategic mutation through which can be created structures
and potentials for conflict status improvement, for dialog and international balance. The Chinas priority is
not the battle for global supremacy but finding and applying the best solutions for its durable development
and for regional stability.
The Chinas relations with USA are becoming closer. Nolens volens, China will continue to buy
the American debt meaning that she must help USA in order to help herself. Even if China is looking
other quotes, presently, neither Yen nor Euro is capable to replace the dollar.
The exports are the Chinas development engine and the main markets for the Chinese products are
in USA, Japan and European Union. The weakness of these markets, due to recession, could have a
serious impact over the Chinese trade. This impact already exists. As a result of recession, the Chinas
foreign trade knew already, in May 2009, a diminution with 25.9 % comparing with same period in 2008.
From this reason, over 20 millions people lost their jobs.
The 3 fundamental questions which China asked herself during this period contain 3 important
fields: stimulation of internal consumption; creation of new jobs for the unemployed people; maintenance
of durable development around the limit of 8 % from GDP. Shortly, the problems seem to be solved. Not
on long term meaning at strategic level because today the strategic level is determined not the domination
levels but the interdependences level.
Nor in Russia the recessions effects can be ignored. The Russian stock markets is at the lowest
level from the last period. Furthermore, if we take into consideration that the Russian economy still
depends on hydrocarbons export, the decreasing of oil barrel price brings serious problems. Probably the
13
strategic investors will not avoid Russia, but, contrary, will look after her. The recent negotiation with
European Union and main European countries proves this think.
The intervention in Georgia and also the firmly attitude during the gas crisis period from January
2009, the provenience of similar situation in 2010, the same firmly reaction toward the implementation in
Europe of some elements of American anti-missile system, the trenchant conception and offensive and
active position regarding the exploitation of Arctic energetic resources, the contraposition expressed pretty
directly regarding the NATO and EU enlargement, the competition and, simultaneously, the
complementary solutions regarding the new European architecture of the energetic resources we are
talking about the projects North Stream and South Stream, but also about the other European projects
through is trying to be reduced the dependence by Russia and at which, obviously, Russia reacts pretty
consistent are elements of a certain type of firmly implication in geopolitical reshape of Euro-Asia space
on power and partnership support. The NATO-Russia Council, the strategic partnerships between Russia
and USA, Russia and China, Russia and India so, and also the one which is still negotiating between
Russia and EU, are part of a new construction through which it is expected to dilute as much as possible
the conflict within the relations and to stress the collaboration and cooperation.
The NATO General Secretary, Anders Fogh Rasmussen, made 3 concrete proposals in order to
consolidate the NATO-Russia partnership, serious affected after the Georgias war from August 2008.
Those 3 proposals are: the examination of the possibilities to consolidate the cooperation in all common
interest fields (fight against terrorism, the Mass Destruction Weapons proliferation and Afghanistans
stabilization); rehabilitation of the damaged trust due to the serious divergences regarding the NATO
enlargement and resuscitation of NATO-Russia Council, advisory body between the Nord-Atlantic
Alliance and Russia, with main purpose to approach all subjects without prejudices; reviewing the entirety
new security challenges of XXI century. Also, the NATO General Secretary considers that is comes the
moment that Moscow, Washington and other European leaders must reunite their anti-missile systems.
The old American project of defense system against long-range missile predicted the installation of strong
radars and interceptive missile systems in California, Alaska, Poland and Czech Republic, forcing the
security strategic environment already to storm-beaten by numerously crisis and armed conflicts and
looking to realize an accomplished fact.
In February 2009, President Obama announced President Medvedev that he intends to give up to
this program in exchange of Russia collaboration on stopping the nuclear Iranian program, similar with the
1962 missile crisis from Caribbean Sea. During that time, the Russians turned around the missiles which
had to be deployed in Cuba with the condition that the Americans will give up to deploy similar missile in
Turkey.
But, after these new tide turns within the relations between Washington and Moscow, it seems that
the exit from the Cold Wars effects and reshape of a strategic environment in which the World Powers to
become Power of World for Worlds protection and security represents the only escape from a conflict
status and a complete change of security and defense philosophy and physiognomy.
NEW SUPPORTS FOR A REVOLUTION OF STRATEGIC THINKING
One March 18
th
, the USA Central Bank (Fed) bought from the market the treasury bills. Giiles
Bonafi compares this day with Black Thursday (1929`s recession) because she mark the dollars end
(11). Paul Jorion announced the capitalisms end and the analysts from Standard Chartered Bank
defined this day as dollar death day. This huge recession with its strategic implications was defined by
Alan Ruskin, analyst at RBS as Romes fall. Many from those who analyzed or analyze still this
recession phenomenon framed, in the first trimester of 2009, the idea that Europe and USA risk the
implosion. Meanwhile, the great continental poles (ASEAN, CEI, and North American Union) claims
Bonafi are in expansion. Even if such phenomenon seems contradictory and paradoxical, it seems that
we are coming close to the nations end or, at least, to the end of nations age and of appearance of great
ensembles which will have, as administrative echelons, regions (12). In 1997, Herbert Marshall Mc
14
Luhan published the paper War and Peace in the global Village , which proposes a new concept:
glocal (13). This mean a world turn upside down by the new technologies. The strategic mutation is
obvious. The town shake itself free more and more by its productive function, exchange function and
Intelligence refinement function (which sends in cyberspace) and concentrates on new organizations
forms on local level, giving the impression that he didnt need other structures that are managing, guarding
and exploiting him; nor even the state. In other words, we are coming back to the ancient cities-states.
The information has an essential role and a great responsibility in starting and developing the
present recession because contribute to the dangerous acceleration of the financial cash flow at the entire
planet level. The adverse reaction was to put this information under control, looking to solve the crisis
inclusive through the consolidation of FMI role. But FMI is not pleased by anyone due to the fact that
imposes conditions and restrictions. The network activate this flux, the savings coming out from rigid
national system frameworks and become a sort of systems of systems, accelerating and metamorphosing
the substance, energy and information exchange within an oversaturated strategic environment,
intoxicated and extremely fragile and vulnerable, in which is liberated a new, cultivated and courted
dimension today in Europe the regional one.
Bernard Lietaer and Margrit Kennedy published a book called Regional Coins. New ways to a
durable prosperity (14) through which analyses such delicate and controversial subject. From the
beginning, the authors underline that: The recession started in 2008 has amplitude and a complexity
without precedent. The announced recession promises to be long, hard and most difficult since 1930.
During that time, we managed ineffectual the economic situation and the social and political degradations.
That situation drove to a fascism wave which climaxed with the Second World War.
The present recession points up a regional dimension and a sort of end of absolute sovereignty of
national states. For the time being the states are sovereign and nobody makes an attempt to their
sovereignty. The agreements, understandings and international institutions are not targeting the diminution
of sovereignty, but just its right exercise within the new conditions generated by the interdependences
increasing.
There is a kind of European consensus regarding the regions importance in the development
politics. This thing is underlined in Eduard Balladurs rapport called It comes the time to decide,
advanced within the Committee for the local collectivities reform from France, whereby are made 20
proposals, mostly of them being adopted unanimously. It is the same thing with the establishment and
function of the 8 regions from Romania. The Balladurs rapport shows: The regional echelon is
considerate by the Committee being the best adapted to the new competitive conditions, turning out that
there is an European consensus regarding the importance of regional level within the development
politics. The articles 2 and 3 from The European Charta of the local autonomy underlines that the local
autonomy must be recognized in internal legislation, this autonomy being defined as the right and
effective capacity of the local collectivities to adjust and generate, within the law framework, under its
own responsibility and for their peoples profit, an effective part of public problems. Unfortunately, some
local communities understands by this regional policy a support for ethnic separatism, when, in fact, the
European Charta of local autonomy targets a new architecture through which must be assured, both, even
out the left behind regions to European level and creation of a greater flexibility which allows a better
resilience to crisis and conflicts. Thats mean exactly vice versa of what promoting the ethnic separatists.
For the crisis situations prevention is necessary to come out from this huge system which generates
chaotic unpredictable evolutions. For that purpose, Bernard Lietaer, former member of Rome Club, shows
that an important decision behind the governments should be to allow to the cities and local authorities to
choose themselves the complementary coins that seems to be appealing in order to encourage and to
accept them for the payment of city or state taxes (15). So, according to this vision, the cities and regions
could choose the coins which are convenient for them and even to create complementary coins. Although,
for some people, this thing seems impossible, such experiences existed during the history. Furthermore,
such practices exist even today in Switzerland (WIR) and Germania (Chiemagauer). Gilles Bonafi gives
such an example and from outside the European continent. The mayor of Curitiba (Brasilia) created a coin
15
with jetton shape which the citizens earns cleaning the towns misery. In this way, Curitiba became one of
the most cleanest and prosperous city in Brazil and the citizens are enjoying by the advantages of such
coin. There is also the example of collaborative activities such those used for the elaboration, on Internet,
of a popular encyclopedia.
Starting from this example and from many others, Lietaer proposes the creation of B-B systems
(Business-to-Business) at the enterprises level. A Russian business man German Sterligov invested
millions dollars (in London, Paris, Bruxelles and Hong Kong) to realize some anti-crisis center which
allows to enterprises to organize barter payments. He specified that is not just a barter but a new payment
system, a new compatibility, within the money, credits, interest disappear
Some specialists advocate that the mutations produced during these possible reshapes could genera
armed conflicts and even wars. Generally, it is asserting the territories reorganization and regions number
contraction, simultaneously with their emphatic autonomisation. First proposal from Balladurs rapport,
assimilated unanimously by the members of the Committee for the local collectivities reform from France
refers to the bias regions voluntary reshuffle and modification of their territorial limits in order to reduce
their number to 15.
Today, France is a unitary state composed from 26 administrative regions which have no kind of
legislative or other type of autonomy. These proposals as those 20 contained in Balladurs rapport can be
found everywhere in Europe.
The Regions European Policy to gain momentum and seems to become benefic for the rising of
some left behind regions but, as it can be deduced from all above mentioned, at strategic level, it could
have more complex effects, even contradictory to the initial purpose.
CONCLUSIONS
The crisis is interconnected. The recessions are strong connected with financial, social, ecological,
energetic one, with the raw material crisis, food crisis and even by the political and military crisis. You can
not be analyses one without the other because ones effects are or could be causes for the others and even
for its evolution. Thats why, Gilles Bonafi, same as other authors, considers that the crisis issues must be
analyzed, both global and on levels, among these most important being the followings: financial level;
monetary system which has as pillar the dollar (considered to be, during the recession, but also after that,
failing); adaptation of economic system to the new information technologies which destroy millions jobs;
energy (it considers that the traditional energy sources are going to end and no viable alternative sources
werent found yet; actually, except the fact that, according to a theory which is confirming more and more
every day the a biotic theory of oil , the oil is forming from primary elements, deep in the Earth, at very
high temperatures and pressures, and comes out in the guise of cold eruptions, is developing, thenceforth,
nuclear technologies which bring the peoples world in the inexhaustible universe of atomic energy, the
Universe energy); the dangers which lurks the democracies and freedom, due to the fact that the real
power is detained by a hand of people through capital accumulation (it proves the John Kenneth Galbraith
warnings who underlined, in an interview published by Nouvel Observateur in 04.11.2005, that it are
necessary only a few enough strong and convincing salesmen in order to determine what people must
buy, eat and drink; the eco-genocide (the act of destruction of an ecosystem, especially through its
excessive exploitation) caused by the present economic system.
These levels are interacting, interpenetrating and tries to settle little within the vulnerabilities
identification and risk management, especially of the extreme risk. The reality shows that the extreme risk
is not consisting in the danger represented by the nuclear weapon which, out of control, can destroy the
world, or in unpredictable, bloody and villainous actions of terrorists, but mainly in the calamitous effects
generated by the recession which itself is, in fact, an effect of effects.
Beyond its disastrous effects which, unfortunately, are not drained , the recent crisis forces the
strategic thinking to vivify and imposes new reflections for finding some solutions to cope with giant
strategic mutations, featuring the human, environment and World security and reducing the risks level.
16
REFERENCES/ENDNOTES
1
Under-bonuses are risk credits with high interest (in order to cover the risk rate).
2
http://www.contrepoints.org/Comment-le-gouvernement-a-cree-la.html (opened on 12.09.2009)
3
Milton Friedman elaborated a theory of permanent income, through which he advocates that the temporary incomes
increase, as opposed to permanent accretions, are not starting a significant increase of consumption.
4
http://www.zf.ro/business-international/sfarsitul-pietei-libere-economia-americana-renunta-la-milton-friedman-
cochetand-cu-interventionismul-4051488/, opened on 10.09.2009
5
In 1992, USAF had 5783 fighters, in 2000 - 3985 and in 2008 - 3542, while the bombers number dropped from 276 in
1992, at 208 in 2000 and at 180 in 2008.
6
http://www.revuemilitairesuisse.ch/node/503 (opened on 19.09.2010).
7
Karim Lakjaa, Lairpower amricaine, entre crise financire et oprationnelle, www.robin-
woodard.eu/spip.php?article474 (opened at 20.09.2010).
8
This amount was injected to the bank institutions till November 2008. Barak Obama signed an economic stimulation
plan in which is forecasted the amount of 787 billions dollars, subsequent injected.
9
Amy Belasco, The Cost of Iraq, Afghanistan and Other Global War on Terror Operations Since 9/11, Congressional
Research Service, RL33110, 14 juillet 2008 pages 16 et 19 (quoted after http://www.robin-
woodard.eu/spip.php?article474&lang=fr, opened on 16.09.2010)
10 Dynasty Ming (1368-1644) removed the Mongolian dynasty Yuan (1279-1368), established by Gingis Han
grandson, realized the Great Chinese Wall and brought to China prosperity and stability.
11 Gilles Bonafi, Crise systemique Les solutions (nr.4 : regions et monaies complementaires), Mondialisation, 30
avril 2009,
12 www.strategicstudiesinstitute.army.mil/pdffiles/ PUB890.pdf (opened on 17.09.2010)
13 Glocal sort of mixture between global and local, which defines an architecture of new global order, on one side
being located continents and, on the other side being located regions and great urban agglomerates. After that the
continents will not count anymore.
14 Lietaer and Margrit Kennedy, Regional coins. New ways to a durable prosperity, Charles Leopold Mayer Publishing
House, Paris, 2008 (translated from German language) ISBN: 978-2-84377-144-6.
15 Gilles Bonafi, Ibidem.
17
MAKING THE DECISION ON BUYING SECOND-HAND CAR MARKET USING DATA
MINING TECHNIQUES
Assistant PhD. Student Cristina OPREA
oprea_cris2005@yahoo.com
Abstract:
According to a recent study by GfK Romania, the institute number one of market research in Romania, 55% of
Romanians that plan to buy a car and would buy a second hand car.
Given the high demand for such cars, this study is to facilitate the acquisition of second hand cars. This will be
achieved through analysis of existing data on the auto market using data mining techniques.
The paper has determined the price of a car using linear regression and the of score each type of car, which,
on a scale from 1 to 5, will show whether or not a car worths to be bought. Also there have been identified the most
important criteria considered when choosing a car using the algorithm "InfoGainAttributeEval" Ranker search method.
The results obtained indicate a strong correlation between price and features set cars: class, fabrication_year, no_km,
combustible, engine capacity, registration_statementand and emissions_class.
Keywords: data mining, linear regresion, decision tree, J 48 algoritm, ID3 algoritm.
JEL Classification: C38, C13
INTRODUCTION
Data mining consists of an evolving set of techniques that can be used to extract valuable
information and knowledge from massive volumes of data. [Ioni, 2005].
Data mining process includes the following activities [Tudor, Carbureanu, 2007]:
data selection aimed retrieval of massive data only for relevant data for analysis;
data cleaning dealing with data cleaning and preparation of the activities that are necessary
to ensure accurate results,
data transformation, converts the data into a bidimensional table and eliminates unwanted
fields so that the results to be valid;
extracting patterns from data (data mining) is to analyze the data by a suitable set of
algorithms to discover patterns and significant rules and to produce predictive models
data validation which requires proper interpretation of the results of data mining and aims to
select those models that are valid and useful in future decisions in different areas.
Data mining techniques to discover segments, clusters, subgroups to classify and better
understanding of the phenomenon analyzed and implement details of its forecasts evolution.
1. DATA PRESENTATION
The data is supplied by ads in newspapers Raid and Automar for selling second hand cars in Ploieti
and in the country published in May 2010. It was created an Excel database with the criteria
considered when choosing a second hand car. Thus, we identified nine attributes, namely:
Table1. The Attributes of the model
Nr. Attribute Description Possible values
1. combustible Type of combustible used 0, 1
2. cylinder_capacity Engine capacity 1, 2, 3
3. emissions_class Class of emissions pollutants 1, 2, 3
4. endowments Endowments car: the trunk, air
conditioning, airbags, etc.
0, 1
5. registration_statement Car registration statement 0, 1
18
6. class Car class 1, 2, 3, 4, 5
7. fabrication_year Fabrication year of the car 1, 2, 3
8. no_km Number of kilometers 1, 2, 3
9. price Price of the car 1, 2, 3
The data quality in terms of attributes used for completing the degree is 99%. Combustible attribute
values is the type of combustible used by car and can take two possible values, namely 0 for
gasoline and 1 for diesel.
Cylinder_capacity attribute is the engine capacity and may take the following values:
Table 2. The value of cylinder_capacity attribute
The values of
cylinder_capacity
attribute
Cylinder_capacity
1 <=1400 cmc
2 >1400 cmc and <=1800 cmc
3 >1800 cmc
Emissions_class attribute is the class of vehicle classification by pollutant emissions and has a value
of 1 if it is Euro 2, 2 if it is Euro 3 and the value 3 if it is Euro 4.
Features attribute refers to the facilities available on the vehicle, e.g. trunk, right passenger airbag,
air conditioning etc. If your vehicle has such features, attribute receives a value and 0 if no such
facilities.
Registration_statement attribute value is 0 if the vehicle is not registered in Romania and one if it is
registered.
Cars are divided into classes. Cars are divided into classes by certain criteria: destination, car body
type, weight, length etc. Each class is denoted by a letter in Latin alphabet. Attribute class has the
following values:
Table 3. The value of class attribute
The values of class
attribute
Class
1 B
2 C
3 D
4 E
5 L
Fabrication_year attribute refers to the year the car was manufactured and may take the following
values:
Table 4. The value of fabrication_year attribute
The values of
fabrication_year
attribute
Fabrication_year
1 <=2000
2 >2000 and <=2005
3 >2005
No_km attribute indicates the number of kilometers the car has and can take the following values:
19
Table 5. The value of No_Km attribute
The values of
no_Km attribute
No_Km
1 <=50000
2 >50000 and <=150000
3 >150000
Price attribute refers to the price offered by the seller and has the following values:
Table 6. The value of price attribute
The values of
price attribute
Price (Euro)
1 <=5000
2 >5001 and <=10000
3 >10000
Before starting the tests, given that the algorithms selected for analysis established a relationship
between input attributes and output attribute (the cause-effect) it was required a modification.
Therefore, all instances of the database must contain at least two attributes not null, one for input
and one for output, since it is impossible to establish a relationship with a single attribute. As a
result, in the database there were deleted all instances that had a single attribute.
2. THE PROPOSED MODEL
As environmental data mining it was used WEKA platform. Weka stands for Waikato Environment
for Knowledge analysis (Waikato Environment Knowledge Analysis) software and is a University
of Waikato, New Zealand.
Weka is a collection of automatic learning algorithms for data mining in Java. Algorithms can be
applied directly on a data set or can be called from code written by the programmer [Oprea, Tudor,
Carbureanu, 2007]. Weka contains tools for data preprocessing, classification, regression,
clustering, association rules and visualization. Contains a collection of visualization tools and
algorithms for data analysis and predictive modeling associated with graphical user interfaces to
offer easy access to instruments.
20
Figure 1. Source file containing the input dataset
Weka strengths of this package are:
is available under GNU (General Public License)
is very portable as it is implemented in Java programming language, language that runs on
any platform;
contains a collection of techniques for preprocessing and data modeling;
is easy to use even by a beginner because it uses graphical user interfaces.
Dataset used in WEKA programming environment must be in CSV or ARFF to be processed. The
data come mostly from an Excel table or a database and must be converted to CSV or ARFF format,
the most widely distributed database in text files. Using this format in parallel with direct support
for databases is another advantage of WEKA. In addition to these favorable factors characterizing
WEKA system, there are some disadvantages, namely that use interface requires learning,
understanding algorithms and the interpretation of numerical and graphical results.
In addition, WEKA uses statistical terms instead of using appropriate terms of input (e.g., in
economic applications) like other specialized software business and more intuitive for a manager or
economist
Dataset used was converted into ARFF format to be processed and it was added a header containing
the description of attributes, types and their values. In figure 1 are the attributes that were used for
modeling application.
The final form of the database contains 9 attributes which describe the existing information about
cars and 329 instances. Analyzing the distribution of car prices according to the 9 attributes we
observe the following (Figure 2):
- Only 49 of the 329 machines have higher selling price of 10,000 euros;
- Nearly half of all machines are considered Class B
- Only 75 of all cars are unregistered.
- Very few cars have the production year since lower then 2005.
21
Figure 2. Attribute Distribution
After applying the algorithm "InfoGainAttributeEval" with Ranker search method we notice that the
most important attribute to consider for the price of a car is the class attributes, followed by year of
manufacture and the number of kilometers traveled.
Features attribute that obtained coefficient of rank 0 will be removed from the model. Eliminating
this attribute will lead to growth speed in the model creation and a better accuracy.
22
Figure 3. Attribute evaluation results
Between the analyzed characteristics and the cars price is a direct relationship, this being
represented by a linear connexion. The corresponding algorithm for a linear connexion between the
input attributes and the output attribute is the model of linear regression, model that is found in the
set of functional algorithms in Weka package.
Linear regression algorithm implemented in Weka is not limited to numeric attributes, being an
excellent method to analyze the training database were 7 attributes determine directly the 8
th
attribute (price). The most important parameter to the algorithm of linear regression is the attribute
selection method with 3 possible options.
At the extreme there are without selection method that leads to rapid obtain of some results, but it
is less selective, respectively, the Greedy method that is considerably slower but with precise
results. Between them, there is M5 method that makes a compromise between speed and
accuracy. Though, we must consider a restriction: The Greedy method determines the most
precise formula, but it needs that the relationship between the input and the output attributes is as
close to a linear order to determine the correct local maximum values. If the relationship is not
linear, it will lead to an incorrect formula.
By applying linear regression classification algorithm based on complete data (329 records), so
method "Greedy" and method "M5" found exactly the same car pricing formula based on its
characteristics.
Correlation coefficient was 0,8133, which means that the relation between car characteristics and
price can be well approximated with a linear relation. A correlation coefficient of value 1 indicates
a perfect linear relation and 0 means that there is no relation between the input and output. The rate
of linear regression considered relevant only 6 input attributes of 7.
659,0022+
1281,6365+
1210,8256+
1561+
1352,0188+
23
1826,2546-
1882,6117=6008,34 Euro
Using the found formula we can easily calculate the price of a car by its characteristics. For
example, a car class D, made in the last 5 years, with less then 50000 km, engine capacity greater
than 1800 cc, registered, has an estimated price by simple adding the corresponding values for each
attribute.
Figure 4. Decision tree algorithm resulting from applying J 48
J.48 algorithm is C4.5 algorithm implementation in Java. and uses top-down inductive method of
building decision trees. They are built on testing each node of the tree from the root node for each
record. Each node represents an attribute name. it tries placing the instance in an existing class
based on common characteristics, evaluating the corresponding attribute for the reached node.
Depending on the value, the instance will follow a branch. When there are no more nodes to
evaluate, the instances is classified. If a particular class no more obviously differs from a different
class by the introduction of more and more records, the two unite, using a process called "pruning."
After applying the J48 classification algorithm we achieved an accuracy of 88.75% which means
that 292 of 329 instances were classified correctly in the model created.
The value of kappa statistic is 0,8152 and indicates a strong correlation between the attributes
analyzed.
Weka generated the following confusion matrix in which the columns indicate the previewed
classes (classified), and the rows are the actual classes (real).
Diagonal matrix indicates correct predictions (110 +140 +42 = 292), and the other elements of the
matrix shows incorrect predictions (20 +6 +7 +4 = 37).
The number of correctly predicted values in the total number of predicted values is indicated by the
Precision parameter that takes values between 0 and 1. Accuracy equal to 0 indicates that the model
doesnt have predictive power, is not conclusive.
24
TP rate (true positive rates) is the fraction of positive instances predicted as positive and equals to
recall parameter.
Rate parameter FP (False Positive Rate) is the fraction of negative instances predicted as positive.
The confusion matrix, PF Rate is calculated using the formula:
linii celelalte pe elem suma diag pe de elem coloana pe elem suma Rate FP _ _ _ _ / ) _ _ _ _ _ _ ( _ =
Parameter F-Measure is calculated using the formula:
) Pr _ /( ) Pr * _ * 2 ( _ ecision Rate TP ecision Rate TP Measure F + =
ROC curves (Receiver Operating Characteristic) are widely used in evaluating the results of
predictions (forecasts) The Area Under the ROC Curve (AUC) is a measure of performance that
encapsulates many of the advantages of ROC curve.
The generated decision tree has as root node the class of pollutant emissions, this attribute being the
main mean to differentiate the cars. In the model there were also found as relevant for car
differentiation the attributes: class (present in every main brach of the tree), the registration state
and the manufacturing year.
For E class cars, the model cannot be successfully applied in the dataset because there are only six
cars registered for the class E. The lack of a greater number of records made it impossible to create
a viable model for this class.
Example of interpretation of a decision tree branch: "If class of vehicle emissions is Euro 4, engine
capacity greater than 1800 cc, it is Class D, with over 50000 miles on board and year of
manufacture between 2000 and 2005, then the price greater then 5000 euros."
25
emissions_class = 3(Euro 4)
| cylinder_capacity = 3(>1800 cmc)
| | class=2(C)
| | | no_km=2 (50000-150000 Km)
| | | | fabrication_year = 1(2000-2005): 2 (5000-10000 Euro)
To make a comparative study it was applied ID3 algorithm. This verifies the number of instances
classified correctly, respectively incorrectly.
Figure 5. Results obtained from applying the ID3 algorithm
The results obtained can be viewed in Figure 5. In the example shown, the case of ID3, achieved an
accuracy of 91.48% which means that 301 of 329 instances were classified correctly and 28
incorrectly in the created model.
The value of kappa statistic is 0.8599 and indicates a strong correlation between the attributes
analyzed.
Weka generated following confusion matrix.
Confusion matrix columns indicate the predicted class (classified), and the raws, the existing classes
(real). Class 1 contains 130 instances, class 2, 149 instances, class 3, 49 instances.
Diagonal matrix indicates correct predictions (115 +143 +43 = 301), and other elements of the
matrix shows incorrect predictions (15 +6 +6 +1 = 28). The number of correctly predicted values in
26
the total number of predicted values is stated in the Precision parameter that indicates that the
proposed model has predictive power and is conclusive.
CONCLUSIONS
This study shows that data mining is an instrument of analyze very strong that allows extracting
new information regarding second hand cars prices by their characteristics and using these
information in buying decision.
Based on a set of learning it was built a model that can be applied to estimate second car price as to
identify defining characteristics client car buying decision.
The obtained results indicate a string relation between the car price and the characteristics
presented: Class, year of fabrication, number of km, engine capacity, registration, and emissions.
The most important attributes for cr price analyze are class, manufacturing year and number of km.
The study can be extended be including others factors, such as interest rate.
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2006.
2. Ioni, A., Asupra termenului de data mining, Revista Romn de Informatic i
Automatic, vol. 15, nr. 2, 2005.
3. Leontin, T. L., Moldovan, D., Rusu, M., Secar, D., Trifu, C., Data mining on the real estate
market, Revista Informatica Economic, nr. 4 (36)/2005
4. Oprea Cristina, Zaharia, M., Gogonea, M., Analysis of student performance to license exam
using data mining techniques, The 14th IBIMA Conference on Global Business
Transformation through Innovation and Knowledge Management, Istanbul, 2010
5. Oprea Cristina, Zaharia, M., Enchescu, D., Knowledge discovery using data mining
techniques: A case study, Annual Session Of Scientific Papers IMT, Oradea, 2010
6. Oprea, M., Sisteme bazate pe cunotine Ghid teoretic i practic, Matrix ROM, Bucureti,
2002
7. Oprea, M., Tudor, I., Crbureanu, M., Prediction of Student Professional Evolution with
Data Mining Techniques, The eight international conference on informatics in economy,
Bucharest, Romania, May 17-18, 2007
8. Tudor, I., Crbureanu, M., Tehnici de data mining n managementul cunoaterii ntr-o
universitate, n Managementul cunoaterii n universitatea modern, coord.: Bodea C.N. i
Andone I., Editura ASE Bucureti, 2007, p.293.
9. Zaharia M., Gogonea R. M., Econometrie. Elemente fundamentale, Editura Universitar,
Bucureti, 2009.
10. http://www.cs.waikato.ac.nz/~ml/weka/
27
ASPECTS REGARDING THE EVOLUTION OF THE TOURIST ACTIVITY AT A
REGIONAL LEVEL IN ROMANIA, POLAND AND SLOVAKIA
Assistant PhD. Student Adrian Liviu SCUTARIU
expresedinte@gmail.com
livius@seap.usv.ro
Abstract:
This article aims at highlighting the general tendencies that manifest in the field of tourism, at regional level in
Romania, in comparison with Slovakia and Poland during the period after 2002. The first part presents several general
landmarks at E.U. level, and then the analysis will focus on the three countries mentioned. Thus, one will follow
through some indicators, among which: the number of accommodation places, the number of overnight stays, and the
intensity of tourism. The available data permit one to observe the evolution of tourism in the three countries at a
regional level for the last years. The study reveals several conclusion among which the fact that Romania is situated
third after Poland and Slovakia as tourist activity, the latter having a larger intensity of this activity, as well as the fact
that there are large discrepancies between regions from the point of view of tourist activity.
Key words: tourist activity, tourism intensity, overnight stays, regional, Romania, Poland, Slovakia
JEL Classification: L 83
1. INTRODUCTION
This research focuses on making a comparison, at regional level, between the evolution of
tourism in Romania, a country which adhered to the E.U. in 2007 and two of the countries which
adhered in 2004, Poland and Slovakia; in this manner one analyzes the manifested tendencies and
the registered experiences, and if these are similar in Romania in the post-adhesion years.
The reason why one has chosen Poland and Slovakia, is the fact that this two countries, like
Romania, had a rather similar past (former communist countries located in the influence zone of the
U.S.S.R.), and for that matter, having a similar route if not identical after 1990, also having at least
the same objectives, although for Romania, the road to creating and consolidating a market
economy was even longer.
One will engage in a short general analysis of tourism in these three countries, in the E.U.
context, underlying the general tendencies of tourism in the E.U. member states in the recent period,
emphasizing the tendencies which manifest themselves at regional level in Romania, Poland and
Slovakia.
2. CONSIDERATIONS REGARDING THE TOURISM OF ROMANIA, POLAND
AND SLOVAKIA IN THE E.U. CONTEXT
Tourism is an important element of the third sector, and has a more and more important role
in the economy of a country, constituting as a factor on which the economic growth is based. The
last half of century has registered a growth in the third sector, which has diversified the activities,
becoming preponderant in the developed countries.
The services which constitute tourism are varied and are derived from the primordial ones:
of information, placement of tourist travels, accommodation, selling of food products, treatments,
leisure and entertainment. The development of tourist activity has as an effect the boosting of those
economy branches, suppliers for tourism and of other fields necessary to consolidating the tourist
product (constructions, food, transportation etc.) as well as those connected, like commerce.
The demand for tourist services is split between business tourism and recreational
tourism. Both forms can have fluctuations in time, according to the available budget.
28
Europe remains one of the worlds major tourist destinations, and 6 of the U.E. member
states are among the top 10 destination of tourist operators (1). Thus, it is absolutely normal that the
tourist industry has an important role from an economic and labor market point of view, and also
from a social and an environmental perspective.
Along with its economical and employment potential, tourism can have a significant role in
the development of regions. The infrastructure can contribute to the local development, and the jobs
in tourism can counteract the effects of the industrial or rural decline. Durable tourism presupposes
the conservation of the natural and cultural heritage, as well as keeping the biodiversity.
The general tendency of tourism was of rapid development in the last part of the past
century, and between 2001 and 2003 as a consequence of the economic regression, terrorist risks,
epidemics and natural disasters, the demand has decreased. After this period low-cost companies
have flourished and tourism has known a revival.
The largest number of overnight stays, according to the data available in 2009, is registered
in Italy, followed by Spain, Germany and France. Poland registers a number of overnight stays
significantly larger in comparison to Romania, and Slovakia ranks after Romania (figure 1).
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Figure 1. Total nights spent in collective tourist accommodation establishments, hotels and
similar establishments, 2009 Source: Eurostat
It can be said that the first four countries constitute tourist destinations par excellence;
having superior worth values in comparison to the other E.U. member countries.
Because of the different surfaces of the countries, one can say that is relevant to underline
the values of the tourism intensity indicator. Figure.2 stresses the intensity of tourism which means
the number of overnight stays of tourists related to the population of a country. Thus, one can notice
the relative intensity of tourist activities in the E.U. countries. This is preponderant in Malta,
Cyprus, and Austria which occupy the first places in the E.U. countries ranking. Regarding
Slovakia, Poland and Romania, they are situated on lower places, the latter occupying the last place
in the ranking.
Figure. 2. Tourism intensity, 2008
(ratio of nights spent by residents and non-residents in hotels and similar establishments and
other collective accommodation establishments per inhabitant)
Source: Europe in figures - Eurostat Yearbook 2010, Eurostat, Luxembourg: Office for Official Publications of the
European Communities, 2010, p.393.
29
For completing the analysis, it is also interesting to follow the evolution of income and
international expenditures occasioned by tourism.
In its dynamic, the point value of income and international expenditure of tourism reveals a
growth, at the E.U. 27 level, and as well as in the case of most member states. Romania lies behind
Poland and even Slovakia, regarding the receipts, registering decreases concerning the income. This
is probably due to a diminishing in the foreign tourists interest for Romania, because of a low
promotion and of disequilibrium in the quality/price value. As opposed to Romania, Slovakia and
Poland register substantial increases in income from international tourism. As value for tourist
expenditure, Poland has the biggest tourist expenses made by citizens outside the country, in
comparison with the other two countries.
Table 1. Tourism receipts and expenditure from personal travel
Source: Europe in figures - Eurostat Yearbook 2010, Eurostat, Luxembourg: Office for Official Publications of the
European Communities, 2010, p.395
30
The intensity of tourism and the income from tourism, expressed as a percentage of the
GDP, bring information regarding the relative importance of tourism in an economy. The intensity
can be measured in the light of the number of nights spent by tourists in relation with the population
of the host country.
Because of the different size of these countries, the overnights/inhabitant indicator is
relevant, so Slovakia has 1,89, Poland has 1,44 and Romania has only 0,8 under the E.U. 27 average
of 4,7 overnight stays. Regarding the share of tourist income in the GDP, Slovakia and Poland have
2,28%, respectively 1,98%, while Romania has only 0,27%. It can be said that tourism has a
relatively reduced share in the economy of the three countries.
One will present several particularities referring to the tourist activity in the three countries.
Romania is an emergent market of tourism, as a country of origin, and as a destination. The
tourist offer had an ascending trend in the last few years. For example, during 2000-2006, the
number of hotels increased with approximately 8,5% per year, while the number of accommodation
places increased with only 2,1% per year, so if the medium size of an unit was of 79 places in
2000, in 2006 this was of 55 places (2). One thus remarks the tendency towards medium and small
units of accommodation. What is more, the number of overnight stays has increased with
approximately 1,2% annually, and international tourism has increased with 7,1% annually (3). The
main origin countries of tourist are Germany, Italy and France, approximately totaling a third of the
total number of foreign tourists overnight stays. The main destinations for Romanian tourists are
Italy, Greece and Spain, these being the object of almost half of the total of travels abroad of at least
4 days. Regarding the scales of tourism, one can see that the incomes are smaller than and the
expenditures occasioned by tourism.
Poland is also an emergent market for tourism. The period of 2000-2006 registers an annual
increase of the number of hotels (8%), as well as the number of accommodation places (6,8%). The
medium number of accommodation places/unit has decreased from 83 in 2000, to 77 in 2006 (4).
The number of overnight stays registered by foreign tourists has increased with an annual average
of 7,4%. The main origin countries of tourists are Germany, The United Kingdom and the U.S.A.,
all these totaling over half of the total number of foreign tourists overnight stays. The main
destinations for Polish tourists are Germany, Italy and the United Kingdom, these being the object
of over 40% of the total of travels abroad of at least 4 days. The comparison between the income
and the expenditures occasioned by tourism reveal a positive balance, of over 10 million Euros in
2006.
Slovakia is in its turn, an emergent market for tourism, both as origin country as well as
destination. During 2000-2006, the number of hotels increased with approximately 8% per year,
while the number of accommodation places increased with only 4,8% per year, thus if the medium
size of a unit was of 75 places in 2000, in 2006 this was of 63 accommodation places (5). Non-
residents represent almost half of the tourist numbers, registering annual increases of approximately
5% (6). The main origin countries of tourists are the Czech Republic, Germany and Poland, these
totaling 60% of the total number of foreign tourists overnight stays. The primary destinations for the
Slovakian tourists are Greece, the Czech Republic and Italy, these being the object of over a third of
the total of travels abroad of at least 4 days. The comparison of income and expenditures
occasioned by tourism reveal a positive balance, of 368 million Euros in 2006.
3. OVERVIEW ON THE TOURIST ACTIVITY AT REGIONAL LEVEL IN
ROMANIA, SLOVAKIA AND POLAND
After one has seen where the three countries lie in the E.U. frame in respect to their tourist
activity, one will further direct ones attention to the regional tourist activity.
31
The regional development policies and plans of the last years take more and more into
consideration the tourist sector, as a strategic sector for ensuring a durable and dynamic economic
growth of some regions which have an important tourist potential. This is why one considers
important the observation of the tourist phenomenon at regional level.
In order to capture the evolution and the state of tourism at regional level, one will follow
several significant indicators. One can signal the fact that Eurostat does not offer one a wide range
of indicators for tourism at a regional level.
The values one has selected for underlining the evolution are from 2003 (the year before of
the adhesion of Poland and Slovakia to the E.U.) and 2008 (the second year of Romanias
membership to the E.U.).
One of the most important indicators is the number of accommodation places. From the
point of view of the evolution, between 2003 and 2008, no spectacular mutations took place. The
most numerous accommodation places can be found in the South-East region of Romania, PL-42
and PL-63 from Poland seaside regions. PL-21, SK-03, SK-04 and PL-51 regions follow, also
having consistent accommodation capacities due to mountain tourism.
Figure 3. Number of places in collective accommodation units in regions NUTS 2 of Poland,
Romania and Slovakia, in 2003 and 2008
Source: Eurostat
Maybe, the most important indicator for measuring tourist activity is that which measures
the number of overnight stays. Its importance unfolds also from the fact that it is in direct co-
relation with tourism cashing. From figure.4, we can notice that the most overnight stays were
registered in PL-42, PL-21, PL-63, PL-51, Ro-22 South-East and PL-12 regions. It is to be
remarked that a characteristic of Poland, also available in the case of overnight stays, is the
existence of large discrepancies between regions. The regions SK 02, 03, 04 of Slovakia manage to
have a larger number of overnight stays than in the regions of Romania, except the South-East
region. But, if one were to compare the South East region with PL-42 and PL-63, regions similar to
32
Poland with seaside areas, one will see that the former registers a smaller number of overnight
stays.
Figure 4. The total of overnight stays in collective units of accommodation in the NUT2
regions of Poland, Romania and Slovakia in 2003 and 2008
Source: Eurostat
As it has been observed in figure.4, the general tendency was that of growth of the number
of overnight stays during the period of 2003-2008. Nevertheless, this growth has not manifested
itself uniformly, but it has been characterized through heterogeneity.
As a rule, the intensity of tourism better indicates the place of tourism in the economy,
rather than the number of overnight stays. This indicator is calculated by reporting the total number
of overnight stays with the number of inhabitants and expresses the relative importance of tourism
for a region. In comparison with the overnight stays graphic, the following one is a bit different, but
the general tendencies remain. Thus, PL-42 which registers a value of over 5000 overnight stays at
1000 inhabitants is followed at a great distance by the SK-01, SK-03, PL-63, PL-21, SK-04 and
RO-22 South-East regions. The general observation is that from the point of view of tourism
intensity, Slovakia has high values in all the regions, while Poland has such values in approximately
half of the regions, and Romania has relatively low values in all regions, except those in the South-
East.
33
Figure 5. The Intensity of Tourism in Poland, Romania and Slovakia, at a regional level in
2003 and 2007
Source: Eurostat
Slovakia is situated ahead Romania regarding the number of accommodations (except the
South-East region of Romania), and in Poland, there are great differences from this perspective. The
same situation has been observed at the number of overnight stays. From the point of view of the
intensity of tourism, the values registered in Slovakia and in several regions from Poland are
superior to those in Romania.
So, from the point of view of the tourist activity, it can be observed that Slovakia and certain
regions from Poland clearly have superior values in comparison with Romania, and although there
are growth tendencies, many of the differences still continue to exist in relative terms.
Also, there are significant differences among regions, especially in Romania and Poland,
regarding the tourist activity.
4. CONCLUSIONS
From the short analysis undergone with the help of the available indicators, it can be
observed that tourism in Romania is behind the other two countries with which we have made the
comparison.
As a synthesis of the analyzed data, it can be said that the tourist activity in Romania still
occupies a rather modest place, many of the values being one of the lowest at European level. The
registered growths are rather small, failing to change the general configuration in relative terms.
In the second part of the paper, one compares Romania to Poland and Slovakia in terms of
tourist activity. Before making this analysis one has presented the place Romania, Poland and
Slovakia occupy in the tourist tableau of the E.U. None of the three countries are tourist zones par
excellence, but there are growth tendencies regarding the tourist activity, and the last two register
superior values in comparison to our country. The observation of the tourist activity in the three
countries, takes place at regional level.
In regional terms, Slovakia is ahead of Romania regarding the number of overnight stays
(except the South-East part of Romania), and in Poland, there are very big interregional differences
from this perspective. As far as the intensity of tourism goes, the values registered in Slovakia and
in several regions of Poland are similar to those in Romania. It is surprising though, that Slovakia
draws more income from tourism than Romania, being a country with a smaller surface, but having
a much larger intensity of tourism activity.
34
So, from the perspective of the tourist activity, it can be observed that Slovakia and several
regions of Poland have superior values in comparison with Romania, and even with the existence of
growth tendencies, many of the differences continue to exist in relative terms.
In order for the tourist activity to contribute to a well positioned economic growth, among
other things, a comprehensive identification of the local resources is required, and starting from this
the selection of the priority tourist areas meant to undergo development processes. For capitalizing
at European level, the tourist objectives of secure value, financial means for their protection must be
provided.
In order to stimulate the tourist activity in Romania, the authorities and the economic agents
could create strategies, which may include a wider offer regarding the tourist amusement, with the
scope of increasing the medium length of the tourists stay in the region, with implications in the
growth of the number of overnight stays and the collected income.
ENDNOTES
(1) Europe in Figures, Eurostat Yearbook 2010, p.385
(2) European Commission, Tourism Statistics, 2008 Edition, p.88
(3) Idem.
(6) Idem.
BIBLIOGRAPHY
1. Avrmescu Tiberiu Cristian, (2006) - Turismul i dezvoltarea regional durabil, Revista
Romn de Economie, Anul XVI, Vol. 22, Nr. 1
2. Constantin Daniela Luminita, (2000) - Turismul i strategia de dezvoltare regional
durabil: efecte i costuri, n Revista Romn de Statistic, nr. 8 9
3. Jones Calvin, Munday Max, Roberts Annette, (2003) Regional tourism satellite
accounts: a useful policy tool?, Urban Studies, vol. 40, nr. 13
4. Minciu R., (2005) - Economia turismului, ediia a III-a revizuit i adugit, Editura
Uranus, Bucureti
5. Neacu N., Baron P., Snak O., (2006) - Economia turismului, Editura Pro Universitaria,
Bucureti
6. Postelnicu Gheorghe, (1997) Introducere n teoria i practica turismului, Editura Dacia,
Cluj-Napoca
7. Scutariu Adrian Liviu, Hapenciuc Cristian Valentin, (2008) - The tourism in view of
regional development in the North-East region of Romania, The Annals of the "tefan cel
Mare" University Suceava. Fascicle of The Faculty of Economics and Public
Administration, anul 8, nr. 8, pp. 36-43
8. * * * Anuarul Statistic al Romniei, Institutul Naional de Statistic, Bucureti, 2002,
2003, 2004, 2005, 2006, 2007, 2008
9. * * * European Commission, Europe in figures - Eurostat Yearbook 2010, Eurostat,
Luxembourg: Office for Official Publications of the European Communities, 2010
10. * * * European Commission, Key figures on Europe. 2009 edition, Eurostat, Luxembourg:
Office for Official Publications of the European Communities, 2008
11. * * * European Commission, Europe in figures - Eurostat Yearbook 2008, Eurostat,
12. * * * European Commission, Tourism statistics 2007 edition, Eurostat, Luxembourg:
Office for Official Publications of the European Communities, 2007
35
13. European Commission, Tourism statistics 2007 edition, Eurostat, Luxembourg: Office
for Official Publications of the European Communities, 2008
14. * * * European Commission, Panorama on tourism 2008 edition, Eurostat,
15. * * * European Commission, Eurostat regional yearbook 2008, Luxembourg: Office for
Official Publications of the European Communities, 2008
16. * * * Statistici teritoriale 2008, Institutul Naional de Statistic, Bucureti, 2008
17. * * * Programul Operational Regional 2007-2013, Ministerul Dezvoltrii, Lucrrilor
Publice i Locuinelor
18. http://ec.europa.eu/eurostat
19. www.insse.ro
20. www.unwto.org
36
DRINKING WATER, A PROBLEM OF SUSTAINABLE DEVELOPMENT OF THE
CITY WE LIVE IN. CASE STUDY
Professor Eng. PhD. Romeo IONESCU
romtit@fim.usv.ro
Abstract:
The need of a more rigorous control of the quality indicators parameters is the subject of this study. The
potential factors of pollution have decreased in number and intensity that does not mean that there is no need in
controlling them. Firstly, I aim to highlight the fact that the drinking water supplied to the inhabitants of Suceava city,
where I live, meets the quality standards imposed by law, according to the European legislation, and, secondly, I want
to clarify some issues that raised questions in peoples minds relating to water use, water quality supply in different
areas.
Keywords: water, drinking water, sustainable development, pollution
JEL Classification: Q 53
WHY DO WE NEED WATER?
The water is a basic and indispensable constituent of the human body. Small changes lead to
serious disorders and the insufficiency of water contribution is a lot less tolerated than the lack of
other elements.
The percent of water in the human body varies depending on age: from over 97% at the 7
days fetus, and decreasing gradually at 80% at the new-born, 60-65 % at adults and 50-55% at old
people. The water percentage varies depending on the intensity of the metabolic changes. This is
reflected in the fact that water is spread differently in the human tissues: bone tissue 22%, knurled
muscle 22%, liver 75%, kidneys 80%, brain (gray matter) 85%, sanguine plasma 90%, [5].
A man can resist up to 30 days without food, but only 4-5 days without water. Actually, the
period of time depends very much on the state of health, age and physical effort etc., but first of all
on the environments temperature.
Why do we need water? While ONU stipulates a minimal consumption of only 50 liters of
water per day that can be used for drinking, cooking, washing and sanitary use, billions of people
around the world dont even have access to sources of drinkable or safe water that can be used for
minimal sanitary use. In fact, a man needs around 100200 liters of water per day: 4-4,5 liters for
his basic
needs (2,5 liters to drink and 1,5-2 liters to prepare food), 13 liters to wash the dishes, 13-20 liters to
wash laundry, 70-80 liters for sanitary needs (to wash your face and hands, shower, water to clean
the toilet), [14].
The water problem can be handled in another way. Less than 0,007% of the Earths water is
drinkable. Even though 1/3 of the drinking water enters into our houses, it doesnt have as a point of
destination its drinking. Millions of people have less than 15 liters of water per day, over a billion
people dont even have full access to drinking water.
It is true that water covers most of our planet, but only 3% is soft water, which is mainly in
the form of ice, and 97% of the Earths water is marine water, too salty for human use. Out of the
3% of drinking water, 2% is in the form of icebergs and ice caps, thus leaving only 1% of water to
be used by the population, [3].
In 1980 the problem of assuring the necessary level of drinking water for the worldwide
population was officially solved: thus, Belgium 95%, Finland 79%, Sudan and Bangladesh 40%, Sri
37
Lanka 37%, Angola 28%, Paraguay 25%, Uganda 16%, Mozambique 9%, Mali 6%...The socialist
countries pretended that their situation was the most favorable Hungary 84%, Albany 92% and
URSS even 100%(obvious overstatement).
The UNESCO report on water development (WWDR, 2003), from the Worldwide Water
Evaluation indicates that,
Figure 1.Perceived seriosness of water related problems.
Flash eurobarometer on Water, [7]. a. How serious is the problem of water quality in your country? b. How
serious is the problem of water quality in your country?
Figure 2- Seriosness of water related problems, water quality.
Flash Eurobarometer on Water. Base all respondents % by contry, [7].
38
Figure 3. Seriosness of waterrelated problems, water quantity.
Flash Eurobarometer on Water. Base all respondents % by contry, [7].
in the next 20 years, the quantity of spare drinking water will decrease with 30%. 40% of the
worlds inhabitants dont have enough clean water for minimal hygiene. Over 2, 2 million people
died because of the illnesses connected to infected water (over 2000) and because of drought. In
2004, an English organization called WaterAid, reported that a child dies every 15 seconds because
of illnesses connected to water, that could easily be prevented, [5].
Together with this decrease in quantity, the deterioration of the waters quality constitutes
another motif for the decline of spare water. Cholera, diarrhea, dysentery, E. Coli and salmonella
contaminations, which are water transmitted, are known to be the reason for the loss of 5 million
human lives each year in the developing countries, [3].
Water pollution could be the biggest user of water, by misspending this resource, disregarding the
benefits it brings to the polluter. Even the purest water resources have become improper to
consumption because the human activities and the industrial residual waters have become polluted
and contaminated.
Taking into consideration the limited character of water resources in general, and of drinking
water, in particular, the consumption becomes controlled.
Drinkable water comes from subterranean waters or from surface waters and less from other
resources. This situation will be maintained, because there are objective factors. For example, 85%
of Terras soft water is in ice caps, but we cant touch them because their diminishing means
catastrophic increases in the level of oceans and seas.
This information that appeared in specialized books, on the Internet, in different national or
international reports, determined a case study on the issue of water quantity and quality in Suceava
city.
ROMANIA - COUNTRY OF THE EUROPEAN UNION. THE PROBLEM OF DRINKING
WATER
Romanias territory has all types of soft water resources (rivers, lakes and water from
subterranean areas). Its largest soft water resource comes from the Danube and from the interior
rivers. Natural lakes, even though there are many lakes in Romania (3450), have an insignificant
contribution to the volume of soft water resources in Romania. The total of hydrologic water
39
resources of interior surface waters in normal climatic conditions has a total of about 42x10
9
m
3
/year and the ones that come from the Danube of 170x10
9
m
3
/year (when entering the country),
[14]
Out of 21 million people, only 14,7 million people in Romania benefit from drinking water
that comes from drainage (68%), out of which 11,3 million people are from the urban environment
(a figure that represents 77% of the population supplied with water and 98% of urban population)
and 3,4 million in the rural environment (a figure that represents 23% of the population supplied
with water and 33% of the rural population), [3].
A study done in January-February 2009 in many countries of the European Union indicates
the peoples preoccupation with the waters quantity and quality. Published in Flash Eurobarometer
on water, this study underlines the increased interest that people have when it comes to drinking
water, but also to water as an environmental factor, [7].
As it can be noticed, there are few people that consider themselves well informed, but there
are also those that dont consider themselves informed when it comes to the water issue rivers,
lakes or coastal waters. Many people think they are well or not so well informed in this field, the
percentage being different from state to state.
In Romania, as one can see, the situation is not so different. Only 6% of the people who
answered the questions consider themselves very well informed, 53% consider themselves not so
well informed, 24% consider themselves well informed, and 16% consider themselves uniformed.
When it comes to the waters quality and quantity the citizens perception is interesting; the
percentage of those that consider that this is a problem in their country is pretty high, as you can
notice in figure.1. Detailed on member states, it can be noticed the peoples interest regarding this
issue, figure.2.
It can be noticed that when it comes to
the waters quality, the Romanians are among the most worried European citizens (61%), figure.2;
people are less concerned, but nevertheless concerned, about the quantity of water that we have,
figure.3, [7].
The Ministry of Environment organized on the March 18
th
2009, the National Conference
We invest in waters, we believe in the future. The members wanted to emphasize improvement
solutions of the water infrastructure through the implementation of environment projects carried out
in the main intervention fields Priority Axis 1 (Expansion and Modernization of water and used
water systems) and Priority Axis 5 (Improving the infrastructure that prevents natural risks in
high risk exposed areas), [15].
CASE STUDY. DRINKING WATER IN SUCEAVA
Subterranean waters have a quality that allows their direct use as drinking water, without
adaptation. Water that comes from other sources, like surface waters, needs to be adapted in order
to make it potable. This implies a complex of processes named currently preparation or water
treatment.
Here are the conventional methods of water treatment: deposition, congealment, filtering
(physical or biological), and then disinfection. There are also used optional processes like:
mineralization, demineralization, deactivating, mechanic flocculation.
Advanced methods of water treatment comprise the following: adsorption, aeration, filtering
receptacle, electro dialysis, reverse osmosis, distillation, freezing, ultra filtering, ultra-violets.
There are no practical applicable methods to purge a certain substance. Thats why we have
to purge without discriminating entire classes of water components, not only the toxic ones, fact
which leads to the removal of needed substances, higher costs and a lot of work, high consumption
of reagents, frequent change of filters etc.
40
It is suggestive the fact that Suceavas oldest image, that was identified on tile from the
XVth century (un-annealing tile, discovered in a house near Curtea Doamneasca), reflects
accurately, by presenting a scenery specific for a medieval court, but a fountain also, sign that water
wasnt missing from the premises.
And Suceavas Chair Citadel was provided with water from a basin (the so-called tank,
discovered in the citadels inner court by Karl Adolf Romstorfer); archeological researchers found
fragments of ceramic conduct, fact which proved that the citadel was supplied with water.
In 1836 a fountain with pomp was installed in the market of cereal fair, and later on the
town hall started to become interested in the acquisition of various pump projects. In 1906
Suceavas city hall made a contract with the firm Theim und Sohne from Leipzig in order to
create an urban network for drainage and water supply. Within the same project, which ended after
four years, the building contractor Georg Rumpel built the first water plant that had as a source of
water supply (through electrically activated pumps) the Suceava river, fig. no. 4. A few years later,
in 1914, the books wrote about the existence of a number of 30 public fountains with pumps (with
a network of conducts that had 24 kilometers), which pumped everyday 1246mc of water. Until
the beginning of the 60s the towns water supply was made through this abstraction, with 20 water
wells dug in Suceava Rivers meadow, with a filtering and water treatment station that was pumped
in a 600 m.c. reservoir. From 1960 the town used the 40 water wells abstraction from the Moldova
rivers bed, which was spread over 28 kilometers (Berchisesti Suceava area), and in the industrial
area we can find a new purge station.
Because the consumption of cold water expanded its metering and because some economic
agents stopped their activity, the volume of sold drinking water indicates a decreasing tendency
from year to year. The data published by the Countys Institute of Statistics are presented in table
no.1 entitled: the evolution of the volume of drinking water distributed to consumers.
Until the year 2008, the Suceava city was supplied by three water sources:
- Berchisesti subterranean water source, situated at 26 kilometers from the town, with a
capacity of 785 l/s. This source supplied at that moment 60% of the water consumption from
Suceava and it was a very good water.
Table no.1. The evolution of the volume of drinking water distributed to consumers,[1].
Drinking water distribute to consumers
City Suceava
Total out of which:
(10
3
m
3
) for domestic use
2000 27689 12134
2001 24852 11872
2002
19928 9809
2003
21765 10138
2004
20945 9703
2005
19395 9649
2006
18913 9382
2007 17589 9290
Figure 4. Suceavas old water plant.
41
Figure 5. Water plant Mihoveni
(decanter basin), [1].
- Dragomirna surface water source from a reservoir , situated at 8 kilometers from the town,
with a capacity of 2390 l/s; the water is pumped by the local water supplier from the Suceava
river into the Dragomirna reservoir.
- Mihoveni surface water source, situated at 5 kilometers from the town, with a capacity of 320
l/s.
Starting with April 2008, the supply with drinking water from the Dragomirna water plant
was has been stopped. Practically, now, the town Suceava is supplied with water from two sources:
Mihoveni and Berchisesti.
The quality of the drinking water distributed in the towns network of water supply is
verified, according to the law, both in S.C. ACET S.A Suceava laboratories and by the Suceava
Public Health Directorate (DSP) that monitors the activity of the supplier. From this perspective, the
following parameters are being monitored: chlorides, the pH, nitrite, ammonium, organic
substances, and the free and cohesive residual chlorine chemical parameters, escherichia coli and
enterococcus microbiological parameters and parameters indicators coliformis bacteria, number
of colonies at 22C and number of colonies at 37C [11].
The physical-chemical analyses department effectuates analysis on brute water (river water
in the case of the Mihoveni source), decanted water, filtered water, drinking water and drinking
water from the supply network. The results of the analyses from this laboratory dictate how the
filters function, how the chlorine dosage is adjusted, as well as the water monitoring in the network
supply.
The bacteriology laboratory effectuates bacteriological analyses of the drinking water and of
the water from the supply network. The results of these analyses indicate if the installations need to
washed or disinfected, as well as if the level of residual chlorine has to be changed in order to
assure the quality of effectual regulations.
The results of the physical-chemical and bacteriological analyses form the basis of the
efficiency calculations of the technological
process, with treatment points, as well as the
monitoring of the waters quality in the supply network. This is consigned to the analyses registers
that are archived for certain periods of time. The frequency of analyses is increased every time it
needs to be increased, both in the case of the number of analyses and in gathering places from the
technological flow and the supply network.
The method of work used is the one with filtering membranes.
Source type Parameter chlorides [mg/l]
Surface water
cloruri
0
10
20
30
40
50
60
2007 2008 2009
v
a
l
o
r
i
42
Subterranean
water
cloruri
0
5
10
15
20
2007 2008 2009
v
a
l
o
r
i
Figure 6. Content of chlorides variation in March of 2007,2008, 2009.
Source type Parameter - pH
Surface water
pH
6,6
6,8
7
7,2
7,4
7,6
2007 2008 2009
v
a
l
o
r
i
Subterranean
water
pH
6,6
6,8
7
7,2
7,4
7,6
2007 2008 2009
v
a
l
o
r
i
Figure 7. Ph variation of the water from the supply network in March of 2007,2008,2009.
To make the microbiological analysis, the samples that need to be analyzed must reflect the existent
microbiological conditions in the moment of the gathering.
The samples gathering is done in an aseptic environment, by using sterile utensils, containers for
sterile collection, thus avoiding any external contamination.
It can be noticed that the variation of the
chloride content is much more abrupt on the surface water than in the subterranean water because of
the climatic change, but it doesnt come anywhere near the maximum standard limit for this
parameter, of 250mg/l. The values of the variation interval for surface water are between 15 and 50
mg/l, and for subterranean water the values are around 10-15 mg/l, figure 6, [1].
Source type Parameter- oxidability(mg/l)
43
Surface water
S.O.
0
1
2
3
4
5
6
7
8
9
2007 2008 2009
v
a
l
o
r
i
Subterranean
water
S.O.
0
1
2
3
4
2007 2008 2009
v
a
l
o
r
i
Figure 8. Evolution in time of the content of organic substances in March 2007,2008,
2009.
If for surface water the Ph variation is between 6, 9 and 7, 5 Ph unities (the standard limits are
6,5 and 9,5), the Ph for subterranean water presents intervals of constant values, together with small
interval variations, 6,9.7,5 with emphasis on the 7,1 7,3 interval, figure 7, [1].
Similar to chlorides, the oxidability parameter presents different variations, depending on the
type of water source. The variation interval for the values of water surface is between 2 and 8,5 mg/l
the maximum value permitted by the standard is of 12 mg/l, and for the subterranean is between
1,6 and 2,5, values which are well under the maximum limit, figure 8, [1].
CONCLUSIONS
Water quality control has been developed in the last century. Focused primarily on
disinfection and filtering, this field was revolutionized in the last 30 years, when, because of public
pressure, the chemical analysis became more complete and complex.
The last decades have underlined a great success in the development of procedures and
technologies that allow the solving of the characteristics of the waters quality by assuring a
balanced quality complex for drinking water, disregarding the pollution of resources. Also, the
effectual regulations (The Directive of the European Economic Commission 98/83; the guiding
values of the Worldwide Health Organization; Law no. 458/2002 concerning the quality of drinking
water) want to assure a flexible, transparent legal frame by imposing both rigorous values for the
quality indicators of drinking water and also a minimal control scheme that allows the achievement
of consistent and comparable results. The pursued parameters are grouped into quality categories:
organoleptic; physical-chemical; inorganic and organic, pesticides, disinfectants and disinfectants
sub-products.
The city-hall of Suceava takes interest in water management and the quality of water delivered
to the public. The project The rehabilitation and modernization of the water supplies systems and
used water in Suceava has as a main target the issue of water supply and the purge of used water in
Suceava city. This project is financed through the ISPA program (Instrument for Structural Politics
of Pre-Adhesion), which takes place from 2007 to 2011, [32].
The projects main objectives in Suceava city are the following:
44
- Coverage area increase of the water supply system for the inhabitants from Suceava, from 75%,
in the present, up to 85%;
- Interface connection at the drainage system for about 13.000 inhabitants from the Burdujeni and
Itcani neighborhoods.
- The purge of urban used waters has to be within the standards of the European Directive
Commission no.91/271/CEE.
In this article we have tried to underline the fact that the drinking water delivered in a system
centralized for the inhabitants of Suceava puts into effect the quality standards imposed by the
effectuated legislation, legislation that has to be tuned in with the European regulations, due to
Roamnias integration into EU at January 1
st
, 2007. The production capacities of drinking water are
continuously modernized and reengineered, in order to rehabilitate the waters supply networks and
to assure an efficient control of the waters quality, through the on-going or project-based
investment programs.
If things are analyzed from the perspective of the durable development of Suceava city, we
can say that the efforts of the local administration have as a main objective the improvement of the
inhabitants living standards under sustainable conditions.
The increase of the number of substances with polluting potential for water consumers
imposes a modernizaed technique for their detection and also, the re-thinking of treatment flows so
as to provide the inhabitants with adequate water for either human or industrial use.
REFERENCES
1. Gaspar, G.D. 2009, Cercetri privind folosirea apei potabile n municipiul suceava (Research
Regarding the Use of Drinkable Water in Suceava City), Dissertation, USV.
2. Goudie, A., 2006, The Human Impact on the Natural Environment. Sixth Edition. Blackwell
Publishing.
3. Voda, P.,2010, Apa potabila devine o mare problem, EcoMagazin, 03.10.2010,
http://www.ecomagazin.ro/apa-potabila-devine-o-mare-problema/
4. *** http:// apa potabila, ecoaqua, www.greenagenda.org/eco-aqua/potabil.htm
5. *** Ap potabil,
http://ro.wikipedia.org/wiki/Ap%C4%83#Utilizarea_apei_de_c.C4.83tre_oameni.
6. *** Directiva cadru privind apa-contribuii la aplicarea ei; Centrul regional de mediu pentru
Europa central i de est, Biroul local Romnia.
7. *** 2009, Flash Eurobarometer on Water, FlashEb no. 261
www.europa.eu/public_opinions/flash.
8. *** 2009, Forumul mondial al apei, www.greenagenda.ro.
9. *** 2002, Legea 458/2002, publicat n Monitorul Oficial nr.552 din 29 iulie 2002.
10. *** 2008, Raport SC ACET SA Suceava, www.primariasv.ro.
11. *** 2009, Water in a changing world, Raport prezentat la Forumul mondial al apei,
Instanbul,Turcia,
http://en.wikipedia.org/wiki/World_Water_Forum.
12. *** www.apmsv.ro
13. *** www.dspsv.ro
14. *** www.mmediu.ro
15. *** www.primariasv.ro
45
THE DISINFLATION PROCESS IN ROMANIA WITHIN THE CONTEXT OF THE
EUROPEAN INTEGRATION
PhD. Student Monica DAMIAN
Alexandru Ioan Cuza University, Faculty of Economics and Business Administration of Iasi, Romania
m0nicadamian@yahoo.com
Abstract:
The accomplishment of a high rank of stability of prices represents one of the conditions of the euro currency,
therefore inflation represents one major problem for the Romanian monetary authorities.Under these conditions to
know the factors that lead to inflationary pressure is necessary in taking monetary policy decisions.This paper analyses
the inflation process in Romania after 1990.The purpose is to identify the most important causes which have determined
the inflation development in our country. Given the evolution of the inflation rate, we study the inflation phenomenon
over the period 1990-1999 (the inflation process) and 2000-2009( the desinflation process). Although, in Romania there
has been a powerful disinflationary phenomenon, the consumer price has risen very much in the first years of
disinflation process. The increase of inflation in the first decade is determinated by the price deregulation, the wage
increase which overcome the increase in labour productivity and the Romanian leu currency devaluation compared to
US dollar.In order to achieve my objectives for this paper, I have used monthly data from 2000-2009, using the
unifactorial model of regression.The results show that inflation in the period 2000-2009 is determined by wage
increase, M2 money supply variation, the exchange rate variation and the international oil price.
Keywords: inflation, European integration, causes of inflation, regression, prices
JEL Classification: C25, E31
INTRODUCTION
Most of the countries involved in a transition period from Central and East Europe have dealt
with a strong inflationary process, having in the first years of transition corective inflation and
followed by the persistent imbalance between demand and supply which transformed it into
structural inflation.
To involve in the process of integration means to fulfil the objectives and priorites mentioned in
the National Adhesion Programme of Romania, meaning: reducing a great amont of inflation,
assuring a sustenable foreign position, improving the banking system and controlling the budget
deficit.The access of Romania to Economic and Monetary European Union represents an important
step of European integration which means abandoning the national currency and adopting the euro
as a legal tender.Most of the European Union accession countries have had major progress towards
macroeconomic stability, especially there has been a substantial decreasing of inflation rate.This
thing implies the importance of price stability as a main objective of central banks from the
accession countries.Inflation is extremely important according to the EU policy agenda, as can be
seen from the main conclusions reached by the Helsinki seminar held in November 1999:
Accession countries need to continue to implement monetary policies geared towards achieving
and maintaining price stability, and to support this process with prudent fiscal policies and adequate
structural reforms. [10].
The integration of Romania to European Union has contributed to reducing the inflation rate
through measures needed for the criteria of nominal convergence mentioned in the Maastricht
Treaty, in order to adopt the euro currency.
46
LITERATURE REVIEW
The specialized literature reveals a large field of empirical studies regarding the causes of
inflationary process.Therefore, Golinelli and Orsi (2001) analyse the inflationary process in three
EU accenssion countries (the Czech Republic, Hungary and Poland), identifying the main causes of
inflation, which are: the exchange rate, which can be a helpful mechanism of adjusting prices, the
progressive market deregulation and the pressure of demand.
IMF (1996) shows that the output gap does not play an important role in explaining inflation in
developing countries.But the
changing of money supply and nominal exchange rate can better explain inflation.On a short term,
inflation is seen as a result of deficit financing through money creation or through time inconsistent
monetary policy.
Lougani and Swagel (2001) have analysed the experience of 53 developing countries between
1964 and 1998.The study reveals that either the money supply growth or exchange rate movements
explain two thirds of the inflation variation in the short and long term. Inflation expectations play an
important role in the inflation process in developing countries: past realizations of inflation explain
between 10 and 20 percent of inflation movements.
Using the ordinary least squares method, Armest and Rad analyse the causes of inflation from
Iran during 1961-2006.The regression parameters show that liquidity (M2) and the import goods
index have a positive influence upon the prices level, while the actual gross domestic product
(GDP) has a negative effect upon inflation rate.
The rising in credit to government as a result of the fiscal deficit can lead to an increase in the
price of non-tradables. This, in turn, will produce an appreciation in the real exchange rate, thereby
reducing the country's export competitiveness.Reducing the fiscal deficit is necesary not only to the
competiveness of the export country [6].The authors show that inflation in Albania is in direct
relationship with money supply and the exchange rate and in opposite relationship with the real
income.The impact of exchange rate on inflation can be seen in a months time, while the effect of
the real income and of money supply on inflation can be seen in two-four months time.
Another major factor of inflation is the exchange rate.A raising of import prices towards
devaluation would affect the inflation expectations, which, on their turns tend to depreciate the
exchange rate as the dealers buy foreign currency to maintain purchasing power [7].
The enlargement of European Union from 15 to 27 states lead to decreasing the expected
inflation reference value (according to nominal convergence criterion in the Maastricht Treaty) with
0,15-0,2%, but with a great deal of a major diminishing [15].
In Romania, the main causes of inflation during June 1997-August 2001 were the monetary
factors, the leu currency devaluation regarding US dollar and the inertia of expectations.The
monetary factors have a bigger influence upon consumer prices than exchange rate.The nominal
wages are not an important factor that explain the variation of prices [2].
Hammermann (2007) has investigated the nonmonetary determinants of inflation in Romania
explaining the differences of inflation in eight member states which joined the European Union in
2004.The results of the study show that employment together with indicators reflecting the
prolonged structural change explain most of the inflation gap.
THE RESEARCH METHODOLOGY
In order to reach my objectives from this paper I have used the method of correlation and
regression to determine the existence and intensity of relationship between inflation and its
factors.In providing the regression model I have used monthly data which were taken from the
47
statistical evidence of the National Institute of Statistic, the Romanian National Bank and Central
European Bank from 2000-2009 concerning inflation rate as against December 1999, the average
net wage, the money supply M2, the leu/euro exchange rate, the leu/USD exchange rate and the
international oil price.The assement of regression parameters was done by using the ordinary least
squares method.
INFLATION BETWEEN 1990 AND 1999
The movement from centralized state economy to market economy has happened in the same
time with the inflationary phenomen of 1990-1999.The strong manifestation of inflation was
determined by the artificial stopping of inflation before 1989 [20].
The inflation from this period was very high and volatile, being a factor of instability for the
Romanian economy.Another feature for the transition process was the price deregulation.
Inflation became a problem in November 1990 when the government resolution 1109/1990
became valid regarding price deregulation and social protection measures, according with State
enterprises and trading companies have prices and tariffs according with supply and demand, in all
cases when on the Romanian market there are at least three economic units which produce, perform
and sell the same good, work or service, through negotiation with the users.In only two months
from the price deregulation, the inflation rate has increased with 37,7%.The price deregulation has
contributed to more economic political and social imbalance and contractions which the Romanian
society has dealt with at that moment.During 1991-1993 the inflation rate has risen due to numerous
resolutions regarding the steps of prices deregulation, the inflationary peak taking place in 1993,
when the inflation rate went up to 295,5%.That happened because value add tax (VAT) was
introduced in April, the trading margin was deregulated and the price deregulation continued to
happen.In 1992 the economy subsidies decreased or even dissapeard and the prices of many
products or services were made according with supply and demand, so as by the end of the year the
goodss prices have risen by 13,2 as against Octomber 1990.
Although the price deregulation and the measures to eliminate subsidies continued during 1994,
the inflation rate has significantly reduced more than half compared with 1993 (consumer price
index in December 1994 as against December 1993 was 161,7).Dropping inflation rate continued
during 1995 and 1996, 1995 being the year with the lowest inflation from the analysed period
(27,8%).The last step of price deregulation and elimination of all subsidies determined an inflation
reburst, the average monthly inflation being that year of 8%.
The inflation calmed down in the following two years, but had high levels (40,6% in 1998 and
54,8% in 1999) due to the economic downfall, prices and tariffs evolutions, increasing VAT and
exchange rate depreciation which have created inflationary pressure.
The burst of inflation in Romania has based on wage increase which overcome the increase in
labour productivity.The highest wage increase took place at the end of 1993 when the average net
wages tripled by the same time compared to last year and in the analysed period rising by 168 times.
Another factor that speeded inflation after 1990 was the Romanian leu currency devaluation
compared to US dollar, the rising average of the American currency being aproximatively 69%, the
highest devaluation being in 1991 and 1992 when the average exchange rate leu/dollar rose yearly
with 255% and 303%.
Inflation during 1990-1999 has not been generated by wars or natural disasters, but happened
during peace, when the economic system changed from one into another, when the economy
suffered a process of devaluation and deterioration, with the highest losses from national income in
the twentieth century [3].
48
The price deregulation process had a great impact on the Romanian inflation, having high values
at those periods.Demekas and Khan (1991) have shown that most of the prices have been
deregulated in three steps in November 1990, April 1991 and June 1991, so as by the middle of
1991 almost 80% from the consumer prices are determined by market.
CAUSES OF INFLATION BETWEEN 2000-2009
Although the consumer prices in Romania have risen in the analysed period, there has been a
powerful disinflationary phenomenon, the annual rate of inflation reducing from 40,7% in 2000 up
to 4,74% in 2009.The trend of inflation rate was a decreasing one, except for 2007, when it changed
its evolution, as it can be seen in figure 1.
The causes of inflation are numerous, both internal and external.From the many factors that have
an impact upon inflation I have chosen the ones with a great importance.Knowing the causes of an
inflationary process presents a great importance in leading monetary policy and assuring a low level
of it.
Figure 1.The evolution of inflation rate in Romania during 2000-2009
I have studied the impact of these factors upon inflation rate using unifactorial regression
models.
The unifactorial regression model regarding inflation rate and average net monthly wage
The increase of wages in the analysed period by 8,5 times have had pressure on the internal
demand, being therefore an inflationary pressure factor.On the other hand, the gaps between the
rising in industry wages and the rising of labour productivity has lead to rising unit labour costs
wich would affect the prices, known in the field as the Balassa-Samuelson effect.Dumitru (2008)
has studied the Balassa-Samuelson effect during 1998-2006 and reveals the impact of this upon the
inflation rate in Romania which is between 0,69 in 2005 and 4,76% in 2000, being one of the causes
of differences of inflation in contrast with the European Union level. We will have this regression
function in order to determine the influence of wage upon inflation :
= a + b*NW, where (1)
the inflation rate as against December 1999;
NW the average net wage;
a, b - regression parameters.
The value of regression parameters are shown in the following table.
49
Table 1.The equation regression statistics regarding inflation rate and average net monthly
wage
SUMMARY OUTPUT
Regression
Statistics
Multiple R 0,95132201
R Square 0,90501356
Adjusted R Square 0,90420859
Standard Error 22,9372224
Observations 120
ANOVA
df SS MS F
Significance
F
Regression 1 591503,2703 591503,2703 1124,2826 3,70175E-62
Residual 118 62081,70818 526,116171
Total 119 653584,9785
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 25,0567886 4,457949281 5,620698439 1,293E-07 16,22883542 33,88474171
NW
(RON) 0,18075365 0,005390752 33,53032398 3,702E-62 0,17007849 0,191428801
The correlation coefficient (Multiple R) signifies the fact that between the two indicators there is
a strong relationship and the determination coefficient (R Square) shows that 90,5% from the
consumer prices is explained by the increase of wages.Because the Significance F is less than 0,05,
the regression model can be used to analyse the dependence between variables.The b parameter ,
also called regression coefficient is 0,1807, which means that by increasing the average net wage
with 1 leu we will
determine the rising of prices with 0,1807.The coefficient is important, confirmed by the value of t
stat which is 5,6206 and the significance scale (P value = 3,702E-62).The trust scale
(0,17007849NW0,1914288) shows that if the average wage would rise with 1 leu, the increase of
consumer prices as against December 1999 will be situated between 0,17 and 0,19%.Intercept is the
available feature and shows that if the wage would be 0, the inflation rate would be
25,05%.Replacing the parameters in the regression function (1) we obtain:
= 25,05 + 0,18*NW
The unifactorial regression model regarding the inflation rate and money supply M2
In monetarists opinion, the money supply is the only cause of inflation, showing that inflation is
always and everywhere a monetary phenomenon [apud 4].M.Friedman thinks that inflation is
caused by the abundance of money in the economy, omitting the other causes of this complex
phenomenon.During 2000-2009, M2 raised by 14,5 times, having a strong impact upon inflation
(Multiple R = 0,922727).The determination coefficient shows that 85,14% is represented by the
influence of money supply M2 upon rising the prices.
50
Table 2.The equation regression statistics regarding inflation rate and supply money M2
SUMMARY OUTPUT
Regression
Statistics
R Square 0,851424722
Observations 120
ANOVA
df SS MS F
Significance
F
Regression 1 556478,4086 556478,41 676,21019 1,10719E-50
Residual 118 97106,56992 822,93703
Total 119 653584,9785
Coefficients
Standard
Error t Stat P-value Lower 95% Upper 95%
Intercept 60,58911239 4,539718121 13,346448 2,494E-25 51,59923468 69,57899009
M2 0,001221719 4,69819E-05 26,004042 1,107E-50 0,001128682 0,001314755
The regression equation is:
= a + b*M2, where (2)
the inflation rate as against December 1999
M2 money supply M2
a, b regression parameters
Significance F 0,05 which signifies the validity of regression model.If M2 was 0, the inflation
rate as against December 1999 would be 60,58%.The rising of money supply M2 with 1000000 lei
leads to the rising of consumer prices with 0,0012%.The significance of regression coefficient is
given by a less value of the significance level (P-value = 1,11E-50).The trust interval 0,001128682-
0,0013148 shows us that inflation rate is between 0,0011 and 0,00139%, when M2 would increase
with 1000000 lei.Replacing the values obtained previously (2), we have:
= 60,5891 + 0,0012*M2
Mandel and Tomik (2008) have analysed inflation in Czech Republic between 1996 and 2007
showing that excess of money supply represents a supplementary variable of inflationary pressures,
case in which a central bank applies the strategy of targeting inflation.
In Romanias case, during 2000 and 2009, the money supply has overcome the rhythm of rising
of GDP, the difference between the rising rates of the two indicators reaching the maximum value in
2005 (16,97%).In 2003, the GDP has overcome the rising rhythm of money supply, whereas the
inflation rate has dropped in those years.
The unifactorial regression model regarding the inflation rate and the leu/euro exchange rate
One of the external factors that affects the level of inflation rate is the exchange rate.This
influences the prices of imported goods with an effect on overall inflation.The downfall of leu
currency towards euro and dollars has lead to rising prices of goods and services, on conditions
when the exchange rate is a point in establishing prices and tariffs of administered prices, but also in
51
free forming of market prices.The impact of exchange rate over rising prices is powerful when the
imports from European Union have an important place in the international trade of Romania.The
share of imports from European Union in the total imports is between 63% in 2005 and 73,3% in
2009.In order to analyse the way in which the rising of consumer prices happens as a result of
modifying the exchange rate, we will use the next regression function:
= a + b*ER euro, where (3)
ER euro exchange rate leu/euro
a, b regression parameters
From Table 3 it can be seen that there is a strong relationship between the inflation rate and the
exchange rate leu/euro (Multiple R = 0,820135) and the variation of prices is explained 67,26% with
raising exchange rate.
Table 3.The equation regression statistics regarding inflation rate and exchange rate
leu/euro
SUMMARY OUTPUT
Regression Statistics
R Square 0,672620675
Observations 120
ANOVA
df SS MS F
Significance
F
Regression 1 439614,7696 439614,77 242,43816 2,17507E-30
Residual 118 213970,2089 1813,3069
Total 119 653584,9785
Intercept -158,9032746 20,65891232 -7,6917542 4,823E-12 -199,8135449 -117,9930044
Exchange rate
leu/EURO 93,08830558 5,97853312 15,570426 2,175E-30 81,24918249 104,9274287
The validity of regression model is confirmed by the F test value and the significance scale
(Significance F = 2,17507E-30 < 0,05).The regression coefficient shows that if the exchange rate
leu/euro increases with 1 leu, the prices will raise with 93,08%.The trust interval of the coefficient
signifies the fact that if the exchange rate raises with 1 leu, the inflation rate as against December
1999 is situated
between 81,24 and 104,92%.Replacing the values of parameters, the regression function (3),
becomes:
= -158,90 + 93,08*ER euro
The evaluation of leu/USD exchange rate impact suggests that between the two indicators there is
no relationship, given the fact the correlation coefficient is 0,071916 as it can be seen in the
following table.
52
Table 4. The regression statistics regarding inflation rate and exchange rate leu/USD
SUMMARY OUTPUT
Regression
Statistics
R Square 0,0062663
Adjusted R Square -0,0021552
Observations 120
The unifactorial regression model regarding the inflation rate and the oil price
The rising prices of oil on international market have pressure upon consumer prices in
Romania.The size of direct effect of oil prices raise depends on the oil cost in the national income,
by the dependence scale of imported oil and the capacity of final users to reduce its
consumption[13].The evolution of oil price is affected in a great deal by seasonality, reaching its
highest peak of 85,93 euro/barrel in June 2008, followed by a dramatic downfall in the second
semester of the year.The influence of oil price over the increase in consumer prices will be
established with the function:
= a + b*OP, where (4)
OP oil price on the international market
a, b regression parameter
Table 5.The equation regression statistics regarding inflation rate and oil price
SUMMARY OUTPUT
R Square 0,479220446
Observations 120
ANOVA
df SS MS F
Significance
F
Regression 1 313211,2847 313211,28 108,5834 2,01161E-18
Residual 118 340373,6938 2884,5228
Total 119 653584,9785
Intercept 18,7214267 14,14852699 1,3232068 0,1883249 -9,296508333 46,73936173
Oil price 3,443219982 0,330432731 10,420336 2,012E-18 2,788873222 4,097566741
53
The correlation coefficient (Multiple R = 0,692257) shows that between international oil price
and consumer prices in Romania there is a relationship of medium intensity.47,92% from the
variation of prices is due to the rising oil quotation.The value of F test and of significance scale
shows the validity of the regression model, which justifies the study of dependence between the two
variables.The available intercept is 18,7214267, which means the inflation rate as against December
1999, when the price of barrel would be 0 euro.Rising the oil price with 1 euro/barrel determines an
increase of consumer prices with 3,44%, the trust interval of the regression coefficient
(2,788873222OP4,09756674) showing that if the oil barrel rose with 1 euro, the inflation rate
would fit into this interval.
CONCLUSIONS
Testing econometric model reveals that among variables taken into account, the average net
wage, the M2 money supply and the exchange rate leu/euro have a strong influence upon inflation
rate, the rising of it being explained by the action of these factors almost 70-90%, while the price of
oil barrel on international market influences the variation of inflation rate in a smaller measure
(approximately 48%).
The pressure of trade unions have lead to major wage raises which overcome the level of
productivity, wich lead to rising unit labour costs.These evolutions generated inflationary effects
both by wage pressure on the demand excess, but also by unit labour costs on the prices established
by producers.
The monetary factor has pressure on the consumer prices, because the money supply rhythm has
overcome the rising rate of GDP in the analysed period, except for the years 2003 and 2008.
Since the majority of imported goods are from European Union and their prices are in euro, the
inflation from Romania can be explained in accordance with the devaluation of our national
currency compared with the European currency.The value of the correlation coefficient between the
inflation rate and the exchange rate leu/USD shows that the leu devaluation with the American
dollar does not influence the inflation rate.
The average influence of oil price on inflation rate can be explained by electricity, gas and fuel
expenses.These represent approximately 16% from the total consumption expenditures, the share of
these in the consumption basket is the second after food products.
BIBLIOGRAPHY:
1. Armesh Hamed, Rad Abas Alavi, Causes of inflation in the Iranian
economy,www.wbiconpro.com/218-Hamed.pd
2. Boel Cezar, Causes of inflation in Romania, June 1997-August 2001.An analyse based on
the structural autoregressive vector, Publishing house no.11, Romanian National Bank,
2002
3. Ciumara Mircea, Ciutacu Constantin coord., Inflation in Romania: modelling the inflation
phenomenon, Expert Publishing House, Bucharest, 2004
4. Dem Amadou, Mihailovici Mihaela, Gao Hui, Inflation and hyperinflation in the 20
th
century causes and patterns, Columbia University, School and International and Public
Affairs, 2001
5. Demekas Dimitri, Khan Mohsin, The Romanian Economic Reform Program, IMF Working
Paper, 1991
6. Domac Ilker, Elbirt Carlos, The main determinants of inflation in Albania, Working Paper,
1930, The Worl Bank, 1998
54
7. Domac Ilker, Explaining and Forecasting Inflation in Turkey, World Bank Policy Research
Working Paper 3287, April 2004
8. Dumitru Ionu, Balassa-Samuelson effect in Romania-the role of statutory prices, Munich
Personal Repec Archive, 2008
9. European Central Bank, Statistical Data Warehouse,
http://sdw.ecb.europa.eu/browse.do?node=2120782
10. European Central Bank, The Eurosystem and the EU enlargement process, Monthly
Bulletin, February, 2000
11. Golinelli Roberto, Orsi Renzo, Modelling inflation in EU accession countries: the case of
the Czech Republic, Hungary and Poland, Eastward Enlargement of the Euro-zone
Working Papers, Free University Berlin, Jean Monnet Centre of Excellence, 2001
12. Hammermann Felix, Nonmonetary Determinants of Inflation in Romania:A Decomposition,
Kiel Working Paper No. 1322, 2007
13. International Energy Agency, Analysis of the Impact of High Oil Prices on the Global
Economy, 2004
14. International Monetary Fund, The Rise and Fall of Inflation: Lessons from the Postwar
Experience, World Economic Outlook, October, Chapter VI. Washington, D.C.:
International Monetary Fund, 1996
15. Lewis John, Staehr Karsten ,The Maastricht Inflation Criterion: What is the Effect of
Expansion of the European Union?, Eesti Pank Bank of Estonia, Working Paper Series,
11/2007
16. Lougani, P. and P. Swagel, Sources of
Inflation in Developing Countries, IMF Working Paper, nr. WP/01/198, 2001
17. Mandel Martin, Tomik Vladimir, Monetary Approach to Inflation Model of Inflation in a
Small Open Economy and its Application to the Czech Republic in the Period 19962007,
Macroeconomics, 2008
18. National Institute of Statistic, Data bases TEMPO-time series
https://statistici.insse.ro/shop/?lang=ro
19. Romanian National Bank, Periodicals, http://www.bnro.ro/Publicatii periodice-204.aspx
20. Turliuc Vasile, Cocri Vasile, et al, Money and credit, Ed.Al.I.Cuza, Iai, 2009
55
THE IMPACT OF BUSINESS LOCALIZATION ON THE INTERNATONAL TRADE
Lecturer PhD. Liviu-George MAHA
mlg@uaic.ro
Professor PhD. Ion IGNAT
ignation@uaic.ro
PhD. Student Sorin-tefan MAHA
sorin.maha@feaa.uaic.ro
Al. I. Cuza University of Iai, Romania
Abstract:
The recent evolutions in the world economy have generated questions which prove the necessity of a new
approach of the theory regarding the international commerce. In which way the price liberalization affects the
localization of the economic activities and the national income in real terms? Which are the factors that make a certain
zone or region to be an attraction for the production factors? Which are the determinants of the international
commerce when there is a mobility of the production factors? In this case, there is a need of a theory which explains
why the economic activities are concentrated in certain countries, regions, cities and how the creation of such
attraction poles over the years can be stimulated.
Keywords: localization, competitive advantage, economic concentration, regionalization, intra-firm trade
JEL Classification: F10, F11, F161.
THE CONCENTRATION PROCESS OF THE ECONOMIC ACTIVITIES
Reality has proved without any doubt the existence of a process of economic concentration
from the geographical point of view. The transition from a rural economy to an industrial one and,
in the end, to one with a tertiary character is followed by the development of the great metropolitan
areas and of the cities which concentrate a great number of people, in many cases the industrial
areas going beyond the national borders.
Once the analysis moves from the national level to the regional or to the local one, there is a
decline of the practicability of the theories regarding the international commerce. The explanations
related to the economic policies in a country, to the endowment with the production factors and to
the comparative advantages have to be completed with a series of other aspects. It has to be seen
why the national policies have different effects in different regions of the same country and the
particular character of the comparative advantage seen at a regional scale has to be analyzed. Also,
the endowment with the production factors cannot really be taken into account because inside a
country only few settlements which restrict the free circulation of work or of the capitals are
applied.
The models regarding the economic geography tend to produce centre- periphery oriented
structures as long as the transportation costs are low enough. A key element in the explanation of
the economic activities implies the finding of the incentives which lead to a sustained migration
towards certain clusters. Great capital and migration movements take place and they go beyond the
national borders in spite of restrictions hostility regarding the employment and investments imposed
by the source states and the destination states.
The geographical concentration of the population and of the industry is a well-known
phenomenon in the world economy and the Gini coefficient is used for its measurement. The Gini
coefficient (G) offers a measure of the geographical concentration of an industry and is calculated
as half of the sum of the absolute value of the differences between the share (s
ri
) owned by the
respective region (r) in the occupied population from the respective industry (i) and the weight (s
r
)
56
owned by the respective region in total occupied population at national level in the processing
sector.
_ _ _
= =
= =
R
r i
r r
R
r
r r
i i i
s s s s G
1 1
2
1
2
1
If the i industry would be equally spread inside of the regions of a state, the two weights
would be equal and the G coefficient would be zero, while if the i industry would be concentrated in
a single region with small dimensions, the value of the coefficient would be close to 1.
Over the time, a series of factors which stimulate the creation of these concentrations have
been identified. In this way, a connection between the economic concentrations and the economies
which the companies obtain on the base of some external aspects of the companys activity was
established. For example, the interaction between companies and the workers in the same location
can have a positive effect over the work performance through the high quality of the human factor
or on the base of a low cost because of the substantial offer.
Another factor that favours the concentration of the economic activities is given by the
possibility to obtain smaller costs through the localization of the business in a certain habitat. By
placing a production capacity in a location which permits the elimination or the minimization of the
transportation costs regarding the supply with raw materials or with other materials or of those
regarding the products distribution, the positive effect of proximity towards suppliers and clients
becomes obvious, even if the company would register economies of scale wherever the activity
would take place.
These two approaches are not entirely convincing. Although they explain the reason for
which the phenomenon of economic concentration appears, none of these factors explains which
certain specific locations are chosen. Many locations have the same characteristics from the
economic, demographic and geographical point of view but there are missing arguments regarding
the explanation why a certain region attracted economic activities in a certain sector. Many experts
attribute an important role in the theory regarding the economic concentrations to the hazard and to
the incidental historical events and even Krugman sustains that the theory regarding the base of the
localization of the economic activities has to take into account not only economic factors, but also
random elements.
Better studies about the geography, localization and commerce appear during the 90s, when
many economists and researchers concentrate on the selection way of the best location for an
economic activity and on the effects that this selection can generate. Remarkable in this case is
Michael Porters contribution.
2. MICHAEL PORTER THE THEORY OF THE COMPETITIVE ADVANTAGE
The settled objective of Michael Porters work, The Competitive Advantage of Nations, is to
determine the causes, factors which lead to success on the international market of the specialised
companies from a certain field. Analyzing the evolution of important multinational companies, the
American economist correlates their success in the world and the national origin. In this way he
places his analysis not at the level of the company as individual unit but at the level and within the
nation from where it comes from. The nation through its production factors, its technological,
natural, human and financial resources is actually a matrix for the companies development, which
use the national advantages in order to distinguish themselves in the world. The mother nation
becomes, from Porters perspective, a national launching base for the companies that will gain
success in the world. [7, p. 101]
57
In this way, the competitive advantages of the company actually show the competitive
advantages that the mother nation has towards other nations. As a result, the companies way to the
international success starts by determining the competitive advantages that the nation owns or could
own. [6, p. 68] By emphasizing the role in the creation of the competitive advantages of his
companies, Porter shows that the nation has to create the frame that allows its industries to gain
international success. In this way, the companies will transfer their competitive advantages from
national to international level.
From the elements that make up the environment in which the national companies compete,
Porter chooses four elements which can become source of the competitive advantage: the
production factors, the nature of the internal demand, the interfacing and the manufacture industries
and the competition, the structure of the offer and the business strategy.
The production factors
Michael Porter extends the meaning of this concept by renouncing at its classical and limited
meaning (work, nature, capital). He classifies the production factors in some big categories: human
and material resources; the quantity of scientific, technical and marketing knowledge regarding the
goods and services; the volume and the cost of the capital available for investments; the type, the
quality and the cost of using the available infrastructure.
Owning these factors represents a premise, but this is not enough for a nation to develop and
to maintain the competitive advantages. Surprisingly, there were situations in which the abundance
of factors can undermine the competitive advantage; sometimes the success was the result of some
deficiencies regarding the endowment with factors, which led to the replacement of this deficiency
by developing the technology and the scientific research. The author states that the competitive
advantage resulted from the production factors will depend especially on the deficiency of their use.
The nature of the domestic demand
There are three characteristics of the domestic demand, which are very important for the
creation of a competitive advantage: the structure of the demand on segments, the sophisticated
consumption behaviours with vast demand, the anticipant needs of the buyers. [7, p. 102]
The interfacing and manufacture industries
The presence of some competitive advantages in a manufacture industry gives potential
advantages in many other industrial branches on the production chain. On the other hand, the
presence in a country of an interfacing industry of international success creates opportunities in
relation to the information fluxes and the technological changes between the companies giving them
the chance to form formal or informal alliances; also, these successful interfacing industries can
accelerate the development of the national manufacture industries.
The competition, the structure of the offer and the business strategy
The companies will gain in those branches in which the objectives and the motivation are in
accordance with the sources of competitive advantage. A major problem in the study of the
competitive advantage is the relation between the rivalry between the national companies and the
creation and the maintenance of a competitive advantage. Some people consider that this has a
negative influence because it hinders the national companies to gain advantages from the scale
economies. The solution would be the domination of the internal market by one or two competitors
that after becoming national competitors will establish themselves on the external market, too.
Other people consider that the internal rivalry between the companies has no influence on the
competitive advantage.
All these factors acting one by one or in a system create the context in which the national
companies appear and compete: the availability of the resources and of the necessary knowledge for
a competitive advantage in a field; the information that shows the existent opportunities and the
directions in which both the resources and the knowledge are oriented; the objective of the owners,
58
of the managers and of the employees; the pressure on the companies to invest and innovate. [7, p.
103]
The companies acquire a competitive advantage where this is permitted by the conditions
from the origin country and support the most rapid accumulation of capital and knowledge, a better
understanding of the technological processes, where the objectives of the owners, managers and
employees support the sustained development and where the internal environment is the most
dynamic and force the companies to raise the quality level and to innovate.
The existence inside a nation of one of the above described factors is not enough to create
and sustain a competitive advantage; only their existence as a whole together with the reciprocal
connections created between them can be responsible for the creation of a national matrix, capable
of pushing competitive companies in the world. All these factors and connections are called by
Michael Porter the national diamond.
In conclusion, the nations have the chance to succeed in an industry in which the national
diamond (the determinants as a system) is the most favourable. We have to deal with a system
characterized by extremely complex reciprocal relations. In this way, favourable conditions
regarding the demand will lead to competitive advantage only if the degree of competition is
advanced enough to determine the companies to respond to this. The advantages in owning and
using of one of these production factors can also create advantages when it comes about other
factors. It is preferred that the companies base on advantages in a great number of determinants, a
situation which is hard to counteract by the eventual rivals.
3. IMPACT OF FOREIGN DIRECT INVESTMENTS ON INTERNATIONAL
TRADE
Investments made by multinational companies are extremely important in the process of
globalization, as they provide significant economic benefits for both the host country's economy
and for the home countrys economy. However, for the countries of origin of multinationals, FDI
outflows are likely to cause a reduction of export levels and volume of domestic production,
overseas expansion generating structural adjustment costs for the country of origin.
In recent literature, exports and foreign direct investments are seen as two alternative
strategies for a particular product, while the relationship between them is characterized by a
linear/sequential movement most of the time, from trade to FDI.
For example, companies could produce in the country of origin and export to foreign
destinations or produce abroad and replace exports with sales of local subsidiaries. Economies of
scale and transaction costs were key elements in decision making, export costs being divided into
fixed costs lower and variable costs - higher. Thus, when firms are extended in through FDI, fixed
costs rose and variable costs decreased. For a given firm, this meant a sequential movement from
exports towards FDI.
Horizontal FDI
Horizontal FDI refers to the case in which multinationals multiply their production,
providing similar products and services to several locations.
One of the key components of the horizontal FDI model, developed by Markusen, is that
firms choose to serve foreign markets through sales of foreign subsidiaries, and not by exports, in
order to facilitate market access and reduce costs of fees and travel expenses.
So, the reason for which firms invest abroad is the result of a comparison between the
advantages of being close to the consumer and the losses from a scattered production, a situation
illustrated by the case of proximity versus concentration developed by Brainard.
For example if a manufacturer of a good from a developed country intends to produce and
sell a new product he will invest in that project so years of research and development and, therefore,
59
significant fixed costs. To ensure that the new model will be a profitable investment the firm must
ensure itself a sufficiently large volume of sales. A handy way to increase sales is to expand
operations beyond their internal market, starting to export to a foreign country. Suppose that
currently, there are trade barriers in export markets, such as tariffs on imported products or transport
costs. If the company invests in a new factory abroad and produces the model for the local market
in a foreign subsidiary, it can increase sales and avoid trade costs.
The firms decision between the concentration of production in the country of origin (and
therefore sales to the foreign market in the country F) and FDI (in which case production and sales
on the foreign market take place through a subsidiary) will be taken depending on much the
company will save avoiding costs associated with export and how much will the FDI alternative
cost. In this context, proximity to consumers will be more important in large markets because
consumers have a greater availability to purchase.
In conclusion, horizontal FDI is generally a substitute for exports as foreign production in a
subsidiary from country F replaces production and exports of home country H. Therefore, in the
horizontal FDI model, firms will prefer FDI in detriment of exports as a way of providing goods
and services.
Foreign production can also generate new export opportunities in the country of origin, since
some components may be exported to the country of destination for final output. Furthermore, while
foreign production replaced all exports of goods, home business "exports" intangible assets; foreign
production requires departments like research - development and marketing, which most often are
found in the country of origin of the multinationals. Because these intangible assets are difficult to
measure it is possible for substitution effect to be overestimated.
Platform FDI
Platform FDI are a more complex form of horizontal FDI. They refer to investments made
depending on ease of access to markets in which multinationals locate their production in a country
located in the vicinity of export markets as a platform that basically facilitates subsidiaries to export
to that market. Thus, FDI generates Platform exports from foreign subsidiaries.
Suppose the manufacturer from the example above also intends to enter the market of a third
country, which we will call R (Rest of the World), by placing a subsidiary in country F in order to
sell on Rs country market. This will be profitable if country F is located close to country R so
commercial costs related to market supply for country R by country F to will be lower than
commercial costs of country F supplying directly country H. In conclusion, "platform" FDI may
restrict exports of the country of origin and at the same time, boost international trade. While the
production in the host country (F) reduces host country exports (H). This generates exports of the
subsidiary from country F to country R. So, in the case of platform FDI, their impact on
international trade is positive overall.
Vertical FDI
Vertical FDI refer to investments in which the production process is fragmented, in order to
take advantage of different input factors. Therefore, production and sales in multinationals can be
seen as a production network, in which parts of the production process are located in different
countries to take advantage of different input factors. Geographical dispersion of production will
reduce production costs. Given that different stages of production require different levels of training
of the work factor and prices may vary from one country to another, locating steps requiring a lower
level of training of the workforce in underdeveloped countries (where labour is cheaper because its
less skilled) and activities which require skilled work force to be located in developed countries.
As vertical FDI implies a geographical separation of the production process, this type of FDI
will boost international trade through intra-firm trade (exports and imports of intermediate
products). Even if the product assembly is performed in a factory abroad, this can lead to increased
exports of intermediate goods from the country of origin. In conclusion, vertical FDI can complete
60
international trade through increased intra-firm trade. For example, locating the final product
assembly abroad may increase exports of intermediate products from the home country.
Complex FDI
Delineating horizontal FDI from the vertical FDI highlights the mechanisms behind
different types of investments. In reality, however, investment can be justified, both by market
access and input costs. For example, suppose that investor locates components production in
country S to benefit from lower costs of inputs. Given the lower costs of manufacturing
intermediate products, the total cost of producing the good will decrease. However this means an
increase in the importance of trade costs regarding the foreign market supply from country R and
the vertical investment in country S could determine the manufacturer to locate the final assembly
in country R. [11, p. 726-734]
Currently, world production has increased significantly due to the increasingly foreign
subsidiaries number. Now firms have increasingly more possibilities when it comes to the
production and distribution of goods and services to foreign destinations, they can choose between:
domestic production for export, production in a foreign country for local sale or production in a
foreign country for export to a third country. Moreover, firms can now obtain resources and raw
materials for production in foreign markets importing them from foreign manufacturers or
establishing vertical production facilities, which facilitates access to resources.
In the new economic conjuncture, firms can use global opportunities that support their
position in international markets by continuously organizing and reorganizing their external
production activities. Consequently, intra-firm activities become extremely important. The decision
to expand a company involves a combination of exports and FDI, in which both ways are
determined simultaneously, by factors as the economies of scale, transaction costs, tariffs, market
access and different endowment with inputs.
4. INTRA-FIRM TRADE
The share of intra-firm trade played a significant role in regional integration, particularly in
the European Union. Between 1957 and 1982, sales of U.S. subsidiaries in the EU increased from
14% to 46% of total trade. This determined Dunning to suggest that one of the most notable features
of the European integration process, by the mid '80s, was the increasing division of labour set by
U.S. multinationals, with has corresponding effects on intra-firm trade growth and intra-
communitarian trade growth. [5, p. 54]
It is estimated that a growing proportion of global trade is represented by intra-corporate
(between multinational) and not between countries. Multinational companies and multi-product
companies that have expanded the '60s, both in number and purpose of the activities have
encouraged the development of intra-corporation trade as a means of overcoming geographical,
financial and technological limits. Multinational behaviour varies by country.
For example, U.S. firms subsidiaries have a higher propensity to export than Japanese
subsidiaries. Significantly, in the category of global trade, intra-corporate transactions are less
controlled by the traditional determinants of trade: price / cost. It is less likely that transactions
between subsidiaries to be market driven; they are sensitive to the international decisions of
multinationals. Intra-corporate trade responds differently to changing economic conditions. [3, p.
424]
Transnational mergers and attracting resources through intra-corporate trade networks have
become competitive strategies, as continuous profits were more dependent, as nations reduce their
trade barriers. Deregulation of businesses that were national monopolies (telecommunications,
banks, utilities) was a growth factor, once it became possible for them to be acquired by large
corporations. In the 80s, many nations have reduced tariffs and other trade barriers to attract global
61
corporate investment. After reduction, manufacturing corporations were forced to become efficient
producers and distributors to survive the competition from imports. [10, p. 258]
Also, cultural and linguistic barriers have prevented corporate integration in terms of flows
of materials and finished goods and have an even bigger effect on suppression of intra-corporate
work transfers. Each factorys strategy remained based on specialized models and penetration of
export markets, in tandem with improving productivity, full capacity utilization and reducing costs.
Specialization implies dependence on a narrower range of products and a tighter integration and
"sisters" factories. This specialization in intra-firm division of labour has created new dependencies
between factories.
Rationalization of production across borders (cross border production rationalization)
followed two patterns:
The first is the pattern of vertical integration, the subsidiaries, and outside bidders of
components, semi-integrated in the production chain, are specialized in supplying components or
are involved in various phases of production. Trade associated with linkages between production
capacity located in different national positions and constant changes in the patterns link is
concentrated in components and intermediate products. Its justified almost entirely by the intra-
industry variety. It often belongs to intra-firm relationships, but not invariably. Over 80s "quasi
integration" rose at the cost of hierarchical vertical integration. Intra-industry trade continued to
grow, especially for products with high added value. [12, p. 32]
The second type of abroad rationalization, which has developed at the others cost is the
horizontal integration, the subsidiaries of given countries are assigned by the transnational centres a
production mandate for a certain variety of finished products. It is more likely that larger
subsidiaries incorporated in international corporate structure following the merger and acquisition
processes to be assigned such a status, because it facilitates the corporation integration process and
merges the very different corporate cultures. Net trade effects created could be small often the
targeted corporation is acquired due to its market share, but the intra-firm trade part will increase,
perhaps significantly. The activities of the branches will also grow; each production subsidiary
should sell part of the complementary products from the total production of the corporation. [12, p.
32]
Firms increase their value by internalizing markets for these assets, amount which is
increased in direct proportion to the markets size. Because these assets are based primarily on
intelligence, companies cannot achieve efficient exchange. Therefore, firms increase their value by
expanding overseas, if this can get a gain that exceeds the additional costs related to administration
of a subsidiary. Multinationals are able to transfer and disseminate technology to measure and
compare costs, to detect the best way to compete on price, quality and service in different countries.
Market nature can also be a stimulating factor for intra-firm trade. Intra-American corporation trade
is related in particular to manufacturing products, while intra-corporate U.S. alien trade is related in
particular with marketing and distribution activities. [3, p. 425]
In conclusion, the relationship between FDI and exports is an extremely complex one, and
empirical studies do not provide accurate answers. If you look at the relationship from the industry,
country or global level trade and FDI simulate each other, and the effect of trade stimulating by the
FDI exceeds than substitution effect. Its been proven, however, that for a product or a company in
particular, FDI may substitute trade.
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Princeton University Press, 2004
62
2. Damijan, J., How Important are FDI for New Member States Recent Trends and Overall
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Trinity College Dublin
10. Seavoy, R.E., Origins and growth of the global economy: From the Fifteenth Century Onward.
Westport, CT: Praeger, 2003
11. Yeaple, S.R., The Role of Skill Endowments in the Structure of US Outward Foreign Direct
Investment, Review of Economics and Statistics 85, 2003, pp. 726-734
12. Chesnais, F., Ietto-Gillies, G., Simonetti, R., European Integration and Global Corporate
Strategies, Routledge, London, 2000.
63
CULTURAL-CREATIVE INDUSTRIES (CCI) ECONOMIC AND SOCIAL
PERFORMANCES
Prof. PhD.Gheorghe ZAMAN
Corresponding member of Romanian Academy, Romania
gheorghezaman@ien.ro
Prof. PhD. Valentina VASILE
Institute of National Economy-Romanian Academy, Romania
valentinavasile2009@gmail.com
Abstract:
Evaluating the economic contribution of CCI represents a relatively new research field triggered especially by
the following factors: a) segregation of the CCI group as a relatively autonomous sector of national economies based
on copyright and its other correlative rights has an increasing economic-social impact; b) the increasingly higher
economic importance of CCI was determined by a complex of economic, social and technological factors among which
we mention globalization, knowledge-based society, ITC, the more stronger interspersing between cultural-artistic
fields and the economy of intangibles; c) the economic contribution of CCI is aimed mainly at value added (GDP),
employment, foreign trade and the role of the state in developing CCI taking into account also their feature of public
good.
In the present paper we intend to make a contextual comparative analysis at international level about the
macroeconomic contribution of CCI from Romania in the period 2002-2008 on the three aforementioned dimensions,
making use of the WIPO methodology for classifying these industries (core, inter-dependent, partial and non-
dedicated). Depending on the available data a series of analyses were extended over the year 2009 which marked the
beginning of the economic-financial crisis in Romania.
Key words: cultural-creative industries, copyright based industries and other correlative rights, economic and
social contribution of CCI.
JEL Classification: K11, O34, Z1, L82
1. INTRODUCTION
Cultural-creative industries (ICC) comprise the activities referring to output and
consumption of creative-artistic and scientific products that enter into the economic circuit, create
value, generate public incomes through paid taxes and duties, create new jobs and profit, help with
regional and national development, and contribute to the foreign trade of the countries. The sizes,
creativity and culture are found again, implicitly and explicitly both in the public sector (cultural
and educational institutions partially or integrally subsidised by local or national authorities), and in
the private sector (companies or non-profit association created as result of private investments). The
unprecedented development of the cultural-creative sector is increasingly stronger related to the
globalisation process, to the expansion of information and communications technology and, last but
not least, to the cultural-artistic and scientific creativity.
Turning autonomous as a complex sector of national economies, CCI have raised a series of
questions of theoretic-methodological and practical-applicative nature with respect to components
and metrics of their inputs and outputs, the institutional-legal framework of copyright, the character
of public goods (positive and negative externalities), the evaluation of the report between the
economic and social-humane dimensions of CCI, etc.
The discussions and controversies about measuring creativity by an adequate system of
indicators creates a fruitful field for rendering operational a policies mix in the field of CCI that
should contribute to increasing the economic-financial and social performances of CCI.
From the viewpoint of countries hierarchy according to various indicators of creativity,
Romania has unfavourable positions that should stimulate theory and practice from our country
64
specifically towards improving the situation, increasing competitiveness and enrolling on the actual
convergence trajectory having as important fact nominal convergence.
According to the computations of the European Creativity Index (ECI), Romania, with 0.16
average value in the period 2001-2007, is placed on the last position in Europe, even if recording an
ascending trend which, unfortunately, was necessary but not enough.
Table no. 1. ECI for Romania and some European countries, average of the period 2001-2007
Global
composite
index
talent -
Global
composite
index
technology -
Global
composite
index -
tolerance
Aggregated global
index creativity
Countries
hierarchy
according to ECI
(position held)
Finland 0.46 0.94 0.51 0.78 1
The Netherlands 0.54 0.82 0.46 0.67 3
Germany 0.54 0. 90 0.29 0.58 8
England 0.90 0. 65 0.49 0.57 9
Hungary 0.13 0. 38 0.74 0.54 10
Slovakia 0.56 0.18 0.62 0.44 17
Portugal 0.55 0.29 0.49 0.39 19
Latvia 0.51 0.13 0.51 0.36 20
Lithuania 0.42 0.15 0.22 0.29 24
Romania 0.56 0.01 0.29 0.16 26
Ratio against the
highest value added
62% 1,1% 39,2% 20,5% -
Ratio against the
lowest value added
4,3 ori 1 1,32 ori 1 -
Source: A. Bobirc, A. Drghici, S. Dumitrescu, O. Mihu, Msurarea Economiei Creative Studiu de caz Romnia,
The Romanian Economic Journal, nr. 34, 2009, pag. 117-144
We notice Romanias ranking first from the viewpoint of the growth rate (dynamics) of
the indexes Creative Class (where the country is on the first position) and Human Capital. This
situation specific to the developing countries (low level and high dynamics for CCI indicators)
practically highlights for a given period a favourable catching-up (rattrapage) position against
developed countries which in order to become efficient must also be sustainable on long- and
very long-terms.
Table no. 2. Composite annual indexes creativity for Romania
Year Talent index
Technological
index
Tolerance
index
Creative Class
Indices
Human
Capital
Indices
2001 8.66 0.93 9.55 10.27 10.15
2002 9.99 0.93 9.56 11.31 13.75
2003 10.48 1.00 11.17 11.33 14.90
2004 11.17 1.03 10.43 11.78 16.05
2005 11.23 1.15 8.70 11.86 15.57
2006 11.34 1.26 8.04 12.40 15.86
Source: After, A. Bobirc, A. Drghici, S. Dumitrescu, O. Mihu, Msurarea Economiei Creative
Studiu de caz Romnia, The Romanian Economic Journal, nr. 34, 2009, pag. 117-144
In our study we shall dwell on the level of the dynamics and structure of the economic and
social contribution of CCI in Romania, as compared with other countries using for the first time in
specialised literature in our country the CCI classification methodology suggested by the World
65
Intellectual Property Organisation.
2. EVALUATIONS REGARDING THE ECONOMIC CONTRIBUTION OF THE
CCI SECTOR IN ROMANIA, BASED ON THE WIPO
Creative industries (1) represent a key-element of the knowledge-based economy which
stimulates to an increasing extent the use of cultural heritage, tourism growth, ideas and imagination
of the nations as assets with an increasing role in economic growth (Towse R., 2002). Measuring
creativity, respectively its impact on economic and social life becomes necessary, because: a)
creativity represents a support factor for knowledge-based economy development; b) incorporating
the outcomes of the creative act in economic and social life generates development; c) impact of
intangible capital (assets) use becomes more and more decisive for ensuring performance and
competitiveness in production/services processes.
2.1. Theoretical-methodological aspects
The notion of CCI, as shown in Guide WIPO 2003, represents groups of activities of certain
dimension and structure which can be statistically identified and measured comprising the
following categories: CI - Core (the basic core industry of CIs); interdependent CI; partial CI;
non-dedicated CI. CCI are characterised by the fact that the copyrighted works immediately after
being generated, imply much lower costs with their reproduction and dissemination, particularly for
the digitalised ones. Delivering on the market a creation work at marginally relatively low costs of
reproduction and dissemination cannot generate the required incomes for recovering total costs
generated by their first time production.
The WIPO methodology is based on the copyright factor, which reveals the attributed
contribution of activities i to the realisation of products incorporating innovativeness under the
protection of copyright. The copyright vector is defined as w = (w
1,
w
2,
....... w
n
) where the weight w
i
is meant to represent the respective percentage of value added to the activity i which depends
directly on copyright. In terms of weights, core activities have the weight 1, and non-related
activities have a weight 0. The weight following to be attributed to each related activity is strictly
between 0 and 1, and the exact values of these weights make the subject of experts estimations.
The increase of specific products and services value and the diversification of activities which
incorporate elements of intellectual property heighten the importance of activities for determining
the copyright factor and make necessary the periodical re-evaluation of activities included in non-
core categories. The issues in attributing the weight begin, actually, when the precise point is
analysed in which related activities cease and where non-related activities begin. In reality, if we
take into account globalisation and the dynamics of technological progress absorption, as well as
the creativity content of new niche fields which develop, it is extremely difficult (probably
impossible) to ponder about an economic activity which is completely unrelated to copyright
products. The analysis based on conditionality, although imposing debatable conceptual restrictions
constitutes currently the WIPO agreed on way for developing studies on countries and build a
map and typology of countries under the aspect of using applied innovativeness in economic
and social progress, in maintaining/developing comparative advantages on specific goods and
services market. The total value of copyright contribution to GDP is given by:
1
k
i i
h
A C w x
+
= +
_
In
relative terms, copyright contribution to GDP is given by:
1
k
i i
h
C w x
Y
T
+
+
=
_
As result we
66
assume that C is just a small percentage of T and as long as x
h+1
is just one activity of the economy,
it shall be almost insignificant in relation to T, hence the right side of this equation cannot be much
higher than approximately 0.05. On the other hand w
h+1
must be rather closer to 1 (as the activity
classified on position h+1 is the most dependent on copyright from those outside the core). Thus,
we might assume as certainty that such a division has indeed as outcome Z > Y. The majority of
studies suggest that the total value added of the core varies between approximately 3% and 5% in
total GDP (R.Watt, 2004 (2)). Based on the outcomes of national studies, Watt develops this
correlation and assumes that C = 0.04T, and the related group of activities constitutes half of the
unweighted total value added, respectively R = 0.5T. Recent developments and the orientation
towards underscoring the absorption of RDI outcomes as support factor of market competitiveness
and developing new economic-social activities/fields suggest an increase of the inter-
branches/activities interdependencies and intensified links. The sphere of dependent activities shall
expand due to the one with 0 impact factor, and the value of the impact factor shall record shift
trends towards 1. In our opinion the methodology for estimating the CCI impact on macro-
economic indicators must be developed by associating qualitative models that would measure the
impact of externalities generated by the absorption of RDI outcomes and increased creativity in
enhancing measurable economic and social performances (productivity, profitability, employment,
triggering, competitive advantage, etc.).
2.2 CCI economic contribution for Romania. Estimates based on the WIPO
methodology
The copyright factor was applied on the indicators on activities resulted from processing
data from the Structural Survey on Enterprises realised on a yearly basis by the National Institute of
Statistics for the period 2002-2008 (for which data could be determined at CANE rev. 1.4 digits
level) (3). On the date of elaborating the present study, no survey data were available for the year
2009, and no recalculation of the indicators was retroactively operated in accordance with CANE
rev. 2, which is currently applicable.
The economic contribution of CCI sector for Romania was determined for the first time on
the occasion of developing the study Economic contribution of copyright-based industry in
Romania under WIPO (4) coordination. In the period 2002-2008 (for which a comparable set of
data was available) the copyright industries were developed in the broader context of a more or less
coherent and consistent transition to market economy mechanisms, characterised by the following
essential features: a) change of the development direction of the national economy as of 2000 from
negative GDP growth rates to positive rates and emergence of consistent signs of improvement and
recovery power of the national economy; b) substantial increase of the private sector, which
currently has the highest weight within the economy, including with respect to the largest part of
copyright-based industries; c) population decreased from 21,8 to 21,6 million inhabitants as
consequence of the low birth rate, a negative natural birth rate and of labour force migration abroad,
particularly of high-skilled labour force; d) the services sector became dominant in absolute and
relative terms (53.4% of the labour force) as result of a relative decrease of the primary and
secondary sectors, of the Romanian societys digitalisation and swifter development of some public
and financial services; e) labour productivity level increased from 32.10% to 40.90% against the
average productivity level in EU-25 in the period 2000-2005; f) Romanias joining NATO in 2004
and the EU accession in 2007 were active factors of development, stability and security, the
estimated accession costs being lower than the benefits on the medium- and long-term time horizon;
g) harmonising legislation between Romania and EU, including the field regarding Rights of
Intellectual Property and of other international agreements and undertakings in complementary
fields which have contributed to the better understanding and strengthening of the support legal
framework for copyright industries.
67
The ascending dynamic of Romanian industry (with a GDP growth of 7.3% in 2008/2007,
the highest at EU-27 level) was brutally halted by the propagation of the economic and financial
crisis effects on the economy. The economic constriction was harsh and more accelerated than
initially estimated (-7.1% in 2009/2008 and an official estimate of at least -2% in 2010/2009),
associated with significant diminishments of the purchasing power of customers for CCI products
and services (both natural and legal persons, i.e. economic agents) (5). The trend on medium- and
long term is of expanding and intensifying the links between products and services incorporating
copyright and of developing the other activity sectors, the absorption of technological progress
generating an increasing trend of copyright activities impact on the entire economy. On medium-
term the activities that do not incorporate support goods and services based on copyright, either
directly or indirectly, shall decrease significantly.
Due to these considerations, we regard as natural the development of the CCI sectors
structure for the indicator enterprises and for the one of employed population on the 4 groups of
activities.
100%
Figure no.1. Structure of the number of enterprises pertaining to the CCI sector, in Romania,
for the period 2002-2008
Source: Own processing based on NIS data. Structural survey on enterprises
On the other hand, the slower growth of employed population from CCI in total national
employment, as compared with the share of enterprises from the CCI sector in total enterprises,
reveals that the CCI sector in its entirety, but especially core activities ensure the highest volume
of human factor use in the business environment, putting to good use a better trained labour force
segment, as a rule, also younger, against the average age of employed persons and with an
educational and employment profile that can sustain competitiveness and the development of
activities requested on medium- and long-term, strengthening the employment structures of the
future.
2002 2003 2004 2005 2006 2007 2008
% o f CCI empIo yment in
t o t aI nat io naI
% o f CCI co re
empIo yment in t o t aI
nat io naI
% o f CCI unit s in t o t aI
nat io naI
% o f CCI co re unit s in
t o t aI nat io naI
Figure no 2. CCI sector position within the national economy after the number of enterprises
and employment (%in total national)
Source: Processing based on NIS data, Structural survey in enterprises
68
Paid employment rate in the CCI sector activities is high and on increase, representing
almost 91% in 2002 and 94% in 2008. This reveals the rather high rigidity of the labour force
employment models for CCI activities, the employment typology differing from the one in
developed EU member countries.
For the analysed period, paid employment in the core copyright sector doubled, a fact which
highlights the increased importance and growing demand for goods and services incorporating
innovativeness, respectively the more extensive use of RDI outcomes.
On activities of the CCI sector, paid work increases significantly in the core sector
reaching to about 2/3 of total number employees in 2008.
0%
20%
40%
60%
80%
100%
2002 2003 2004 2005 2006 2007 2008
non-dedicated
partial
interdependent
core
Figure no 3. Paid work structure on CCI categories of activities in the period 2002-2008 -%-
Source: Processing based on NIS data, Structural survey on enterprises
Real wage earnings for CCI activities increased for the analysed period to lower shares than
the national average. Facilitating factors of wage increases in the CCI sector were: a) increase of the
average skills level of newly employed within the sector; b) wage increases for employees as result
of the policy for attracting and retaining on the national market expert personnel; c) increased
taxation associated to labour incomes based on contributions to the social funds; d) labour
productivity growth from 63 thousands lei/employed person in 2002 to 197 thousands lei. The
activities from the interdependent and partial sub-groups have recorded a superior growth of the
sector and of the national average which might be partially explained by the propagation effect in
using some goods and services which incorporate innovative ideas, procedures and mechanisms, or
in the case of artistic activities unique products. Additionally to activities based exclusively on
copyright, support services are developed which allow for distribution, wide-scale dissemination of
direct and indirect products generated by the core activities. The growth of the CCI sector was
realised both extensively by creating companies, and intensively by developing the existing ones
due mainly to investments which imposed also an increase in the professional exigency level for
new employees and more performing jobs, fact contributing to the renewal of the employment
structure.
The global analysis of CCI sector contribution to Romanias economic development
underpins the evolution of the CCI-core industries sector contribution from 2.52% (2004) to 3.94%
(2007) in creating gross value added at national level, with annual oscillations and slight decrease
trends in 2008, on the background of marked economic-financial crisis, which in the case of CCI
was signalled far before the one in other sectors.
The contribution of gross value added of CCI was of 3.4 billion lei, in 2002, and it increased
to about 14 billion lei in 2008 which represented about 6.3% from the macroeconomic level of the
respective indicator. On components of the CCI sector the following percentage contribution is
found:
69
- core copyright activities 60%;
- interdependent and partial industries 30%;
- non-dedicated industries 10%.
In the period 2002-2008, in the case of core industries was recorded a growth of 9 pp of
their weight in total CCI value added, whereas for interdependent and partial industries a
corresponding decrease took place, the weight of non-dedicated industries group remaining
constant.
This structural modification was due to the 2.85 times growth of the gross value added from core
industries, of 1.85 times for partial and interdependent industries, and of 2.3 times in non-dedicated ones.
Within the general growth trend of CCI weight in total GDP there are still recorded variations of its size from
one year to the other, which illustrates the volatile character of the branch for which the incomes are very
sensistive to the influence and conjecture of internal and external factors of supply and demand, including for
those pertaining to the business cycle. The CCI field proved to be relatively sensitive to fiscality and
other conjectural influence factors legislative, political, cultural, institutional, and environmental ones, etc.
The largest share of the value added of CCI was held by Core-CCI, about 60% in the years 2005-2008,
which confers to it the role of a factor with strong propagation effect for the other components
(interdependent, partial and non-dedicated).
A significant contribution to creating total gross value added of the sector, and at national
level as the second important category of the CCI industries was the one of interdependent
industries, with respectively 1.17% in 2005 and 1.88% in 2003-2004. Partial and non-dedicated
industries had a contribution of less than 1 percent to creating gross value added at national level,
respectively partial CCI 0.48% (2008) and, respectively, 0.63% (2002), and the non-dedicated
0.59% (2007) and, respectively 0.76 % (2003).
Table no 3. CCI sectors contribution to creating gross value added at national level, on
groups of component industries in the period 2002-2008 (%)
2002 2003 2004 2005 2006 2007 2008
Total CCI from which: 6,36 6,76 5,70 6,25 6,36 6,61 6,31
Core 3,18 3,59 2,52 3,93 3,62 3,94 3,75
Interdependent 1,87 1,88 1,88 1,17 1,48 1,53 1,43
Partial 0,63 0,53 0,59 0,53 0,52 0,55 0,48
Non-dedicated 0,67 0,76 0,71 0,62 0,75 0,59 0,64
Source: Processing based on NIS data, Structural survey on enterprises.
As different from non-core components, where the weight in total value added of the branch had
higher or lower variations from one year to the other, in the case of Core-CCI the trend is identified of
increasing the weight on medium-term with certain annual oscillations which represents a confirmation of
the increasing importance of copyright protected industries, or of creative-cultural industries, under the
conditions of the knowledge-based society, and of the information and communication technologies, the
growth potential of which in Romania is at still insufficiently valued levels. This weight of CCI in GDP is
equal to or even higher than the weight of some branches of processing or extractive industries with tradition
in the Romanian economy.
2.3. Analysis of the outcomes of CCI industries activities and economic performance
Turnover.
Goods and services realised in the CCI sector in Romania have summed up 9873 mill. RON
in 2002 and have increased up to 46391 mill. RON in 2008 (current prices) which represented 3.6%
70
and, respectively, 4.8% from total value of the turnover realised at national level. As annual
evolution, an oscillating dynamic is found but on an increasing trend, with a growth in 2008, as
compared with 2002, of almost 2.8 times on total CCI and even higher being the growth in core
and non-dedicated industries. The CCI turnover exceeded the national average in each year of the
analysed period, being of 1.35 in 2008.
Gross value added per employed person in the CCI sector represents in 2002 about 22 thousands
lei/person, as compared with only 13 thousands lei/person at national level. This higher ICC
capacity to realise plus-value is maintained for the entire analysed period, yet with the gradual
diminishment of the dynamic gap of the value added of CCI and total value added, which highlights
achieving a certain development threshold of some of the most dynamic activities of the CCI sector.
In the year 2008, a value added was obtained of about 60 thousands lei/employed person in
the CCI sector, against the less than 50 thousands lei at national level. On CCI components, the
highest capacity of creating value is recorded by the CCI-interdependent sector, and thereafter by
the group of core-industries which, also, form the hard core of the cultural-creative branches with
impact and the strongest propagation effects for contemporary economies.
CCI profitability. Even though the CCI goods and services have a strong dimension specific to
public goods, with higher or lower time lags, depending on legal regulations and shares of counterfeit and
piracy, the aspects related to their profitability represent a sine qua non criterion of economy on the
competition market. Therefore, we consider as useful the analysis of CCI profitability which, to different
shares, leaves its mark on the future development of these industries, hence on increasing their economic
contribution. Of course, one of the biggest issues for the process of economic growth remains the allocation
of profit for future investments in the CCI field, in other fields or for consumption. Global gross profitability
(as gross value added to 1000 lei turnover) in the case of CCI-core industries as absolute value of the
indicator was of 1.3 1.8 times higher than the national average and recorded as dynamic annual variations
over and under the average value at national level.
The gross outcome of the exercise (to total gross profit) of companies pertaining to the CCI sector
recorded a quasi-constant absolute growth for the entire period, and the weight of its contribution to total
value at national level being diminished from 12.1% in 2003 to little more over 7% in the year 2008.
In 2003 the profit rate within the ICC sector oscillated between 4.5% and 18.3%, and in
2007 between 5.4%-21.2%. In 2008 these differences decrease, same as the average profitability to
turnover varying between 3.3% and 9.3%. The economic crisis affected earlier and stronger CCI
industries which had not only to limit investments in business development but also their
profitability margin. Less affected were interdependent and non-dedicated CCI-core industries, and
most affected being partial industries. The propagation effect of CCI-core industries, from the
viewpoint of profitability, is much more emphasised in partial industries than in the interdependent
ones, the performance volatility being present also in this situation, fact which highlights that the
CCI sector still remains a strongly emergent sector with probabilities of more efficiently valuing the
resources and creativeness potential of the attracted labour force. Of course, not al CCI components
were affected to equal extent by the crisis, just as their profitability was not uniform. What must be
remembered is the fact that core industries based exclusively on copyright represent the engine of
the other CCI components (interdependent, partial and non-dedicated) which could not expand
without the background ensured by the core sector.
Foreign trade. Circumscribed to an ascending trend, the exports dynamics of the core
and non-core branches of CCI have recorded variations from one year to the other, which confirm
not only annual oscillation of the CCI output due to internal factors but also to the external
conjecture and to the incapacity of maintaining a relatively constant level of Romanian exports.
These oscillations, to a good extent, are explained also by the strong influence of the factor
fashion which presupposes a higher creation, adjustment and absorption capacity of the
Romanian economy. The modest power of Romanian companies of imposing brands at domestic
and external level represents another instability factor in the export of copyrighted products.
71
Leaving aside the group of non-dedicated activities, the annual average growth rate of direct exports
of the CCI sector was constantly superior to the one at national level in the years 2006-2008,
particularly due to the marked dynamic of CCI-core industries. On the other hand, the imports of
products and services of CCI in Romania exceeded several times the volume of Romanian exports
which leads to the conclusion that CCI represented a sector with unfavourable influences on the
chronic negative balance of Romanias trade balance. In addition, the imports prices were a lot
higher than the ones of export which still has to improve the competitiveness and internal and
external performance parameters.
3. ESTIMATIONS ABOUT THE LEVEL AND DYNAMIC OF THE CCI SECTOR
FROM ROMANIA IN COMPARATIVE INTERNATIONAL CONTEXT
By international comparisons between Romania and developed countries it results that CCI
in Romania are still at modest levels, but in a dynamic expansion process. The record contribution
of these industries was registered in the US economy, where total copyright industries have
employed 5.38 million employees in 2005 (8.49% from total US employees).
In developed countries is registered a more noticeable development of the CCI sector, the
contribution to GDP and employment being superior to the world average of 5.68% from GDP and
6.03% from employment.
Figure no.4. Contribution of CCI industries on groups of countries in GDP and employment
A synthesis of the studies on countries highlights as leaders USA and Australia with respect to CCI
share to GDP, and Mexico and the Philippines to employment (6).
Table no.4. Economic contribution of copyright-based industries determined in accordance with
WIPO methodology
Copyright-based industries contribution to GDP - % Copyright based industries contribution to employment-
%
Country Year of
Reference
Total Core Interdependent Partial Non-
dedicated
Total Core Interdependent Partial Non-
dedicated
Bulgaria 2005 2,81 1,57 0,62 0,09 0,52 4,30 2,29 0,73 0,27 1,0
Jamaica 2005 4,81 1,7 0,74 0,47 1,9 3,03 1,79 0,31 0,23 0,68
Lebanon 2005 4,75 2,53 0,71 0,62 0,89 4,49 2,11 0,73 0,70 0,95
Mexico 2003 4,77 1,55 1,69 0,85 0,68 11,01 3,41 3,65 2,53 1,41
Philippines 1999 4,82 3,50 0,96 0,04 0,29 11,10 8,81 1,4 0,2 0,6
Canada 2004 4,7 3,5 0,81 0,08 0,31 5,4 4,0 0,91 0,16 0,33
Hungary 2002 6,66 3,96 1,24 0,45 1,0 7,1 4,15 1,25 0,61 1,07
Latvia 2000 5,05 2,9 1,1 0,28 0,77 5,59 3,7 0,7 0,44 0,75
Singapore 2001 5,67 2,85 1,76 0,09 0,97 5,80 3,64 1,24 0,18 0,74
Developed
Transition
countries
Developing
7.5
6.04
4.8 4.79
4.04
6.21
0
1
2
3
4
5
6
7
8
Contributing (%)
employment rate
GDP rate
5.68
72
USA 2004 11,09 6,48 2,13 0,40 2,08 8,53 4,07 2,17 0,26 2,03
Australia 2007 10,30 7,30 2,0 0,40 0,70 8,0 4,97 1,81 0,57 0,65
Croatia 2004 4,27 2,99 0,88 0,32 0,07 4,64 3,22 0,93 0,41 0,08
2005 6,25 3,93 1,17 0,53 0,62 4,30 2,47 0,47 0,90 0,46 Romania
2008 6,31 3,75 1,43 0,48 0,64 5,18 3,16 0,59 0,72 0,71
Columbia 2005 3,30 1,90 0,80 0,30 0,40 5,80 1,70 0,70 1,90 1,50
Russia 2004 6,06 2,39 0,76 0,27 2,64 7,30 4,29 0,75 0,56 1,69
Ukraine 2005 2,85 1,54 0,68 0,10 0,54 1,90 1,16 0,46 0,08 0,20
The
Netherlands
2005 5,9 4,0 0,4 0,9 0,6 8,8 6,2 0,6 1,1 1,0
Source: WIPOs Framework and Experience in Surveying the Economic Contribution of the Creative Industries,
Dimiter Gantchev, Creative Industries Division, WIPO, Bucharest, Romania, February 18, 2009.
Romania takes a middle position for both indicators.
On types of activities, there are significant differences on countries, yet a structural typology can be
extracted which places press and literature activities, in average, on the first place with about 40%
contribution to GDP and 44% contribution to employment based on studies on countries, with an increasing
trend of the share of software activities in GDP, which tends to become equal to the share of radio and TV
activities.
With respect to labour force employment, software activities has a higher capacity of attracting
personnel (16%) as compared with radio TV activities (11%) and those of musical, theatre and opera
production (12%) or the advertising ones (9%).
Against a number of member- and candidate-EU countries, employment in CCI-core
activities was more diminished in Romania. At the same time there are also EU member countries
where the respective weight was lower than in Romania, which reveals the specific conditions of
each country. We notice that in 2002, Romania was closer to France and Portugal as weight of
employment in CCI in total number employment.
In event that the employment contributions of CCI-CORE and CCI-Interdependent are taken
together, it can be seen that the gap between Romania and the other EU member countries is maintained, and
this can be explained by a spillover effect of CCI-CORE which is higher in developed countries than in
Romania.
At the level of cultural industries sector level, in accordance with Eurostat data, employed
population in culture for EU-27 was in 2005 of 2.4%, with a maximum of 3.8% in the Netherlands
and Iceland, and with just 1.1% in Romania.
CCI represents a strategic sector for investment policies. Increasing the volume of
expenditures with investments in intangible assets is an actual fact both for developed countries and
developing ones, being a proof of CI economic contribution to knowledge-based economy and to
information society, driven by scientific and cultural-artistic creativity.
Table no.5. Development of the ratio dimension intangible assets/turnover in 1999-2003 (%),
for the creative sector. Components
Years Country
1999 2000 2001 2002 2003
Austria 0,2 0,1 5,1 5,0 2,5
Belgium 1,4 3,5 3,0 2,6 2,3
Cyprus
Czech Republic 0,0 12,4
Denmark 3,0 8,9 9,7 10,7 7,9
Estonia 1,5 3,2 2,5 1,4 1,4
Finland 2,7 2,4 2,3 2,6 4,7
France 4,1 4,2 4,7 4,5 4,2
Germany 2,5 2,5 1,2 1,1
73
Greece 1,7 3,0 2,8 2,2 2,5
Hungary 0,6 1,9 1,8 1,3 1,9
Ireland 1,1 13,9 11,4 11,5 12,3
Italy 3,2 3,6 4,0 3,4 3,6
Latvia 0,8 0,7 0,7 0,7 0,8
Lithuania 11,3 11,2 11,0 11,2 11,9
Luxemburg 0,0 0,5 0,0 1,1 0,8
Malta
The Netherlands 15,2 7,6 12,7 11,4 6,0
Poland 0,7 0,8 1,2
Portugal 1,0 1,1 1,6 1,8 1,5
Slovakia 0,5 0,5 0,3 0,3 0,3
Slovenia 1,7 1,5 4,6 2,3 0,7
Spain 3,2 4,0 3,5 3,2 2,9
Sweden 5,6 5,3 6,0 4,9 4,4
United Kingdom 6,3 11,1 11,8 9,0 8,4
Bulgaria 1,3 3,9 1,6 1,5 1,3
Romania 0,6 0,6 0,7 0,9 1,2
Norway 5,6 4,4 5,1 5,0 4,9
Iceland 4,2 4,3 2,4 4,2 4,2
Total EU 25 3,6 4,3 4,9 4,0 4,2
Total 30 countries 3,5 4,2 4,5 3,9 4,0
Source: The Economy of Culture in Europe, Study prepared for the European Commission
(DG for Education and Culture), Oct. 2006.
As compared with EU-25 countries, EU-12 countries (the New Member-States) have lower
percentage weight of investments in creativity and knowledge. For instance, this weight was in
2003 of 1.2% in Romania, against 8.4% in Great Britain, 12.3% in Ireland, 6% in the Netherlands,
etc. However, this discrepancy between groups of countries is less marked than in the case of
productivity and profitability gaps. At the same time, a relative stability or lower variation of the
respective share can be seen for almost all countries in the analysed period.
4. CONCLUSIONS
CCI are characterised by the fact that copyrighted works and services as soon as they were
produced, their reproduction and distribution, particularly for the digitalised form requires much
lower costs. Supplying the market with creation works at relatively low marginal costs of
reproduction and distribution, cannot generate the necessary incomes for recovering total costs
originated by their first-time production. Identifying copyright-based industries allows for
developing indicators and models for measuring the economic and social impact. The activities
based on copyright cover a large sphere of the economic and social environment, less and less
activities being completely independent. Understanding the development potential provided by the
cultural-creative industries sector allows for promoting intervention/support policies for valuing
intangible assets, generated and protected by intellectual property rights.
Currently, the contribution of the copyright sector reached a significant relevance threshold
according to output indicators at macroeconomic level. By its dynamics which is about 2.5 times
higher than the average of economic development, by positive externalities which are generated and
the attributes associated with the knowledge society, CCI represents a significant factor of structural
change at economys level, and in an employment multiplier, of generating new, performance jobs
74
on a sensible interface segment with the international trade of goods and services. The main
activities which generate products subject to copyright law are: editing activities, radio/TV
activities, software development, music, film, and advertisement.
By and large, employed population in the cultural sector is comparatively younger against the
national average, creativity and performance in some fields being specific to young ages (artists,
ICT experts, etc.). If at EU-27 level over 2/3 from the employed in culture were between 25-49
years of age and another 10.2% between15-24 years of age, there are countries where young up to
24 years of age represent over 20% (Latvia) or 18% (Malta, the Netherlands, Iceland).
In Romania, only 7% from employed population is of up to 24 years of age and over 2/3 are
between 25-49 years of age. Very talented young are not retained on the culture market from
Romania, as they leave abroad where the labour market is substantially wider and the young can
develop exceptional professional careers.
We mention that employment flexibility is diminished within the cultural sector in Romania,
as compared with other EU-27 countries, which reflects: a) the inertial of the old employment
system and the lack of in-depth reforms of the sector under the aspect of employment opportunities;
b) low innovativeness, weak-performances management and rigid institutional structures,
unadjusted to the dynamics of the European model of CCI sectors development.
Rendering modular working time and flexibility under the aspect of at-home job
opportunities are particularities of CCI activities to which the necessary importance is still not
given.
Some of the main conclusions and remarks resulting from the analysis of the CCI sector,
based on the WIPO methodology, target the following aspects:
The copyright-based industries sector (CCI) underwent significant quantitative and
qualitative development in the period 2002-2008, as result of the in-depth changes occurred
within the Romanian economy and society in the transition process to democracy and
regulated competitive market mechanisms, due to the fact that the preparation for European
Union accession took place, the functionality degree of the market increased, the volume of
foreign investments recorded unprecedented growth, and the private sector became
predominant.
CCI represents a dynamic sector of the Romanian economy which comprises a large
diversity of fields, sectors and sub-branches and is characterised by high volatility,
depending on the intensity of internal and external influence factors which affect copyright
as source of incomes and national wealth.
The weight of CCI in GDP exceeded the ones of manufacturing industry such as chemical
fibres, rubber and plastics, real estates activities, computers and of related activities which
ascertains the potential and importance of the CCI branch, currently and in perspective.
According to the CCI weight in GDP, Romania is placed among the countries with an
average size of this indicator, as in US this weight was of 11.12% in 2005, and 11.09% in
2004 (Copyright Industries in the U.S. Economy: The 2006 Report).
Both in Romania and in other countries which analysed the CCI contribution to GDP, a
medium-long-term growth is found with respect to CCI weight in GDP which means the
increasing contribution of this sector to economic-social development in countries with
various development levels.
The CCI sector has an important potential of job creation, particularly for highly-skilled,
creative individuals which are inclined towards assimilating new cultural-artistic, scientific
and technological knowledge.
The most important component of CCI was the one called CCI-CORE from the viewpoint
of the labour force employment weight which comprises: programs editing; consulting and
supplying software products; printing papers and other printing activities; editing books,
75
papers and magazines; advertisement; radio and TV activities. Advertising, theatre and
opera, press and literature were the most dynamic sectors with respect to labour force
employment.
Labour productivity in CCI-CORE, computed as value added per employed person in
Romania was in 2002 of 19.980 Euro and of 46575 Euro in 2008, that is, almost 10 times
lower against the value achieved in developed countries (Germany, USA, Canada etc.).
CCI-CORE industries profitability, computed as share of gross profit in turnover for the
period 2002-2008, reveals a diminishment of the indicator from 5.40% to 5.08%. During the
entire period, CCI-core profitability was placed on higher levels against the national
average, even if a decreasing trend was recorded from 11.4% in 2002, 12.5% in 2005, to
9.3% in 2007 and to 4.7% in 2008. The diminishment of the profitability indicator is
explained both by increased competition, but also by its high level in the initial functioning
periods as result of a much higher demand than supply and the modest level of the CCI-
CORE output.
The most profitable components of CCI-CORE were in 2005: artistic and literary creation
and interpretation; activities related to data banks; digitalised data processing; consulting
and other software products; reproduction of audio recordings.
The nominal gross average wage level in copyright industries against the average on
national economy was 1.27 times higher for total CCI, 1.4 times for CCI-CORE and 1.8
times for interdependent ones.
*
* *
The sustainable CCI sector development, within the national economy imposes a strategic
vision on long term and policy instruments corresponding to each stage of the process, taking into
account the interference between the economic, social, and environmental pillars of Romanias
sustainable development, as well as the educational, behavioural and relational impact that may be
induced by copyright at individual, and social group level, and for the society in entirety.
A strategic approach of the CCI sector requires also implementing and developing adequate
statistical instruments and indicators at national, regional and local level.
ENDNOTES:
(1) In the specialised literature, parallel to the notion of CI (copyright-based industries) also other categories are
used, more or less related or with an overlap/delimitation degree such as cultural industries and creative
industries. (Caves R.E. 2000). Cultural industries are considered as an auxiliary sector of creative industries
and comprise tourism, and cultural heritage, museums, libraries, sport, as well as a wide range of other cultural
events at local, national and international level. At the same time, cultural industries are centred on supplying
social, cultural values and not necessarily some values measurable in monetary terms.
(2) Richard Watt, A Comment: The Copyright factors, Review of Economic Research on Copyright Issues,
2004, vol.1(1), p.71-78.
(3) The major objectives of the study for evaluating the CCI sector based on the WIPO methodology took into
account measuring the total economic contribution, and on components of CI determined, mainly, based on the
following indicators: output and value added; labour force and employment; foreign trade. Starting from
these basic indicators we attempted to determine also other derived performance and structural indicators of
output and costs for the entire CI sector as compared with the average level on national economy. The analysis
was extended also with respect to the CI influence on the Romanian economy also from the viewpoint of
indicators regarding wages, the gross exploitation surplus, profit, investments. At the same time we performed
comparisons inter- and intra-branches on categories of core and non-core industries (interdependent,
partial and non-dedicated). Our analysis refers to the period 2002-2008 when Romanias economy after a
strong decline generated by transition costs to market economy succeeded at macroeconomic level to gain an
ascending trend, recording growth developments of GDP, improving the parameters of macro-stability and of
76
market mechanisms functionality. The research pursued, at the same time to catch the influence of several
quantitative and qualitative factors on size and structure of CI economic contribution among which we mention
the availability of production factors (labour and capital), volume and dynamics of demand, interference with
upstream and downstream industries, the evolution of the business climate and state intervention.
(4) The Economic Contribution of Copyright-Based Industries in Romania, no.3, Study Case Romania, (co-
author) January 2010, p.163-249. http://www.wipo.int/ip-
development/en/creative_industry/pdf/ecostudy_romania.pdf
(5) The lack of statistical data does not allow for the time being to determine the GDP loss as result of economic
activity shrinking, but according to preliminary estimates, due to the specific particularities of the sector, of the
increased dynamics and flexibility of the activity and economic and social use of specific products and
services, the activity constriction was relatively lower but with high differentiations on types of activities. In
average, it was lower for ICT applications sub-sector, mass-media products and relatively more considerable
for entertainment and recreational activities industry.
(6) Performing an international comparative analysis between Romania and other countries with respect to the
economic contribution of CI components took into account the similarity of methodological approaches with
other countries; final report elaborated by Robert G.Picard, Timo E.Toivonen, Miko Grondlund entitled: The
Contribution of Copyright Related Rights to the European Economy", Final Report 2003 which comprises data
regarding CI of EU-15 in the year 2000; the paper National Studies on Assessing the Economic Contribution
of the Copyright - Based Industries, Creative Industries", Serie No.1,2 and 3 World Intellectual Property
Organization, which comprises national reports for a series of countries such as Singapore, Canada, USA,
Latvia and Hungary (vol.1.); Philippines, Mexico, Jamaica, Bulgaria, Lebanon (vol.2), Columbia, Croatia,
Romania, Russia, Ukraine (vol.3); the paper The Economy of Culture in Europe", UNESCO Culture Sector,
The Global Alliance for Cultural Diversity, Brussels, 2006.
LITERATURE
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Nauwelaers and R. Wintjes (eds.), Innovation Policy in Europe.
2. Banacu, C. S. (2006), Evaluarea dreptului de autor (Authorship Evaluation), Tribuna Economic, 2006.
3. Bobirc A., Drghici A., Dumitrescu S., Mihu O. (2009) Msurarea Economiei Creative
Studiu de caz Romnia, The Romanian Economic Journal, nr. 34, 2009.
4. Bowen H.P, Sleuwaegen L., (Vlerick Leuven Gent Management School), Moesen W.
(Catholic University of Leuven) (2006), A Composite Index of the Creative Economy,
http://ideas.repec.org/p/vlg/vlgwps/2006-31.html
5. Cardona, Jeannine (2002), Cultural Statistics in Europe: Updates and Trends, a paper presented at The
International Symposium on Culture Statistics: Statistics in the Wake of Challenges Posed by Cultural
Diversity in a Globalization Context, Qubec.
6. Caves, R. E. (2000), Creative Industries: Contracts between Art and Commerce. Cambridge,
Massachusetts, Harvard University Press.
7. Constantin I. (1996), Proprietatea intelectual i succesul n afaceri (Intellectual Property
and Success in Business), Editura Rentrop & Straton, Bucureti, 1996.
8. Moldoveanu M (2005) Industrii culturale I i II - Colecia Biblioteca Economic, Seria
Probleme Economice vol. 171 - 172, 186 - 187, CIDE.
9. Moldoveanu M. (coord.), Mucica D., Ciutacu C., Ioan-Franc V. (2003), Fundamentarea
strategiei de dezvoltare a culturii. Abordare sectorial pentru programul naional de
dezvoltare a Romniei 2004-2006, institutul de Economie Naional, contract cu Ministerul
Culturii din Romnia.
10. Moldoveanu M., Ioan-Franc V. (1997), Marketingul i cultura, Editura Expert, Bucureti;
(2000) Managementul culturii: universul rural, Editura Expert, Bucureti.
11. Moldoveanu M., Mucica D., Vasile V., Ioan-Franc V. (2005), Cultur, culte, industrii
culturale-principii, obiective strategice, direcii de aciune 2007-2013, Colecia Biblioteca
Economic, seria Probleme economice, vol. 168-169-170, CIDE.
77
12. Piedras E., (2004), The Value of Culture: Economic contribution of Industries, Protected by
Copyrights in Mexico, Sept.30.2004.
13. ian E., Todose M. (2010), Abordri teoretico-metodologice de msurare a contribuiei
industriilor cultural-creative la dezvoltarea economic sustenabil, The fifth International
Conference on Economic Cybernetic Analysis: Efficiency of social and economic anti-crisis
policies, 14-15 mai 2010.
14. Todose D., ian E., Todose M. (2008), Cultural Industries Indicators in Romania:
Possibilities And Determinaton Limits, The 48
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Congress of the European Regional
Science Association, University of Liverpool, Anglia, 27-31 august 2008;
15. Zaman G., Vasile V., Prvu R., Drteanu C. (2008), Industriile bazate pe drepturi de autor
i conexe, http://culturadata.ro/PDF-uri/contributia%20industriilor.pdf.
16. Zaman Gh., Vasile V., Economic contribution of copyright-based industries and impact on
employment and performance indicators in knowledge-based society developing in
Romania, Romanian Journal of Economics, Anul XIX, vol. 28 Nr. 1(37)/2009, Ed.Expert,
ISSN 1220-5567, p.27-53.
17. INS, Anchet structural n ntreprinderi pentru perioada 2002-2008.
18. *** World Intellectual Property Organization, Introducere n proprietatea intelectual,
Editura Rosetti, Bucureti, 2001.
19. *** World Development Report 1997, The State in a Changing World, Septembrie 1997
20. *** World Intellectual Property Organisation, Guide on Surveying the Economic
Contribution of the Copyright-Based Industries WIPO Publication, Geneva, 2003.
78
THE ENVIRONMENTAL DIMENSION OF COMMON AGRUCULTURAL POLICY
PhD. Student Cristian TEODOR
teodor_p_cristian@yahoo.com
Abstract:
Agriculture continues to be the main user of rural land and an important factor of landscape and environment
quality, therefore in recent years more and more attention was paid to the integration of environmental policy
objectives into agricultural policy. The paper aims to investigate the current situation of agricultural policy, aiming at
highlighting new trends and targets for sustainable development.
Key words: agriculture, agri-environmental measures, set-aside land, forestry, CAP
JEL classification: Q18, Q58
INTRODUCTION
Over time agricultural activity has developed a symbiotic relationship with environment.
CAP has known a series of successive reforms, influenced by developments of European
agriculture, the enlargement of the EU and the GATT multilateral trade negotiations on liberalizing
world trade in agricultural products. Some measures to support agricultural policy, caused damaged
of natural capital through erosion, water pollution and biodiversity loss. First agri-environment
schemes were introduced in 1992, after the 2003 and 2004 CAP reforms represented a major step to
sustainable development of agriculture; sustainability is supported by a number of initiatives,
including cross-compliance. Follow the Gothenburg European Council was agreed that "economic
performance must go in correlation with sustainable use of natural resources, principles that have
been also confirmed in the Lisbon strategy. Currently, to the level of EU is discussed an new CAP
reform, environmental, health and welfare standards will be respected by all farmers, whether or
not receiving direct payments.
EVOLUTION OF COMMON AGRICULTURAL POLICY
CAP has known a series of successive reforms, influenced by developments of European
agriculture, the enlargement of the EU and the GATT multilateral trade negotiations on liberalizing
world trade in agricultural products. During each of its meetings, in Cardiff (June 1998), Vienna
(December 1998) and Helsinki (December 1999), the European Council requested the Commission
to report on the integration of environmental concerns into Community sectoral policies.
Beginig with 1992 the first five traditional and well-known objectives of CAP, included in
Article 33, have been legally enriched by three horizontal ones. The CAP has also to serve the
environmental protection, the human health protection, and the strengthening of the economic and
social cohesion.
Agenda 2000 reorganized orientation of instruments of development policies to strengthen
agricultural and forest sector and improve competitiveness in rural areas and preserve the
environment and rural heritage. Therefore, the need to create a new framework for rural
development as the main starting point in restoring economic and social network in rural areas has
become indispensable.
Development and implementation a policy of rural development has become with the CAP
Agenda 2000 the second pillar of common agriculture policy. Together with the first pillar - market
79
support through joint organization of market, rural development policy has become an essential part
of the European development model.
It has been passed to adoption of measures that put based of new EU agricultural policy,
measures whose main purpose is to apply the Community Strategy for rural development in
member countries, a greater emphasis was gave to the environmental dimension of agriculture The
Agenda 2000 CAP reforms included the basic principle that Member States shall take
environmental measures they consider to be appropriate in view of the situation of the agricultural
land used or the production concerned. This principle has been incorporated in the horizontal
regulation. Member States have had different options to implement such requirements.
Great importance had agri-environment measures, which generally have been assessed
positively by the population and are also well accepted by farmers. Agri-environmental measures
are intended to provide additional payments to farmers who provide environmental services and
maintenance of the country-side site, on a voluntary basis (which means more than the minimum
requirements in the field).
IRENA (Indicator Reporting on the integration of Environmental concerns into Agricultural
policy) project which was aimed at developing a set of agri-environmental indicators, reveal the
importance of agrienvironment measures in 2000 approximately 20 percent (25.2 million hectares)
of the utilised agricultural area (UAA) of the EU-27 was covered by management contracts. This
had risen to 24 percent (30.2 million hectares) in 2007. A wide range of uptake levels in different
Member States contributes to this average.
The purpose of agri-environmental measures is to strengthen the role of farmers and
encourage their actions to conserve biodiversity and rural landscape diversity. the most important
specific agri-environmental measures were the following:
- Reduction of the use of fertilizers and pharmaceutical inputs;
- Introduction or continuation with organic farming methods;
- Change of production methods towards or maintenance of extensification, and,generally,
introduction of farming practices compatible with the environmental requirements;
- Reduction of number of animals per forage area;
- Maintenance of the countryside and the landscape, and generally of the bio-diversity;
- Encouragement to upkeep the abandoned farmland or woodlands;
- Set aside of farmland for at least 20 years for reservation, natural parks, etc;
- Management of land for leisure activities;
- Improvement of training of the farmers concerning the use of practices compatible with the
environment.
Organizations that represent farmers were agry with setting a minimum target of 10% for
organic products for transport by 2020.
A simplified system was proposed to new Member States: a system known as the Single
Area Payment Scheme (SAPS). Receiving direct payments to farmers under the SAPS is subj ect
to compliance with a set of environmental standards and animal and plant health through cross-
compliance system, farmers must comply with 19 measures and a set of standards aimed at
protecting agricultural land, known as The good agricultural and environmental practices -
GAEC. The introduction of these standards aimed, first to ensure a minimum level of
maintenance of agricultural land to prevent their abandonment, a possible threat during the
decoupled payments and maintenance, on the other hand of areas occupied by pastures, partly in
order to slow an massive conversion toward production of arable crops and to preserve the
environmental benefits associated with certain types of grassland.
Another principle set out in the Agenda 2000 CAP reform is that of good farming practice
(GFP).
80
Member States have to dene codes of GFP at regional or national level. GFP should
correspond to the type of farming that a reasonable farmer would follow in the region concerned,
which entails compliance with existing statutory environmental requirements. GFP constitutes the
baseline requirement for farmers wishing to join agri-environmental schemes. Only farming
practices going beyond GFP may qualify for agri-environment payments (see Box 2). These
payments mainly cover the loss of farmers income for adopting environmentally friendly practices.
Measures related to less-favoured areas (LFAs) also require the respect of the codes of GFP.
The principle of compliance with GFP is enshrined in the rural development regulation.
Compliance with minimum environmental standards is a condition for eligibility for support under
several measures, such as investment in agricultural holdings, setting-up of young farmers, and
improving the processing and marketing of agricultural products.
The Agenda 2000 CAP reform also introduced the possibility of a shift of support from
market policy tomeasures contributing to environmentally benign practices. Thus, part of the
contribution to farmers in direct payment may be made available by Member States to increase the
budget available for agri-environmental measures. This concept, known as modulation, is a part of
the horizontal regulation.
The 2003 CAP reform includes modulation as a compulsory measure. Modulation will start
in 2005 with a rate of 3 %, increasing in two steps up to 5 %. Farmers receiving direct payments up
to EUR 5 000 will receive a full reimbursement of modulation amounts.
Based on the document Towards a Sustainable Agriculture, Commission presented a
package of proposals for CAP reform, discussed by the Council of Ministers on Agriculture and
Fisheries on January 2003. After difficult negotiations, in which opponents of reform were
particularly net recipients of financial funds, it has reached a consensus on the package on June
2003.
One of the main elements of reform is to follow certain standards required by farmers as
the environmental, food safety, animal and plant health. The inclusion of environmental, food
safety, animal health and welfare increases consumer confidence and improve the
environmental sustainability of agriculture. Reform ended the so-called "CAP health check" and
targeted a more radical simplification of the system of direct grants, elimination or adjustment
of market support measures, gradual reallocation of EU funds to rural development measures to
meet new challenges (climate change, food security, protection of biodiversity, bio-energy).
EU enlargement from 15 to 27 Member States has led to increasing of the common
agricultural policy challenges, the number of farmers increased to 70%. In accordance with rural
development policy, in 2007-2013, the European Union allocates 88.3 billion euros for rural
development projects in 27 Member States. Land administration projects that support and improve
the environment must receive at least 25% of this amount. However, in practice, national and
regional authorities often decide to allocate a greater percentage of the budget for environmental
measures.
In February 2006 it was adopted a European strategic guidelines for rural development.
Rural development policy has been strengthened to meet the challenges of rural economic, political
and environmental aspects century. The new legal framework and European Agricultural Fund for
Rural Development emphasize the need to stimulate growth and create jobs in these areas to
enhance sustainable development in accordance with the Lisbon and Gothenburg Council. As
regards environmental protection are set a series of priorties: promoting environmental services and
agricultural practices that protect animals, cultivated landscapes and forests, climate change,
contribution of organic farming, promoting territorial balance.
The new Rural Development Regulation for the period 20072013 links environmental
measures to the objectives of the Sixth Community Environment Action Programme. The
Community strategic guidelines identify three priority areas for measures to improve the
81
environment and the countryside: biodiversity and the preservation and development of high nature
value farming and forestry systems and traditional agricultural landscapes, water, and climate
change. The main new measures are more explicit support to farmers in Natura 2000 and other high
nature value areas. Support for areas with handicaps and for agri-environment measures is
maintained. In the future, cross compliance will also apply to most of the environmental measures.
Currently, a new structure of the CAP reform is being discussed at European level. Its
importance can not be underestimated, because on the results of so-called "Health Check" CAP will
depend developments of multi-annual budget plan by 2013. In parallel, there is a wider debate on
the reform of the entire EU budget structure.
Granting direct payments will still be dependent on compliance with cross-compliance
measures. Is also discussed about the environmental and health and welfare standards that will be
respected by all farmers, whether or not receiving direct payments. Cross compliance is seen as a
measure that will create controversy and it is expected that some Member States to exert pressure to
reduce its impact and to simplify the process which is considered currently too laborious in terms of
administration. For example, is expected strong resistance to any proposal to expand the list of
RMS (Statutory Management Requirements) and even a list on a good agricultural and
environmental practices. DG Environment and a number of NGOs working in this area will
certainly push for more inclusion of environmental provisions, such as regulations on the use of
water resources. Are expected also proposals to control / regulate the manner in which Member
States set standards for cross-compliance to ensure that environmental priorities are met.
Long term, other issues concerning CAP refer to climate change, promote biofuels and
water management. CAP-HC proposals examines how the CAP could consider these complex areas,
but after 2013. One option could be to introduce measures concerning climate change and water
resource management in cross-compliance measures. Another alternative would be to supplement
funds for rural development so that under this pillar to be supported such measures.
Projected situation related grain supply and demand, including demand related to the target
set by the EU for biofuel, advocates to mobilize land currently set out of production by the
mandatory scheme of set aside. But the permanent elimination of set aside will require measures to
maintain environmental benefits achieved through this scheme. One possibility was would be to
replace the wit set aside scheme by measures adapted locally, taking into account the spatial
heterogeneity of agro-environmental conditions. To maintain and enhance these benefits, the
support for rural development policy it should be focus on ecological management of set aside land,
protection of riparian strips and measures for adaptation to climate change and renewable energy
policy, such as biodiversity corridors.
CONCLUSION
The reforms on 1992 and 1999 have brought first progress towards integrating
environmental concerns into CAP. 2003 and 2004 CAP reforms represent a major step forward in
improving the competitiveness and sustainability of farming in the EU and provide the framework
for future reforms. Reform effects on the environment were different, intensive models of culture
and farming were removed. Can be identified in this respect some positive aspects: more rational
use of fertilizers and pesticides to reduce the guaranteed price, environmental benefits generated by
the restriction of production areas, stimulation of a better territorial distribution of livestock.
Currently, a new structure of the CAP reform is being discussed at European level, issues
concerning CAP refer to climate change, promote biofuels and water management. The future of
Commune future agricultural policy can not be based only on a strong link between agricultural
production and changes in rural areas, both contributing to the achievement of sustainable
development.
82
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Sustainable Agriculture, International Congress Exploring Diversity in the European Agri -
Food System, Zaragoza, Spain
6. Communication from the Commission ( 2001) - A sustainable Europe for a better world: a
European Union strategy for sustainable development,Commission's proposal to the
Gothenburg European Council
7. COM (97/2000) Agenda 2000
8. COM(2007) 722, Preparing for the "Health Check", Brussels
9. Decizia Consiliului Uniunii Europene (2006) privind orientrile strategice ale Comunitii
pentru dezvoltare rural, Brussels
10. http://ec.europa.eu/agriculture/food/index_ro.htm
11. http://europa.eu/legislation_summaries/agriculture/general_framework/l60042_en.htm
83
THE MIGRATION OF HEALTH CARE SKILLS IN THE CONTEXT OF THE
ENLARGEMENT OF THE ECONOMIC EUROPEAN AREA
- THE CASE OF THE ROMANIAN DOCTORS -
Lecturer PhD. Despina VASILCU
des_pina2004@yahoo.com
Abstract:
The international migration of the Romanian health professionals is part of the general dynamics of the
migratory phenomenon that occurred in Romania, after 1989, inducing a new form of labour globalisation. The
interrelations between the migration and the economic development illustrate complex changes: institutional and
political ones, demographic and social mutations, territorial and cultural reconstructions, disruptions in the sanitary
field.
The interest taken in the study of the migration occurring in the health field resides in the unprecedented
increase in this type of migration, as a result of the acknowledgement of the medical degrees obtained in Romania. The
Romanian doctors are attracted especially by the developed countries that do not pose particular language problems to
them. For several years now, a doctor shortage has been confronting France, the destination preferred by the vast
majority of the emigrants, especially in the rural environment. The medical desertification phenomenon, as it is
called by the press, concerns certain small towns, especially in the urban peripheries. At the beginning of 2009, the
doctors of Romanian nationality ranked second among the doctors of foreign nationality who practised their profession
in France.
The increased mobility of the specialists is accompanied by the feminization of the migratory flows. The
current female migrants enjoy a privileged status in comparison to the way things were in the pioneer migrants stage,
when women were generally dependant migrants and did not work. This is why we may now speak about a
redistribution of the roles within the family, which shows the role of female migration initiators.
The international migration of the health professionals constitutes the answer to the specific problems faced,
on the one hand, by certain E.U. countries, and on the other hand, by Romania. At present, the Romanian healthcare
system crisis has been worsened by the fact that the economic problems are accompanied by the shortage of skilled
personnel. The latter refers to the doctors having left the emigration gate open for their colleagues who have remained
in Romania, thus generating new migratory flows.
The doctors reasons for leaving are manifold. The decision to emigrate is mainly based on financial reasons,
but there are also other grounds. Among these, we can mention: medical practice insecurity, unfit working conditions,
obsolete technology, a limited professional career span in the country of origin, and, in the case of the female family
migrants, the wish for their family to have access to a different living standard.
The right to free circulation and the already existent pay differential of the health personnel will deepen the gap
between Western and Eastern Europe, while the negative effects of the health agents emigration will become more and
more severe in the long run. The current stakes of the migration of this professional category encompass several
sectors. The challenges to be taken up require a better understanding of this phenomenon and its being taken into
consideration by the politicians, both in the countries of origin and of destination.
Keywords: labour globalization, European Union, heath care crisis, international migration of skills, migratory
flows
JEL Clasification: F22, I18, J11, J24, J61, L78, R23.
INTRODUCTION
The changes of the Romanian migratory landscape as a result of moving the European
border further to the East has been a major topic of debate for specialists in various fields of
activity, such as geographers, economists, sociologists and psychologists, due to the major
implications of this phenomenon.
The interest in the study of migration in the health sector resides in the unprecedented
dynamics of this migration type, especially since the acknowledgement of the medical degree
obtained in Romania, starting with the 1
st
of January 2007. At the beginning of 2009, the doctors of
84
Romanian nationality ranked second among the doctors of foreign nationality practising their
profession in France, according to the data provided by the Medical Demography Atlas in France,
2009.
Our preoccupations concerning the current migration of the Romanians and especially the
migration of the Romanian health professionals materialised in a study done within the framework
of a post-doctoral research at Rennes 2 University, Haute-Bretagne, France; several results of this
study are to be analysed in this article. The questionnaire survey accompanied, in most of the cases,
by an interview, constituted effective tools which reflected the terrain reality.
Structured in six parts, the present article aims to examine the Romanian doctors migration
phenomenon and its multiple consequences at the economic, social, political and demographic
level. Particular attention is given to the factors and motivations prompting the medical elite to
emigrate, with the intention to draw an actual picture of Romanias situation as an EU member, in
general, and of the Romanian health system, in particular; another purpose of our study is to retrace
the spatial and temporal dynamics of the migratory flows. In terms of spatiality, we aim at
identifying the areas in Romania most subject to the emigration of the medical personnel. The
temporal analysis concerns the evolution of the doctors migration after Romanias integration in
EU, as well as the prospects of this phenomenon, with the intention of making a forecast on the
dimension of the future flows (determined by the economic crash, the low living standard and the
political situation in distress). At the end of the article, we attempt to retrace the tendencies of this
phenomenon and to propose appropriate solutions meant to control the migration of the medical
elite that will otherwise have negative consequences on the health of the Romanian population in
the long run.
1. THE MIGRATION OF THE HEALTH PROFESSIONALS A EUROPEAN AND
INTERNATIONAL CHALLENGE
In an increasingly connected world, thanks to the development of transportations means and
of new communication technologies, when the international migration has become one of the major
characteristics of our time, the skills mobility phenomenon is glaringly obvious. The Romanian
health professionals migration is part of the European and international current affairs
characterised by a sanitary crisis, as an adjustment strategy to a specific economic situation and
as a new form of globalisation of the labour force.
The process of EU enlargement, accompanied by decisions at the community level
concerning the increasing integration of the single market, influence the enforcement of national
policies in the health field, sometimes hindered by the policies at the European level. This process
reveals an entire series of consequences of the increasing impact of the EU, both at a social and
economic level. For Romania, the integration means opportunities in terms of freedom of
circulation, settlement and work in the community countries. Given the discrepancies in the
standard of living between Romania and the developed countries, these liberties become real
problems at a national level, that will engender the risk of losing an important part of the highly
skilled, in the future. The interrelations between the migration and the economic development are
indicative of the upheavals in terms of health, the institutional and political changes and the social
and demographic mutations, as well as the territorial and cultural reconstructions.
Which will be the most appropriate measures to face this big challenge while preserving the
fundamental social principles the European health care systems should satisfy: solidarity, equity,
accessibility and quality? (Vandenbroucke F., 2002). Will the political actors be capable of ensuring
the balance and if yes, by which means? Which will be the impact of the integration on the
Romanian health system in the long run? Which will be the costs and benefits of this opening
towards Europe? Was Romania ready to be integrated in 2007?
85
2. FACTORS AND MOTIVATIONS OF THE ROMANIAN DOCTORS
MIGRATION
The migration, as a social phenomenon, is conditioned by a series of factors of economic,
social, demographic, cultural and geopolitical nature, which impose a multi-tiered approach of this
phenomenon. The migration is determined by the motivations and aspirations of those who move
from one social milieu to another. By way of consequence, as far as the country of origin is
concerned, it is mainly the repulsive factors that are at work, while in the country of destination it
is mainly about the attractive factors. The inequities in the standard of living between Romania
and the developed countries act as an important spur to emigration. This decision is strongly
influenced by the desire to improve ones destiny, from this point of view, the income playing a
decisive role in the feeling of satisfaction induced by life.
Among the most important reasons driving the doctors to leave their country, we must
mention the inadequate conditions at the workplace, the out-of- date technology and the limited
professional horizon. As actors of this migratory project, the Romanian doctors desire to enjoy the
respect and social acknowledgement; they wish to regain their professional dignity, to have the
possibility to enlarge their career prospects and to ensure better opportunities of education for their
children. This is why, 88% of the respondents mentioned the socio-professional factors as being
decisive in their decision in favour of emigration
(1)
.
The scarcely favourable social conditions in Romania influence in a dramatic way the
dimension of the migratory phenomenon. The unemployment rate, the poverty level, the corruption,
the rhythm of the economic growth, the lack of investment and the lack of confidence in the state
institutions represent as many reasons in favour of the decision to emigrate.
The demographic fragility of the developed countries, reflected in the need of labour
represents an important factor for emigration. The increase in the percentage of the elderly
population implies, on the one hand, the need of substitute labour and, on the other hand, the
creation of new jobs in the sector of social care, given the load of an increasing number of old
persons, a segment of the population that requires special care.
The ageing phenomenon is also visible in the health sector where there is a lack of health
care professionals, which cannot be filled by local labour. By way of consequence, is resorting to
emigrants a necessity in order to maintain their populations health? In France, for instance, the
average age of the medical body is 51 years
(2)
; in the years to come, the country will also witness an
increase in the number of retired doctors, a decrease in the medical population and, by way of
consequence, a decrease in the medical density. The number of practising doctors will diminish by
almost 10% in 2025, the medical density by almost 16%, reaching a level equivalent to the one in
mid 1980s
(3)
.
The doctors migration represents the response of the human capital to the policies in the
destination country and in the country of origin. The recruitment policies at work in the developed
countries, oriented towards absorbing the skilled immigrants are based on making up the deficits in
their labour market. The recruitment companies of Romanian doctors for the United Kingdom,
France, Germany, Belgium and other countries are the living proof of that. On the other hand,
Romania is characterised by a lack of implication on the part of the decision-making factors in
solving the health problems, through the absence of concrete political measures, incoherent out-of-
date policies and through the incapacity of the political decision-makers to promote targeted
policies in order to reduce the doctors and health professionals emigration, in general.
86
3. THE ROMANIAN HEALTH SYSTEM WHAT DIAGNOSIS?
After 1989, Romania went through a particularly difficult transition towards the market
economy which ended only too early. A slight improvement of the economic situation was recorded
ten years later, starting with 2000, but the living conditions generally remained difficult. At the
social level, the Romanian society was subject to big tensions generated by the deep
transformations in all the fields of activity but most and foremost in the industry sector. These
changes contributed to the lay-off of a large number of workers, who, deprived of any source of
income, set out on the tough way of illegal emigration, in its vast majority.
Beyond the enthusiasm of the Romanian population, Romanias entry in EU represented a
great challenge for the economic and social transition, if we think of the difficulties the Romanian
economy had to cope with competing, on the single market, with the Western companies.
Unfortunately, right before its entry, after 17 years of post-communism it did not have a solid
economy, able to keep the pace with the European giants. In 2007, the disparities between the
European citizens and the Romanians were still great, as at the integration moment the monthly
salary in Romania was only of 150 Euros
(4)
. Was Romania ready to enter the EU? This is an
obsessively recurrent question and if it was, how will it surpass these discrepancies tending to
become bigger and bigger? Even if a member of the European Union, between Romania and EU-15
there are deep economic and social inequities that reflect in the geographic inequities in the health
sector, that are highly amplified by the economic crisis. Even if, according to the specialists, the
most difficult period of the crisis has been surpassed, it will take two or three more years before the
economy and the labour market recover
(5)
. If this reality characterises the European developed
countries, how more time will it take Romania to reach a stable level?
The analysis of several revealing demographic indicators will show the paradox of this
country which belongs to the European area. Suggestive from this point of view is the life
expectancy upon birth, an indicator of both the health state and the development stage. If, for the
developed EU countries, the life expectancy has been increasing rapidly since the last century
(6)
,
thanks to a series of factors, among which the decrease in the infant mortality, the increase in the
standard of living, a better education, as well as the progress of health care and of medicine,
Romania recorded a decrease in the life expectancy at birth, to 69,8 years in 2008, for males, in
comparison to Greece and Austria, that go past 77 years or the 80,8 years in the Netherlands. The
seven or ten years difference in terms of life expectancy between Romania and certain countries in
the European community is the effect of a frail economic and social situation that increases the risk
factors in health and life.
The infant mortality as a faithful expression of the degree of material and spiritual
civilisation of a population is another important indicator. While in all the EU-15 member states,
the mortality during the first year of life has considerably diminished, in 2007 having the lowest
value in the world (3,84), the same year, Romania recorded the highest rate for this indicator
(11,99), which placed it next to the Third World countries. This is the faithful image of the
economic situation, of the standard of living, of the habitat conditions, of the cultural level and,
presumably, of the health care and finally of the state capacity to intervene in order to protect life
from its very beginning.
The deep economic crisis characterising Romania had a direct impact on the resources destined to
the health sector. In 2009, the Romanian health care sector was allotted less than 3% from its
GDP
(7)
which represented a quarter of the percentage allotted in the developed European countries.
The quota allotted to health, in comparison to the minimal European quota (6%) and the average
one (8%) places Romania under the average of the budget of the African countries, that comes near
to 4,5 % from the GDP
(8)
.
87
The number of doctors for one thousand inhabitants is another health indicator that
completes in a suggestive way the picture of the Romanian medical disaster. If in 2006, the average
value of doctors for one thousand inhabitants exceeded 3,3 for EU-15 and 2,5 for U.E.-27, - in the
Netherlands reaching 3,8, and even over 4 in Belgium (4,1) -, in Romania the number of doctors for
one thousand inhabitants was much smaller (1,9), a density equal to the one of the overall health
care providers in the WHO African region
(9)
. The nurses situation for one thousand inhabitants
makes no exception, the rate of 3,97 representing half of the one recorded in EU-15 (8,0), inferior to
the one in EU-27 (5,5) and four times smaller in comparison to the one in the Netherlands (14,7).
Given the complexity of health care services and their ever increasing costs, it is sure that
the keystone of any health system is its financing. By way of consequence, we cannot be speaking
about the performance, reform or vitality of a health care system in the absence of an appropriate
financing. All these evolutions prove that the most important economic aspect, and also the most
forgotten one by the Romanian decision-makers, is that a populations health is undoubtedly its
main asset
(10)
. While the developed countries are facing an ageing phenomenon of the medical
body and especially of the doctors, Romania makes no exception: 56% of the Romanian doctors are
more than 50 years old, 27% are between 40 and 50 years old while only 16% are under 40 years
old
(11)
, which is indicative of the fact that in 10-15 years time, 60% of the doctors working in
Romania will be over 60 years old.
4. THE FLIGHT OF THE WHITE COATS - RED CODE FOR THE
ROMANIAN HEALTH SYSTEM
The emigration of the health personnel was recorded even before 2007, but the rather weak
dimensions and effects of these departures on the Romanian health system back then did not turn
them into alarming issues
(12)
. After 2002, the free circulation in the Schengen area opened the way
to Europe for the best students and doctors, who, once abroad, settled there
(13)
; the exodus of the
white coats , though, actually started after Romanias entry in EU.
In the first two years after the integration, the number of doctors having emigrated amounted
to 3600, 2009 being considered the year when the greatest emigration wave took place, 2400 more
doctors adding up to the number of emigrant doctors (1800) who negotiated their departure abroad,
on the occasion of the job fairs
(14)
. In general, the Romanian doctors are attracted by the developed
countries that do not pose major language problems to them. Thus, France and United Kingdom are
the most important destinations, followed by Germany, Belgium and Luxembourg. At the beginning
of 2009, France ranked second in terms of doctors of foreign origin who practised in the country.
During the two years after Romanias integration in EU, the doctors number grew up from 734,2%,
from 158 on 1
st
of January 2007 to 1160 on 1
st
January 2009.
At a national level, the big regional university centres represent important emigration poles.
Bucharest - the capital of Romania stands out through its large number of departures, followed by
Cluj-Napoca, for the central part of the country, and by Iasi, for Moldavia. We can notice important
discrepancies throughout the country which are linked to specific cultural practices. The strong
propensity to emigration on the part of the doctors in the Central-West part of Romania, area that
has always manifested great openness towards the Western countries, is the effect of this areas
belonging to the Austro-Hungarian Empire, of the cohabitation of the autochthones with the
German and Hungarian population, of the imitation of these traditionally more mobile non-
indigenous communities, of the bilingualism and of the mentality change (V. Rey, quoted by I.
Muntele, 2003).
The feminisation represents another characteristic of the migration of the health
professionals. We can notice a strengthening of womens autonomy, a strong affirmation at the
family and social level signs heralding a role redistribution and a review of the specific social
88
reports in the migration context. In 2009, in Romania, women held 63% of the total number of
Romanian emigrants. The processing of the data obtained through a survey confirms our
hypothesis, revealing a feminisation rate which is higher among the Romanian doctors practising in
Bretagne (71%), reaching 72,6% at the level of the total sample of our survey, a result which is
close to the one launched by the National Council of the French Medical Association (70%), for
2009, concerning the Romanian women who practised in France
(15)
.
Romania is confronted to a really desperate situation, given the fact that the overall
Romanian medical body counts about 41 000 doctors. To this small number adds up a serious
shortage of doctors in the rural area and in the services of major importance which are also in high
demand abroad, such as anaesthesia, intensive care or casualty. As an emigration country which
financed the education of its health professionals, Romania is deprived of a return on investment
and becomes, without having a choice, an involuntary donor for the rich countries
(16)
. If the
emigration of the health professionals goes on at the same pace, in the next decade, Romania will
witness a collapse of its health system, a realistic scenario also proven by the fact that the
average value of the Romanian emigrated doctors came round 7% at the end of 2009(Source: Ziarul
financiar, the 17
th
of February 2010), as a critical value of the emigration in the health sector, the
red code , according to the WHO rules, being 2 % of the total number doctors in a country.
According to the official
(
sources
17)
, the doctors migration is much underestimated, as a significant
number of young rezidenti
(18)
doctors are not recorded as emigrants by the database. This is the
case of those who apply by themselves for a position to hospitals in different countries, and of the
physicians practising in France or of those leaving the country for the US, where they do not need a
training qualification issued by the Health Department, the right of practice being the result of an
entire series of exams testing the candidates medical knowledge.
In spite of the large number of departures, more than 5000 Romanian health professionals,
among whom 1800 are doctors, for the last year alone, the measures taken by the Romanian
government are a long time coming
(19)
. There is an emergency state that requires rapid and
efficient intervention, all the more as the potential migration is particularly high. Instead of
intervening by means of stimulating measures in order to reduce this medical exodus, through the
new salary scale, the political actors envisaged the decrease in the retribution of the Romanian
health professionals. What is more, the National Health Insurance Fund, through its project of
Framework Agreement for 2010, introduced drastic measures that cannot but discourage the health
agents and, by way of consequence, to augment the emigration even more
(20)
.
5. WHAT SOLUTIONS FOR THE FUTURE? LET US FIND AN ANSWER TODAY
TO TOMOROOWS QUESTIONS
(21)
In recent years, Romania went through a series of socio-political and economic evolutions
with negative consequences on the evolution of the health sector. The political crisis, the precarious
economic situation doubled by the global economic crisis, the absence of a political will and the
weak involvement of the decision-making factors and of the municipalities in terms of public
health, the centralised system, here are only a few traits depicting the difficult situation of this
country.
Although it is an EU member, between Romania and the developed countries there are considerable
social and geographic health inequities that will only tend to increase in the future. The economic
health dimension does not stop to the budget problems, that is the GDP quota allotted to the health
sector, but also concerns the political involvement that is supposed to embark upon the most
suitable actions with a view to bring solutions to the health problems identified as a priority, in the
medium term. The decentralization process proves to be one of the solutions that may render the
Romanian health system efficient, both from a financial and an organisational point of view
(22)
. The
89
experience acquired in this sector by the other countries shows that the proximity of the communal
administration to the every-day life of the citizens favours a better awareness of the populations
health needs and gives way to answers that are sometimes more appropriate than the ones usually
proposed by the sanitary system
(23)
. The local intervention capacity in the health system materialises
the significant role of the local actors in the local reality and their ability to mobilize all the
resources likely to participate to the solving of the health problems.
Another objective of the authorities in Romania should be to guarantee to the population
equal access to health care, given the fact that alongside the problem of the decrease in the medical
density there is also the one of the decreasing number of health professionals because of the
emigration (especially the doctors emigration), a threat to the supply of health care services. This is
why the promotion of health and of a life style meant to preserve it in different environments, such
as schools, workplaces and families, has proved to be an effective means of solving the health
problems
(24)
.
As urgent measures, there must be enforced a targeted policy meant to control migration, in
order to reduce any harmful consequence on the supply of the health professionals and in order to
guarantee a better preservation of the labour supply. The political decision-makers should envisage
the implementation of health plans and programmes in agreement with the regional and
international priorities capable of rallying the existing resources, the complexity of the information
in order to construct in the long run a solid system, capable of promoting the health. And why not
formulating policies able to manage the international migration of the health professionals in a new
way and to incite the return of the skilled and the investment of the knowledge acquired abroad in
order to ensure a better health to the Romanian population?
Equally important to the good functioning of the Romanian sanitary system is changing the
mentality of the decision-makers on the perception of the health state. The health sector should not
be perceived as a consumer, but as a producer of health goods, since it takes a healthy population to
produce goods, in its turn; consequently, the investments in this sector will contribute to the
economic growth. Health is a powerful capital and a vector of the economic growth.
6. CONCLUSIONS
The right to free circulation and the major discrepancies in terms of the standard of living
will deepen even more the gap between the East and the West. The demand of immigration
determined by the diminishing of the medical density, by the ageing of the medical body and the
demographic ageing, in general, will reinforce the emigration demand.
The present issues of the health staff migration are manifold and the challenges to take up
require a good knowledge of the phenomenon, of the importance of health as an investment in the
human capital essential to the economic growth, as well as the acceptance of financial responsibility
on the part of the politicians, both in the countries of origin and in the destination countries.
This study also opens the way to future investigations in order to envisage solutions able to limit a
phenomenon that creates major imbalances in an already-weakened health system.
ENDNOTES
(1)
A postdoctoral research on the migration of the Romanian health professionals, coordinated by Raymonde Schet,
was conducted in 2010 starting from a survey on 106 Romanian doctors currently practising their job in Western
France and in Ile-de-France.
(2)
Conseil National de lOrdre des Mdecins (CNOM) (National Council of the Medical Association).
(3)
Daniel Sicart, Doctors Estimation on the 1
st
of January 2007, Report DREES, Statistics Series, n 115, p. 61.
(4)
http://www.eurosduvillage.eu
(5)
Ewald Nowotny, member of the Governing Council of the European Central Bank (Capital, 12/03/2010).
90
(6)
Eurostat 2009 yearbook (Europe in figures).
(7)
2,6 % of the GDP, according to Vasile Astarastoaies statement (Chief of the Romanian College of Physicians).
(8)
Agerpres, Cornelia Stanciu, 05 March 2010.
(9)
WHO, 2006, Report on World Health Working Together for Health, p. xvii
(10)
Franois Grmy, History and Future of Public Health, n 50 March 200.
(11)
Source: College of Physicians in Romania.
(12)
Less than 10 doctors for 1000 inhabitants (5 for 1000, in 1990 and 7 for 1000 inhabitants, in 1996), according to the
data provided by I C.P.
(13)
It refers to the Romanian doctors who attended a specialisation abroad or to those having obtained
the ISD (Inter-universiy Degree of Specialisation) or STC (Specialised Training Certificate).
(14)
Romanias College of Physicians.
(15)
Atlas of Medical Demography in France, 2009.
(16)
http://www.who.int/mediacentre
(17)
Chief of the Association House Physicians in Romania.
(18)
The status of rezident doctor in Romania corresponds to that of mdecin interne in France.
(19)
Financiarul , 17
th
of February 2010.
(20)
In the project of the Framework Agreement for 2010, published on the CNAS site, the penalties quota for the service
providers is doubled and even trebled, the minimum value for the service payment is no longer guaranteed and,
moreover, the quota allotted to the value of the point per capita has been modified from 90% to 70%, which will
lead to a decrease of at least 25 to 30 % of the surgeries income. This project also stipulates the contract termination if
the number of insured patients written on the physicians list diminishes by more than 20%.
(21)
The slogan of the Association of Support of the Immigrant Workers (ASTI) for its campaign of reflection and of
awareness of the migration consequences in Luxembourg.
(22)
The Health Department set the date for the hospital decentralisation by 1
st
of July 2010 (Source : Ziarul de Vest, 1
st
of March 2010).
(23)
Current Affairs and special feature on public health n 15, June 1996
(24)
http://ec.europa.eu/health
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ECONOMETRIC ANALYSIS OF THE FLOW OF TOURISTS IN ACCOMMODATION
STRUCTURES IN ROMANIA
Professor PhD. Marian ZAHARIA
Petroleum-Gas University of Ploiesti, Romania
marianzaharia53@gmail.com
Associate Professor PhD. Rodica Manuela GOGONEA
manuela.gogonea@gmail.com
Univeristy Assistant PhD. Student Cristina OPREA
oprea_cris2005@yahoo.com
Abstract:
The fluctuations of the tourism movement in Romania can be highlighted by the structural change of it
principal indicators, the number of tourist arrivals as well as their development trends covering the period of 2000 to
2009.
Romania's international tourist flows give an overview of the Romanians outside departures and arrivals of foreigners
in Romania. Of these, the paper approaches the tourism flows for Romania on two categories: Romanians and foreign.
Also developments are analyzed regarding the foreign tourists arrived in Romania on the basis of geographical areas
and countries of origin.
Keywords: tourist arrivals, regression, Fisher test, Student test, ANOVA
JEL clasification: C10, L83
1. METHODOLOGICAL CONSIDERATIONS
Information about time evolution to the phenomena of tourism and targeting tourist traffic are
recorded systematically.
Evolution of tourist traffic is driven by the action of different categories of factors, measurable
through the system of indicators.
Dynamic analysis of tourist movement attests that its evolution is recorded as qualitative changes in
the tourist orientation for high comfort of services, for specific tourism products and as quantitative
changes resulting from its size expressed by various indicators.
One of the most important indicators for assessing the tourist traffic is the number of tourist
arrivals in tourist reception structures that are studied, both in terms of structural
developments and the trend in the period 2000-2008.
Structural changes made, and the dynamics of tourist arrivals in tourist facilities are determined by
applying various statistical, econometric methods: the indices method, regression method, etc
Regression method is based on measuring and predicting the influence of one or more factors may
have on the evolution of a phenomenon or economic process.
The basic element in the regression is the regression function, which summarizes the outcome
variable Y shape dependence, the factorial variables X. The main indicators used for summary
regression analyses are R, R
2
, R
2
and S
e
(Table No. 1).
93
Table No.1 The indicator used for regression statistics R, R
2
, R
2
, S
e
Multiple R
, ,
, ,
, ,
, ,
_
_
_
_
=
=
=
=
=
n
i
i
n
i
i i
n
i
i
n
i
i i
y y
y y
y y
y y
x Ry
1
2
1
2
1
2
1
2
,
R Square
, ,
, ,
_
_
=
=
=
A
A
=
A
A
=
n
i
i
n
i
i
y
e
y
x y
y y
y y
R
1
2
1
2
2
2
2
2
/
2
1
Adjusted R Square
1 /
1 /
1
2
2
A
A
=
n
k n
R
y
e
Standard Error , ,
2
2
1
2
2
A
=
_
=
n
y y
n
s
n
i
i i
e
e
Observations n
Regression function can be validated by F test (Fisher Snedecor) dispersion analysis (Table No.2).
Regression model is statistically significant if calculated F is greater than critical F
) (
1 ; ;
>
k n k calculated
F F

. Also, the model is considered statistically significant if Significance F is less
than . , where . represent threshold signified and 1 represents confidence level.
Usually, 05 . 0 = or 01 . 0 = , corresponding to 95% or 99% confidence level.
Table No 2. ANOVA table with F test
Source variation
df SS MS =SS/df
F
Significance F
Regression
k
SSR=
, ,
_
=
= A
n
i
i x y
y y
1
2
2
/
k
s
x y
x y
2
/
2
/
A
=
Residual
n-k-1
SSE=
, ,
_
=
= A
n
i
i i e
y y
1
2 2
1
2
2

A
=
k n
s
u
e
Total
n-1
SST= , ,
_
=
= A
n
i
i y
y y
1
2
2
SST=SSR + SSE
1 n
s
2
y
2
y
A
=
F calculated
F =
2
2
/
e
x y
s
s
Finally, regression model parameters are tested by t test (Student test).
The methods used involve the determination of absolute indicators, relative and medium through
which the image will shape the evolution of this indicator of tourist traffic.
1. STRUCTURAL FLUCTUATIONS OF TOURIST ARRIVALS IN ROMANIAN
TOURIST RECEPTION STRUCTURES
Analysis of fluctuations in tourist arrivals, in tourist reception structures, is done from two
viewpoints:
at regional level, on the tourist destinations;
by resident tourists, in the two categories: Romanian and foreign.
94
Romania has established six major tourist destinations (denoted by DT), for which the structural
fluctuations in terms of tourist arrivals in tourist accommodation in Romania on these destinations,
both in 2000 and 2008, which are presented within Figure 1.
Structural changes, recorded principally tourist destinations are:
DT 1 - for spas situation is as follows: if in 2000 they were for 13.77% of their tourist arrivals in
2008 to return only 10.22% of the total, due to quality facilities and services
DT 2 - resorts in sea side, excluding town only to return in 2008 11.68% 13.65% compared to
the set of all tourist arrivals in 2000 due to significantly lower quality of services offered to the
tourists;
DT 3 - mountain area resorts host tourists in tourist reception so that the weights of 2000
(15.37%) and 2008 (14.01%) are fairly close to what explains the continuing attraction that
offers the Romanian Carpathians;
DT 4 - Danube Delta area, including town is the area that attracted quite a few tourist tourists in
2000 (the share is only 0.7% of their total arrivals), while over the years, promotion and
attention particular rearrangement led to a change of holiday destination for tourists, many
prefer this region, a fact noted by higher share down to 1.35% of Romanian tourists, the
explanation lies in changing the tourists, now due to high stress limited time is often motivated
to spend the weekend in the mountains as close to their residence;
DT 5 - Bucharest and cities of the county, excluding become over the years most popular tourist
destinations all, fluctuations were observed in weight and substantially amended in 2008
(47.20%) compared to the year 2000 down to 45.47% of total tourist arrivals in tourist reception
in Romania, especially due to rising rates in the tourism business is conducted;
DT 6 - Other places and tourist routes are also increasingly sought in recent years, all due to
increasing tourism, business, cultural and religious one, the share of 11.04% of total arrivals in
2000 is substantially altering fixing the levels of 2008 to 15.54%.
2000
11,04%
0,70%
15,37%
13,77%
13,65%
45,47%
SB SL AM ZDD B.O.Res A.Loc.
2008
15,54%
47,20%
14,01%
1,35%
11,68%
10,22%
Figure.1 The tourist arrivals in tourist reception in Romania in 2000 and 2008 on tourist
destination
Structural changes are recorded on tourist destinations due to the changes occurring throughout the
analysis of 2000 by 2008, which includes either a deterioration of infrastructure in certain
destinations or tourist preferences change in the type of tourism practiced focusing on the week-
end, cultural, religious or business.
Study of structural changes on the number of tourist arrivals on the two categories, as their
residence, followed Comparative Romanian tourist arrivals and foreign tourist establishments in
Romania over the period 2000-2008.
Trend is well illustrated by the graphical representation within Figure. 2. As you can see the
corresponding series are relatively different.
95
Figure.2 Comparative of the two categories of Romanian and foreign tourists
arrivals in the tourist reception in Romania
The number of Romanian tourists who have done tourism between 2000 - 2008, through the share
of representation in the composition of tourist arrivals between 75% and 83%, gave the outline of
the evolution of the total number of tourists accommodated in this period.
Since 2000, there was a corresponding decrease in percentage of Romanian tourists, the overall
decreasing by 7.01%, the value recorded in 2005, being 75.37%, with the maximum share of
82.38% in 2000.
After a sinusoidal trend with a minimum in 2000 (17.62%), foreign tourist arrivals in Romania have
returned to the first year level, in 2005 falling to 24.63% from the base year.
The percentage reduction of 2.43% set in 2006 against 2005 for foreign tourist arrivals is reported
as a structural change in the Romanian tourist arrivals.
Although in 2007 to 2006 the share of foreign tourists arrivals in the total of tourist in Romania has
been a slight revival, from 22.20% to 22.25% in 2008 their share in total tourist arrivals was only
20.57%. How low is not given by the higher growth of the Romanian tourist arrivals of tourist in
Romania but by reducing the absolute number of foreign tourists from 1.551 million in 2007 to
1466 thousand in 2008, this is an important warning to Romanian tourism.
An important factor that determined this evolution is the low purchasing power of the Romanian
population, because small increases in revenue in relation to the price jump and the entry in the
current economic crisis.
Structural Analysis of registered tourist arrivals of tourist reception structures in 2008
compared to 2000 shows a positive change in the share of foreign tourists arrivals in tourist
establishments. Thus, if in 2000 the total foreign tourist arrivals returned 17.62% in 2008 will
determine that the arrivals in this category are 20.57% of the total. (Graph 2 and 3) as seen in
Figure. 3.
0
1000
2000
3000
4000
5000
6000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Romanian Foreign
96
Figure.3 The tourist arrivals in tourist reception in Romania
in 2000 and 2008, the Romanian and foreign categories
A structural overview of the two categories of tourists arrivals by country of residence, the main
tourist destinations, is shown in Figure.4.
96,23%
3,77%
96,26%
3,71%
95,12%
4,88%
95,01%
4,99%
88,38%
11,62%
89,44%
10,56%
86,67%
13,33%
81,85%
18,15%
70,59%
29,41%
67,27%
32,73%
98,28%
10,72%
84,33%
15,67%
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
120,00%
2000 2008 2000 2008 2000 2008 2000 2008 2000 2008 2000 2008
% str.
% rom
Figure.4 The tourist arrivals in tourist reception on Romania's tourist destinations and by
category by country of residence in 2000 and 2008
The period 2000-2008 is outlined in the Romanian economy after the transitional period and
conduct a fairly significant economic progress.
This context explains the oscillations recorded in terms of tourist arrivals on the two and on
Romania's tourist destinations.
Percentage values of Romanian and foreign arrivals in 2008 compared to 2000, tourist destinations,
have highlighted the significant fluctuations in arrivals at the destination called "other places". Here
was reported a significant decrease in tourist arrivals for the Romanian foreign percent reflected by
the 84.33% (2008) compared to 98.28% (2000). Claim is justified not only by arrivals recorded as a
result of the practice of tourism activities by foreigners, and a more marked increase in
collaboration with Romanian firms with foreign collaborators who sent the country resulting in an
increase in overnight stays.
This argument explains the significant weights corresponding foreign tourists for destination
Bucharest and cities of the county, excluding, where the share of foreign tourists arrivals in 2008
reached 32.72% from 29.41% down to the 2000.
Increased degradation and poor quality infrastructure, facilities and services resorts led to a loss
from a departure of foreign tourists, a fact noted by insignificant percentages of 3.77% in 2000
respectively 3.74% in 2008, established the total tourist arrivals in tourist destination considered.
97
The phenomenon of slight increase in the number of arrivals of foreign tourists is reported and
seaside resorts and the Danube Delta, the proportion of the total arrivals is changing from 4.88%
(2000) to 4.99% (2008) for the first destination that from 13.33% in 2000 to 18.15% in 2008 for the
second.
Resorts in the mountain area is a favorite destination for Romanian mainly, especially if we
consider weekend tourism, increasingly practiced by them, a situation reflected by the proportion of
89.44% of total tourist arrivals in that destination in 2008 compared to the 88.38% in 2009.
Structural analysis was focused in particular to the situation of foreign tourist arrivals in view of
prospects that would have created the conditions in which their number was a significant increase.
Structural oscillations presented evidence that, for a few tourist destinations, arrivals of tourists
were slightly signification in 2008 compared to 2000, reflecting the unfavorable situation of
Romania in terms of tourism supply.
2. EVOLUTION OF THE NUMBER OF ARRIVALS IN TOURIST RECEPTION IN
ROMANIA
Retrieving data from statistical publications have enabled a graphical representation showing
evolution of the number of tourist arrivals in tourist reception in Romania.
6 2 1 6
5 0 5 7
7 1 2 6
4 8 7 5
4 9 2 0 4 8 4 7
5 8 0 5
5 6 3 9
6 9 7 2
y = 3 1 0 . 0 2 x + 4 1 6 7 . 4
R
2
= 0 . 9 0 6 7
0
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 0
7 0 0 0
8 0 0 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8
Figure.5 Evolution of the number of arrivals in tourist reception in Romania
Chronogram shows overall growth of the number of tourists during the period 2000 - 2008, from a
minimum of 4920 visitors registered in 2000, corresponding to a maximum of 7126 tourists in
2008.
This increase is confirmed by calculation of average indicators which indicates an average increase
of about 276 thousand tourists annually, i.e. an average increase of 1.0474 times with an average of
4.74%, according to the annual arrival of tourists in 5337 average year.
The graphic representation shows that the evolution of the number of tourist arrivals is as linear
trend equation is:
i t
t y + = 02 . 310 4 . 4167 (1)
It follows that, after applying the method of adjusted linear, this equation allows us to note that the
regression coefficient value indicates an average increase from one year to another, the number of
tourists with around 310 tourists per year.
Representatives of travel agencies, estimated that the number of foreign tourists will increase until
2010, because 2009 was a year of stagnation caused by the current economic crisis.
98
Evolution of tourist arrivals is determined both in absolute and relative value of each year
comparing with that of the first year or the year before.
For the first comparison to the number of tourist arrivals in 2000 may be added that, from 2002 to
2008, every year has increased. Phenomenon recorded the lowest increase in absolute terms in 2003
compared to 2000 (with 137 arrivals, so the actual 2.8%), while the year 2008 was before the sharp
increase, they are accommodated in tourist establishments Romania with 2.206 million tourists
more than in the reference year, representing a relative increase of 44.84%.
To those listed, there are exceptions only in the years 2001 to 2000, respectively in 2002 to 2000 so
that the number of tourists arrivals decreased with 45 thousand, respectively 73 thousand people
concerned.
Comparing the number of arrivals in each year from that previously seen the lowest increase in this
indicator in 2008 than in 2007, when before it only a difference of 154 thousand persons, which
represents a positive change by only 2.21% significance the trend was registered in 2007 compared
to 2006 (an increase of arrivals is higher by 12.16% i.e. 756 thousand person actually
accommodated).
Also refer to a small decrease in 2002 compared to 2001, with 28 thousand personae, which is a
relative reduction of 0.58%.
Overall, the number of tourists has seen a very slight growth process, which may be interpreted as a
situation favorable to Romania, while the future is aware that facing global economic crisis.
3. CORRELATION BETWEEN ROMANIAN TOURIST ARRIVALS AND REAL
AVERAGE WAGE
In this chapter we turn to a brief analyze respect how the number of arrivals of tourists stay in
tourist reception in Romania has been influenced by the evolution of their actual average salary in
2000-2008.
During the period analyzed, Romania, the real average wage had an upward trend (Figure.6)
doubled during the analyzed period. The largest increase in average real wages occurred in 2007
2008 (123.03%) followed by 2006-2007 (115%).
0
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8
r e a l a ve r a g e w a g e A r r i va l s ( t h . )
Figure.6. Average real wage developments and the number of tourist arrivals in tourist
structures in Romania
Considering the developments of average real wage and the number of tourist arrivals in tourist
structures in Romania between 2000-2008 it was examined how the number of Romanian tourists
arrivals is influenced by their real wage. The results obtained are presented in Table 3.
99
Table No.3 Determination and testing of regression model
SUMMARY OUTPUT
Multiple R 0.9677839
R Square 0.9366057
Adjusted R Square 0.9275494
Standard Error 180.17931
Observations 9
ANOVA
df SS MS F Significance F
Regression 1 3357489.458 3357489 103.4201 1.91474E-05
Residual 7 227252.0757 32464.58
Total 8 3584741.533
Intercept 2375.5574 216.1482332 10.99041 1.14E-05 1864.448035 2886.667
real average wage 2.6460805 0.260196015 10.16957 1.91E-05 2.030814742 3.261346
Analyzing the data presented in Table 3 shows that between the number of tourist arrivals and
their real wage is a strong connection (Multiple R = 0.977839). The percentage of actual average
wage influence on the number of tourists arrivals is about 94% (R Square = 0.9366057). Since
Significance F =. 000,019<0.05 regression model is valid. The model was testing for 05 . 0 = .
The model is:
x y + = 646 . 2 55 . 2375 (2)
In equation (2) y represents the number of tourist arrivals Romans (expressed in thousands of
tourists) and x represents the real average wage (expressed in lei). As t
a
=10.99041 and
significant level (P-value) is 1.14E-05<0.05 means the coefficient is statistically significant
coefficient taking values between the lower (Lower 95%) and upper limit (Upper 95%) of
1864.448035 to 2886.667
The coefficient of real average wage (2.6460805) indicates that the average real wage increase of
1 lei, the number of Romanian tourists arrivals increased by about 2600 tourists. Since t
b
=
10.16957 and P-value is 1.91E-05 <0.05, the coefficient is statistically significant. Confidence
interval is the lower limit (Lower 95%) and upper limit(Upper 95%) of 2.030814742 to
3.261345.
CONCLUSIONS
Overall, in 2008 compared to 2000, structural changes on tourist arrivals in tourist reception are
not significant. This situation is very favorable for Romanian tourism, given the advantages they
had in economic Romania, under the significant increase in tourist arrivals in tourist reception
stain in the country.
Today, as global tourism is characterized by strong competition between destinations, the
necessity of a new model of a tourist policy is emerging based on a strategy to provide a new
vision of production and marketing of tourism products.
100
This new approach could change the default so favorable tourist traffic tourist arrivals on
condition that arises linking supply with pricing given the present crisis which is still evident in
the Romanian economy.
REFERENCES
1. Gogonea R.M, Zaharia M. Econometrie cu aplicaii n comer-turism-servicii, Editura
Universitar, Bucharest, 2008
2. Gogonea Rodica-Manuela, Zaharia Marian, Dumitru Nicoleta-Rossela Statistic and
econometric analysis of the motivationl factors on turistc behavour, Analele Universitii din
Oradea, seria tiine Economice, Tom XVIII 2009 - Volumul II, pag. 654-658..
3. Oprea C., Zaharia M., Gogonea R.M., Analysis of the accommodation capacity of Romania
in the period 1990-2007, Tourism Review, Special Issue/2009.
4. Zaharia M, Gogonea R.M, Econometrie. Elemente fundamentale, Editura Universitara,
Bucharest, 2009
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Bucharest, 2009
6. Marian Zaharia, Rodica-Manuela Gogonea, Cristina Oprea, Developments and
Characteristics of Net Using Of the Accommodation Capacity from the Establishments of
Tourist Reception in Romania, Knowledge, in Business Transformation through
Innovation and Knowledge Management: an Academic Perspective- The 14-th IBIMA
Conference, June 23 - 24, 2010 Istanbul, Turkey,p.1827-1833.
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the view of lasting development, Articol indexat n 2009 n BDI
EconPaper,http://econpapers.repec.org/article/raujournl/v_3a2_3ay_3a2007_3ai_3a3_3ap_3a
48-59.htm
8. Marian Zaharia, Cristian Valentin Hapenciuc and Rodica-Manuela Gogonea, Analysis of the
correlation between the existing accommodation capacity and the number of tourists arrived
in Suceava county structures of touristic reception Articol indexat n 2009 n BDI
EconPaper,
http://econpapers.repec.org/article/scmrdtusv/v_3a5_3ay_3a2008_3ai_3a5_3ap_3a43-48.htm
9. Zaharia Marian, Oprea Cristina, Rodica-Manuela Gogonea Econometric analysis on the
evolution of the demand and offer of accommodation in camps for children under and of
school age, Journal of tourism nr.7/2009, Editura Universitii Suceava, pg. 35-40.
10. Zaharia, Marian, Hapenciuc Cristian Valentin, Gogonea Rodica Manuela, Analysis of the
correlation between the Existing accommodation capacity and the Number of Tourists
Arrived in Suceava Country Structures of Tourist Reception in Journal of tourism - studies
and research in tourism, No.5/2008, P.43-48.
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Approach, International Journal of Computer, Communications & Control, Year 2006, vol.
1, Supplementary Issue p. 492-496.
12. http://www.insse.ro
101
INTEGRATED QUALITY MANAGEMENT OF TOURIST DESTINATIONS IN
PROTECTED AREAS, THE CASE OF PIATRA CRAIULUI NATIONAL PARK
Post-doctoral researcher PhD. Adina Nicoleta CANDREA
adina.candrea@unitbv.ro
Professor PhD. Gabriel BRTUCU
gabriel.bratucu@unitbv.ro
Abstract:
In an increasingly competitive marketplace, viable destinations must develop competitive products in a
framework of responsible development. Many destinations operate within highly competitive environments where
customers have a wide range of choices even within a country or a region. The challenge is for destinations to
develop a service culture, physical environment and a set of products that can satisfy not only first-time visitors but
attract repeat visitors. Due to the obstacles of ensuring a quality destination experience many communities are
missing significant opportunities to create productive employment for the residents and realize opportunities for
poverty reduction due to the ineffective planning and management. Maintaining and improving high quality supply
in Romanian tourist destinations situated inside or close to protected areas is fundamental to meeting the challenges
of competitors and increasing their market share. Integrated Quality Management (IQM) is an argumentative and
efficient method proposed by the European Commission to reach and maintain tourist products and services quality
in destinations. This paper aims to explain how Integrated Quality Management (IQM), as an integrated
management tool, can improve the level of sustainability in Piatra Craiului National Park keeping its comparative
advantages and enabling long-term market competitiveness. Improving the quality of this tourist destination is
essential in satisfying tourists' needs, making the local tourism industry more competitive and ensuring that tourism
development is in a balanced and sustainable way.
Keywords: protected areas, tourist destinations, integrated quality management, partnership, Piatra
Craiului
JEL classification: L15, L83
ACKNOWLEDGEMENT: This paper is supported by the Sectoral Operational Programme Human
Resources Development (SOP HRD), financed from the European Social Fund and by the Romanian Government
under the project number POSDRU/89/1.5/S/59323.
1. INTRODUCTION
Providing a quality facility or service for tourists is a fundamental part of developing a
sustainable product, especially when dealing with the smaller and less accessible market
segments based on natural and cultural heritage. In these circumstances, the better the quality of
the tourism product, the more satisfied the tourist is likely to be of his holiday experience and the
more likely he is to stay longer, come back, tell others and be concerned about the conservation
of local heritage (European Commission, 2002). To be effective, quality needs to be assured all
along the tourism chain from first marketing messages through to the provision of
accommodation, food, information, orientation, town planning etc. Each one of these products
can make an important contribution to the overall level of visitor satisfaction. In tourist
destinations covering or surrounding protected areas there is a need for a well-organized and
coordinated tourism strategy, which encourages all partners to work together in enhancing the
overall quality of the destination and in ensuring that the quality standards are maintained.
Romanian protected areas provide a variety of rich experiences for visitors. Both
domestic and international visitors are turning to tourist destinations covering or surrounding
102
protected areas for holidays, but changes in the length and type of visit sought and a rapid
growth in alternative destinations worldwide has meant that these areas are facing a need to be
even more competitive (European Commission, 2000). At the same time, there in an increasing
need to be sensitive to both the positive and negative impacts of tourism on the environment and
local communities. One approach is to focus on quality, putting the right management process in
place to ensure that visitors have a special experience, meeting or exceeding their expectations,
while maximizing the benefit to the destination.
Integrated quality management (IQM) is a European-led initiative aimed at encouraging
the development and implementation of a sustainable and quality-oriented approach to tourism.
A quality service only exists as much as the visitor perceives it to meet their expectations and
requirements. It is important therefore to take into account all aspects of the visitor experience,
from initial planning through travel, destination information, accommodation to the after-sales
care and communication (Serra, 2006). The IQM approach is based on two key elements: a focus
on visitors and the involvement of local people and local tourism businesses in the management
of the destination. When it comes to the quality of the services, as much importance is attached
to offering a personalized, genuine and informed service as to being efficient and professional
(European Commission, 2002).
The aim of this paper is to propose the application of the integrated quality management
in Romanian tourist destinations covering or surrounding protected areas, including practical
recommendations for a specific area Piatra Craiului National Park.
2. LITERATURE REVIEW
Total quality management systems are a common feature in the approach developed for
specific tourist service providers (tour operators, travel agents, hotels, restaurants, etc.).
However, as far as the tourist is concerned, the satisfaction derived from staying at a destination
depends not only on experience of specific tourist services, but also on more general factors, for
example hospitality, safety and security, sanitation and salubrity, traffic and visitor management
(European Commission, 2000). A large number of elements have an impact on the tourists
perception of a destination, on the level of his/her satisfaction and, in consequence, on the
tourists willingness to make a repeat visit and to recommend the destination to potential visitors.
The concept of Total Quality Management emerged in business management theory in
the 1980s. It is a way of meeting an organizations objectives by improving the customers
experience of the product or service provided. It is concerned with effective use of resources, and
the level of participation and satisfaction of the people in the organization (European
Commission, 2000). The concept of Integrated Quality Management (IQM) follows this
approach but is broader and more flexible. It recognizes that an organization may have a wide
range of objectives, and that it should approach them in an integrated way.
Tourist satisfaction can be observed in five phases of quality (expected, perceived, given,
wanted and quality prescribed by business system), but there is a "gap" and variation between
each of these phases. The goal is to eliminate the difference, to level the ''gap'' as much as
possible and to bond particular phases. In a tourist destination there are a number of
considerations and interests such as: interests and satisfaction of entrepreneurs, management,
employees, guests, inhabitants and society, that should be coordinated and also to find a quality
that shall satisfy all interested parties and their interests because it is the only way to achieve
business excellence of every tourist destination (Vujic, 2007). When it comes to business
excellence and the model of sustainable development of tourism, it should be noted that
sustainable development of tourism is based on consideration of the following three components:
ecological, socio-cultural and economic sustainability.
103
According to the United Nations Commission on Sustainable Development (1999)
sustainable tourism development is a concept that is already widely accepted at an international
level and in most tourist destinations. It is about keeping a balance between the needs of the
visitor, the environment and the host community for current as well as future generations. The
concept of IQM must embrace this, emphasizing policies and actions which address all these
needs together.
Typically, a tourist destination manager has twin objectives: to increase local income and
employment through tourism and to ensure that the environment and quality of life of local
people is not damaged and if possible is enhanced by tourism. IQM can meet both these
objectives by improving visitor satisfaction and monitoring and managing impacts on the local
environment and economy (Denman, 2000).
The working definition of IQM in tourist destinations developed by the European
Commission (2000) describes it as an approach to managing a tourism destination which focuses
on an ongoing process of improving visitor satisfaction, while seeking to improve the local
economy, the environment and the quality of life of the local community.
The Integrated Quality Management (IQM) is the optimal concept and model of quality
management in tourism, because it integrates all elements of quality tourism within itself. IQM
enables satisfaction of ever increasing needs, requests and expectations of modern tourists. At
the same time, it provides balanced and sustainable tourist development (Vujic, 2007).
A model of quality management devised by the European Foundation for Quality
Management (EFQM) is being widely applied in Europe in the public and private sectors. The
model identifies nine elements; five of them are to do with structure and functions: leadership;
strategy; personnel management; use of resources; and processes of delivering the service. A
further four are to do with results: client satisfaction; staff satisfaction; integration into the
community; and operational results (European Commission, 2000).
IQM should simultaneously take into account and have a favorable impact on the
activities of tourism professionals, tourists, the local population and the environment (i.e. the
destinations natural, cultural and manmade assets). The integrated quality management
strategies implemented in destinations must have the requirements of tourists as one of their
major considerations. In this way, the tourist destination is described by two independent
elements: its internal reality, i.e. a given space that is internally coherent (a set of actors working
together) and makes its own decisions; and its external reality, based on its image and perception
by the outside world, i.e. its meaning for the tourist (European Commission, 2000). Also, for a
tourist destination, IQM can be seen as a systematic quest for internal quality and external
quality.
The process of improving quality in line with identified standards requires a close
working relationship between everyone involved in tourism in the destination, and well
constructed training and assistance programmes which meet their needs. As well as obtaining
feedback from visitors, it is important to maintain a check on the wider impact of tourism so that
adjustments can be made in management, with a view to contributing to sustainable tourism
development. However, monitoring impact is still currently a weak point in many tourist
destinations, probably because efficient and user-friendly tools and indicators are not available
(Godin, 1999).
3. TOURISM DEVELOPMENT IN PIATRA CRAIULUI NATIONAL PARK
Piatra Craiului National Park (PCNP) is a Romanian protected area, established in 1990
for the purpose of preserving the biodiversity, landscape and valuable species. Another goal of
the National Park is promoting and encouraging tourism development, public education and
104
awareness regarding the protection of nature and its values (The Administration of Piatra
Craiului National Park, 2005). Situated at only 30 km from the main city of the County - Braov,
Piatra Craiului National Parks benefits from the proximity to this well-known tourism
destination. Day trips or longer journeys are available from Braov for tourists interested in
climbing, wildlife watching or just a breath of fresh air in the idyllic villages included in the
park. The park is crossed by 30 tourist trails leading the tourists to several beautiful areas. The
main tourist attractions are:
- the outstanding rich flora, including the specie Dianthus callizonus - unique in the world;
- the wild fauna includes the chamois and the large carnivores - the symbol of unaltered nature
- which have disappeared from most of the European countries;
- the traditional lifestyle in the areas neighboring the massif, especially in Mgura and Petera
villages.
There is no statistical data on the tourist arrivals or expenditure in Piatra Craiului
National Park as the local authorities believe this is not their responsibility, but that of Braov
County Statistics Institute and local tourism stakeholders either do not have these statistics or do
not wish to make it public.
The first stage of tourism activities monitoring took place in year 2000 for the purpose of
assessing the tourism traffic both from a quantitative and qualitative point of view. According to
this survey, each year, approximately 86.000 tourists visit the national park (The Administration
of Piatra Craiului National Park, 2005). The main visiting motivations are: appreciating the
mountain, the nature, to escape from crowded cities, to be alone, to be with ones family, to
camp. As for the activities that the visitors plan to develop inside the PCNP, the following were
most common: relaxation and landscape (80.7%), camping (68,4%), picnic (48,8%), climbing
(44,7%), cave visits (25,1%) and mountain biking (22,1%). From the total number of tourists
about 48% were aged 18-29, 45% 30-49 and 6% under 18. An important aspect of the matter is
the amount of time allowed for the visit: 17% of the tourists spent a day or less, 44% spent 2-3
days, 30% spent 4-7 days and only 9% of the tourists spend more than a week inside the National
Park.
Concerning accommodation, there are several guesthouses in the villages inside the park
(Petera and Mgura), in the villages neighboring the park (Bran, Moeciu, irnea, Zrneti,
Ciocanu, Podul Dmboviei, Dmbovicioara and Stic), and also the chalets and the camping
sites inside the park. In Moeciu-Bran area, there are over 150 guesthouses rated at one to three
daisies, located at distances from 100 meters to 10 km from the parks border.
A qualitative research conducted in 2008 (Candrea & Bouriaud, 2009) reveals the
necessity of implementing sustainable tourism strategies in Piatra Craiului National Park. The
study identifies many issues that show unsustainable practices of tourism in the Piatra Craiului:
- the problem of waste disposal in the communities included in the national park;
- negative tourist behavior;
- the lack of tourism statistics;
- little support for the local communities from the local authorities;
- the presence of buildings that do not respect the local architecture;
- little understanding of the sustainable tourism concept by the local community members;
- infrastructure problems;
- little tourism signs and tourist information;
- excessive land parcelling;
- hunting and logging;
- little funding for conservation purposes.
105
Piatra Craiului National Park has a great tourist potential, but, if tourism development in
the park is done in a chaotic and uncontrolled manner, without taking into account the existent
values, there is danger that these values will be permanently altered. This is why we are
proposing an integrated quality management approach in order to increase visitor satisfaction as
well as local income and employment through tourism development and ensure that the
environment and quality of life of local people is not damaged by tourism.
4. AN INTEGRATED QUALITY MANAGEMENT APPROACH OF PIATRA
CRAIULUI NATIONAL PARK TOURISM
Integrated quality management is about delivering quality at all stages of the tourism
experience. The deliverance of a quality experience will result in an increase in repeat visitors
and those that visit through recommendation by other. Quality management of a tourism
destination is achieved through working closely with the local communities and tourism
stakeholders in the area. Working towards sustainable quality in tourism involves
communication and monitoring through: understanding needs and meeting them, checking and
communicating standards, training and business support and monitoring impacts on local
economy, community and environment (Serra, 2006).
The first step in the process of integrated quality management of a tourist destination
covering or surrounding a protected area would be the creation of an organization or association
resulting from the partnership of local authorities, the administration of the protected area, tourist
service providers and other association interested in quality promotion. In order to ensure the
success of such a partnership there is a need for permanent involvement of local authorities,
projects development to finance quality initiatives, the involvement of regional and national
tourist offices and the interest of tourist service providers. In Piatra Craiului National Park there
have been unsuccessful attempts to build and maintain a local partnership, especially due to the
divergent interests of local businesses, but also because of the lack of interest of local authorities
and the administration of the protected area. This situation is manly caused by the dispersion of
tourist services providers and the fact that the park territory is bordered by three different
communes that are not efficiently communicating to find solutions for the common problems.
The existence of a local partnership will ensure a better promotion of the area and will enable
financing for common projects that can increase tourist arrivals and sustainable local
development.
A second step of the integrated quality management is to have a sustainable tourism
strategy. Piatra Craiului National Park already has a sustainable tourism strategy since 2003 but
the recommendations of this strategy have not been entirely set in practice. A new strategy
should be developed taking into account the current situation of Romanian tourism in the context
of the economic crises, based on qualitative and quantitative research that could outline the
market segments and their characteristics but also the main strengths and weaknesses of tourism
activities in the area.
In order to achieve the objectives of the strategy it is necessary to have a complete
promotion plan for the protected area, including:
- promotion purpose and objectives;
- the marketing approach;
- destination brand and positioning message;
- modern promotion techniques.
Tourists experiences begin before their arrival in the destination and ends with their
memories of the trip and future plans for other holidays in the region. The communication of
106
promotional information must take place during the entire tourism experience and not lead to
false expectations. This is why it is very important to survey tourists both before arrival and
especially at the end of their trip in order to identify their opinion on service quality and
destination image. Piatra Craiului National Park should have a client data base gathered from
each service provider and centralized by the destination management organization.
The accommodation services play an important role in having a quality experience in a
tourist destination situated inside or close to a protected area as tourists are more demanding
concerning their comfort and facilities and prefer traditional accommodation units, especially
those run by locals. In order to respect the conditions imposed by the integrated quality
management the destination management organization of Piatra Craiului National Park should
promote the following measures:
- making a standard survey questionnaire for all tourism providers and gathering tourism
statistics from accommodation units;
- motivating accommodation units to reflect the local culture in their architecture and
interior design;
- encouraging other types of accommodation in the area: camping sites, caravanning
camping, hostels etc.
Traditional products and local gastronomy play an important role in the integrated quality
management of protected areas as tourist destinations. In Piatra Craiului National Park the local
gastronomy is insufficiently promoted and traditional products can be rarely found, mostly with
the occasion of local events and fairs. There used to be a souvenir shop selling authentic products
in Zrneti, but it no longer exists. For an efficient promotion of traditional products it is
necessary to have a network of local artisans, weekly fairs, especially during the high season,
several souvenir shops in tourist areas and workshops where tourists can see the artisans
working. Traditional products could also be sold in the accommodation units. The promotion of
local gastronomy could be made in local events where tourists can taste and appreciate local
gastronomy, but also in restaurants and accommodation units.
The quality of tourist experience also depends on the variety and availability of tourist
attraction. Piatra Craiului National Park has huge natural potential, which is unfortunately not
well-promoted and managed. The existing hiking trail network is sufficient but a better signaling
is necessary as well as interpretative techniques: personal (tour guides, info points, visitors
centre), impersonal (publications, interpretative panels) based on art (sculpture, painting, drama,
stories) or new media (internet guides, audio guides). Day trips to nearby cultural attractions
should be promoted especially as weather conditions dont favor permanent outdoor activities.
As the main motivation of tourists traveling to a protected area is nature appreciation, the
environmental quality is a key issue of the integrated quality management of these tourist
destinations. Several measures should be taken in Piatra Craiului National Park in order to
increase the quality of the environment:
- promoting good environmental practices among tourist providers;
- printing promotional materials on recycled paper;
- implementing a complete program of energy and water conservation, instructing personnel to
limit consumption;
- protecting biodiversity;
- implementing a system of waste management;
- organizing public meeting to ecologically educate local stakeholders;
- raising tourists awareness concerning nature conservation.
Another issue of the integrated quality management is the understanding of tourists
needs in order to improve service quality. Due to the lack of tourism market research there is no
107
evidence of tourists expectations and opinions so we cant evaluate the quality of their
experience in Piatra Craiului National Park. Qualitative and quantitative research is needed as
well as an efficient system of complaint management.
A key component of the integrated quality management is monitoring tourism impact on
the local economy and community in order to assure a sustainable development of the tourist
destination. Sustainable tourism in Piatra Craiului National Park (adapted after MacGregor,
Blumer & Florescu, 2006) and surrounding area must:
- Be educational and informative. Park visitors are particularly interested in discovering
and learning about the park and adjacent region. For the most part, they also want to learn how
to help sustain its character while deepening their own visitor experiences. Residents will also
learn the value of resources they may have been taking for granted.
- Support the values of the region. International travelers to the region and the park are
particularly interested in supporting the local values and resources. Therefore, they seek out
businesses that emphasize local character in terms of architecture, cuisine, heritage, aesthetics,
and ecology. Tourism revenues in turn raise local perceived value of those assets.
- Benefit local residents. Tour operators, particularly those from Romania, should try to
employ and train local people, buy local supplies, and use local services.
- Conserve resources. Environmentally responsible tourists prefer to support businesses
that minimize pollution, waste and energy consumption, water usage, chemicals and toxic
materials, and that provide accommodation which is respectful of the environment.
- Be sensitive to local conditions. Stakeholders anticipate development pressures and apply
limits and management techniques to prevent unnecessary changes to the existing conditions.
Local and external businesses cooperate to sustain natural habitats, heritage sites, scenic
appeal, and local culture.
- Emphasize quality over quantity. Communities measure tourism success not by sheer
numbers of visitors, but by length of stay, money spent, and quality of experience.
- Provide a quality travel experience. Satisfied, excited visitors bring new knowledge home
and send their friends and relatives off to experience the same thing - which will provide
continuing business for the region.
Setting and verifying standards for tourism services is vital for tourist destinations in
protected areas. In Piatra Craiului National Park area there are two service providers certified
through The Ecotourism Certification System developed by The Association of Ecotourism in
Romania. This system is based on the Nature and Ecotourism Accreditation Programme
promoted by the Australian Ecotourism Association and on Nature's Best developed by the
Swedish Ecotourism Association. The Ecotourism Certification System addresses three different
categories of applicants: ecotourism programmes / tours provided by tour-operators or guides
(i.e. eco-tours of maximum 15 participants), small-scale accommodation structures in rural and
natural areas (eco-lodges and guesthouses of maximum 25 rooms) and eco-destinations (one or
several communities within natural areas). More tourist services providers in Piatra Craiului
National Park should try to be certified through this system in order to have a local common
standard that could help tourists identify accommodation units and tours with ecological
initiatives.
Improving the quality in a tourist destination covering or surrounding protected areas
implies a partnership of all local stakeholders and the necessity of assistance programs and
training in this field.
108
5. CONCLUSIONS
Success in implementing an IQM approach in tourist destinations covering or
surrounding protected areas depends on the respect of certain principles, in particular: integration
of quality at all levels, including the environment; a combination of authenticity, distinctiveness
and creativity; fitting tourist supply with targeted market segments; monitoring and managing
the impact on the environment and the local community; professionalism; interdependence
between tourism and other local activities; co-operation and commitments of all partners with a
long-term vision; and last but not least, patience and continuous feedback.
Sustainable tourism can make a substantial contribution to the development of the Piatra
Craiului National Park. In order to achieve its full potential it must embrace an integrated quality
management plan and:
1. Make optimal use of the unique mountain environmental resources that constitute the
central attraction in tourism development, maintaining essential ecological processes and helping
to conserve natural heritage and biodiversity of the National Park.
2. Respect the socio-cultural authenticity of the surrounding communities, particularly
these that serve as hosts and service centers for the park. It must conserve the communitys
cultural heritage and traditional values, and contribute to inter-cultural understanding and
tolerance.
3. Ensure viable, long-term economic operations, providing socio-economic benefits to
all stakeholders that are fairly distributed, including stable employment and income-earning
opportunities and social services to host communities, and contributing to poverty alleviation.
Such a process requires the informed participation of all relevant stakeholders, an
engaged park administration and strong political leadership (particularly at the county level) to
ensure wide participation and consensus building.
Developing sustainable tourism in tourist destination situated inside or close to protected
areas should maintain a high level of tourist satisfaction and ensure a meaningful experience for
tourists. It should raise their awareness about sustainability issues at local and regional level and
promote sustainable tourism practices to visitors and tourism suppliers. These management
changes in such a tourist destination can bring a substantial contribution to the sustainable
management of biological resources.
REFERENCES
1. Candrea, A., Bouriaud, L., A stakeholders' analysis of potential sustainable tourism
development strategies in Piatra Craiului National Park, Annals of Forest Research, vol. 52,
2009, p. 191-198.
2. Denman, R., Integrated quality management of tourist destination issues and experiences,
International Conference Sustainable Tourism, Environment and Employment, Council of
Europe Publiching, 2000, p. 77-84.
3. Godin, P., Contribution Of Quality Tourism To The Sustainable Management Of Protected
Areas: Some Recommendations Resulting From 15 Case Studies In The European Economic
Area, Gndling, L., Korn, H., Specht, R., Report of the International Expert Workshop "Case
Studies on Sustainable Tourism and Biological Diversity", 1999.
4. Kano, N., Attractive quality and must-be quality, The Journal of the Japanese Society for
Quality Control, April 1984.
109
5. MacGregor, J., Blumer, A., Florescu, B., Sustainable Tourism Development Strategy for
Retezat National Park Region, 2006.
6. Serra, F., Integrated Quality Management as Part of the Strategic Management of Tourism
Destinations: A Systems Perspective, in Lazzeretti, L., Petrillo, C., Tourism local systems and
networking, Elsevier, 2006, p. 135-1487.
7. Vujic, V., Implementation of Integral System of Quality Management in Tourism, International
Journal for Quality Research, Vol.1, No. 4, 2007, p. 323-328.
8. *** The Administration of Piatra Craiului National Park, Piatra Craiului National Park
Management Plan, 2005.
9. *** European Commission, Towards quality rural tourism, Luxembourg, 2000.
10. *** European Commission, Using natural and cultural heritage to develop sustainable
tourism in non-traditional tourist destinations, Luxembourg, 2002.
11. *** European Commission, Towards quality coastal tourism. Integrated quality management
(IQM) of coastal tourist destinations, Luxemburg: Office for Official Publications of the
European Communities, 2000.
12. *** United Nations, Commission on Sustainable Development, Decision concerning tourism
and sustainable development, New York, April 1999.
110
IMPACT OF ECONOMIC CRISIS ON THE TOURISM INDUSTRY IN ROMANIA.
AN ECONOMETRIC ANALYSIS OF OVERNIGHTS STAYS
Ec. PhD. Candidate Alina BALAN
Associate Professor PhD. Mihaela BRSAN
Faculty of Economics and Public Administration, tefan cel Mare University of Suceava, Romania
alinab@seap.usv.ro
mihaelab@seap.usv.ro
Abstract:
Tourism is one of the largest industries in the global economy and has been both a key driver and a
beneficiary of the prolonged period of economic growth seen in recent years. It also has significant social and
cultural benefits because of its potential to promote understanding and international relationships. These
socioeconomic dimensions make tourism a vital component of globalization. But the many events taking place at
global level call into question how the tourism industry is affected. Natural phenomena (earthquakes, hurricanes,
volcanic eruptions), epidemics, terrorist acts, political instability drastically affect the tourism industry and hence
national economies. The intensity of business organizations is reflected in the national economy and hence overall
performance. The tourism industry has been affected by other crises in the previous period but the current crisis
(whose starting point can be considered the period September-October 2008) is characterized by some specific
aspects that differentiate it from other crises. Its impact, based on real data, are analised in this article. Despite the
current difficulties, the Tourism sector remains a critical economic sector worldwide and one that provides
significant potential for economic growth and development internationally. A growing national Tourism sector
contributes to raises national income, employment, and can improve a countrys balance of payments. Using
statistical and data and econometric models of overnights stays and tourists accommodation capacity in function is
diagnosed the current status of tourism industry from Romania. This paper examines the impact of crisis events on
the demand for tourism overnights in order to establish a better understanding of changes and trends in tourism
firms.
Key words: economic crisis, competitiveness, tourism industry, tourism, performance, economic growth
JEL Classification: D12, F14, L83
1. INTRODUCTION
Tourism is one of the largest industries in the global economy and has been both a key
driver and a beneficiary of the prolonged period of economic growth seen in recent years. It also has
significant social and cultural benefits because of its potential to promote understanding and
international relationships. These socioeconomic dimensions make tourism a vital component of
globalization.
The importance of the sector worldwide is strengthened by increasing volume and
complexity of tourism supply that have generated a real development of tourism industry; by the
specific business environment witch take proportions more than any other service sector.
Economic advantage that is represented by international tourism, specially, has led many
developing countries to increase their efforts to develop tourism industry as an activity susceptible
to provide one part from necessary currency in order to develop the national economy.
A growing national Tourism sector contributes to raises national income, employment, and
can improve a countrys balance of payments.
The sector is thus an important driver of growth and prosperity and, within developing
countries; it can play a leading role in poverty reduction. Despite the overall importance of
developing the Tourism sector, many obstacles at the national level continue to hinder its
development.
This analysis aims to serve two purposes. First, we intend to provide useful comparative
information for making decisions related to business and tourism development. Second, and more
111
importantly, we hope that the analysis provides an opportunity for the Tourism industry to highlight
the obstacles to Tourism competitiveness.
The number of tourism overnights stays directly impacts the tourism industrys income and
the government agency investments therein. Therefore, policymakers need to improve their
understanding of how crisis events affect the demand for inbound tourism.
The impact of economic crisis on the Romanian tourism industry is analyzed with an
econometric model based on two indicators: the number of establishments of tourists reception
with functions of tourists accommodation and overnight stays in the establishments of tourists
reception with functions of tourists accommodation.
Overnight stay means the 24-hour interval, starting with the admission hour of respective
establishment for which a person signs in the register of establishment and benefits of
accommodation according to the price paid even if actual stay lasts less than the mentioned interval.
Overnight stays related to additional beds (paid by tourists) are also taken into account.
A short introspection on these data show firstly that, at the moment, the attractiveness of
Romanian tourism knows a decreasing trend, especially for foreigners tourist and that trend is
suppose to be seen on the whole year 2009, and secondly, the period of staying in Romania
decreased, too.
Those facts means that on short time, tourism in Romania could confront with a decrease of
revenues, both because of decreasing of the number of tourists and the number of overnights,
especially of the foreigners ones.
This paper finds that a long-term equilibrium exists among both variables, indicating that
macroeconomic variables may be used to determine the rise or fall of the number of tourists
overnight stays.
Income and foreign exchange rates are both significant explanatory variables. In terms of
incurred losses, the number of overnights stays suffered the greatest decline during the impact of the
financial crisis.
This paper finds that any impact on safety, whether domestic or international, negatively
affects tourism demand. The impact of financial crises on tourists overnights stays demand is not
less significant.
The crisis has brought balance between price and quality. Important changes have occurred
mainly in the accommodation prices, the time spent on holidays; consider reducing, but especially
as a tourist destination and place.
2. DATA ANALYSIS
A literature review of studies investigating tourist demand suggests the most frequently used
explanatory variables are income, prices, exchange rates, transportation costs, and some dummy
variables.
Among these, income is the most statistically significant variable, followed by prices,
exchange rates, and currencies. Dummy variables are used to explain the influence of special events
on tourists overnight stays.
We consider that the overnight stays in the establishment of tourists reception with
functions of tourists accommodation is an important indicator witch reflect the potential of tourism
consumers and measure the tourism phenomena.
Indicators variations show us financial power of the tourist, the evolution of tourism
demands, so if the indicator is increasing in a good signal for national economy (more overnights
stays means increasing the income of organizations with functions of tourists accommodation),
while a decrease of indicators shows that the consumers budget is low.
112
But this indicator must be analyzed in correlation with number of establishments of tourists
reception with functions of tourists accommodation.
The tourists accommodation capacity in function express the attractiveness of a tourists
facility during the period of time when they are available, the closer is the value to 1, the most
attractive is the establishment for tourists, meaning even that managers prefer to make available the
beds on the appropriate moment of the year or that they do not offer for the entire period the
possibility for tourists to accommodate even if there is a large needs for their services.
So, for relevance of analysis we
selected data from 1990 to 2009, data witch is reflected in next table (table no. 1):
Table 1. The main indicators between 1990-2009
Year
Overnight stays in the establishment of tourists
reception with functions of
tourists accommodation thousands places)
Number of establishments of tourists reception
with functions
of tourists accommodation (thousands)
Yi xi
1990 77022 44552
1991 64124 31927
1992 55870 26076
1993 57434 24769
1994 53255 23296
1995 53540 24111
1996 53639 21838
1997 52027 19611
1998 53164 19183
1999 51275 17670
2000 50197 17647
2001 51882 18122
2002 50752 17277
2003 51632 17845
2004 53989 18501
2005 54979 18373
2006 56500 18992
2007 57138 20593
2008 59188 20726
2009 61104 17325
Figure. 2 reflect the evolution of the variables:
113
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
number of establishments of tourists reception
overnight stays in the establishments of tourists reception
Figure 1. Evolution of number of establishments of tourists reception and overnight stays
between 1990-2009
Source: wwww.insse.ro
Data were collected from national financial statistics.
Evolution of both indicators is characterized, with a decreasing trend until 2004. The
overnights stays continue to decrease due to the influence of economic factors, demographic,
political, and social.
Overnight stays registered in establishments of tourists reception in semester I 2010
amounted to 6252.8 thousands, decreasing by 3.7% as against those in semester I 2009.
Overnight stays of Romanian tourists in establishments of tourists reception with
accommodation functions represented in semester I 2010 80.5% of total overnight stays, while
overnight stays of foreign tourists represented 19.5%.
Net use index of accommodation places in semester I 2010 was 22.1% per total
establishments of tourists accommodation, decreasing by 1.6% percentage points as against
semester I 2009.
Higher net use indices of accommodation places in semester I 2010 were registered for ship
accommodation places (72.3%) and for hotels ( 34.8%).
3. THE ECONOMETRIC MODEL PROPOSE
The paper wants to demonstrate the link between overnight stays and tourism industrys
income through the number of nights
From graph no. 2 we can see that the empirical distribution of points (xt, yt) can be
approximated by a straight line. As such, the econometric model that describes the relationship
between two variables is transformed into a linear model y = a + bx single factorial + u and b
represent parameters of the model, b 0, the slope is positive because the relationship between two
variables is linear.
114
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
0 10000 20000 30000 40000 50000 60000 70000 80000 90000
Figure 2. The relationship between tourist accommodation capacity and number of overnight
stays
So, the econometric model is a simple regression model:
, ) ( u bx a y u x f y + + = : + = (1)
The main variables utilized in this study were two specific tourist behaviors:
- y = tourist accommodation capacity, representing the variable outcome (endogenous);
- x = number of overnight stays, representing the variable factors (exogenous) factors considered by
the assumption that working with the strongest influence on the variable y;
- u = residual variable representing the y variable influences of other factors not specified in the
model considered accidental factors with significant influence on the variable y.
4. ANALYSIS AND RESULTS.
Estimation of parameters was performed in Excel program and is presented in the following:
-
Table 2. Linear regression
SUMMARY OUTPUT
R Square 0,738704472
Adjusted R 0,724188054
Standard Err 3222,420754
Observation 20
ANOVA
df SS MS F
Significan
ce F
Regression 1 5,28E+08 5,28E+08
50,8875
2 1,2E-06
Residual 18 1,87E+08 10383996
Total 19 7,15E+08
Coefficients
Standard
Error t Stat P-value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 38156,0459 2594,446 14,70682 1,79E-11 32705,32 43606,78 32705,32 43606,78
X Variable 1 0,811045863 0,113695 7,133549 1,2E-06 0,572182 1,049909 0,572182 1,049909
Following calculation of the regression model will have the form:
x y 810458 , 0 05 , 38156 + = (2)
It can be stated so that a unit increases in the number of overnight stays, tourist
accommodation capacity increased by 0,8110458 places.
To see whether the parameters differ significantly from the one we compare t
0, 05
(12) =
2,365 with:
67 , 1
0112695 , 0
1 8110458 , 0
=
= b (3)
It may be noted that the slope not significantly different, with a significance level of 5%.
Consequently, the number of tourists is a key factor witch influence the change of
accommodation capacity in operation, it contributed to explain variation in 81,10% of total
accommodation capacity in operation witch is direct proportional with
There are co-movements in the overnights stays model, indicating that there is a long-term
equilibrium between the number of overnights, and of number of establishments of tourists
reception. Over the long-run, all variables become interconnected. The coefficient of the error
correction item is 0,11, indicating a positive and rapid adjustment from a short-term imbalance.
This implies that the imbalance of overnights tourist stays from the previous period may be adjusted
during this period with error corrections that resume the long-term equilibrium. This indicates that
long-term relationships are valid.
Those realities conduct to the concussions that there is necessary an additional training for
managers and administrators of tourists facilities for making them understand the danger for their
businesses of a too reduced level of accommodation capacity, especially the one in used.
So, they can use different efficient options to improve it: reducing the accommodation
capacity, keep them open only on the period of time when they are a attractive to tourist or offering
new services to increase the attractiveness.
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5. CONCLUSIONS
The economic crisis seems not to have affected the tourism industry in Romania since the
tourist accommodation capacity increased in 2009.
This indicator reflects the increasing number of tourism organizations with accommodation
or maintaining the existing number and increasing the number of investments.
On the other hand the number of nights spent has decreased in 2009 and consequently
decrease hospitality industry incomes.
The economic crisis has induced a change in consumer behavior with consequences over the
tourism industry.
Because of the crisis, some groups will decide not to take any holiday this year or change
their preferences in terms of tourist destination. At the European level, for example, the tourism
industry is experiencing a trend towards last minute bookings, which leads to some uncertainty in
the demand for tourism operators.
But Romania has an enormous potential which can turn into a tourist destination for the
whole year. For this it is important, firstly, understanding and maximizing all opportunities offered
by sites of natural and cultural heritage. Geographical positioning Romania will support the
development of a unique tourism product, however, found it impressive progress in recent years the
number of tourists.
Upgrading, promotion and investment in accommodations are vital for Romania to become an
international tourist destination of success.
This paper shows how the overnight stays and accommodations tourist are dependent and
any variations of thus variable have a consequence over the tourism industry.
Indicators variations show us financial power of the tourist, the evolution of tourism
demands, so if the indicator is increasing in a good signal for national economy (more overnights
stays means increasing the income of organizations with functions of tourists accommodation),
while a decrease of indicators shows that the consumers budget is low.
BIBLIOGRAPHY
1. Andrei Tudorel, Bourbonnais Regis, (2008), Econometrie, Ed. Economic, Bucureti;
2. Leiper N., (2008), Why tourism industry is misleading as a generic expression: The case for
the plural variation tourism industrie, Tourism Management, Nr. 29 (2);
3. Minciu R., (2004), Economia turismului, Editura Uranus, Bucureti;
4. Norbert Vanhove, (2005), The economics of tourism destination, Elsevier;
5. Robu Vasile, Balan Alina, (2009) The analysis of competitiveness in the tourism sector in
the actual context of economic crisis, Revista de Turism: Studii i cercetri, No. 7;
6. Sharpley R., Telfer D. J., (2002), Tourism and development. Concept and Issues, Editura
Cambrian Printers Ltd., Frankfurt;
7. Wang Yu-Shan, (2009), The impact of crisis events and macroeconomic activity on
Taiwan's international inbound tourism demand , Tourism Management, No. 30, Issue 1
8. www.insse.ro;
9. www.ase.ro
117
THEORETICAL CONSIDERATIONS FOR SECURITIES ISSUED BY JOINT STOCK
COMPANY
Assistant PhD.Laurentiu NOVAC-DIACONU
laurentiunovac@yahoo.com
Assistant Adrian LUPASCU
adrian.lupascu@ugb.ro
George Bacovia University from Bacau, Romania
Abstract :
In this moment in Romania and in the European economy securities issued by joint stock company occupies a
very important role. Stocks and bonds are debt securities which it individualises by certain characteristics .Without
them, joint-stock companies could not exist . The stock is a fraction of the authorised capital that has always to be of an
equal value. In the anonymous stock companies, the social shares can have an inequal value. If the constitutive
document does not say different, the stocks give to the owners equal rights. The stock represents the credit title that
observes the rights and obligations that are part of the quality of shareholder. In other words, the document in which it
is incorporated the shareholders right. The bonds are fractions of an unique loan contracted by the company. They
represent the companys obligation to return the borrowed money. The titles of the bonds are equal and indivisible. The
bonds from the same emission have an unitary regime. Through the incorporation of the obligation of reimbursement in
the title, the bonds are transmissible. Through this article we will see their role and solutions for a better aplication for
Romania in the context of actual European economy.
Key words: securities, stocks, bonds, shareholders, solutions.
JEL Classification: K22
1. INTRODUCTION
In Romania with the actual European economy the securities issued by the joint stock
company have an important role. The stocks and the bonds are credit titles that have certain
characteristics.
The stock is a fraction of the authorised capital that has always to be of an equal value. In
the anonymous stock companies, the social shares can have an inequal value. If the constitutive
document does not say different, the stocks give to the owners equal rights.
The stocks are representative titles of the social parties and they are fractions of the
authorised capital and they give to their owners the quality of share holders. After the legal
institution of the joint stock company, the stocks can be transmitted and negociated.
The bonds are fractions of an unique loan contracted by the company. They represent the
companys obligation to return the borrowed money. The titles of the bonds are equal and
indivisible. The bonds from the same emission have an unitary regime. Through the incorporation
of the obligation of reimbursement in the title, the bonds are transmissible.
Without them, the joint stock companies would not exist or function. The solutions for a
good applicability of the securities issued by the joint stock company from Romania would be
several but the most important would be that the managers get involve more in the companys
activity.
2.SECURITIES THAT ARE EMITTED BY THE JOINT STOCK COMPANY,
THEIR ROLE IN SUCH A COMPANY AND IN THE SAME TIME IN ROMANIAS
ECONOMY
In Romania the securities that are emitted by the joint stock companies are incarnated by
bonds, and the most important securities are the bonds and stocks.
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First of all the stocks are representative titles of the social parties and they are fractions of
the authorised capital and they give to their owners the quality of share holders. After the legal
In the juridical doctrine one can identify several means for the notion of stock.
the anonymous stock companies, the social shares can have an inequal value. The stock represents
the credit title that observes the rights and obligations that are part of the quality of shareholder. In
other words, the document in which it is incorporated the shareholders right.
Also the stock deisgnates the corporative or associate proportion, that is the juridical bond
that exists between shareholder and the company. The shareholders rights and obligations are
determined by the stocks possession and not by the company contract or by the quality of
shareholder (1).
These actions titles ave to comprise the following elements: the name and the duration of
the company, data regarding the constituent document and the companys matriculation, the
corporate funds, the number of stocks and the payments they did, the advantages given to the
founders. The stocks have to be signed by two managers, when they are multiple managers, or of
the only manager.
It is really important the aspect regarding the fact that the nominal value of the stock can be
established through the constituent document or through the law. In the case in which the stocks
quantum is established through the constituent document the associates have complete freedom. In
the national legislations, the legal stipulations establish a minimum limit regarding the nominal
value of the stock (2).
The stocks cannot be emitted for a smaller sum than their nominal value.
The basis of this stipulation means the protection of the social creditors. In the measure in
which the nominal capital corresponds to the real capital, the social creditors cannot be mislead. But
the company can emit stocks for a superiour value to their nominal value. The contrary modality of
issuance is allowed, because the companys patrimony grows with the difference that results.
After the issuance of the stock its value can be inferiour or superiour to the nominal one.
The stock has an effective value, reported to the real situation of the companys patrimony. The
stock can also have a stock exchange value.
The stock titles can be unique or multiple. The unique or simple titles correspond to only
one stock, and multiple ones to several stocks.
In the speciality literature the process of emitting multiple stocks has been challanged. The
objections referred to the fact that the shareholder that has a stock or a number of stocks, that is
inferior to the multiple for which the stocks have been emitted, wouldnt have the right to vote. But
the shareholders right to vote is stipulated by the law. No matter the number of his stocks, the
shareholder cannot be stopped to vote.
Regarding the juridical nature the stocks are considered to be credit titles. But they do not
have all the characteristics of the credit titles.
The stocks are characterised only through the existence of a title that incorporates the right,
without being autonomous and literal. As such, we ave to deal with the following consequences: the
extension of the possesors right is incompletely stipulated in the document that observes, it is
determined through the company contract and through statute; the content of the posessor;s right
can change according to the modifications of the company contract and of the statute; the sub-
obtainer has a derivat right and not an intrinsical one, and the exceptions that the debtor can
invoque against the first obtainer are opposable to the following ones.
As a consequnce the stocks are not perfect credit titles. They attest a complex right, being
corporative or participation titles.
Next we shall see aspects regarding the stocks types and transmission.
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After their individualisation model, the stocks are of two types: nominative stocks and
bearer shares.
The nominative stocks have in their title the name, the forename and the address of the
possessors, or the name and his headquarter. Their ownership is established through the listing in
the shareholders register.
The nominative stocks can be emitted in the material form, on paper, or in the
dematerialized form, by listing in the shareholders register. For the stocks that have material form
there can be emitted cumulative titles, that comprise a multiple, that means several stocks. If it did
not emit actions in material form the company will release, at the request or from office, a
certificate for shareholder.
Regarding the transmission of the nominative stocks it is made through a declaration made
in the shareholders register, that is signed by the assignor and by the assignee or their trustees and
through the mention that is made on the title. Through the constituent document one can say other
ways of transmitting the property rights on the stocks.
The formality of listing is necessary for the cessions opposability regarding the third
parties. The rights that correspond to the quality of shareholder can be exerted only by the
associated that is listed in the shareholders register, that means the titular holder.
The listing of the operation in the companys register is also mandatory in the case of
institution of real securities on the stocks.
Bearer bonds have in the title only a number, without the mentioning of the possesors
name. The bearer bonds property belongs to the possessor. The bearer bonds are transmitted
through the simple material tradition of the title.
It is also interesting the fact that the associates have the right to chose between nominative
stocks and the bearer bonds.
Although the bearer bonds are prefered, many times the constituent act or the law stipulates
the nominative form. Through the nominalisation of the stocks it is intended to know exact the
shareholders and implicitly the componence of the social capital. If in the constitutive document it
does not say otherwise the stocks will be bearer bonds. But the stocks that are not paid in full are
always nominative.
The stocks are indivisible. In the situation in which a nominative action becomes the
property of several people, the company id not bound to list the transaction, if a soul representative
is not designated by the co-owners that will exert the rights that are a result of the stock.
The nominative stocks that are paid in full can be converted into bearer bonds. The bearer
bonds can be changed into nominative stocks. In the lack of a legal ban, the conversion of the
stocks from one form into another is decided through the decision of the extraordinary general
shareholders meeting.
According to the rights that are given to the title holder, the stocks can be divided into two
categories: regular stocks and privileged ones (3).
The regular or ordinary stocks are of equal value. Due to the parity of the contributions, the
regulat stocks give their possessors equal rights.
The priviledged or preferential stocks give to the title holders additional advantages. The
creation of priviledged stocks can be established through the constituent document or later on,
through a decision of the extraordinary general shareholders meeting.
These given priviledges can be of patrimonial nature or they can refer to the right to vote
and they give certain facilities to the sharing of the dividends or to the division of the social actives,
in case of the companys dissolution or to multiple rights to vote (4).
In the concretization of the prefernces that are given to a category of stocks we must keep
in mind the equality of treatment, respecting the others shareholders rights.
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The advantages that are given are not always accompanied by the right to vote in the general
meetings. In a different conception, in the Dutch and Finish law, there cannot be emitted stocks
without the right to vote.
In some legislations there can be emitted stocks that give special rights to the founders or
the promoters, as well as facilities to the employees for providing certain services. They have
dividends, but their right to vote has a series of restrictions.
In the Italian law the companys whose stocks are listed at the market can emit
compensatory stocks. Their possessors have the right to a prior dividend, that represents 5% from
the nominal value of each stock owned.
Next we shall see notions about the attainment by the company of its own stocks.
The anonymous joint stock company cannot attain its own stocks, either directly, or through
people that act in their own name, but in the behalf of the company.
In an exceptional manner the attainment by the company of its own stocks can be decided
by the extraordinary shareholders general meeting. Its qon stocks that are attained cannot exceed a
certain value of the subscribed social capital (5).
Its own stocks that are attained by the company do not have the right to dividends. During
the duration of their attaining by the company the right to vote that they give is suspended.
The company can attain its own stocks without restrictions. In certain situations the law
allows the free attaining of a determined number of its own stocks, that are integrally free (6).
Another important aspect regarding this problem is the one referring to the rights and
obligations of the shareholders.
Thus, the owner of the stock is called a shareholder and the possession of the stock gives
him the quality of associate. The rights and obligations of the associate are determined by the
number of stocks that he owns, as well as the stipulations of the constituent document of the
company.
The main obligation of the shareholder lies in the payment of the payments they owed and
the anexis to the actual financial situation has to comprise data regarding the stocks. It will be
specified if the stocks have been paid in full, as well as the number of stocks for which the payment
was requested .
The payment of the rest of payments on the stocks it is made at the data that are established
before hand, through the constituent document of the company. In the lack of such stipulations the
moment of payoff of the rest of the debt is appreciated by the general assembly or by the managers
(7).
According to the principle of the equality of treatment the request of payment is addressed
to all the shareholders. The payment invitation is made through a collective somation, published
twice, in the Official Monitor and in the media.
In the situation in which after the somation the residual payments are not made, the board of
directors can decide the pursuit of the shareholders or the anullemnt of the stocks that are not paid
in full. In the place of the anulled stocks now stocks will be issued, having the same number that
will be sold. The money obtained from the sell will be used for the covering of the residual payment
and the afferent expenses.
If the price obtained it is not enough or the selling does not happen because of a lack of
buyers, the company can go agains its sub-subscribers and assignees.
They are sollitary responsible for the full payment of the stocks and the company can pursue
either of them. But when the sums that are owed to the company are not recovered, the social
capital will be reduced in a procent that is proportional with the existent difference(8).
According to his quality, the shareholder has the following rights: to cash dividends, to
participate in the general meetings of the company, to vote in the general meetings, to be informed
on the companys activity, to receive his share after the companys liquidation (9).
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The making of benefits is one of the essential elements of the contract of company.
They are observed through the annual financial situation and they are established by the
general meeting, the benefits are divided between the shareholders. They are called dividends and
they represent a part of the net annual benefits, that are paid for each stock.
The dividends can be expressed in two ways: under a procentual form, as weight in the
nominal value of the stock, and in absolute terms, as sum for each stock. The dividends are divided
periodically. According to the moment of payment, during or at the end of the year, the dividends
are temporary or permanent.
The dividends are paied in a certain order. First the fixed dividends are paid, that correspond
to the priviledged stocks. From the sum that remains, the variable dividends are paid, and they
correspond to the regular dividends.
From the moment when the quantum of the dividends is specified, the shareholder benefits
from a right of claim against the company.
The shareholder will use this right according to his own will. In the case in which the
company is declareed bankrupt, the shareholder will enroll with the other creditors to the mass
bankruptcy.
Next we shall clear up aspects referring to the bonds, notion and juridical nature.
The making of the joint stock companys operations imply a social capital. When the capital
becomes insufficient, the company can use certain procedures. The necessary money will be
obtained by the increase of the social capital or through short term loans.
In order to avoid the difficulties created by the increase of the number of shareholders or by
the markets fluctuations, the company can use a specific mean. In exchange for the sums that are
lent on a long term, the company can issue bonds. Included in the category of securities, the bonds
are credit titles, that are individualised by certain characteristics.
companys obligation to return the borrowed money.
The titles of the bonds are equal and indivisible. The bonds from the same emission have an
unitary regime. Through the incorporation of the obligation of reimbursement in the title, the bonds
are transmissible.
The possession of the bonds gives the quality of creditor for the company, and not
associated. Being only a creditor the owner of the title has the right to the reimbursement of the
borrowed money and of the established rates no matter the situation of the company.
If the company is declared bankrupt the creditor will participate to the division of the active
bankruptcy (10).
According to the circulation manner, the bonds can be nominal or bearer bonds. They can be
issued in material shape, on paper, or in dematerialiyed shape, through listing into an account.
Nominative stocks have in their title the identification data of the creditor. The right belongs
only to the title holder, and it can be transmitted through transfer.
Bearer bonds do not contain data to identify the title holder. The right belongs to the owner
of the title, and it is transmitted through simple material tradition.
After the nature of the right given to the owner, the bonds are of three types: regular, with
the gratification and with the lot.
The regular bonds give the right to reimburse the nominal value and the afferent rate.
The gratification bonds are bought by a sub-scriber at a price under the nominal value. They
give the right to the difference between the nominal value and the sum that is effectively paid to the
company.
The bonds with lots can be reimbursed, at the date of payment or before that, through the
cast of lots. They give the right to a value superior to their nominal value (11).
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The conditions of issuing the bonds. The issuing of bonds can be decided by the
extraordinary general meeting of the company. The nominal value of a bond cannot be lower than
the limit established by the legal stipulations.
The issuance of bonds can be made through a bank or through appeal to public subscription.
In the first case, the banks take over all the stocks issued by the company. After that, they
give the stocks to their clients.
In the second case, the company has to publish an issuance prospect. This prospect has the
value of a public offer.
The issuance prospect will comprise the following aspects: identification data of the
company; the social capital and the reserves; mentions regarding the listing and the constituent
document of the company; the situation of the social patrimony, after the last approved balance
sheet; the types of stocks issued by the company; the total amount of the bonds that were issued and
that will be issued, the reimbursement manner, the nominal value of the bonds, their interest, the
indication if their are nominal or if they are bearer bonds, as well as the fact if they are convertible;
the tasks that burden the securities of the company; the date to which was published the decision of
the general meeting that approved the issuance of the bonds (12).
The bonds will be subscribed on the copies of the issuance prospect, and the value of the
subscribed bonds has to be paid in full.
Another important aspect is the one refering to the general assembly of the bonds.
The unique juridical regime of the bonds creates between the creditors a community of
interests. With the purpose of protecting their common rights, some national legislations have
stipulated the organisation of the aggreggation of the creditors. Through analogy, the group of
creditors is the object to the laws regarding the ordinary assembly of shareholders.
The general meeting is convened at the request of a number of shareholders that represent
the forth part of the issued titles and that are not reimbursed or of the representants of the title
holders. The compnay that issues them cannot participate to the deliberations of the general meeting
of the creditors. The title holders can be represented through trustees, except the managers, censors
and the companys clerks.
The assembly of the bonds holders can take the following decisions: to name a representant
of the bonds holders and one or more surrogates, with the right to represent them to the company
and in a court of law; to fulfill all the supervision acts ad to defend their common interests; to make
a fund, that will be taken from the interests that belong to the bonds holders, to cover the necessary
expenses in order to defend their rights; to oppose any modification of the constituent document or
the conditions of the loan that could harm the rights of the bonds holders; to have a say on the
issuance of new bonds. The decisions of the meeting are brought to the attention of the company
(13).
Through the validation of the deliberations the decision will be made with a majority
representing at least a third of the issued and non reimbursed titles. In the case of the modification
of the constituent document or the conditions of the loan or the issuance of the of new bonds, it will
be required at the meeting the presence of the owners that have at least two thirds of the non
reimbursed titles and the favourable vote of at least four fifths of the titles that are represented at the
meeting.
The decisions of the meeting are compulsory and for the bonds holders that were missing or
that they voted against. They have the possibility to attack these decisions in a court of law.
The reimbursement and the conversion of the bonds.
The bonds are reimbursed by the company that issued them at the date of payment.
The operation can take place even before the date of payment for the bonds from the same
emission and with the same value. The bonds will be reimbursed through cats of lots, to a sum that
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is superior to their nominal value, that is established by the company and that is publically
announced.
The bonds can be converted into stocks of the issuing company. This operation is made in
the conditions stipulated in the prospect of public offer (14).
In the last years the Romanian legislation and the European ones suffered modifications that
we shall see next.
In this sense the joint stock companies are big companies that have a large number of
shareholders when they are made. Today, the law says that a joint stock company can be made with
only two shareholders.
The compulsory social capital at the constituent moment, established by law, is minimum
90000 lei. The social capital can be made only in cash or in cash and in nature (15).
In the case of the joint stock companies that are made through simultaneous subscription,
the law says that at the constituent moment minimum 30% from the share of each shareholder has
to be paid, if their part is cash, the difference will be paid in 12 months from the date of the
companys listing. If there are parts that will be paid in nature, the difference will be paid in 2 years
from the date of the companye listing.
According to art 10 paragraph 1 from the Law 31/1990, republished and modified, the
Government will be able to modify, at least once every 2 years, the minimal value of the social
capital, taking into account the exchange rate, so that this quantum represents the equivalent in lei
of the sum of 25000 euros.
The social capital is divided into stocks, represented by negociable and transmissible titles
on organized financial markets (as the stock market) as well as on non-organized markets,
especially when the stocks are not listed on the stock market.
The stocks are transmitted through inter vivos acts (selling, donation), as well as juridical
mortis causa acts (wills).
The management of the company is made on the majority of shareholders votes principle
and not that of unanimity. The management organ is the general shareholders meeting, that can be
ordinary or extraordinary.
The administration of the company can be made, either according to the unitary system, by
the management council and by the directors, or according to the dualist system by the supervision
council and by the dierctorate.
According to art 137 paragraph 1 from Law nr 31/1990, republished and modified, the
management of the company can be made by asole administrator, with the exceptions stipulated by
the law (16).
The control of the companys activity is made, compulsory, by a comission of censors made
from at least 3 censors and as many surrogates (17), if by the constituent document is not stipulated
a higher number. In all the cases the number of censors has to be an odd one (according to art 159
from Law nr 31/1990, republised and modified).
3. A FINAL VERY IMPORTANT ASPECT IS THE ONE REFERRING TO THE
DEFINITION OF THE SECURITIES IN THE COMMUNITARY EUROPEAN
LAW
The definition of the securities in the communitary European law has its origin in the
principle of harmonization of the national legislations of the field, principle that has at its basis the
Rome Treaty, having as a starting point the harmonization of the essential notions of the capital
market. Between them the concept of security is fundamental. That is why the Directive nr 79/279
regarding the conditions of admission at the official share of a stockmarket and the Europen Code
of conduct in the transactions with securities imposed to the states that are members of the UE and
124
to the actors of the communitary capital market give a definition of the security. In the sense of this
sources of communitary law, the notion of security covers any negociable or that is susceptible of
being negociated title on an organized market. Directive 93/22/CEE of the Union Council from
10.05.1993 regarding the investition services in the field of securities (DIS) considers that by
security one understands the categories of titles that are negociated usually on the capital markets,
for example, state titles, stocks, the negotiable values allowing the buying of stocks on subscription
or through trade, stocks certificates, stocks that are issued in a series, warants with indices and the
titles allowing the acquisition of such bonds on subscription.
Art 1 from this Directive considers that that are securities: stocks and other values that
assimilated to the stocks, bonds and other claim titles, negotiable on the capital markets, as well as
any other values that regularly are negociated allowing the buying of such securities on subscription
or through trade, or that have the right to a payment in money, with the exculsion of the payment
means (18).
The European courts of law decided that the proposed definition has effects only in regard to
this directive and it does not affect in any way the different definitions of financial instruments that
are held in the national legislations with other purposes and especially with fiscal purposes. As such
the definition has only value of indication.
The European dogma considers that by securities one understands: stocks or other securities
that are assimilated to the stocks, the representative certificates on stocks, the bonds issued by
public or private entities, other negotiable titles on the capital markets and any other values that are
usually negotiated that would allow the attainment of such titles through public subscription or
exchange or through payment in cash.
In sysnthesis, one must remember that the securities are, in the communitary law, titles that
incorporate claims or personal-nonpatrimonial rights (sometimes they are called political rights,
because some securities give the right to vote in the general shareholders meeting or of the issuers
obligations, as well as, in some conditions, the control over the issuer). In order to be negotiable on
the regulated markets, the securities have to have been made the object of an initial public offer and
to have been listed at the share market or on the regultaed market (19).
Traditionally, the Roman law did not dedicate a certain settlement to securities.
Roman civil code, in art 474 (that takes the stipulations of art 529 from the French civil
code) defines as securities through the determination of the law the actions or the interests in
finance, commerce or industry companies, even when their capital is in real estates.
The securities, as juridical institution, were introduced in the Romanian law recently.
The consecration of the notion of security was made through Law nr 52/1994, regarding
the securities and the stock markets. This law defined securities as negotiable instruments that are
issued in material form or that are marked out through listings into account, that give their owners
patrimonial rights on the issuent, according to the law and in the specific conditions of their
issuence. The law mentioned that there are considered as securities: the stocks, the bonds as well
as the derived financial instruments, or any other credit titles, that are situated in this category by
the National Board of Securities (20).
In Romanian legislation of securities the definition of the security starts from the premise
that the securities are a specy of financial instruments (art 2, point 11, letter a) from Law nr
297/2004 regarding the capital market). The financial instruments are the kind that is a part of the
securities.
They are considered securities according to art 2, pct 33 from Law nr 297/2004:
- The stocks issued bt commercial companies and other securities that are equivalent,
negotiated on the capital market;
- Bonds or other claim titles, including state titles that have a payment day bigger
than 12 months, negotiated on the capital market;
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- Any other titles that are normally negotiated, that give the right to purchase the
respective securities through subscription or trade, giving place to a settlement in
money, excepting the payment instruments.
Through confusing definitions, art 2 pct 33-34 from Law nr 297/2004 divides the securities
into state titles and titles, other than the capital titles. The capital titles are the stocks or other
assimilated securities, as well as any other type of securities, giving the right to attain them as a
result of a conversion or of the exertion of this right, in the measure in which the values of the
second category are issued by the same issuer or by an entity that belongs to the group that the
respective issuer is a part of. The securities that do not fit in the first category, of the capital titles,
are part of the second category. With all the lack of precision of the text, we can appreciate that the
capital titles are securities of type of stocks, while securities from the second category are the type
of bonds that cannot be converted into stocks (21).
The common trait of these titles is, as we can notice, negotiability. Capital titles or titles,
other than capital titles, are securities either because they are negotiated or because they are
negotiable on the capital market. Securities are transactioned on the regulated markets, stock
markets or extra-stock makets, only after they had been listed, as such, by the CNVM, at the Office
for the Evidence of the Securities (OEVM).
The financial instruments, generally can be: (i) securities; (ii) participation titles for the
organisms of collective investments; (iii) instruments of the money market, including state titles
with a payment date that is less than a year and certificates of deposit; (iv) financial future
contracts, including contracts that are similar to the final settlement in funds; (v) forward contracts
on the rate of interest; (vi) swaps on the rate of interest, on the exchange rate and on stocks; (vii)
options on any financial instrument, including contracts that are similar to final settlement in funds,
options in process and on the interest rate; (viii) derived financial instruments on goods; (ix) any
other instrument that is allowed at a transaction on a regulated market from a state member of the
European Union or for that a request has been made to allow the transactioning on such a market
(22).
From the definition of the financial instruments we can notice their common trait,
negotiabilty.
In the contemporary French law securities are defined as titles issued by legal persons of
public or private right, that are transmitted through listing in account or through simple tradition,
giving to the title holders identical rights and access, directly or indirectly, to a part of the capital of
the issuent person or to a claim right with general character over its patrimony. The dogma
characterises them as negotiable titles representing the rights, identical through category, attained
by those that gave to a legal person, public or private, the cash or the goods necessary for its
financing. The securities represent, either a part of the capital of the issuent legal person, either a
claim against it. Securities are considered movables, representing a claim against the issuer. In the
case of the securities issued in dematerialized form, the title holder of such a value has a right of
claim against the issuer and on the intermediary as well as a real right on the value represented by
the respective listing into account (23).
Generally, in the French law there are considered as securities the following value titles: the
stocks and bonds of the commercial companies, in all the variants allowed by the law or by the
companys bylaws; credit titles issued by the state and by the authorities of public central and local
administration (municipal bonds); derived financial instruments, as futures and options contracts;
negotiable instruments with a fix or variable income; participation titles issued by the investment
funds; certificates or titles issued by different financial institutions authorized by the law.
The juridic regime of the securities is regulated in the United States of America through
Securities Act from 1993. through the term of securities there are designated the stocks, the cash
vouchers, bonds, interest certificates, deposit certificates, warranty certificates, and, in general, any
126
interest or instrument, together designated as securities or any interest or participation certificate,
giving the right to subscribe or buy, regardin any of them (Securities Act, 1993, title I, Definitions,
section 2 (1). American dogma fundaments the juridic regime of the securities as their main
function as financial/ investemnt instrument. The securities are considered instruments that give to
their owners property rights in a company, as stocks, or that show the relationship between the
creditor and a state entity, or a commercial company issuer, as in the case of bonds, or that offer the
right of special property, as in the case of the options and warrants (24).
In Great Britain the general juridical regime that applies to the securities is regulated in
Companies Act from 1985, modified in 2000, in Public Offers of Securities Regulation (POSR)
from 1995 and in Financial Services Act from 1986. Securities issued by the companies listed are
regulated in Financial Services Act from 1986, completed by Financial Services and Markets Act
2000. According to the stipulations of the Companies Act commercial companies can be private
(the equivalent of the close type company from the Roman law) or public (the equivalent of the
company that issues securities from the Roman Law).
4. CONCLUSIONS
Without any doubt in this moment in Romania with the actual European economy the
securities issued by the joint stock company have a very important role. The stocks and the bonds
are credit titles that have certain characteristics.
The stocks are representative titles of the social parties and they are fractions of the
authorised capital and they give to their owners the quality of share holders. After the legal
In the juridical doctrine one can identify several means for the notion of stock.
the anonymous stock companies, the social shares can have an inequal value. If the constitutive
document does not say different, the stocks give to the owners equal rights.
The stock represents the credit title that observes the rights and obligations that are part of
the quality of shareholder. In other words, the document in which it is incorporated the
shareholders right.
Also the stock deisgnates the corporative or associate proportion, that is the juridical bond
that exists between shareholder and the company. The shareholders rights and obligations are
determined by the stocks possession and not by the company contract or by the quality of
shareholder.
The stocks are characterised only through the existence of a title that incorporates the right,
without being autonomous and literal. As such, we ave to deal with the following consequences: the
extension of the possesors right is incompletely stipulated in the document that observes, it is
determined through the company contract and through statute; the content of the posessor;s right
can change according to the modifications of the company contract and of the statute; the sub-
obtainer has a derivat right and not an intrinsical one, and the exceptions that the debtor can
invoque against the first obtainer are opposable to the following ones.
companys obligation to return the borrowed money.
The titles of the bonds are equal and indivisible. The bonds from the same emission have an
unitary regime. Through the incorporation of the obligation of reimbursement in the title, the bonds
are transmissible.
The possession of the bonds gives the quality of creditor for the company, and not
associated. Being only a creditor the owner of the title has the right to the reimbursement of the
borrowed money and of the established rates no matter the situation of the company.
127
According to the circulation manner, the bonds can be nominal or bearer bonds. They can be
issued in material shape, on paper, or in dematerialiyed shape, through listing into an account.
Without them, the joint stock companies would not exist or function. The solutions for a
good applicability of the securities issued by the joint stock company from Romania would be
several but the most important would be that the managers get involve more in the companys
activity and of course the improvement of the national legislation through its harmonisation with
the European legislation.
NOTES
(1) I Macovei, International Commerce Law, Vol I, ED. C.H. Beck, Bucharest, 2006, p. 133.
(2) I Macovei, International Commerce Law, Vol I, ED. C.H. Beck, Bucharest, 2006, p. 133.
(3) I Macovei, International Commerce Law, Vol I, ED. C.H. Beck, Bucharest, 2006, p. 135
(4) The owning of a stock can give the right to at most 10 votes, in the Danish and Swedish law, or 20 votes in the
Finish law.
(5) For example 10% in the Italian, German or Dutch law
(6) See art 104 from Law nr 31/1990
(8) In this sense, art 100 from Law nr 31/1991
(9) S.D. Carpenaru, Roman commercial law, ed. V, Ed. All Beck, Bucharest, 2004, p. 311 and followings
(15) S. Angheni, M. Volonciu, C. Stoica, Commercial law, Edition 4, Ed. C.H. Beck, Bucharest, 2008, p.80
(16) S. Angheni, M. Volonciu, C. Stoica, Commercial law, Edition 4, Ed. C.H. Beck, Bucharest, 2008,p.81.
(17) S. Angheni, M. Volonciu, C. Stoica, Commercial law, Edition 4, Ed. C.H. Beck, Bucharest, 2008,p.81.
(18) Gh. Piperea, Commercial law, vol I, Ed. C.H. Beck, Bucharest, 2008, p. 328
(20) Law nr 52/1994 regarding the securities and the stock markets
REFERENCES:
1 Angheni,S , Volonciu,M , C. Stoica, M.G. Lostun, Commercial Law, Ed. Oscar Print, 2000;
2 Angheni S.,.Volonciu M, Stoica C., Commercial Law, Editia 4, Ed. C.H.Beck, Bucharest, 2008
3 Crpenaru Stanciu ., Roman Commercial law , Editia a-IV-a, Ed. All Beck, Bucharest, 2002;
4 Carpenaru S.D., Roman Commercial law, ed. a V-a, Ed. All Beck, Bucharest, 2004
5 Costin Mircea i Deleanu .S , The law of the international commerce, Ed.Lumina Lex,
Bucharest, 1994 ;
6 Macovei. I , The law of the international commerce, Ed.Junimea, Iai, 1980
7 Macovei I., The law of the international commerce, vol.I, Ed. C.H.Beck, Bucharest, 2006
8 Piperea Gh., Commercial Law , vol.I. Ed. C.H.Beck,Bucharest, 2008
9 Law nr.31/1990 regarding commercial companies
10 Law nr.52/1994 regarding securities and stock markets
128
5ECTION 2
MANAGEMENT AND BU5INE55
ADMINI5TRATION
129
EMPLOYEE MOTIVATION IN THE COMPANY. STUDY CASE
valentinh@seap.usv.ro
Master student Andrei-Alexandru MOROAN
alexandrumorosan@gmail.com
Abstract:
A firms performance is in a direct link with the resources it involves, namely material, financial and human
resources. If in the case of the material and financial resources the diagnosis and improvement processes are relatively
simple, the human resources imply more complex issues.
The first condition for a firm to obtain performance (in terms of human resources) is recruiting staff with
appropriate qualifications. But conforming to this criterion does not lead automatically to the elimination of human
resources issues.
Currently, the vast majority of firms employ qualified personnel with experience in the field, yet many of
them record an inadequate performance in human resources.
This is due to staff motivation. In addition to employing qualified personnel with experience it is necessary
that it be motivated adequately.
But motivation can be achieved through a variety of forms, salary bonuses and benefits such as cell phones,
cars, products at promotional prices, program flexibility and more, all having a different impact.
This article explores the effectiveness of various manifestations of motivation, trying to determine its
optimum structure. For this purpose an analysis was made of a firm that obtained a significant improvement in
performance, while maintaining material and financial resources constant. The company applies many ways to
motivate staff, so it was possible to analyze the impact of each one.
Following this analysis an indicative hierarchy of motivational methods was created. The results of this study
can be used and adapted in any companies that want to improve the quality of their human resources.
Keywords: human resources, motivational methods, personnel, motivation, motivation structure
JEL Classification: J30, J31, J32, J33
INTRODUCTION
Motivation is defined as the action of orienting ones behavior to a specific goal. There are a
lot of theories that try to explain, how and why motivation function as is does. The simplest
explication of how motivation functions is the need to minimize physical pain and maximize
pleasure, of chorus there are a lot of needs that may act as a motivator (e.g. eating, resting, or a
desired object, hobby, goal, state of being, ideal). Other theories attribute motivation to less-
apparent reasons such as altruism, selfishness, morality, or avoiding mortality. [1](Seligman M,
1995)
INCENTIVE THEORY
This theory is one of the oldest, and it states that presenting a reward (tangible or intangible)
after the occurrence of a certain action will cause the behavior to occur again. The theory is based
on the fact that the subjects mind will associate a positive meaning to the behavior. [2](Maslow A.,
1970).
The time passed since the occurrence of the action and the moment when the subject is
presented with the reward is also very important, it has been shown that for shot periods the impact
130
is greater than for longer ones. If this cycle of actionreward is repeated it is possible to convert that
action into a habit. [3](Goldthorpe, J.H. and others, 1968)
This theory depicts motivation as a very simple process, but in reality there are a lot of
factors that influence it. There are a lot of motivational techniques and it is hard to decide which
one is the optimum for a given situation. [4](Kerr S., 1995)
EMPLOYEE MOTIVATION
One of the most important uses of motivation is in a company. Organizations employ
workers to perform certain tasks; these workers need to be motivated in order to perform their tasks
with maximum productivity. Of chorus workers need to be kept in the organization for a long
period of time, for this process motivation is once again responsible. The traditional motivator for a
worker is his salary, but in many cases that isn`t enough. Companies use a lot innovating tactics to
keep their productivity at a maximum level. Some of them imply material rewards, others imply
psychological motivators.[5]( Weightman, J., 2008)
Analyzing from the perspective of the motivational factor we can speak of two types of
motivation:
Intrinsic motivation is generated by a factor that comes from within the subject (beliefs,
feeling that what he does is important, modality, the perspective of learning something new).
Extrinsic motivation is generated by a factor that comes from the exterior (e.g. salary,
material rewards, good reviews). [6](Lepper, M.R. and others, 1973)
BUSINESS
A very important theory in the field of motivation is Maslow`s pyramid. In his work
Maslow has created a hierarchy of needs felt by an individual. [7](Maslow A., 1970)
At the base of his pyramid Maslow put physiological needs; for an individual found under
their constraint money is a perfect motivator. But after these need are satisfied the individual will
advance on Maslow`s hierarchy and his needs will change, this implies the fact that the motivator
will change as well [8]( Goldthorpe, J.H. and others 1968). At higher levels of Maslow`s pyramid,
are placed needs that are satisfied with praise, respect, recognition and empowerment, money
having a small impact [9]( Steinmetz, L., 1983).
EXPERIMENTS
Given the extremely important functions
played by motivation and its complexity, over time
there have been a lot of researches and experiments.
One of these experiments was made by Sam
Gluxberg. He used the "candle problem" (created by
psychologist Karl Druncker in 1945 to study the
functional fixedness).This problem forces the
subjects to go beyond the obvious usefulness of
objects and use their creativity to determine other
functions. More specifically in the "Candle
Problem" the subject is placed in a room with a
table, on which are three items, a candle, a box of
matches and a box of thumbtacks (like in Figure
1). They must fix the candle to the wall so that the wax does not run on the table.
Figure 1 The Candle Problem
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Figure 3 Simplified Candle Problem
The solutions that are first tested by the subjects are:
1. Lateral melting the candle and try to stick it to the wall;
2. Fix the candle to the wall with thumbtacks;
But none of them work. After an average time of about five minutes subjects find the solution, the
box of the thumbtacks is an object to be used in solving the dilemma, the solution is depicted in
figure 2.
To solve this problem it is necessary to be
creative.
Gluxberg found a very interesting use for
this experiment, he took two groups of people and
put them to solve this problem. To the first group
he said that the top 25% who finish will receive $
5 and the first person to finish will receive $ 20.
The second group was told they would be timed to
determine the average time to resolve this
problem.
The results were very interesting, the
group which was promised the rewards, had pour
performance, individuals within the first group,
took about 3.5 minutes longer to find the
solution.[10]( Pink D., 2009).
Gruxberg determined from this experiment
that extrinsic motivations (such as material
rewards), put pressure on individuals, having negative
effects on creativity. To prove this first hypothesis, Gluxberg devised a second experiment. This
time he used a simplified version of the "Candle Problem" depicted in figure 3 (in this simplified
version, the thumbtacks are out of the box, making the solution obvious).
Repeating the experiment under similar
conditions, but simplifying the problem, Gluxberg
achieved a result which reinforced the hypothesis.
Using a simple problem which requires no
creativity the first group (that was motivated
extrinsically) obtained much better results (accounting
for much better times).
These results supported his hypothesis. For
tasks whose solution is obvious extrinsic motivations
are working as they should (increasing performance),
but for tasks whose solution is more complex, extrinsic
motivation backfires, having negative effects on
performance [11]( Pink D., 2009).
Given Gluxberg conclusions in 2005 a team of
researchers from Massachusetts Institute of
Technology, led by D. Arily conducted a similar
experiment. This time they used several games, some of which required only motor skills, while
others required in addition to motor skills, cognitive abilities. They used three types of rewards. The
MIT researchers conclusions were similar, as long as they used only games that required motor
skills, extrinsic motivations operated as expected (the higher the reward conducted to the highest
Figure 2 - Solution of Candle Problem
132
performance), but when using games that required cognitive abilities, rewards had negative
effects. For complex games (which required cognitive skills) the best performances was recorded
for groups that werent offered any rewards. Some researchers suggested moving the experiment to
another country, where the standard of living would be lower, this suggestion being made on the
basis that the U.S. standard of living is quite high and extrinsic motivations (such as material
rewards) have lost some of their effect.
As a result a set of research was conducted in India, a country with a low living standard and
a sum of money which is irrelevant to an American, is significant for an Indian.
In India the results of the experiment were identical to those in the U.S.. Therefore it is not a
question of living standards.
The conclusion of the two experiments is that if the task is complex the motivation uses
must be intrinsic (within the employee) and if the task is simple the motivation uses must be
extrinsic [12]( Heyman J., Ariely D., 2004).
But this conclusion is lacking applicability. It is hard to believe that an employee operating
only on intrinsic motivation will perform tasks in the interest o a company for a period of time. In
order to prove this point of view we take a look at Malov`s theory.
"Maslov's pyramid (figure 4)(hierarchy of needs generates a default behavior and a certain
sensitivity to motivation) is another theory uses in human resources management.
According to Maslow's pyramid individuals will
be motivated in the first phase of basic needs (needs
such as food, clothing, security), those on the first two
levels of his pyramid. Only after these two needs will be
satisfied they can advance. In an attempt to meet these
two basic needs, individuals will be attracted to extrinsic
motivations. Later, after satisfying the first two levels,
they will advance. Only in this second phase they will
present a greater openness to intrinsic motivation. It is
worth mentioning that in this second phase they will
have to maintain the first two needs at an optimum level
of satisfaction, therefore they will maintain a certain
sensibility to extrinsic motivation [13](Maslow A., 1970). Gluxberg used in the experiment
subjects, who most likely had past the first three levels of the pyramid, therefore they were not
affected by strong constraints such as lack of food or security.
Figure 4 Maslow`s Pyramid
Graph 1 - Sensibility
133
If we were to superpose the two theories, that of Maslow and Gluxberg we get a more
complex scenario, which would be more realistic. Individuals in the first phase will be very
sensitive to extrinsic motivations, once these needs on the first level of Maslow's pyramid are met,
their sensitivity will change to intrinsic motivation (this sensitivity will vary in direct proportion to
the level attained in the hierarchical pyramid). But after this shift, the sensitivity for intrinsic
motivation will vary depending on the complexity of tasks individuals have to perform.
A graphical representation is depicted in graph 1 and graph 2.
These developments are indicative.
Also, an employee can carry out activities with a medium or high level of creativity only when his
needs are located at least at the third level (or higher) on Maslow's pyramid.
In the motivation process it is very important to take into account the specific work
undertaken. Employees are extrinsically motivated (rewards) and for those carrying out a complex
task which requires cognitive and creative functions it is recommended the use of intrinsic
motivation, extrinsic showing multiple limitations. Gluxberg's conclusion is a bit naive and
inappropriate application (for cognitive and creative activities to relate to intrinsic motivation,
extrinsic ones having a negative effect), but combined with Maslow's theory, it takes on a new
dimension that can have great practical utility.
STUDY CASE
To demonstrate the functionality of the above
principles, we conducted a study on a company with
60 employees. We chose a company that has two
divisions: automotive service (35 staff) and an auto
sales (25 employees), the choice was based on the
consideration that the service division performs tasks
Table 1 Forms of Motivation
Intrinsic Motivations
1. Great importance on communication
2.
Employees have the possibility to propose
improvements
3.
Employees are consulted when the firms
strategy is updated
4. Flexible program
5. Opportunities of career advancements
Extrinsic Motivations
1. Salary bonuses
2. Life ensures
3. Mobile phone
4. Company car
Graph 2 Sensibility
134
does not require much cognitive and creative functions (vehicle diagnoses being provided by a
computer, other operations being described by the vehicle service manual), and the sales unit witch
perform opposite task, they must be very creative in direct marketing, addressing customers so as to
persuade them to opt for products distributed by the company. Another consideration on which this
company was chosen is the forms of motivation applied. In table 1 these forms of motivation are
enumerated.
It is worth mentioning that the company allocates similar resources for the two forms of
motivation (graph 3).
Within this company a survey was conducted among all employees, trying to determine the
effectiveness of various forms of motivation.
Employees were applied a questionnaire
which contained several questions, one section
include a list of all forms of motivation applies,
they were asked to tick a degree of effectiveness
for etch one, from their point of view.
The results of this query support
Gluxberg theory, the employees from the sales
department have agreed intrinsic motivation is
more effective than extrinsic motivation, while
those in the service department had a reverse
reaction.
If we were to relate only to Gluxberg`s
theory the general motivation of employees
from this company should be low, due to the
fact that this company applies the two forms of
motivation equally. But the same survey also
had a section to quantify the overall motivation
of employees (graph 4).
As shown, Gluxberg`s theory is not valid
in practice. The experiment studied motivation
isolated from other factors.
If we were to relate the conclusions
derived from overlapping Gluxberg with
Maslow's theory, the results are validated. The
company applies the two forms of motivation
(approximately equal) and obtains a relatively
good motivation (approximately 75% of
employees).
As a possibility of improving employee
motivation in this company, it is recommended
to easily apply the two forms of motivation
distinct among the two divisions (graph 5).
It's hard to say which would be optimal; it must
be found by repeated tests.
Graph 4 General Satisfaction
Graph 5 Optimum distribution of
motivation forms
Graph 3 Forms of motivation
applaied
135
CONCLUSIONS
The results of a series of experiments conducted under controlled conditions are not always
appropriate to be applied in practice, these experiments provide very important contributions, but
they should be correlated with both existing theory and the issues identified in the companies.
Gluxberg's experiments have made very important contributions on forms of motivation that
should be applied in modern society. But, the solutions given by his experiments, can`t be applied
in practice, they are not taking into account all the factors that act on an employee. If his
conclusions are related to existing theory they become feasible, consequently, suited to the situation
found in companies.
Managers must take into account the situation of employees, the needs that they show
(placing them on a certain level of Maslow's pyramid), but also the specific work performed by
them (involving cognitive and creative activities or not). Following these findings, managers are
able to identify the predominant form of motivation recommended for their company. And then
through successive adjustments to identify the optimal point (these adjustments are necessary,
because economic theory provides an indicative distribution, every company and every employee
has certain features that are hard to take into account).
BIBLIOGRAPHY
1. Baumeister R.F., Vohs K.D. Handbook of self-regulation: Research, theory, and
applications, Guilford Press, New York, 2004
2. Burciu A., Prelipcean G., Bostan I., Hapenciuc V., Chaovschi C., Roman C., Popescu M.,
Vancea R., Dmbu D., Nstase C. Introducere n Management, Editura Economic,
Bucureti, 2008
3. Carver C. S. Scheier M. F. On the self-regulation behavior, Cambridge University Press,
New York, 2001
4. Cofer C., Appely M. Motivation: Theory and Research, John Wiley & Sons, New York,
1967
5. Goldthorpe, J.H., Lockwood, D., Bechhofer, F. and Platt, J. - The Affluent Worker: Attitudes
and Behaviour, Cambridge University Press, Cambridge, 1968
6. Heyman J., Ariely D. Effort for Payment: A Tale of Two Markets, Psychological Science
15, 2004
7. Kerr S. - On the folly of rewarding A, while hoping for B, Academy of Management
Executive, New York, 1995
8. Knghts D. and Willmott H. - Organizational behaviour and management, Tomson
Learning, London, 2007
9. Lepper, M.R., Greene, D., Nisbett, R.E. - Undermining children's intrinsic interest with
extrinsic rewards: A test of the overjustification hypothesis, Journal of Personality and
Social Psychology, 28(1), 1973
10. Maslow A. - Motivation and Personality, Harper & Row, New York, 1970
11. Pink D. Drive: The Surprising Truth About What Motivates Us, Penguin Group
Incorporated, New York,2009
12. Seligman M. - Learned Optimism,Alfred A. Knopf, Inc., New York, 1995
13. Steinmetz, L. - Nice Guys Finish Last: Management Myths and Reality, Horizon
Publications Inc., Boulder, Colorado, 1983
14. Weightman, J. - The Employee Motivation Audit, Cambridge Strategy Publications,
Cambridge, 2008
15. www.wikipedia.org
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16. www.ted.com
-
METHODS OF MEASURING THE PERFORMANCE OF INTERNAL AUDIT
PhD Assistant Cristina BOA-AVRAM
cristina.botaavram@econ.ubbcluj.ro
PhD Professor Ioan POPA
ioan.popa@econ.ubbcluj.ro
PhD Lecturer Cristina TEFNESCU
cristina.palfi@econ.ubbcluj.ro
Babe-Bolyai University, Faculty of Economic Sciences and Business Administration, Cluj-Napoca, Romania
Abstract:
This paper is focused over the performance of internal audit, more exactly over the methods of measuring the
effectiveness of internal audit activity. The global economic crisis put in the light many difficult economic areas that
need to be reviewed and their performance is discussed. One of these problematic areas is represented by the
performance of internal audit and the right methods to measure it. Based over an analysis of the most recently internal
audit practices at leading international companies, our main objective was to develop a synthesis of the most relevant
methods that could be used to measure the effectiveness of internal audit, from an international point of view, and also
to identify the key trends that will influence the internal audit activity from the performances point of view.
Key words: internal audit, performance of internal audit, methods of measuring, value added, internal audit
practices.
JEL Classification: M42
INTRODUCTION
The current economic crisis generates a major pressure over several areas, and one of these
is represented by internal audit. The activity of internal audit it is now more than ever called to
prove its usefulness, or in other words, to eliminate the unpleasant label of resources consumer
and to become a provider of value added. In this context, the problem of measuring and
evaluating the performance of internal audit is more and more in the attention of both auditors and
those who are following and using the results of internal audit. The International Standards for the
Professional Practice of Internal Audit states that The chief audit executive must develop and
maintain a quality assurance and improvement program that covers all aspects of the internal audit
activity (1300- Quality Assurance and Improvement Program) (IIA, 2008). According to the
interpretation offered by the new version of internal audit standards issued by The Institute of
Internal Auditors in 2008 and applicable with 2009 this program also assesses the efficiency and
effectiveness of the internal audit activity and identifies opportunities for improvement.
Different studies realised recently (Deloitte, 2010; PriceWaterhouseCoopers, 2010; Pop &
Boa-Avram, 2009) emphasized the need to rethink the strategy of the internal audit activity, maybe
even to rethink a new model of internal audit. One of key trends identified more recently at
international level showed that now we are confronted with the growing of the interest for the
measuring and evaluating of the performance of internal audit, that will leading to more attention in
choosing those methods to detect the real level of performance achieved by internal audit, from
both quantitatively and qualitatively. It becomes necessary to organise periodicaly, under the audit
committes supervision, the external evaluation of the level of performance of internal audit activity
determined by the internal audit itself.
The next perspectives of internal audit function show an intense concern for the value added
provided by internal auditors, and also for the methods through the internal audits effectiveness
could be reliably measured and evaluated. The problematic of measuring the effectiveness of
internal audit function receive increasingly significant valences so that internal audit has to face a
significant challenge consisting in finding the best and relevant metrics for measuring the efficiency
and performance of internal audit and quantifying the progress made in achieving its goals and
objectives (Prawitt, 2003). The difficult economic context requires accurate answers at questions
138
like: Which methods of measuring the of internal audits performance are more relevant and more
effective?
METHODOLOGY OF SCIENTIFIC RESEARCH
The scientific research methodology of this paper is based on fundamental type of research,
trying to make a review of main approaches, ideas and opinions of high rated specialists regarding
the internal audits performance trying to identify the next key trends of the researched area.
Combined with the method of critical analysis of recent publications and various articles and
studies in international literature, we used the analysis of case studies that described internal audit
practices used by the leading international companies more recently. The main objective of this
study is to determine the main methods that could be used for the most relevant evaluation of
internal audits performance. So, the construction of the research methodology was focused over the
identification of the potential answers at the question:
1. Which methods are more relevant for the measuring of internal audits performance?
2. Which are the main characteristics of internal audit practices used by leading international
companies for measuring and evaluating the effectiveness?
In the process of finding solutions at the problems discussed we investigated high rated
articles and papers, reports and recommendations, combining the documentation process with the
observation process materialized in its two forms: participative and non-participative. Finally, we
tried to synthesize the most relevant methods and techniques that could be used as guidelines for the
assessment of internal audits effectiveness.
LITERATURE REVIEW IN THE RESEARCH AREA
Ernst&Young, one of Big Four Audit firms, conducted a few relevant studies regarding the
international audit practices, the results being incorporated into so called studies Global Internal
Audit Survey. Next, we are going to refer at the more recently studies realized in 2007 ant 2008.
The report Global Internal Audit Survey 2007 (Ernst&Young, 2007) highlights the findings of
survey made through internal audit executives representing 138 predominately public companies
representing membership in the Global Business Week 1000, and the Standard&Poors Global 1200
from 24 countries, most of the participants companies being large multinational functions with
revenues over US$ 4 billion. The results of this survey show that half of the respondents (50%) do
not track the value their internal audit function provide to the organization, while only 13% measure
value based upon actual cost savings. The importance of value tracking is given by the fact that
reinforces internal audits relevance as well as help to justify the investment in necessary resources
for internal audit. Regarding the methods used for the evaluating of internal audits performance,
the survey (Ernst&Young, 2007) showed that:
the most used methods for measuring internal audits effectiveness are represented by:
- Completed internal audits in comparison to the internal audit plan (89%); and
- The length of time for issuing internal audit reports (72%);
- only 32% of respondents use length of time for resolve internal audit findings as a key
metric, and
- 23% use support of key business initiatives.
The survey realized by Ernst&Young next year (Ernst&Young, 2008) emphasized that
beside the methods (identified in 2007 survey) used in measuring internal audits performance:
completed internal audits in comparison to the internal audit plan and the length of time for issuing
internal audit reports, there is one more frequently used namely the results from shareholders
surveys. The survey (Ernst&Young, 2008) identified that:
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only 34% of respondents use length of time to resolve internal audit findings and
only 22% use support of key business initiatives as a key metric.
According to Ernst&Young Survey from 2008, the most used methods to measure internal
audit effectiveness are presented in Figure.1
Figure 1. Metrics used in measuring internal audit effectiveness
Source: Ernst&Young, 2008
Starting with 1993, The IIA's Global Auditing Information Network (GAIN) has realized
different benchmarking information over different topics of internal audit. Many GAIN participants
were interested to identify the most relevant methods for evaluating the internal auditing department
effectiveness. Ziegenfuss (2000) presents the results of a study involving CAEs participating in the
GAIN project, and there were identified five top performance measures like:
1. Staff experience;
2. Auditing viewed by the audit committee;
3. Management expectations of internal auditing;
4. Percentage of audit recommendations implemented; and
5. Auditor education levels.
According to Ziegenfuss (2000), we present in the Table no.1 and Table no.2 the top twenty
of performance measures for internal audit activity as follows:
Table 1. TOP 20 Gain Performance Measures as ranked by CAEs
Overall Ranking Performance measures Audit process
1 Staff experience Input
2 Auditing viewed by the audit committee Audit environment
3 Management expectations of internal auditing Audit environment
4 Percent of audit recommendations implemented Output
5 Auditor education levels Input
6 Audited satisfaction survey Process
7 Importance of audit issue Output
8 Training hours per internal auditor Output
9 Audit committee satisfaction survey results Audit environment
10 CAE reporting relationships--functional Audit environment
11 Audit committee risk concerns Audit environment
12 Number of complaints about audit department Process
13 Role of internal auditing viewed by the audited Audit environment
14 Number of management requests Audit environment
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15 Percent of certified staff Input
16 Number of process improvements Output
17 Quality assurance techniques developed Audit environment
18 CAE meets privately with audit committee Audit environment
19 IT integrated auditing Audit environment
20 Average years of audit experience Input
Source: Ziegenfuss, (2000)
Table 2. TOP 20 Gain Performance Areas as ranked by CAEs
Overall Ranking Performance areas
1 Auditor quality
2 Standing with audit committee
3 Management satisfaction
4 Quality of findings
5 Auditor quality
6 Audited relations
7 Quality of findings
8 Audit resources
9 Standing with audit committee
10 Organizational status
11 Audit committee effectiveness
12 Audited relations
15 Auditor quality
16 Quantity of findings
17 Quality assurance
18 Audit committee effectiveness
19 Audit mix
20 Auditor quality
When CAEs participating at GAIN survey were asked to identify the five most vital and
important measures for evaluating the internal audit performance, their responses were quite
interesting. We present them in the Table 3.
Table 3. Most critical performance measures in the vision of the CAEs
Overall Ranking Performance measures Audit process
1 Audited satisfaction survey results Process
2 Percent of audit recommendations implemented Output
3 Number of management requests Audit environment
4 Audit committee satisfaction survey results Audit environment
5 Importance of audit issue Output
6 Management expectation of internal auditing Audit environment
7 Staff experience Input
8 Completed vs. planned audits Process
9 Number of process improvements Output
10 Training hours per internal auditor Input
11 Role of internal auditing viewed by the audit committee Audit environment
12 Number of major audit findings recommendations Output
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13 Amount of audit savings Output
14 CAE reporting relationship--functional Audit environment
15 Percent of certified staff Input
16 Number of complaints about audit Process
17 Quality assurance techniques developed Audit environment
18 Audit committee risky concerns Audit environment
19 Number of repeat findings Output
20 Days from end of field work to report issuance Output
Frigo M.L. had a significant contribution at the researching of the internal audits
performance. He propose the using of Balanced Scorecard instrument in the evaluating of the
performances of an internal audit department through his paper totally dedicated to this problematic
- A Balance Scorecard Framework for Internal Auditing Departments (Paperback) a paper
realized in cooperation with The Institute of Internal Auditors Research Foundation. The author of
this study wanted to develop a model of Balanced Scorecard for internal audit departments,
following to emphasize the ways that internal audit departments could improve their activities
regarding the measuring of internal audit performances. The Balanced Scorecard model presented
by Frigo M.L.(2002) is approached from few key elements perspectives like:
(1) Internal audit customers (audit committee, management and the audited);
(2) Internal audit process;
(3) Innovations and capabilities.
For the construction of this model, Frigo starts from the premise that there are some key
concepts of this model that could be applied for the internal audit departments like:
measuring the performance from customers point of view;
determination of some certain indicators for the quantifying of the internal audit performance;
the connection between internal audit and customer expectation;
focusing on general strategies of the department;
innovation and capabilities of internal audit.
Arena & Azzone (2009) realized a study through they followed to understand the
organizational drivers of internal audit effectiveness, taking into account the recent changes of the
internal auditing and its central role in corporate governance. The data used for this study were
collected through a questionnaire, which was sent to 364 Italian companies, and a response rate of
47% was obtained. On the basis of data from 153 Italian companies, Arena & Azzone (2009)
survey emphasizes that the effectiveness of internal auditing is influenced by factors like:
the characteristics of the internal audit team,
the audit processes and activities, and
the organizational links.
It was observed an increasing of internal audit effectiveness, particulary, when:
the ratio between the number of internal auditors and employees grows,
the Chief Audit Executive is affiliated to the Institute of Internal Auditors,
the company adopts control risk self-assessment techniques, and
the audit committee is involved in the activities of the internal auditors.
INTERNAL AUDIT PRACTICES FOR EVALUATING THE PERFORMANCE
USED BY LEADING INTERNATIONAL COMPANIES
The study realized by PROTIVITI (one of the largest providers of internal audit services and
consultancy from United States and Canada) in cooperation with The Institute of Internal Auditors
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(Protivi Knowleadgeleader, 2010), have been continued the series of studies realized by Protiviti
starting with 2005, each of these studies analyzing the internal audit practices at leading
international companies from different point of views. The last volume (VI) Internal Auditing
Around the World tries to establish a summary of the profiles of technology enabled internal audit
functions at leading international companies.
Due to the value provided by technology-based audit and data analysis techniques, internal
audit has now the capability to examine vast amounts of data, identify patterns and potential risks,
in this way internal audit being able to provide better recommendations to management and to the
board, which would determine a greater effectiveness and performance for internal audit activity.
The study (Protivi Knowleadgeleader, 2010) presents data for nine international leading
companies. Based on the data provided by this study, next we try to outline a synthesis of elements
of internal audit practices used by these companies in the measuring of internal auditing
performance.
1. ACCENTURE:
Industry: Professional Services
Number of employees:181.000
Annual Revenues: US $ 21.6 Billion
Auditors in IA Function: 45
Number of Years IA Function has been place: 9
IA Director/CAE reports to Chief Risk Officer (CRO).
Metrics used for measuring of the internal audit performance:
Effectiveness of global risk coverage
Scope and dept of coverage
Quality of internal audit reporting to management and the audit committee
Quality of internal audit staff (leadership, development and qualifications)
Efficiency of the overall internal audit function
Efficacy in covering existing and emerging risks and new businesses
Using of balanced scorecard approach to track key departmental metrics.
2. COMMONWEALTH BANK:
Industry: Financial Services
Annual Revenues: AUS $ 34.9 Billion
IA Director/CAE reports to Chief Financial Officer (CFO).
Audit client feedback
Internal post-audit review
3. DENTSPLY INTERNATIONAL:
Industry: Medical Instruments & Supplies
IA Director/CAE reports to Chief Risk Officer (CRO) and Chair of Audit & Finance Committee.
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The performance of audits according to the annual plan
The issuance of audit reports within 10 days from the last day of fieldwork
Minimal audit director/manager review notes
Minimal audit plan risk assessment changes
Value-added recommendations written into the audit report
Risk-based assessment with priority ranking given to the audit plan.
4. DEUTSCHE BANK :
Industry: Financial services
Number of employees: 77.053
Annual Revenues: US $ 40 Billion
IA Director/CAE reports to Management board/Group CFO.
Balanced scorecard approach aligned to Deutsche Banks strategic objectives. The four
performance indicator categories are people, processes, financials and service.
Report to management board and audit committee with regard to audit plan progress and
key control deficiencies.
5. PHILIPS:
Industry: Consumer electronics
Annual Revenues: 23 Billion
IA Director/CAE reports to Chief Executive Officer (CEO) & President.
The compliance with the audit plan that contains a number of issues
The measuring of audit scope around financial reviews, business audits and strategic risk
audits and the connection to an assessment of overall risks in Philips
The measuring of performance on a continuous basis reporting to the companys
supervisory board audit committee on its progress.
6. SAP:
Industry: Computer Software
Annual Revenues: 10.7 Billion
IA Director/CAE reports to Chief Executive Officer (CEO).
Analysis of audit cost including costs per engagement
Display audit results from geographical regions
Audit survey results
Developing conceptual approaches such as continuous auditing.
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7. SHELL:
Industry: Energy
Annual Revenues: US $ 278 Billion
IA Director/CAE reports to Chair of Audit Committee.
The audit scope
The progress in action implementation of audit recommendation.
8. SPB:
Industry: Financial Services
Number of employees: 822
Annual Revenues: 117.7 Billion
IA Director/CAE reports to Chief Executive Officer.
Evaluation of boards satisfaction with the internal audit team work and findings
Measuring the satisfaction of audited after each audit engagement
Examination of financial benefits that company achieves through the implementation of audit
recommendation
A global analysis of what audit brought to the organization in terms of cost reduction and risk
management improvement
9. TALECRIS BIOTHERAPEUTICS:
Industry: Pharmaceuticals
IA Director/CAE reports to Chair of Audit Committee dotted line report to CFO.
Traditional methods like making sure that internal audit is on target with budgets,
productivity and quality
The evaluation of accomplishing of audit plan from an investigation standpoint and if they
are resolving issues as they emerge
The acceptation of internal audit recommendations by management
The evaluating of organizational tone of accepting internal controls.
It can be observed a strong preoccupation for internal audit directors with regard to
effectiveness and performance of internal auditing. The technology provides a great added value for
a lot of activities including internal auditing. Thanks to technology, now, internal auditors have the
possibility to assess the entirety of their transactions, being able to develop data analysis more
accurate and complete. As the director of internal audit from Shell company remarks: Internal
auditors have strengthened the assurance they provide (Protivi Knowleadgeleader, 2010).
On the other side, due to this great advantage represented by technology, the expectances
from internal auditors are now more than ever, and from here arises the intense preoccupation for
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internal auditors to measure their effectiveness and to prove the value added provided to their
companies.
A synthesis of the main metrics used by international leading companies for measuring and
evaluating the performance of internal audit is given as follows:
Using of Balanced Scorecard instrument
Using qualitative methods by realizing some satisfaction studies for the clients of internal
audit, one main objective being the identifying of the potential causes for the unhappiness of
the client;
implementation of some assurance quality programs and the accountability to realize annual
assessments of internal audit quality;
other instruments used for the measuring of the internal audits effectiveness are: informal
reports for the management, different monitoring systems of a necessary time for fulfilling
the audit missions and the quality of internal audit reports.
CONCLUSIONS
Taking into account the difficult economic conditions that we are passing through, its
become obviously that one of the main challenge that will influence the next perspectives of
internal audit development will be determined by the necessity for internal audit to prove the added
value provided and so, to find the most relevant methods and techniques to evaluate internal
auditing performance.
With no doubt, we can conclude that both stakeholders and internal auditors themselves
recognize the critical focus of management under internal audit is analyzed, which require the
fundamental rethinking of the internal audit strategy. It is necessary for internal audit profession to
achieve a significant step toward some radical changes with regard to how internal audit works and
the value added by its functioning to meet successfully the requirements of Executive Directors,
members of audit committees, and even internal auditors. In our opinion its quite important in the
process of metamorphosis of internal audit to give the internal auditors the opportunity to develop
the range of skills necessary in carrying out tasks, focusing more insistently on the ability to
identify potential risks and strategies to manage and mitigate these risks.
Analyzing internal audit practices there could be identified many methods and instruments
that are considered as being quite relevant for measuring and evaluation of internal audit efficiency.
In our opinion, the choice of different metrics for evaluating the performance depends on the
settlement of the main objective of trying to obtain the best reflection of internal audits relevancy
and efficiency, offering arguments for investment for a good developing of internal audit
department.
In our opinion there are few general rules that have to be respected by internal auditors in
order to assure their contribution at the progress of the company:
the internal audit strategy has to be focused over the concept of value added for the work
environment
Internal auditors must be aware over their responsibility to demonstrate to the management
and the audit committee how internal audit works;
Internal auditors have to be also aware of their responsibility to find the most relevant
methods and techniques in evaluating their performance
Starting from the real level of performance determined, internal auditors have to find
solutions for improving internal audit strategy if its necessary in order to assure the top
level of effectiveness.
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REFERENCES
1. Arena, M.&Azzone, G. (2009), Identifying organizational drivers for internal audit
effectiveness, International Journal of Auditing, (13): 43-69.
2. Delloite, (2010), The changing role of internal audit, March, accesibil on-line la
http://www.deloitte.com/view/en_BE/be/services/aers/internalaudit/efeb39896dea7210VgnVCM10
0000ba42f00aRCRD.htm
3. Ernst&Young, (2007), Global Internal Audit Survey, A current state analysis with insights into
future trends and leading practices, accessible on-line at
www.theiia.org/download.cfm?file=31923
4. Ernst&Young, (2008), Escalating the role of internal audit, Ernst&Young Global Internal
Audit Survey, accessible on-line at http://www.ey.com/global/content.nsf/International/AABS_-
_Advisory_-_Escalating_the_role_of_internal_audit
5. Frigo, M.L., & Krumwiede, K.R., (2000), The balanced scorecard: a winning performance
measurement system, Strategic Finance, January, pp.50-54.
6. Frigo, M.L., (2002), A Balance Scorecard Framework for Internal Auditing Departments
(Paperback), The Institute of Internal Auditors Research Foundation, Altamonte Springs,
Florida
7. Gross, J.A., (2006), Control consciousness: internal auditors need to use their knowledge and
experience to provide innovative methods of adding value, The Internal Auditor, April,
accesibil on-line la http://findarticles.com/p/articles/mi_m4153/is_2_63/ai_n16134043
8. Institute of Internal Auditors - IIA (2008), International Standards for the Proffesional
Practice of Internal Auditing, Octombrie, available on-line at
http://www.theiia.org/guidance/standards-and-guidance/ippf/standards/.
9. Institute of Internal Auditors (2008), International Standards for the Proffesional Practice of
Internal Auditing, Octombrie available on-line at http://www.theiia.org/guidance/standards-
and-guidance/ippf/standards/
10. McCall, L.(2006), Enhancing the value of internal audit, Accountancy Ireland, June, Vol.38
No.3, accesible on-line la http://www.ey.com/Global/Assets.nsf/Ukraine_E/
Internal_Audit_Brochure_Eng/$file/ 10_Questions_eng.pdf
11. Pop, A. & Boa-Avram, C. (2009), Criza economic global: activitatea de audit intern ar fi
putut preveni aceast criz?, Revista de Audit Financiar Nr.7/2009, pp.14-22.
12. Prawitt, D.F., (2003), Managing the internal audit function, The Institute of Internal Auditors
Research Foundation, accesibil on-line la www.theiia.org
13. PricewaterhouseCoopers, (2010), State of internal audit profession, accesibil on-line la
http://www.pwc.com/us/ en/internal-audit/ publications/2010-study-internal-audit-
profession.jhtml
14. Protivi Knowleadgeleader, (2010), Internal auditing around the world, Profiles of Technology-
Enabled Internal Audit Functions at Leading International Companies, Protivi
Knowledgeleader, accessible on-line la www.knowleadgeleader.com, Vol. VI
15. Ziegenfuss, D.E. (2000), Measuring performance, Internal Auditor, February, accessible on-line
at http://findarticles.com/p/articles/mi_m4153/is_1_57/ai_62599893/?tag=content;col1
147
METHODS FOR ECONOMIC AND FINANCIAL ANALYSIS
OF INTANGIBLE ASSETS
Associate Professor Gabriel I. NSTASE
Director Department of University Studies
MastersChristian University Dimitrie Cantemir
Member of the Academy of Scientists from Romania (AOR)
gabriel_i_nastase@yahoo.com
Abstract:
Intellectual property is intangible property stemming from human creation. This together with material goods
(as goods acquired by the company), and natural resources used or usable in the production of materials, forms part of
the national wealth. Referred to as intellectual property rights are also rights relating to intellectual creation and its
results, the most varied forms.
Keywords: research, development, innovation, intellectual property, intangible
JEL Classification: M 21, M41
GENERAL FRAMEWORK
In a market economy based on free competition, intellectual property established markets,
dominate industries, ensure international security, etc. generate profits., representing the greatest
asset of a company.
Intellectual property is intangible property stemming from human creation. This together
with material goods (as goods acquired by the company), and natural resources used or usable in the
production of materials, forms part of the national wealth. Referred to as intellectual property rights
are also rights relating to intellectual creation and its results, the most varied forms.
Intellectual property right is exclusive, private, to be recognized and protected by laws and
legislative instruments under a state constitution. In Art. 41 of the Romanian Constitution stipulates
that "ownership is guaranteed, private property is protected, regardless of ownership." Romania's
participation in the international flow of values has long been subject to the existence of a national
framework of intellectual property protection.
With the advent, in March 1996, Law no. 8 on Copyright and Related Rights, the legal
framework for intellectual property protection in Romania was completed. Currently, the Romanian
citizens have the opportunity to protect intellectual property by modern legislation, relevant current
conditions of market economy. Under this legislation objects of intellectual property holders have
exclusive and absolute rights, intellectual property rights are enforceable in court and can be
measured economically by the effects they generate business.
Summary of intellectual property rights is to prohibit exploitation by any third party without
authorization holders.
From a business point of view it is clear that intellectual property must be continuously
monitored economic value because they cause the creation and maintenance expenses, and
operation can generate income. Intellectual property by the amount they can make a substantial
contribution to capital. Estimated profit and result of these rights may come from influences on the
growth of revenue or decrease costs, such as: increasing sales, getting a higher price, gain markets,
a dominant position or monopolistic market, maintaining a large number customers, providing a
source of future business and generate additional business and further development of new products
and new markets, lower labor costs, reduce material consumption, reduced utility consumption,
lower recruitment costs and skilled labor, eliminate the initial costs for products and technologies,
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design and development cost avoidance (when buying licenses), providing cheap and reliable
funding sources, etc.. In short we can say that intellectual property contributes to:
- Profit company;
- Corresponding rates of return on investment;
- Economic contributions derived from the assets side of the business.
Each manager must be advised of the importance of identifying, assessing and protecting
intellectual property in its own company for the operation to make maximum profits.
A practical self on these issues can be achieved by correct answers to the following
questions:
- Intellectual property firm is identified at this time?
- Intellectual property is so important to the firm and how can help achieve its strategic
objectives?
- There are gaps in terms of corporate intellectual property or technology failures and how they
are compensated?
- Cost of generation and maintenance of intellectual property are accompanied by economic and
strategic profits?
- Which is the strategy of protecting intellectual property in business?
- Company has a licensing strategy?
- The competitors have intellectual property and how they use their own goals?
In any company can identify an active intellectual property and intellectual property passive.
Active intellectual property generates most of the profits, act directly on production costs or
introduce features that justify a high price. Reducing production costs is an area where intellectual
property can lead to improved earnings. There are many ways in which intellectual property can
control production costs, including:
- Reduced consumption of raw materials;
- Replacing other materials with cheaper, without compromising product quality and
performance:
- Increasing the number of products produced per unit time;
- Improving product quality, which lowers the number of scrap;
- Improving the quality of production, which will reduce sewage and finished products
rejected for quality control;
- Reduce electricity consumption and utility;
- Improving processes, the impact on aging equipment, thus reducing maintenance costs and
repair times;
- Eliminating production steps and equipment used in the previous production process.
Passive intellectual property has no influence on production costs, the action is more subtle
gains. Production and operating synergies may lead to higher profits. If large quantities of products
are produced, they give synergistic benefits society, which ultimately translates into increased
profits. Some of the typical synergies associated with a high production volume, are listed as
follows:
- Raw materials can be purchased in large quantities which usually means price reductions.
Suppliers offer price discounts to customers who make big orders. Economy resulting from the
purchase of raw materials:
- Can achieve efficiency at every stage of production;
- Sales costs can be more easily controlled if there is a smaller number of sales agents, which carries
a significant amount;
- Can make special arrangements with distributors;
- Costs related to compliance regulations can be dispersed over a larger quantity of products, as well
as other fixed costs;
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- Companies that carry a high volume production to ensure companies are able to pay utilities
supplies, which can be obtained with discounts.
All synergistic benefits are helping to increase profits, if only through intellectual properties,
leading to a dominant market position, especially trademarks and distribution network.
In the intellectual property of a business liability can be taken into consideration all existing
documentation and the book existing in the company, which does not participate in achieving
production schedules.
In the past 10 years has seen a growth in recognition of intellectual property business.
Intellectual property value is ultimately what people are willing to pay for it. Complex primary
method of valuing a company introduces the total addition amount of material injury and the
corresponding value of intangible assets in their expression or accounting - intangible, in which
intellectual property is included. In industrial or commercial environment, can be identified over
100 intangible assets, which may be mentioned:
- Technical competence (documentation, studies, licenses, patents. Know-how), other object
of industrial property, copyright, software, libraries, databases;
- Quality assurance system, staff qualifications, etc..;
- Commercial power (promotion, advertising, ford commercial, distribution networks etc.).
- Power management (quality, key managers, performance management etc.).
- Reputation (business reputation);
- Location;
- Customers;
- Creditworthiness and solvency to customers and banks;
-Stand on public and administrative bodies.
Practical assessment of the intangible assets is a complex and difficult.
Multitude of factors that influence varies from one country to another, from one continent to
another. Responsibility of carrying out transactions with these intangible assets, particularly
intellectual property, is maximal because in many cases resulting social and political implications.
The national policy support and activation of processes of innovation and technology transfer of
research results, technology transfer (domestic and international) occupies an important place in the
national economy. Conceptually, technology transfer refers to the transition of research results,
which creates the source, the recipients do not have and can not create, but can apply and develop.
In principle, evaluation of activities of domestic or international transfer of technology must go
from firm diagnosis, in order to obtain an overview of its economic and financial situation. Thereby
obtain a diagnosis component synthesis (production, quality, competition, turnover, financial
situation, personnel). In this respect, the assessment a number of models able to base solutions on
restructuring actions and strategic plans to guide research units - Development towards a market
economy.
In Romanian and international theory and practice are used to calculate the economic
efficiency and international transfer of technology, different models of Global Diagnostic; SWOT
(Strenghts weaknesses, Opportunities and Hreats) Rolland Berger, AG. (Alexander Gheorghiu)
CEMATT (Center for Management and Technology Transfer), BCR, Histogram, Method scores
(scoring). Each of these methods has its specific and assigned a score for assessing economic and
financial activities of the company.
Diagnosis Analysis of many models, some of them are not applicable to Romania (eg scores
method). I think the most representative models and diagnostic analysis CEMATT overall
diagnosis.
CEMATT Diagnostic Analysis model is designed as a tool of multicriteria diacnoses
check a company. Structure type model is heuristic, because it refers to a search procedure of
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unknown targets (evaluation "analyzed state enterprise"), based on its incremental operation,
making a series of ascending steps, using a number of known criteria.
Comprehensive diagnostic analysis of a firm fixed strengths and weaknesses of its activity
allowing the final assessment and calculation of economic efficiency of technology transfer (and
international).
Construction of overall diagnosis involves determining the criteria designed to highlight the
company in its complexity. In this regard note the following criteria by which we can guide you in
compiling a comprehensive diagnosis:
undertaking functions in connection with leadership attributes;
structuralist definition of the enterprise concept, the criterion of 5 M;
other criteria.
The national economy, the economic effects of introducing technical progress include the
economic effects of applying the results of scientific research (CS) and Technology Development
(TD) and the import of new technique. Uniform methodology for determining and analyzing the
economic efficiency and social research (CS) and technology development (TD) and the
introduction of technical progress (IPT), the authors have shown through mathematical formulas,
methods for determining the economic efforts to implement the CS results and DT, and economic
effects as a consequence of the results of CS and DT. For example, the valuation of patents requires
a number of situations of interest to individuals and legal persons (Figure 1).
Accounting Law no. 82/1991 established as customary in the balance sheets of registered traders
appearing and intangible, and Law. Government Ordinance No. 15/1994 and. 54/1997, specify how
the depreciation of fixed capital in tangible and intangible. In these circumstances, to establish a
concrete value of patents and depreciation allowances, their evaluation is needed.
Evaluation of a patent requires going through the following sequence:
A. Clarification of working principles
assessment concerns only patented inventions (protected by title protection so);
This is in accordance with the law (Accounting Act no. 82/1991), which provides for balance
sheet assets of Intellectual Property Rights (category are listed patents).
Unpatented inventions can be considered:
- Be part of technological know-how, inventions unpublished applied in production;
- Be part of the research & development, inventions still not implemented in production.
These are specific measures to protect privacy.
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Results relating to intellectual property law
Exit intention of possession
Transmission intention
By
assignment /
license
By legal succession /
testamentary
Grant entitlements employed inventors
Estimated damages if evidence of
counterfeiting
Intent to Abandon
Risk of compulsory licensing or office
Registration requirement of Accounting
intangibles
Intention Association
Heritage Assessment
For restructuring For privatization
Income tax calculation
Results of legislation relating to records
Presents
Interest
For
Individuals
Presents
Interest
For
Legal
Entities
Figure 1. Situations requiring assessment of patent
The final result is expressed quantitatively assess the value units (RON, Euro, USD etc.).. Not
allowed qualitative assessment such as "X is the score eight patent" or "Y is valuable patent in
70%;
outcome reflects the value the patent at some point in the concrete conditions of an operating
business units and in relation to assessment;
outcome is not the market value of the patent, but a starting value of negotiations. May have
influenced the final amount due to the demand / supply market, the ability and interest of
negotiators, etc..;
margin approximating the final result depends on the specific case of each patent:
- Patented invention applied in production
- Patented invention being implemented in production (preparation phase of construction)
- Patented invention not applied in production.
Obviously as the degree of realizing in practice the invention increases the accuracy increases and
the final outcome of the evaluation.
both the assessor and beneficiary assessment agree to preserve the confidentiality of the results;
both the evaluator and the recipient agree to use outcome assessment only for the purpose stated in
the idea that assessment was undertaken;
all patent information needed to calculate the amount and provided the holder is deemed accurate
and in good faith.
B. Analysis of Diagnostic Patent
Diagnostic analysis of patents and prior assessment itself is carried out legally:
- Legal diagnostic analysis includes checking the legal aspects of laws, such as:
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- Legal status of patent (life, any transfer / licensing, fees paid to date to maintain in force);
- Legal status of inventors and holders of their reports;
- Any outstanding payments due to application of the invention;
- Possible infringement lawsuits.
- Technical. Technical analysis refers primarily to:
implemented inventions in production:
- Field of application
- Consumption of raw materials necessary
- Capacity production of proprietary object or proprietary method
unimplemented inventions in production:
- Required investments (machinery, human resources and energy, etc.)
- Trade and Commercial Analysis deals:
- Domestic and foreign competition, represented father patents with similar themes;
- The degree of implementation in the production of competing patents;
- Any survey of public opinion regarding the products / methods in the field of the invention
was made;
- Potential market segment interested in apply-ing industrial invention;
- Strategy patent holder in the short / medium / long on invention, including estimates of
revenue.
- Office. The analysis is aimed at social issues as:
- Size and specialization of labor required;
- Ways of organizing and conducting the necessary staff.
C. Calculation of the recommended methods
Legislation and literature recommended several methods and computational techniques.
D. The provisions of current legislation in industrial property
Inventors have to determine the entitlements due under contract. Less used but still in force, is the
methodology of calculation of such rights under Regulation implementing Law no. 64/1991 rule 53
para. 2. According to the Regulation of Law Enforcement nr.64/1994, Rule 53, para. 2:
It requires a few words:
- After estimation method relates solely to inventions already applied economics;
- Method is an algorithm for calculating the liabilities of the invention, receiver unit assigns its
invention. Payment obligations include:
- Annual awards for 5 consecutive years of application;
- The share of annual savings postcal-lation, the first 2 years of implementation;
- Cash equivalent of legal rights resulting from authorship (salaries, etc..) Updated by indexing and
amended with various additions.
Usually, however, the amount of entitlements granted to inventors residing in terms of the contract
between the inventor and the company receiving the invention.
When negotiating entitlements in art. 66 para. 2
of the Act, will be used:
a) after calculating the annual economic benefits
from applying the invention, the unit prepared to
apply the invention.
b) If the calculation is made after the entry into
force of this Regulation applied invention unit,
has an obligation to call the inventor to prepare
and approve post-calculation.
b) economic or social benefits established by the
assessment unit, where there may be a position
of direct economic benefit calculation
(difference in costs, eliminating or reducing
imports, etc.)..
153
Moreover, the overall value of a patent, but can not be strictly equated with the amount of liabilities
by the inventor losing. The amount of global patents is moving to accounting methods and
valuation techniques, presented below.
E. Provisions of the literature
Traditional methods of valuing assets (assets) may be intangible:
a) Methods based on market comparisons
b) Methods based on estimated income
c) cost-based methods
It requires the following considerations:
- To recommend simultaneous use of these three methods. Establishing a credible values is possible
only through comparative analysis of partial values that result from applying each method;
- A logical approach recommended by the three methods of evaluation, according to the specific
asset evaluated.
For patents, the sequence of methods (overall), after preferences, is income / market / cost.
Furthermore, preferences in adopting one of the methods for assessing intellectual property objects
are presented schematically in table nr. 1.
Table 1. Methods for assessing items
Note that often is made to assess (the situation which forced assessment) can move from one
pole of interest to other methods.
Thus, the valuation of assets of a company, costing it is assumed that its component assets,
so preference goes to a method based on cost. When assessing for privatization, matter-bility
capable company and its resources, so preference goes to a method based on income. Since the
input data and method, differentiated from one method to another, it is possible to obtain results
(values) different. In this case, it is recommended mediation with different weights of intermediate
values, a formula like:
\ ] pia venit 2 t cos 1 calc
V sau V f V f V > < + =
(1)
where: f1 + f2 = 1
F. Cost-based method
Method based on the value of an item estimated intangible costs (intangible asset) on the principle
of substitution. Thus, a prudent investor would not pay for an intangible or incorporeal more than
the cost of replacing it with another comparable.
Replacement cost is the cost to create (at current prices) an intangible that has the same utility as
those using modern production methods with modern designs to current standards and
In method preference (overall)
Type Recom-
mendation
Secon-
dary
Low
Patents Income Market Cost
Trade brands,
services
Income Market Cost
For management
Programs
Computing
For Product cost
Income
Income
Market
Market
Cost
Cost
Copyrights Income Market Cost
154
qualifications current.
Replacement value is determined:
updating and amortization of purchase price (if purchased with a patent a given price at a time).
Purchase price history is updated with over integer coefficients calculated based on information
provided by the National Commission for Statistics, Statistical Bulletin of prices, they reflect price
trends in the economy. Prices updated subunit is corrected by a factor correlated with the remaining
life, giving a present value remaining. Note that the remaining life of the patent depends on both the
time remaining until expiry and renewals pace of technical and technological field of use patent.
updating and amortization of all costs associated historical patents (in the case of a patent the
company obtained dinpropria activity). Costs related to patent relates to historical research,
prototype, preparation of construction, launching the manufacturing, etc. approval. Significance
and damping coefficients update remains the same.
G. Method based on income
Income-based method, is to determine the economic net income, which can be obtained, with
credibility, the use of intangible asset, such income is:
- Be the nature of cash-flow achievable during the remaining economic life of the intangible asset;
- Be the nature of profit;
- Be the nature of net fees.
Patent value is determined:
updated by adding net profit profit on the remaining life (in patents whose eploatare not require
additional expenditure);
updating of gross cash flow during the remaining life (in patents whose exploitation requires
additional costs).
In these cases, the remaining life has the same meaning, while the exploitation of the invention that
can benefit, that period may not coincide with the remainder of legal protection.
155
Revenue derived from patent
minus
Patent operating expenses (raw materials, fuel, energy,
direct salaries, etc..), including costs of acquisition of
patent research or prototype development, production
preparation, etc..
minus
Overheads, administrative and selling marketing
related patent exploitation
minus
Annual depreciation of fixed capital investment
equal
OPERATIONAL GROSS PROFIT
minus
Operating Income tax
plus
Increase in net income from tax cuts:
- Declare or pay by
- By reducing / decreasing the tax rate
Equal
OPERATIONAL NET PROFIT
plus
minus
Depreciation annual gross fixed capital investment
minus
Increased working capital requirements
Gross investment in fixed capital
equal
GROSS CASH-FLOW
For the first five years
the use of patented
inventions, the tax is
zero
only those patents whose
exploitation while requiring
additional expenditure
only those patents whose
exploitation while requiring
additional expenditure
Figure 2. Market comparison method H.
The additional costs relate, in this case, the fixed capital investments and increasing working
capital requirements. Subsequently, the net profit (or gross cash-flow) is update and totals for those
years that is not the remaining life. In this case, the upgrade reflects the process by which the
amount will be in future income is brought to present value by multiplying the discount factor.
Discount factor for the year and the remaining life of n years, is of the form:
_
+
i
) t 1 (
1
F
) a (
(2)
where t = discount rate = 18 ... 25%
The discount rate is determined by comparison with the effectiveness of risk-free investment
(government bonds). Therefore, the update factor subunit, the smaller the more distant and future
income is greater, the higher the overall investment risk is lower.
Schematic model for determining the cash flow is shown in figure 2.
Method based on market comparisons, is to compare the market value (fair market value) of
the same kind of intangible assets similar or comparable, and which were subject to normal market
transactions. Using this method is limited by lack of information necessary to ensure comparability.
156
REFERENCES
1. Nastase, I., G., Insurance law of industrial property rights of inventors, QUALITY magazine,
year X, no. 1-2, January-February 2009, p. 67
2. Nastase, I., G. Implications of research, technological development and innovation in security
system, PhD Thesis, Ministry of National Defense, National Defense University, War College,
Bucharest, 2008
3. Nastase, I., G., Financial Management of the Company. Methods of analysis, evaluation and
calculation of financial and economic efficiency of intangible fixed assets. Case Studies - The
patent PROUNIVERSITARIA Publishing, Bucharest 2010
4. Nastase, I., G. Lepadatu, G., Interdependence of economic and technological environment,
journal QUALITY, year X, no. 6, June 2009, p. 40-45
5. Nastase, I., G., D. Nastase ,G, I, D, Scientific research and technological development- factors
of progress, Journal INOBAROMETRU year I, no. 2, October 2009, p. 5
6. Nastase, I., G., Economic and Financial Crisis in Romania in our Globalized World, Causes,
Effects and Solution METALURGIA INTERNATIONAL Magazine, vol XV (2010), no. 3, p.
111-113 3, p. 111-113
7. Nastase, I., G., Badea, C., D., NSTASE , G., I. D., General Concepts of Political Science,
METALURGIA INTERNATIONAL Magazine, Vol V (2010), no. 1, p. 195-200 1, p. 195-200
8. NSTASE, I., G., BADEA, C., D., NSTASE, G., I., D., Innovative models of development
through science, COGITTO Magazine, no. II, March 2010, vol II, Ed PROUNIVERSITARIA,
Bucharest, 2010, p. 106-135
9. Nastase, I., G., Badea, C, D, System Problems, Research and Development and Innovation
(RDI) of Romania, EUROMENTOR Magazine, Vol I, March 2010, p. 29-30
157
THE IMPORTANCE OF INNOVATION IN INTERNATIONAL BUSINESS
Associate professor, PhD Valeriu POTECEA
valeriu.potecea@rau.ro
Teaching assistant, PhD candidate Georgiana CEBUC
srdgeorgiana@yahoo.com
Romanian-American University, Bucharest, Romania
Change is the law of life. Those who look only to past or present will certainly miss the future
John F. Kennedy
Abstract:
To face competition, companies must have innovations. No longer an issue whether we should have or not
innovations, but a condition that must be created to establish an effective innovation management. Great companies put
under pressure of international competition have instruments for the management of innovation. Coordination
specialists and organizational impediments are the main problems facing companies.
Innovation is generally considered as the main engine of economic growth in the global economy today. By
introducing innovations into practice you may obtain products with improved quality characteristics, quality service,
new production processes, more efficient and clean (environmental) management system, improved models of business,
modern management methods of employment etc
There are many reasons for companies and organizations to innovate, including: increasing market share,
capture new markets, improve product quality, choice of products, replacing outdated products, reducing
environmental impact, etc.
Keywords: innovation, company, market, creativity, management
JEL classification: M16
1. UNDERSTANDINGS OF THE TERM "INNOVATION"
Innovation is inextricably linked with creativity. Innovation and creativity processes are
interrelated, because finding a solution to the problems in the process of innovation requires
creativity. Innovation covers a practical application of a marketable invention; however, innovation
is possible without a prior invention.
Innovation has been defined in many different ways by different specialists, without a
generally accepted definition. DEX online states that innovation is
novelty, change, change.
solving a technical problem or to improve the organization of work (productivity) of work,
improving or streamlining technical solutions applied.
Innovation is a process (the act of innovation) and innovation is the result of a process
innovation. There is also the view that innovation is both a process and outcome of this process, the
term is polysemic.
Innovation Management is the process oriented organization and available resources, both
human and technical, in order to acquire new knowledge, generate ideas leading to new processes
or improving existing services and transfer the best ideas to phases manufacturing, marketing and
distribution services.
Innovation is not limited to science and tehnologie. In broad sense, innovation can be and
social (social system), artistic, administrative, business, etc. in healthcare. In sociology, innovation
is defined as a process of influence leading to social change and whose effect is the rejection of
existing social rules and adopting new rules.
158
2. TYPES OF INNOVATIONS
Type of innovation is a differentiator commonly used in literature. OSLO Manual version 3
of the 2005 proposed classification of innovations in four categories:
1) product innovation;
2) process innovation;
3) marketing innovation;
4) organizational innovation
OSLO Manual recommends the following conceptual definition of innovation (technical):
"An innovation is the implementation of new or significantly improved product (good or service),
or a process, a new marketing methods, or new methods of organization business practice in
employment organization or external relations. " The minimum requirement for an innovation is
that product, process, marketing method or method of organization must be new (or significantly
improved) to the firm.
A product innovation is "introducing a good or service that are new or significantly
improved in terms of their characteristics or intended uses." These include significant
improvements in technical specifications, components and materials, the embedded software, the
user-friendly attitude of other functional characteristics. Product innovations can use new
knowledge or technology, or may be based on new uses or combinations of existing knowledge and
technologies. Product term is used to cover both goods and services.
Process innovation is implementing a new or significantly improved methods of production
(eg new manufacturing processes or technology flows) or a new method of delivery. This includes
significant changes in techniques, equipment and / or software. The result of process innovation
should be significant in terms of: the production, product quality or reduce production costs and
distribution.
Marketing innovation is implementing a new marketing method involving significant
changes in product design or packaging, new sales methods, product placement, product promotion
or pricing on the policy. Marketing innovations are designed to better meet customer needs, pursue
new markets or opening a ninth position of company products on the market, with the objective of
increasing company sales.
Organizational innovation is implementing a new way of organizing the company's
business practices in employment organization or external companys relations. Such an innovation
aimed at enhancing business performance by reducing administrative and transaction costs,
improving satisfaction at work (and thus labor productivity) or reduce supply costs.
In the U.S. many organizational innovations have taken place in distribution. Examples of
organizational innovations include the introduction of supply chain management, quality
management system etc.. In a general sense, the term "organizational innovation" refers to the
creation or adoption of new ideas or behaviors organization through change and innovate the
organization's internal adjustments may be introduced changes in strategy, structure, skills,
processes, systems or cultural stimulation innovation of organization, reorganization of the whole
organization.
Abernathy and Clark (1985) evaluated that in terms of innovation brings benefits to an
organization over its competitors, resulting in four types of innovations:
a) "architectural" innovation (substance) that recombine certain components of a product
or process so that produces a new "architecture". An example of architectural innovation can
replace steel with plastic in some applications,
b) niche business innovation "which allows creation of new markets using existing
technology,
159
c) regular innovation "(current) which are incremental changes, continue to have
significant cumulative effects on cost and performance products. Continuous improvement of
current innovations taking place in the automotive industry, computers, etc..,
d) "revolutionary" innovation (the break) that produces completely new technologies or
products, involving radical changes (rupture) of industries or the creation of new industries. .
3. INNOVATION ACTIVITIES
Innovation activities are proceedings of scientific, technological, organizational, financial
and commercial innovations involving all the materialization and implementation. Innovation
activities include R & D even if arent directly related to the development of specific innovations,
but pursuing the accumulation of new knowledge in mechanics, kinematics, electromagnetism and
thermodynamics, which will be necessary in modern innovative design of technical systems.
Innovation process includes a series of activities non R & D, as subsequent phases of production
and distribution of new products, staff training on new processes, implementation of innovation
activities, eg new marketing methods or new organizational methods.
Systematic innovation begins with analysis of sources of new opportunities for innovation.
Drucker, Peter (1985) argues that there are many sources of innovation, internal and external
innovation firmei. For domestic sources of firm or industry can be considered:
- Unexpected events. Any unexpected commercial success must be exploited in a business
opportunity for innovation by developing a new product variant or a new product to be launched in
the next generation.
- Discrepancies between expectations and outcomes or between assumptions and reality can
create opportunities for innovation.
- Process needs: improvements in processes can create new oportuniti.De example, the
invention of linotype allowed to print large quantities of newspapers, with high efficiency in the
media.
- Changes in industry and market: increasing market demand and industry growth opened new
opportunities to launch innovative processes.
The Company's external sources (the social environment and intellectual) are:
- Demographic changes in population, eg age distribution, in education, occupations, etc.
concerns are opportunities for innovative entrepreneurs.
- Changes in perception. Understanding customer perceptions of products is the key to exploit
opportunities.
- New knowledge of categories of inventions, patents, know-how etc.vor bring new products or
market opportunities. Managers must consider all these sources of new opportunities.
Joel Frry Broustail (2003) has proposed other important sources for innovation, such as
suppliers and customers, technology transfer from one industry to another or between different
industries, market demands. Should not be ignored other sources and methods of collecting
information and innovative ideas, such as competitors, the company's current staff, business
partners.
Achieving innovation success depends largely on decisions made by people. The concept
"complex man" created by Edgar H. Schein is based on the following assumptions:
- People are very adaptable. Hierarchy needs change according to situation and time
- People are able to learn, and this is done through workplace experiences.
- Its no singular management concept to achieve the same results for all categories of
employees. Depending on the motives, abilities and activities of people, everyone responds
differently to management concepts and their instruments.
160
To generate creative ideas needed people who could be defined as a combination of known
elements and new elements, combined operations made by people's thinking. Thus, creativity its
not a defining characteristic of an elite, but how different is the fulfillment of creative potential.
Creativity is not taught, but can be developed and that the task managers in the company is to
provide a work environment conducive to developing creativity.
While creativity belongs to the sphere of "can", be willing to innovate the field of 'want'
depends of people. Be willing to innovate in other words means not against change. This can be
improved through better information, cooperation and training.
4. FEW EXAMPLES OF INNOVATIONS
Worldwide happened enough things that give us a hint to what is going communication in
the years ahead. Three words I think best define the new direction in the communication world, and
they are: mobile, mobile, mobile. So let's see what happened in the world:
- Texans order their coffee trough Twitter
Groundz Coffee Company offers clients a chance to make their cup of coffee and order a
post on Twitter. Company owner says that the number of customers has doubled since it introduced
the idea. You probably remember the Baker Tweet two weeks ago, are curious when someone
appears to us to implement something similar.
- People in Madrid buy Coca-Cola trough sms
Media agency Universal McCann has made an interactive megaposter Coke Zero which
proved to be very beneficial for the brand. A building under construction was completely covered
with posters imitating a very good coffee machine. Poster was displayed on a phone number to
which to send a message puteu Spanish with the word "zero." As a reward, they receive a code that
could get a free bottle of Coke.
- The Dutch follow their phone to find ATM's
ING Wegwijzer is an application for mobile, which allows users to find the nearest ATM.
For this, the application uses the phone's camera and GPS. The user must choose one of the camera
settings and positioning it as if taking a picture. The application displays the picture immediately
above that which is the fastest way to a nearby ATM.
- Londoners send their content on Facebook in the first MMS phone
Fun Text, a provider of mobile messaging, has developed a function that allows users to
send MMS content on Facebook. This can send animations, videos and virtual gifts.
- Danes can view their site directly to Lego shops
Lego in Copenhagen content boxes are brought to life in 3D before being purchased through
a company in Munich on Metaio name. How it works: if you fix a cell phone camera on a box of
Lego, your phone will appear on an animation that shows you some 3D combinations that you can
do with Lego pieces. The new package, known as Digital Box stores are expected to enter in the
fall.
5. CONCLUSIONS
Innovation process is a necessary and very important step in companies development.
Innovations make the difference, offering companies an important competitive advantage on
domestic and foreign markets.
To innovate means to be truly entrepreneurial. But leaders of companies fail to do
everything themselves, so we need to spread the "virus" in the companys environment. Managers
161
often do not focus their forces to find and use the funds to stimulate innovation, but follow their
own ambitions and visions. Only an entrepreneurial flair is not enough. Management tools must be
employed consistently for both routine tasks and processes of innovation. Companies size is not
decisive for the use of certain instruments, the only thing that matters is the existence of stimulation
that cause the desire to innovate.
REFFERENCES
1. Abernathy,William J.and Clark, Kim B. (1985): Innovation: Mapping the Winds of Creative
Destruction, Research Policy, 14,3
2. Business Dictionary.com, 2007-2009
3. Corsi, Patrick et al. (editors), (2006). Innovation Engineering. The power of intangible
networks. Published by ISTE Ltd 2006- London
4. Damanpour, F. (1991) Organisational Innovation: A Meta-Analysis of Effects of Determinants
and Moderators, Academy of management Journal, 34, No.3, 1991, p.555-590
5. Francis, D., Bessant, J. (2005): Targeting innovation and implications for capability
development, Technovation, 25(3), p.171-183
6. Lam, Alice (2004), Organizational Innovation, Working Paper,No.1
7. OSLO Manual. Guidelines for collecting and interpreting innovation data.3rd
ed.OECD/European Communities, 2005
8. Pinchot, G., Pellman, R. (1999): Intrapreneuring in Action: A handbook for business
innovation, Berret-Koehler Publishers Inc,San Francisco CA, 1999.
162
THE IMPLICATIONS OF CULTURAL DIMENSIONS ON BUSINESS PRACTICES AND
MANAGERIAL BEHAVIOUR WITHIN THE ORGANIZATIONS OF BIHOR COUNTY
PhD Maria-Madela ABRUDAN
mabrudan@uoradea.ro
Mirabela Constana MATEI
mmatei@uoradea.ro
Adriana chiopoiu BURLEA
University or Craiova, Faculty of Economics and Business Administration
aburlea2000@yahoo.it
Doina DNIA
West University of Timioara, Faculty of Economics and Business Administration
doina.danaiata@feaa.uvt.ro
Mirela SRBU
University or Craiova, Faculty of Economics and Business Administration Dr. Tr. Severin
mirsirbu@yahoo.com
Doina ROCA
University or Craiova, Faculty of Horticulture
rosca2na@yahoo.com
Abstract:
The scientific references consider that the influence of culture on organization and leading, on management in
general, should be examined from two viewpoints: that of national culture and corporate culture. Although, there is a
direct relationship between the two types of culture, and they are mutually influencing each other, they are not identical
phenomena, they are different in nature. Over time, specialists have confirmed the influence of national and corporate
culture on the behaviour of managers, on their style and work behaviour, reaching the conclusion that corporate
culture does not erase or diminish the national culture; on the contrary, sometimes it even maintains or increases the
national differences.
The project Managerial Behaviour within the Organizations of Romania COMOR was initiated in 2008 by
the Romanian Scientific Society of Management and it consists of a research aiming to identify the cultural dimensions
of organizational management within the Romanian territory. The overall objective of the research is to identify the
factors acting on the organizational structures and managerial behaviour in order to promote and lead the change of
structures at micro, medium and macroeconomic level.
Our paper, taking into consideration the results of the Globe [6] project as well, intends, based on the use of
the survey method, with the questionnaire as the research instrument, to determine the effects of national culture, or its
subcultures, exerted on business practices and behaviour of managers within the organizations of Bihor County.
Keywords: cultural dimensions, managerial behaviour, survey, cultural implications.
JEL classification: M10, M14
1. INTRODUCTION
The project The Managerial Behaviour in the Romanian Organizations COMOR was
initiated in 2008 by the Romanian Management Society and it is a research trying to identify the
cultural dimensions characterising the organizational management within the Romanian space, by
knowing:
a) the effects that the national culture or its subcultures has upon the organizational practices and
the managers behaviour
b) the managers and the executive personnels perception on leadership
c) the cultural dimensions characterising the organizational management within the Romanian
space having as a general objective the identification of the factors having effect on the managerial
163
organizational structures and behaviours in order to promote and lead to changes at the level of
micro, medium and macroeconomic structures.
In the speciality literature, it is considered that the problem regarding the influence that the
culture has on the organization and the management, generally, must be analysed from two points
of view: that of the national culture and that of the organizational culture. Although, between the
two types of cultures there is a direct relation, although they reciprocally influence each other, they
are not identical phenomena, they are of a different nature.
Specialists like Hofstede or Laurent [16] demonstrated the influence of the national and
organizational culture on the managers behaviour, on his/her style and on the work behaviour. It
was them who concluded that an organizational culture does not erase and does not diminish the
national culture, sometimes it does maintain and increases the national differences.
Geert Hofstede in his research performed within the IBM branches employees, in different
national contexts, demonstrated that there were differences in practices and values and concluded
that, nationally, the cultural differences consisted more in values and less in practices while,
organizationally, the cultural differences consisted more in practices and less in values [8]. The
results of the initial research and of the researches that followed demonstrated also a level of
occupational culture somewhere at half distance between nation and organization. The same
specialist states that a national culture determines bigger differences in values and attitudes to work
than the position within the organization, profession, age or sex. These differences regarding both
the managers and the employees can be emphasised using four dimensions:
1.power distance;
2. individualism/collectivism;
3. masculinity/femininity;
4. uncertainty avoidance (the extent to which people feel threatened in new situations).
In Romania, through the Globe Romania Project [6], the specialists, using the Value
Survey Model made by Hofstede, performed a series of studies having as one of the main
objectives the delineation of the particularities of the organizational culture, both at the practice
level and at the value level, in the Romanian organizations.
This paper intends, based on the survey method made in the COMOR project, to determine
the effects that the national culture
or its subcultures has on the organizational practices and on the managers behaviour in the Bihor
County organizations. The group making the object of our research in Bihor County was formed of
256 respondents (154 males and 102 females), executive and management personnel within 20
companies of Bihor.
The structure of the sample according to sex, age groups, education and hierarchical position
is presented in the graph below (Figure 1):
164
Graph 1. Samples structure
The selection criterion of the organizations we are referring to was the counting step applied
to the list of the firms of Bihor County. The average of the surveys applied within the companies of
Bihor is of 13 surveys/firm.
Within the survey applied, which contained 51 items, each question referred to two
situations:
the first situation intended to identify the actual practices in the organization (Pa);
the second situation intended to identify how these practices should be according to the
respondents opinion (Pd)
Each answer was evaluated on a scale with values ranging between 1 and 5.
figure 1, meaning totally agree; strongly agreement ta
165
figure 2, moderately/partially agree; partial agreement pa
figure 3 indecision, neither agreement, nor disagreement i
figure 4, moderately/partially disagree; partial disagreement pd
figure 5, totally disagree; strongly disagreement td
2. THE PARTICULARITIES OF THE POWER DISTANCE DIMENSION
Power distance is defined (Hofstede, 1996) as the extent to which less powerful members
of institutions (main components of the society: family, school community) and organizations
(where people work) within a country expect and accept that power is distributed unequally[8].
Thus, the societies trying to reduce the inequalities in power and wealth are characterised by the
small power distance, while those which institutionalise the differences in wealth and power are
characterized by high power distance.
In the countries in which the power distance is small there is a limited dependence of the
subordinates on the managers and a preference for consultation the emotional distance between
them is relatively small: the subordinates will approve or contradict the manager quite easily. In the
countries with high power distance there is a considerable dependence of the subordinates on the
manager. In this case, the emotional distance between the subordinates and their manager is high: it
is less likely that the subordinates directly approve or contradict their manager.
The GLOBE study made in Romania, shows, at the level of national culture, a high index of
the Power Distance regarding the practices and an average index regarding the values of the society.
Comparing the values of this index, it has been concluded that, in the first case, the score was much
higher. When comparing the index at the two levels, regarding the values, the result was that these
were approximately equal. In reality, these values show the fact that, generally, the Romanians
prefer not to interfere with the authority and to obey the orders coming from the top. Due to this
behaviour, Romania is signalling the need to have authoritative leaders, centralization in decisions
and the population wishes to follow rules set up by such leaders [9]. Another interpretation of this
high index shows that the employees prefer a close relation with only one boss in order in order to
get his/her protection and to avoid taking responsibility for contrary opinions. Generally, the
personnel of organizations in such cultures do not express contrary opinions to the superior and
receive orders that they execute, many times, without asking questions.
Within the survey applied in Bihor County, the opinions expressed by the respondents
regarding this dimension are framed within Q1 and Q2 items:
Pa are trying to increase the
social distance between
them and the others
Q1
Persons with
powerful
positions within
the
organization
Pd should try to establish a
fair hierarchy between
the personnel categories
in order to increase the
them and the others
Pa are trying to lower the
them and the others
Q2
Persons with
powerful
positions within
the
organization
Pd should try to lower the
them and the others,
establishing a fair
hierarchy
166
47% of the respondents consider that, currently, within the organizations where they work,
the management is making efforts in order to lower the social distance between them and the
employees. We notice the fact that 39% of the total of respondents were undecided in the case of
Q1 item and 19% in the case of Q2 item, which might demonstrate indifference, the fact that the
content of the item had not been understood or the fear not to make a mistake when answering
which had led to choosing the indecision answer. In the case of both items, the most majority of the
undecided respondents belonged to the university education category.
Regarding the desirable behaviour, there is an obvious preference for the reduction of the
social distance between the managers and the employees, 66% of the surveyed people saying that
the management should try to make more efforts in order to accomplish this.
The statements above are supported also by the opinions expressed by those in the age
group between 30 and 44 years old, which represents the highest percentage (57% of the total of
respondents), these respondents considering in a percentage of 46% that in the practice of the
organizations they are trying to lower the social distance between the management and the
employees. In this case, too, the quite important percentage of the undecided respondents 32%
can be explained using the arguments from above.
Analysing the answers from the point of view of the hierarchical position held, it can be
noticed the fact that the executive personnel (more than 41%) perceives the actual situation in the
organizations as being characterised by a more reduced social distance between those occupying
powerful positions and the others, while the top management considers, in a percentage of 56%
that, in the present, in the organizations there is a considerable social distance between these
categories of people. The declared wish, in both cases (more than 80% for each of the two
categories) is that to continuously lower this social distance, by complying with a fair hierarchy.
In conclusion, while the populations behaviour demonstrates a relatively high authority
distance as it results from the Globe study, the preference is for a participative and cooperative
management style. This might explain the Romanians preference to work in organizational
environments with Anglo-American characteristics, with a participative management style
characterised by a small authority distance.
3. THE PARTICULARITIES OF THE INDIVIDUALISM-COLLECTIVISM
CULTURAL DIMENSION
The individualism-collectivism dimension is based on the relation among individuals and
the way in which this is formed. In the individualistic cultures, the connections among individuals
are chaotic and superficial, each taking care of himself. Collectivism characterises the cultures in
which the emphasis is on the group, the individuals being integrated in different groups and
subgroups among whose members the connections are strong. These groups have the aim to
promote and protect their members interests.
Romania is a country with a high collectivism index[6]. Previous researches showed that
there was a correlation between the high individualism index and a countrys richness. Thus, the
high level of collectivism in our country is an indicator of our modest living standard. Another
correlation is that identified by the Dutch specialist, Geert Hofstede, between individualism and the
external financing received by a certain country. According to this correlation, the index of
individualism in Romania is growing [9].
The description of the individualism-collectivism cultural dimension at the level of Bihor
County was made using the items Q3, Q5, Q6, Q8, Q9, Q10, Q11, Q12, Q13, Q42, Q56, Q58, Q59,
Q66 and Q72 from the survey.
167
The first statement meant to facilitate the description of the individualism-collectivism
dimension is based on the respondents perception regarding the place of the individual interests
within the group.
Pa are encouraging the loyalty to the group
Q3
Even though the individual
interests are affected, the managers Pd should encourage the loyalty to the group
In the current practice in the organizations of Bihor County, 80.08% of the respondents
declared, expressing their agreement (totally or partially) that the managers are encouraging the
loyalty to the group even though their individual interests are affected, 4.69% expressed their
disagreement (totally or partially) to this statement, the rest of them being undecided.
Regarding the desired practice, a similar percentage (80.86%) expressed their agreement
while the percentage of those expressing total disagreement went up to 7.42%.
The fact that a high percentage of the respondents consider that the individual interests are
and must be subordinated to the group interests, the group being the most important, it is not
surprising taking into account that Romania is a country with a collectivist culture. Yet, the very
high percentage (80%) can be an indicator of the fact that at the organizational level, collectivism is
higher than at the individual level. This has major implications on the identification of optimum
management practices.
Another statement of the survey tries to identify the level of peoples loyalty to the
organization they belong to.
Pa are (feel) loyal to the organization
Q6 The people in your organization
Pd should be (feel) loyal to the organization
70.56% of the respondents consider that in the current practice in the organization of Bihor
County, people are or feel loyal to the organization they belong to. A percentage of 8.66% considers
that these are not loyal to the organization, the rest of approximately 20% being undecided.
Regarding the desired practice, it is worth noticing that the percentage of those considering
that people should be more loyal to the organization is higher, having a value of 81.82%. In the
same time, both the percentage of the undecided people and that of the respondents who showed
their disagreement to this statement are smaller in the case of the desired practice than in the case of
the current practice.
The analysis of the answers according to sex is surprising. If within the current practices in
the organizations, the women have the highest percentage of the total of those considering that the
people are loyal to the organizations they belong to, within the desired practices this situation is
changed, the highest percentage being recorded by men. Moreover, a percentage of approximately
7% of the women declares that people should not feel loyal to the organization they belong to.
These differences are presented in the following graphs (Figure 2 and 3).
168
Graph 2. Current practice. The percentage of the answers to question Q6 according to sex
Graph 3. Desired practice. The percentage of the answers to question Q6 according to sex
The loyalty to the group and/or to the organization is a characteristic of collectivist cultures.
This high level of loyalty determines reduced personnel fluctuations, one side, but it can also be
correlated with the individuals high degree of avoiding uncertainty, with the need of stability and
protection.
Pa work individually
on projects
Q9
In your
organization the
employees
Pd should work
individually on
projects
Regarding the current practice in the organizations analysed, 40% of the respondents state
that the employees work individually on projects, while 38.71% declare that the employees do not
work individually on projects. In return, regarding the desired practice, the percentage of those
considering that the employees should work individually goes up to 46% to the detriment of those
disagreeing with individual work.
Pa work in team to make projects
Q10 In your organization the employees
Pd should work in team to make projects
68.2% of the respondents consider that, currently, in the organizations the employees work
in tem to make projects while 16.13% do not agree with this statement. In spite of all these, 76.5%
169
declare that the employees should work in team while the percentage of those not wishing such
practices lowers to approximately 7%.
The preference for team work manifested in such a high percentage among the surveyed
people (approximately 70%) is in agreement with the predominant characteristic of collectivist
cultures: the importance of the group. Yet, it can be noticed that, to a certain extent, individual work
is preferred. It is surprising the fact that the highest percentage in the total of those wishing
individual work belong to the over 45 year old people.
All these 15 statements meant to facilitate the description of the individualism-collectivism
cultural dimension emphasise the collectivist attitude of the individuals in the Bihor County
organizations. A synthesis of the analysis of the answers to the other statements is presented in the
table below (Table 1).
Table 1. The synthesis of answers
Current practice Desired practice
- 64.11% of the respondents consider that the joys
and sorrows of people in the organization are shared
with the members of the group they belong to;
- 76.5% of the men and 83.5% of the women
consider the fact that the other members of the group
accept them as they are is important for their personal
satisfaction;
- 66.27% of the respondents consider that the group
managers are proud of the individual accomplishments
of the group members;
- of those questioned, 85% consider that the positive
image of the organization among the members of other
organizations is important for its members;
- 50% of the opinions expressed emphasise the fact
that the way in which the remuneration system is
conceived ensures the maximization of the individual
interests;
- 80% of the respondents are proud to be working in
the current organization;
- 83% of the respondents declare that in the
organization they work for, people care about the
others;
- of the total of expressed opinions, 87% consider
that the parents achievements are a reason of pride
form children, while 95% of the respondents consider
that the childrens achievements are a reason of pride
for the parents.
- 80% of the respondents consider that sharing the
joys and sorrows within the group should be
encouraged;
- 85.5% of men and only 55.7% of women (27.8%
smaller) declare that the other members acceptance
should be important for personal satisfaction;
- 78.57% of the respondents consider that the
managers should be proud of the individual
achievements of the group members;
- 90% of the respondents declare that the positive
image of the organization among the members of the
other organizations should be important for its
members;
- 66.41%of the respondents opinions state that the
way in which the remuneration system is conceived
should ensure the maximization of the individual
interests;
- 84% of the respondents consider that the employees
should be proud of the organization they work for;
- the opinion of 97% of the respondents is that people
should be encouraged to care about the other
members of the organization;
- 94% of the respondents consider that the parents
achievements should be a reason of pride for
children, while 92% of the opinions state that the
childrens achievements should be a reason of pride
for the parents.
170
4. THE PARTICULARITIES OF THE MASCULINITY-FEMININITY CULTURAL
DIMENSION
Hofstedes study delineated the masculinity-femininity cultural dimension based on the
antagonistic relations between the material values and the social values of the members of an
organization. Thus, masculinity is considered as being the privilege of the material values, while
femininity has the role of connector between the members of the organization, leading to an
improvement in the life quality.
Nicolescu Ovidiu states in the managerial level, the predominance of the masculinity or
femininity dimension is reflected in the engraving of certain constructive and functional
characteristics on these particular organizations, especially affecting the way in which the forecast,
training and organization are exercised [11].
An organization in which masculinity is predominant may face a serious unbalance of social
roles, with an orientation towards materialism which might lead to a break or neglect of the ethical
codes and principles while an organization in which femininity is predominant, due to the
exaggeration of the friendly work ambient may lead to the disobey of the work discipline and
professional neglect. .
The GLOBE study made in Romania shows the fact that Romania is a feminine country,
that is the members of the society are looking for a collaborative environment and are asking for the
support of all the members of the society, no matter their contribution [9]. The main emphasised
disadvantage is that the feminine values of the society determine a lower level of competitivity of
the local organizations as compared with the external market organizations and the employees will
not positively contribute to improve the situation.
In the survey applied in Bihor County, the opinions expressed by the respondents regarding
this dimensions are found among the items Q14, Q15, Q17, Q18 and Q60:
Pa are mainly held by men
Q14
The authority
positions Pd
if they were held by
more women, work
would be more
efficient
Pa is encouraging men
more than women
Q15
To participate to
professional
development
programmes, your
organization
Pd should encourage
men more than
women
Pa are more available to men than women
Q17
The opportunities to
have managerial
positions
Pd should be more available to men than to
women
Pa is worse for a man than for a woman
Q18
Being unsuccessful in
work Pd should be worse for a man than for a woman
Pa is :
below 10%, 10-25%, 26 - 55%, 56 - 75%,
over 75%
Q60
In the management of
the firm where you
work, the percentage
of women
Pd should be
below 10%, 10-25%, 26 - 55%, 56 - 75%,
over 75%
171
The items of the formula had in view the perception of the equality of chances between men
and women regarding their access to different managerial positions, to the professional
development programmes, to the existence or inexistence of sex discriminations in the
organizations.
The analysis of the answers to item Q14 shows the fact that, in the current situation, in the
organizations studied in Bihor County, the authority positions are mainly held by men (62% of the
respondents state this). We notice the high percentage of undecided respondents (37% of the total
out of which 78% men and 22% women) regarding the existence of a correlation between the
increase of the number of women in management positions and the increase of the work efficiency
which foreshadows, in a first stage, a relatively high degree of distrust, both of women (only 14%
of the total totally/partially agreed (only 17% totally/partially agreed), regarding womens capacity
to be efficient in management positions.
0
10
20
30
40
50
60
70
at ap i dp dt
M (Pa)
F (Pa)
0
10
20
30
40
50
60
70
80
at ap i dp dt
M (Pd)
F (Pd)
The authority positions according to structure on sexes
Graph 4 a) current practice (Pa) and b) and Graph 5 desired practice (Pd)
Analysing the answers according to the structure on the respondents age groups, we notice, apart
from the particularities mentioned above, a high degree of lack of vision and trust in the womens
management ability for the group age between 30-44 years old (57% of the total of undecided
respondents).
0
10
20
30
40
50
60
at ap i dp dt
under 30 years
old
30-44 years old
45-60 years old
over 60 years
old
Graph 6 The authority positions on age groups the desired practice (Pd)
Taking into consideration the respondents level of education, we notice again a high degree
of uncertainty for those with university education (83 % of the total of undecided respondents and
31% of the total of respondents) regarding womens ability to be efficient in a management position,
only 27% of the respondents with university education of the total of respondents totally/partially
agreeing with the statement.
From the point of view of hierarchical position, the statements of those questioned have been
surprising, 64% of the executive personnel considering that the work would be much more efficient
172
with women in management positions while only 27% of those having managerial positions - top,
middle and low-level agreed with this statement.
The analysis of the degree of accessibility to the professional development programmes for
women and men was made based on item Q 15.
From the point of view of access to these programmes, there is a non-discriminatory attitude
both regarding the current practice and the desired practice. Thus, 67% of the total of those
answering the survey consider that the current practice is non-discriminatory, a small percentage
19% of the total of respondents considering that their organization is encouraging more men than
women to participate to the professional development programmes.
The analysis of data shows the fact that, no matter the age group, the level of education or
the hierarchical position within the organization, the percentage of those considering that the
participation to the professional development programmes is accessible both to men and to women,
the discrimination in what concerns both the current situations and the desirable situations is of a
majority.
Using item Q17 we intended to get information regarding the way in which the promotion
opportunities within the organizations are or should be non-discriminatory available both to men
and to women, to the same extent.
The analysis of the answers received demonstrates the fact that, in the current practice, the
situation is still controversial: 36 % of the total of respondents stated that, in reality, the promotion
opportunities are addressed especially to men, 42% consider that the situation is not discriminatory
and 22% are undecided. Yet, in what the desirable practice is concerned, 55% consider that the non-
discriminatory access to the management positions must be facilitated.
On age groups, the analysis reveals the fact that the over 60 year old age group considers
that, in a percentage of 100%, in the present, the managerial positions are more available to men that
to women.
We notice the fact that the respondents with primary education could not characterise the
current situation in the organizations from the point of view of access to the management positions
of men and women, but they stated in a percentage of 100% the fact that the promotion opportunities
should be non-discriminatory.
Item Q18 refers to the way in which the work failure is sanctioned more in the case of men
than of women.
In the current practice, in the surveyed organizations of Bihor County it is considered that
there is no differentiations in applying these sanctions the respondents stating this in a proportion
of 50% of the total (37% totally agree, 13% partially agree) and in this case, the percentage of the
undecided respondents 25% is high. It is interesting to note that 51% of the women questioned
consider that there is no discrimination in this situation while only 28% of the questioned men state
the same thing, totally agreeing.
The problem of mainly sanctioning the men in case of work failure is still controversial as
long as the distribution of the answers on age categories, level of education, hierarchical position is
relatively even regarding the total or partial agreement or the total or partial disagreement,
respectively of the respondents regarding the statement in this item.
From the point of view of the desired practice, it is obvious that a discriminatory behaviour
in applying the sanctions at work is not desirable 40 % of the total of respondents totally
173
disagreeing with the second statement in the item Q18.(12% partially disagree, 23% undecided, 8%
totally agree and 17% partially agree).
The position of the executive personnel is surprising for 47% of the respondents belonging to
the executive personnel consider that the sanctions/punishments applied to men in case of failure in
work should be harsher than those applied to women (32 % of these respondents were undecided).
Graph 7 The percentage of the answers to item Q18 according to hierarchical position
In the end, the answers to the question referring to the percentage of women in the
organization shows mainly the masculine presence in the management of the firms surveyed in
Bihor County.
In the present situation, 44% of the respondents consider that the number of women in the
firm management is between 10-15% of the total of management personnel, 37 % stating that the
percentage is higher between 26-55%.
Regarding the desired practice, it is worth noting at the age group analysis the fact that the
under 30 year old respondents (92 % of the total of respondents in this group) prefer that the
percentage of women in the organization management exceed 10% (but not more than 55%) and
those in the age group between 45 and 60 years old (92 % of the total of respondents in this group
prefer that their percentage be below 10%).
Also, the preference for a higher representation of women in the management positions
(over 10% but not more than 55%) is seen also at the respondents with university education - 78%
of them agreeing with this.
5. THE PARTICULARITIES OF THE UNCERTAINTY AVOIDANCE CULTURAL
DIMENSION
Uncertainty avoidance refers to the degree of tolerance towards future unknown situations
and it represents the extent to which an organization or a society is based on rules, procedures,
norms and rituals in order to control the uncertainty of future events.
Thus, in the organizations or societies in which uncertainty avoidance is high, there is a
preference and, in the same time, a need for written rules, strict regulations, detailed plans and a
rigorous control. In this case, the aim is to create an as stable and controllable as possible
environment. In the organizations and societies in which uncertainty avoidance is reduced, the
tolerance to uncertainty is higher, therefore there is not such a great emphasis on detailed rules and
procedures.
174
The description of the uncertainty avoidance cultural dimension at the level of Bihor was
made through items Q19, Q20, Q21, Q33 and Q43 from the survey.
The first question trying to analyse the degree of uncertainty avoidance in the organizations of
Bihor County refers to the respondents perception regarding the organization of the work tasks.
Pa
are sufficiently well
stated in the job
description Q19
In your
organization,
the work
tasks
Pd
should be better stated in
the job description
Regarding the current practices of work organization, 70.31% of the respondents state that
the work tasks are well stated in the job description, while 10.16% consider that the work tasks are
not sufficiently well stated in the job description of the organization they work for. It is worth
noticing that a percentage of almost 20% of the respondents are undecided or do not know the
answer to this question. Instead, regarding the desired practices, the percentage of the undecided
respondents in the total of answers is reduced almost to a half, up to 8.6%. Also, regarding the
desired practices, 84.77% of the respondents declare that the work tasks should be better stated in
the job description, which represents an increase of approximately 14%, while only 6.64% consider
that the work tasks should not be better stated in the job description.
The analysis according to the respondents sex (women and men) does not emphasis
significant differences, the latter following the same tendency. Instead, the analysis of the answers
on age groups shows the fact that the most significant differences between the current practice and
the desired practice regarding the organization of the work tasks take place in the case of the under
44 year old respondents. In the latters case, the number of those considering that the tasks should
be better stated in the job description increases with 12% of the total of answers. Instead, in the case
of the over 60 year old respondents, their percentage lowers, 14% of the total of the over 60 year
old respondents considering that the tasks should not be better stated in the job description. The
graphs below present the percentages of the answers according to age.
Graph 8. Current practice. The percentage of the answers to question Q19 according to age
category
175
Graph 9. Desired practice. The percentage of the answers to question Q19 according to age
category
The analysis of the answers according to the level of education and according to the
hierarchical position of the respondent has not recorded important differences. Yet, it is worth
noticing that the highest percentage of the indices in the current practice belongs to the top
managers while, in the case of the desired practice, the highest number of undecided respondents is
recorded among the middle-level managers.
The second question has in view the identification of the respondents opinions regarding
the influence of strictly stating the work tasks on the employees activity.
Pa is stimulating the activity of the employees
Q20
The strict stating of the work
tasks Pd should stimulate the activity of the employees
70% of the respondents consider that the strict stating of the work tasks is stimulating the
employees activity, 21.8 % are undecided or do not the answer to this question and the rest of 8.2%
do not consider that the strict stating of the tasks is stimulating the activity in the current practice.
In the desired practice it can be noticed an obvious tendency to increase the percentage of
those considering that the strict stating of the tasks should stimulate the employees activity. Thus,
in the case of the desired practice, the percentage of those agreeing (totally or partially) with this
statement is of 92.19%, and of those disagreeing (totally or partially) is lower, having a value of
2.73%. The percentage of the undecided respondents in this case is reduced with approximately
15%.
Just like the other questions, the analysis of the answers was made according to several
criteria, the respondents being divided according to: sex, age, level of education, and hierarchical
position. For this statement the most important differences were noticed in the case of analysis of
the answers according to the respondents sex. This analysis is emphasising the fact that a higher
percentage (97% of women compared to 89% of men), women consider that the strict stating of the
tasks should stimulate the employees activity. Approximately 3% of the women are undecided, but
no woman disagrees (totally or partially) regarding this statement, although, in the case of the
current practices, their percentage was of 12% of the total of responding women.
Among men, approximately 5% were in disagreement both in the case of the current
practices and in that of the desired practices. The following graphs show better these differences.
176
Graph 10. Current practice. The percentage of the answers to question Q20 according to sex
Graph 11. Desired practice. The percentage of the answers to question Q20 according to sex
A third statement has in view the identification of the respondents perception regarding the
effects of setting up the goals on the employees activity.
Pa are stimulating the achievement of the
Q21
The goals that the employees in your
organization set up
Pd
should stimulate the achievement of the
objectives
The analysis of the answers showed the fact that 68.36% of the respondents consider that the goals
the employees set up are stimulating the achievement of the objectives and 12.89% disagree with
the statement.
Regarding the desired practice, there is an increase of the percentage of those whose
opinion is that the goals that the employees set up should stimulate the achievement of the
objectives and a diminishing of the number of undecided respondents (from 18.75% to 9.77%) and
of those who disagree (from 12.89% to 8.98%).
In the case of this statement, the results of the analysis of the answers according to sex are
surprising. If in what the current practices are concerned, approximately 65% of the women agree
that the goals the employees set up are stimulating the achievement of the objectives, in the case of
the desired practice, their percentage is lower, while the men percentage agreeing increases from
70% to over 97%. 9% of the women (and no man) state that they do not agree with the statement
according to which the goals should stimulate the achievement of the objectives.
Also, regarding the undecided respondents, there have been significant differences
according to the respondents sex. Thus, the percentage of the undecided respondents is of 14%
177
men compared with that of 24% women, and in the case of the desired practice, this difference is
higher (2% men, 20% women).
It is worth noticing also the results of the analysis of the answers according to the other
criteria. For example, regarding the analysis according to the age groups it can be noticed that, in
the case of under 30 year old respondents the percentage of opinions inn favour to the statement is
the lowest (64% for the current practice and 67% for the desired practice), while for the over 60
year old respondents the percentage if of 100% in the case of the desired practice (and 68.5% in the
case of the current practice).
Also, regarding the analysis according to the level of education, it can be noticed that the
percentage of the respondents with university education is approximately constant both in the case
of current practice and in that of the desired practice, while the percentage of those with secondary
education who do not consider that the goals the employees set up should stimulate the achievement
of the objectives is 0, even though in the case of the current practice 13% show partial disagreement
to the statement.
According to the hierarchical position, it has been noticed that the executive personnel, in a
proportion of 50% shows disagreement to the statement in the case of the current practice and 32%
are undecided or do not know the answer, but in the case of the desired practice, over 60% of them
consider that they need established goals and that these could stimulate their activity.
The fourth statement meant to facilitate the description of the uncertainty avoidances cultural
dimension in the organizations of Bihor County refers to the work instructions and procedures set
up by the organizations.
Pa
are detailed enough and clearly stated
Q33
For the employees to be aware of
what is expected from them, the
work procedures and instructions
Pd
should be more detailed and clearly stated
75 % of the respondents consider that, in the present, the work instructions and procedures
are detailed enough and clearly stated, while 7.42% disagree with this statement, the rest of 17.58%
being undecided. These results underline the fact that in the current practice the majority of the
employees know what is expected from them, the duties being established through formal
instructions and procedures. Yet, a part of the respondents considers that the work instructions and
procedures should be more detailed and clearly stated, a thing for which, in the case of the desired
practice, the percentage of the respondents expressing their agreement (partially or totally) with the
statement increased to 87.11%, while the percentage of those disagreeing diminished to 0.78%. This
percentage of 0.78% is totally formed of men, women being in a proportion of 96% in favour to the
statement and only in a proportion of 4% undecided (compared with 10.54% of the percentage of
undecided men).
The last statement illustrates the managers practices, current and desired, referring to the
way in which the work instructions destined to employees are established.
Pa are providing detailed
instructions regarding the
way in which the
objectives established
can be achieved
Q43
The
managers in
your
organization
Pd should provide detailed
instructions regarding the
way in which the
objectives established
can be achieved
178
In the current practice in the organizations of Bihor County, 67.97% of the respondents
consider that the managers in their organization are providing detailed instructions regarding the
way in which the objectives established can be achieved while 13.67% do not share this opinion and
18.36% are undecided.
Regarding the desired practice by the respondents, it can be noticed that almost all, that is 92.58%,
consider that the managers should provide detailed instructions regarding the way in which the
objectives established can be achieved, only 0.78% being in disagreement and 6.64% undecided.
6. CONCLUSIONS
As it was stated also in the case of the Globe study performed in 2005, the Romanian
population has a high need of closeness to power, which is capitalized in the need to be treated
trustfully, to get the permission to freely express their fears and to be even allowed to avoid those
decisions which seem too risky [9]. There is also the desire to be led by a leader who should
sometimes take risky decisions in their name. This behaviour expected from their managers is a
contradictory one paternalism and consultation in the same time indicating the fact that in the
Romanian organizations the participative system can be successful to the extent to which the
authority lines are clearly defined and complied with.
The results of the survey applied in Bihor County referring to the power distance dimension
strengthen the statement above, the respondents preferring a reduction of the social distance
between the management and the employees, in the conditions of a clear hierarchy.
The index of collectivism in the organizations of Bihor County is high. The emphasis in the
organizations of Bihor County is on the group and the loyalty to the group is more important than
personal interests: important events, individuals successes are shared with the other members of
the organization. Approximately 65% of the respondents consider that within the organizations of
Bihor County, the group cohesion is and should be appreciated in comparison with the attitude to
individualism. The family and the organization are elements that the individuals in the Bihor
County organizations are proud of.
It is obvious that, as compared to twenty years ago, the collectivism in the Romanian
organizations is lower. This can be explained either by the correlation made by Geert Hofstede
between individualism and the external financing received by Romania in the last period or by the
development of the need of self-promotion and financial independence of the members of the
organizations and/or society [9]. It is worth retaining in this view the opinions of the 46% of the
respondents which consider that people should work individually to project accomplishment.
In what the masculinity-femininity dimension is concerned, the Globe Study of 2005 states
that Romania is a feminine country, that is the members of the society are looking for a
collaborative environment and are asking for the support of all the members of the society, no
matter their contribution. We must though take into account the fact that the feminine values
emphasise the personal free time and the cooperation to the detriment of the performance
objectives, which determines the fact that many of the Romanian firms will allow the foreign firms
to take their place on the market without a significant fight. The orthodox religion, predominant in
Romania, is more inclined towards sex complementarity than to the women obeying to men.
Our analysis and conclusions demonstrate the fact that in the organizations of Bihor County,
the perception of the respondents regarding then womens access to different professional
development programmes and to the application of some sanctions at work is, to a great extent,
non-discriminatory. Yet, we notice the lack of trust manifested in the womens ability to manage as
well as the respondents statement regarding the existence of the promotion opportunities mainly
addressed to men.
179
Although the research has showed the fact that in the organizations of Bihor County there
are detailed rules and procedures, yet, there is still a need for a higher rigorousness and a more
detailing of these which should provide more stability and control. The need for rules, stability and
control identified among the respondents is in agreement with the conclusions underlined by
Geert Hofstede in his studies and in the Globe Study, which includes Romania among the countries
with a high degree of uncertainty avoidance [6].
Taking into account these conclusions, we can state that, both individually and
organizationally, there is a concern for the future, a fear which must be kept under control.
Organizationally, this means clear, detailed and rigorous instructions, rules, procedures meant to
create and maintain an as stable as possible working environment.
BIBLIOGRAPHY
1. Abrudan Maria-Madela, Managementul resurselor umane n contextul globalizrii, Editura
Universitaria, Craiova, 2004.
2. Bibu Nicolae, Management comparat, Editura Mirton, Timioara, 2007.
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4. Burlea chiopoiu Adriana - Managementul Resurselor Umane, Editura Universitaria Craiova,
2008.
5. Fink G., Mayrhofer W., Cross-cultural competence and management setting the stage,
European J. Cross-Cultural Competence and Management,Vol. 1, No. 1, 2009, pp.4265.
6. GLOBE Global Leadership and Organizational Behavior Effectiveness
7. Hofstede Geert, Culture's Consequences: Comparing Values, Behaviors, Institutions and
Organizations Across Nations, 2003.
8. Hofstede Geert, Managementul structurilor multiculturale, Bucharest, Editura Economic, 1996.
9. Luca Adina, Studiu despre valorile i comportamentul romnesc din perspectiva dimensiunilor
cultural dup metoda lui Geert Hofstede, 2005, http://www.training.ro/articole-training.php?pag.24,
visited on 15.09.2010
10. Marina Cristian-Virgil, Managementul comparat al resurselor umane, Editura Economic,
Bucharest, 2010.
11. Nicolescu Ovidiu Management comparat, Ed. Economic, Bucharest,1997.
12. Roca Constantin, Roca Gheorghe, Vrzaru Mihai, Resurse umane. Management i gestiune,
Editura Economic, Bucharest, 2005.
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180
THE EVOLUTION OF THE GLOBALIZATION AND ITS IMPACT ON THE
INVESTMENT PROCESS
Lecturer PhD. Mariana LUPAN
marianal@seap.usv.ro
Abstract:
This paper proposes a complex analysis of the evolution of the globalization concept, phasing of globalization,
the pylons of globalization, and also the evolution of the direct foreign investments. The globalization problem it was, it
is and it will be an interest subject for the entire society. Thereby, the end of the XX century and the beginning of the
XXI century is defined with the acceleration of the globalization process, and the flows of direct foreign investments
involved by the transnational corporations constitutes the main forms of manifestation of this complex phenomena.
Key words: globalisation, foreign direct investment, transnational corporations, capitalization, mother-
corporation, host country
JEL Classification: F15, F21, G11
1. INTRODUCTION
It is spoken more and more about globalization, the pro and against opinions. But what is
actually the globalization? It is a concept, a status fact or a reality? It is a new phenomena generated
by the speed which is propagated the new technology and the information, or a naturally continuity
of one process which appeared and developed long time ago? These are just few of the questions
that weve been asking and that weve trying to find an answer, that being the reason of choosing
this subject.
In the economical literature had advanced the idea that once with falling the Berlin Wall in
the year 1989 weve walked in the second age of globalization, the first age dates back to the
middle of the 19
th
century and being interrupted by the First Global War. The break period
between the two ages of the globalization has arrived to the end once with The Cold War.
Therefore, the 1989 year represents a new beginning of the globalization, a consciously and
irreversible globalization within that the social and economical relations became without distances
and borders. I dont know if it is a coincidence or it was written that this year to be one with turns
for many nations. It is the year when the ex Soviet Union has decomposed, the wall was
eliminated, it is the first year of the democracy from our country, but it is also the year when USA
puts up its supremacy.
2. THE ANALYSIS OF GLOBALIZATION PROCESS
The analysis of the globalization process is possible through its pylons: the path from the
international businesses to the global businesses, transnational corporations, direct foreign
investments, capital international flows, financial institutions and the international economical
organizations as well as the evolution without example of the technologies and communications.
The big corporations have invaded the planet, and the international financial flows makes
that the global economy cant be barred inside the borders of one state. The free flux of information
has lead to the amelioration of the communications and to the decreases of the transport costs, such
as the globalization offers to the communities and to the persons from the further areas, also to the
developed ones, and also to the less developed ones, various opportunities and options.
181
Compared to the previous periods, the contemporaneous stage of the businesses
globalization is much more intensive and deep thanks to the growth of international investments
flows, to the growing number of the transnational corporations, the market liberalization and to the
technological progress. Another characteristic of the contemporary business globalization is the
acceleration of the international competition. The development and the evolution of the
infrastructures of global communications, which is realized in real time, has allowed the
fundamental transforming of the firm capacities to organize its activities on the global level, to
adapt its organization forms and the production level to the competitive conditions that are always
changing and accentuating, but also to increase its speed with whom the goods and services are
moving in the background of the production and distribution networks. From this perspective, the
production and transnational businesses gained a big diversity of organizational forms, and the
production abroad has became very important for the corporations. Therefore, the evolution of the
global economy from the international businesses to the global businesses was possible thanks to
the international investment flows, and also to the growing role of the transnational corporations.
The pregnant role of the transnational corporations and to the direct foreign investments, especially,
has lead to the acceptation of the idea that these two entities represent the pylons of the
globalization.
The capital, with all its forms, is probably the economical resource with the biggest amount
of mobility in the economical context of the new millennium. The capital flows are today common
presences also on the international circuits and also on the national tracks, inter-sector and intra-
sector. Not only the volume of the capital flows and the speed of their movement are in a permanent
ascendancy, but also the easiness which these are transformed (direct investments, portfolio
investments, banking and un-banking credits, loans), according to the characteristics of the host-
country environment and to the interest and profile of the holder.
The main international institutions responsible for the globalization process, which, in the
same time, are the essential pylons of this ample process, are the International Monetary Fund,
Global Bank and the Global Organization of Commerce. Of course, there are also other
international institutions that play an important role in the economical international system, like the
ONU, UNCTAD, BERD, BEI etc.
The evolutions recorded on the technological development scheme, in the informatics
sphere and in the lately telecommunications have contributed, within a real information
revolution that which have switched out, in a crushing manner, to the globalization of the
international economical life. Within its nature, the new technologies from the communication
sphere have a global dimension, because they dont admit and dont respect the national borders.
3. THE DIRECT FOREIGN INVESTMENTS FLOW IN THE GLOBALIZATION
PERIOD
In this work Ive weight on the evolution of one of the globalization pylons, namely the
direct foreign investments flows. In the most general approach, the investments are constituted in
resources allocations, realized in present, for obtaining in the future some utile effects, on a period
of time as bigger as possible. It is important to establish from the beginning that, any investment
involves the concrete existence of the resources (material, financial, human and logistic), the
efficient utilization of these, so of the efficiency concept, the materialization of the resources in
results and their exploitation attending to the influence of the time factor and, also the risk factor.
With this work Ive pointed to do an analysis of the direct foreign investments in the context
of the new globalization context and to identify the effects of this process on the Romanian
economy.
182
Starting from the definitions of some foreign and Romanian authors of the globalization
concept, Ive analyzed the concept of direct foreign investments in terms of the new evolution
recorded on the global, regional and national level. Considering the distribution of the FDI flows on
the Central and East European level, and also the attractiveness of the foreign investors owing to the
new characteristics of the states from this area, weve realized a detailed comparative analysis of
the effects generated by the foreign capital in this region, following the prominence of the impact
on the economic environment, social and natural, from the perspective of the durable development.
Therefore, Ive tried to approach in an own manner the analysis of the impact of FDI flows on the
economy of our country, also from the point of view of the adhesion criteria to the European Union,
and also under the impact of the globalization process.
Started from the assumption that the appearance of the international businesses constitutes
an essential component of the economical activity of the global level and Ive relieved the way to
the global businesses. A lot of direct foreign investments are the result of the activity of the
transnational corporations and other are understood as being companies which operates to different
levels of the firm internationalizing.
According to the fact that in the contemporary economy the direct foreign investments have
became a significant component of the global economical circuit, and in the last two decades of the
XX century have represented a source in continuous ascension for the developing countries, in the
World Rapport of Investments, elaborated by UNCTAD in 2002, is accentuated the fact that the
direct foreign investments constitutes the biggest component of the capital flows to the developing
countries, recording oscillations less than the portfolio investments and commercial-banking loans.
To relieve the importance of FDI in the global contemporary economy, Ive analyzed the global
flows of direct foreign investments from the perspective of the volume, of the influence factors, of
the economical development, according to the geographical distribution and sector distribution, and
also in the relation with the internationality modalities and with their component elements.
Ive started from the premise that drawing foreign capital under the direct foreign
investments shape is a specific activity, well defined on the international level, initiated and
perfected in the developed countries, that arent only the main global investors, but also the mains
receivers of the direct foreign investments flows. In these conditions, the success in drawing direct
foreign investments supposes the alignment to the international practices in the domain, considering
the participation in competition conditions to the global offer of investment projects.
The strategically objectives to draw the foreign direct investments aims for building an real
external credibility of our countries as potential investment market, and also the promotion of the
Romania as potential foreign investor, in the context of the competition with countries with
developing economy from Central and East Europe. In these conditions, the politics for drawing
foreign direct investments must be actively sustained, generating investments, and the business
initiative must start nut only by offering opportunities of internal investments but also by supporting
and keeping a stabile and profit generator business climate.
The analysis of the macroeconomic indicators relieves the important transforming that have
been produced on economical and social level but also the delays recorded in promoting the market
mechanisms, in preparing the premises for assuring a durable development of the Romanian
society.
It is known that the flows of foreign direct investment attracted by a country or region is
influenced by local conditions and situation of economic, social and international policy. Thus, FDI
flows received worldwide have registered an ascendant trend in the period 1998-2000, but were
fallowed by a significant reduction in the period 2001-2003 based on the slowing pace of economic
growth worldwide, the trend was changed since 2004, when it recorded anew trend of increasing
international investment flows. In 2008 shows a inflexible point and this decrease in the volume of
FDI flows is a consequence of the current economic and global financial crises.
183
691
1087
1388
818
679
558
711
958
1411
1833
1449
0
500
1000
1500
2000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Investments value
Figure no. 1 Annual FDI flows received worldwide in the period 1998-2008
($ billion)
Source : World Investments Report, UNCTAD, 2001 -2008
Comparative analyses of global trends show that the developed countries, developing
countries and economies in Central and Eastern Europe have seen a different dynamic depending on
the economic situation and domestic politics and the share held in total world. Thus, developed
countries which hold the largest share in total flows of foreign capital have seen an evolution
similar to that of the world while the states of Central and Eastern Europe (CEE) have followed a
trend different from that.
Year 2000 was an important moment of development, as flows of foreign direct investment
reached a record level, registering an increase of 18%, increase was almost entirely absorbed by
developed countries, respectively Triad USA - Japan - EU had 80% share of total foreign direct
investment received (Table no. 1). Therefore, international production was heavily concentrated in
the triad, while flows received by CEE were maintained at the level recorded in the previous period.
Table no. 1 FDI flows received worldwide in 2000 ($ billion)
Year 2000
Total off 1.388 100%
Developed countries 1.108 80%
Developing countries 252 18%
Central and Eastern Europe 28 2%
Source: World Investments Report, UNCTAD, 2002
In the period 2001-2003 FDI flows recorded a significant decrease as a result of decreased
growth recorded in 2001, but due the terrorist attacks in America. Thus, flows of foreign direct
investment received in 2001 fell significantly which was intensified competitive pressures, stressing
the need to seek out locations were costs were lower. We appreciate that this is the main cause that
has generated an increase in the relative size of FDI flows received by economies of Central and
Eastern Europe countries to 2% in 2000 to 5% in 2003, although in developing countries which has
been increased from 18% in 2000 to 31% in 2003.
At the end of 2002, flows of foreign direct investment followed the same downward trend
started in 2001 reaching $ 679 billion. This year, China recorded a record level of capital flows
184
received ($ 53 billion), becoming the largest recipient of FDI. As regards the countries of Central
and Eastern Europe they recorded an absolute growth of $ 4 billion to offset divergent evolution in
the sense that there were higher flows in 10 countries, mainly in the case of the nominees
integration into EU, while the other 9 countries, including Bulgaria, have received lower flows of
foreign direct investment. In Romania, the level of FDI attracted a slight increase (with 0,6%) over
the previous year.
Entries of foreign direct investment fell further in 2003, for the third consecutive year
reaching the lowest level recorded since 1998. The most drastic decrease in inputs of capital
registered in the US (53%) which totaled only $ 30 billion, being the lowest in the last 12 years.
Compared with developing countries that have recorded a rising trend of FDI flows attracted with
9% (from $ 158$ billion to $ 172 billion), the CEE countries have experienced a decline in their
from 31 billion to $ 21 billion (with 7%), which led to a reduction in total global share from 5% to 3
% (1) (Table no. 2).
Table no. 2 FDI flows received worldwide during 2001-2003 ($ billion)
Years 2001 2002 2003
Total off 818 100% 679 100% 558 100%
Developed countries 571 69% 490 72% 365 66%
Developing countries 220 27% 158 23% 172 31%
Central and Eastern
Europe
27 4% 31 5% 21 3%
Source : World Investments Report, UNCTAD, 2004
Following the analyses of investment flows towards Central and Eastern Europe in 2003,
notes the most part of the inputs of foreign capital registered in the candidate countries to EU
integration. Thus, the most significant flows were reported in Poland, which has posted the highest
volume of entries of foreign capital ($ 4.6 billion) followed by Hungary and Romania ($ 2.2 billion)
and Czech Republic and Bulgaria have recorded entries worth $ 2.1 billion.
Since 2004 is an amendment of the favorable trend of FDI flows received, resulted in
increased to $ 711 billion. After three years of decline recorded a slight return of FDI flows
received worldwide, particular in developed countries. the main receiver is the U. S. state, followed
by Britain and China, and this increase is made in particular on enhancing the mergers and
acquisitions operations.
Must point out that 2004 brought a change in integration of national economies classification
on categories in statistical development achieved by UNCTAD. Thus, European countries that
acceded to the EU in 2004 are included in the developed economies, while European countries were
not members of European Union appear in the category of developing economies along with most
countries in Asia, America and South Africa. As a result was defined a new region, namely South
East Europe (SEE) and Community of Independent States (CIS).
New polarization of the world economies was reflected on the flows of foreign capitals. Thus,
the main share in total FDI flows received worldwide (55.7%) was held by developed economies,
represented by 35 countries (EU -25, USA, Japan, Canada, Switzerland, Gibraltar, Iceland, Norway,
Israel, Australia an New Zeeland), while the majority states of the world, placed in a group of
economies in developing, recording only 38.68 % of total global FDI flows.
Although, FDI flows received by South Eastern Europe and CIS has been a trend upward,
only three villages received FDI flows higher than in 2003. Thus, foreign direct investment was
concentrated in five states that have totaled 81% from foreign capital inflows: Azerbaijan, Bulgaria,
Kazakhstan, Romania and Russian Federation. As regards the countries of SouthEastern Europe
185
which drew 1.87% of global FDI flows as the main receiver is remarkable Romania ($ 6517
million) and Bulgaria ($ 3443 million) candidate states for EU integration at that time.
Year 2005 is characterized by continuing upward trends of FDI flows received worldwide ($
958 billion, compared with $ 711 billion in 2004) which brings a favorable change to the developed
economies, whose shared in total input flows of foreign capital increased by about by 4 % (Table
no. 3).
Evolution flows of foreign direct investment in 2006 was influenced by events that took place
on the political and economic plan on intern and international level, but also the confidence of
foreign partners in the development strategy of Romania. Improving the business environment, the
effects of introduction of flat tax, have helped to attract a large volume of foreign investment.
Table no. 3 FDI inflow during 2004-2006 ($ billion)
2004 2005 2006 Year
Region mld.$ % mld.$ % mld.$ %
Total off: 711 100 916 100 1.411 100
Developed countries: 396 55,7 542 59,17 941 66,69
Developing countries: 275 38,68 334 36,47 413 29,27
South and Eastern Europe and CSI 39,6 5,57% 39,7 4,34 57,17 13,84
Is a note that the reorientation of transnational companies activities in the countries of Central
and Eastern Europe aimed, primarily, the nominees states to integration which has generated for
the period 2001-2003 a significant increase in the input of foreign capital in the integrated states in
2004. The same upward trend was noted, during that period and in Romania and Bulgaria which
were the main receivers of foreign direct investment in CEE.
Therefore, joining the European Union was an essential incentive for foreign investors
interested in gaining a better position on regional market, generating an increased attraction of the
countries of CEE candidate to integration, compared to other countries in the region.
The highest rates of FDI flows is achieved in 2007, with over $ 1833 billion (Table no. 4) year
in which EU is extends by joining Romania and Bulgaria on January 1. Emphasize that this year
our country is in UNCTAD analysis as developed country, with a volume of entries of FDI flows
worth $ 9.2 billion and for 2008 to $ 10.6 billion.
Table no. 4 FDI inflow in 2007 and 2005 ($ billion)
2007 2008 Year
Region mld.$ % mld.$ %
Total of : 1.833 100 1.449 100
Developed countries 1.248 68,08 840 57,97
Developing countries, of: 499,7 27,26 518 35,75
South and Eastern Europe and
CSI :
85,9 17,19 91,3 17,62
The volume of foreign direct investment attracted by a national economy is measured in
terms of two major indicators, namely: the index of performance and potential index. The
performance index shows the comparison between FDI inputs in each country, calculated as a share
of total world economic power of each countrys share that it holds in world GDP. It is preferable
that the value of this indicator should be as close to 1, which shows that the countries performance
186
in attracting FDI is better in the sense that attracts FDI over their economic power, occupying such
a high position in the world hierarchy.
The potential index measures the potential of each country to attract FDI. Like the previous
index, potential index take the values 0 and 1. According to UNCTAD methodology this index is
determined by taking into account certain economic, political and social variables, such as the :the
stock of input FDI as a percentage of the total world, GDP at purchasing power parity per capita,
growth rate of real GDP, the level of total exports as a percentage of GDP, exports of natural
resources as a percentage of the total exports, exports of services as a percentage of the total world,
import of parts and accessories from electronic and auto industry as a percentage of total
worldwide, energy consumption per capita, researching and developing costs as a percentage of
GDP, the number of main telephone lines per 1000 inhabitants, the number of students in higher
education as a percentage of total population, country risk. It is desirable that the index of potential
to be as close to 1, which shows that the countrys potential is larger, occupying a better place in the
global hierarchy. According to the data from UNCTAD, between the Central and Eastern Europe
Countries are significant gaps both in terms of performance and potential for attracting FDI.
Table no. 5 The performance index of FDI for the countries of Central and Eastern
Europe (global position)
Performance index
Country
1995 2000 2002 2003 2004 2005 2006 2007
Bulgaria 96 30 23 14 9 7 3 2
Czech 31 17 13 19 29 31 34 41
Estonia 15 19 22 13 15 6 9 8
Poland 45 49 59 76 61 56 51 60
Romania 82 65 76 60 31 25 21 32
Slovakia 64 43 8 12 21 30 28 49
Slovenia 86 114 60 53 57 95 98 94
Hungary 3 26 28 39 43 52 48 50
Source: World Investmentrs Report, UNCTAD, 2000,2006, 2008
Table no. 6 The performance index of FDI for the countries of Central and Eastern
Europe (global position)
Potential index
Country
1995 2000 2003 2004 2005 2006 2007
Bulgaria 39 66 62 63 64 60 59
Czech 38 38 38 38 39 39 39
Estonia 67 37 34 34 34 35 34
Poland 56 41 43 42 43 44 43
Romania 83 96 79 78 78 74 69
Slovakia 47 47 45 47 47 54 53
Slovenia 42 29 27 28 29 33 33
hungary 54 42 36 37 37 89 89
Source: World Investmentrs Report, UNCTAD, 2000,2006, 2008
From the analysis of performance index is observed that the changes in the performance of
states and the gap between them are significant. Regarding the evolution of performance index is an
apparent reversal of the situation. Thus, in the year 1995 Hungary, Estonia and the Czech Republic
attracts a large volume of FDI, While Romania, Bulgaria and Slovenia receive the share of foreign
187
capital under the power of GDP world. In 2005, Estonia ranks first place at the regional level, while
Bulgaria and Romania occupying two sets in the hierarchy of CEE states analyzed attracting FDI
over their economic power, while Hungary and Czech Republic recording foreign direct investment
appropriately the weighting that hold in world GDP. Slovenia is notable, in that throughout the
period analyzed, attracted foreign investment under its economic power. A similar event is recorded
in Poland.
4. CONCLUSION
In conclusion, this analysis highlights and completes the observations on the attractive states
of the UE for foreign investors. Thus, the most attractive countries were the Czech Republic,
Estonia and Slovenia which had great potential and have attracted the most part of foreign direct
investment over their economic power. Latest positions were occupied by Romania and Bulgaria,
countries that were characterized by a low potential and appropriate attractiveness of their economic
power.
Should be note that our country had made an improvement on the potential of attracting FDI
flows, so that from 2000 to 2007, climbing 27 positions compared with Bulgaria, which only goes
up 7 positions. This situation is explained if we consider the positive developments of the
economic, institutional and legal climate, registered in Romania in the European Union pre-
accession.
If we analyzed the evolution of FDI presented in accordance with theories on the types of
foreign direct investments, we appreciate that foreign investors in UE have watched especially:
potential market capitalization as a result of foreign investors preference for trade
activities ;
abundant and cheap labor, investors are attracted by industrial activities that do not
require highly skilled labor ;
Exploitation of natural resources in countries that have such resources.
Following the evolution process of globalization in recent decades have been recorded
significant changes in the global economy and the most eloquent change consists of increasing the
share of services to the detriment of other sectors. This change is due, mostly unprecedented
progress in technology, particularly in communications technology, with the main source
transnational corporation (CTN). CTN exported this trend throughout the global economy, so in the
countries of Central and Eastern Europe through foreign direct investment made in this region.
Romania crosses in this period an important stage from its modern history. On one hand, the
adhesion on 1 January 2007 to the European Union had requested the accommodation to the
exactingness which supposes the new statute of state member, and on the other hand must protect
the internal market of the noxious effects of the contact with free European market. Furthermore,
our country will have to find viable solutions that for the national economy to face successfully
another international process, much more deeply, the globalization.
The financial global integration and the international mobility of the capitals have modified
deeply the existing relations between different economies. Aforetime, the international transmitting
of the economical conjunctions was realizing through the flows of goods and services changes.
Today, the financial variables are those whom play the determinant role in transmitting the
conjunctions, these becoming more and more independent.
188
ENDNOTES
(1) World Investments Report, UNCTAD, 2003
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Princeton University Press, New Jersey, 2007
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Political Economy of Globalization, edited by Ngaire Woods, MacMillan Press, 2000
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Bucureti, 2000
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Polirom, Iai, 2004
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Century, Princeston University Press, New Jersey, 2000
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globale. Politic, economie i cultur, Ed. Polirom, Iai, 2004
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189
ETHICAL ISSUES IN INTERNATIONAL BUSINESS
Assistant Professor, PhD. Andreea-Daniela GANGONE
Constantin Brncoveanu University of Pitesti, Romania
andreeagangone@yahoo.com
Abstract:
The international business environment, through its cultural and economic diversity, often puts international
managers in great difficulty as it generates a large variety of ethical issues. On a short term, finding a solution and
respecting the organizational principles of business ethics could generate an increase of the organizational costs and,
thus, a decrease of efficiency.
But, on a long term, even though there is the possibility that the ethical management practices are not related
to the specific indicators of financial profitability, there is no inevitable risk between the ethical practices and the
profit. This is demonstrated by the well-known corporations that are respected by the consistency with which they
assume ethical responsibilities and obtain, at the same time, superior financial results.
Consequently, the profit and the ethics can be considered two essential parts in the process of evaluating the
organizational activity results as, while the profit reflects the organizational results from a quantitative point of view,
the ethics reflect the quality of these results.
International managers carry the heavy task of formulating organizational policies and standards by
combining the law, the ethical business principles, the local cultural values and the organizational standards. The
ethics fulfills, from this perspective, the managers catalyst role to take fair actions from a social point of view and it
represents a guide in making and evaluating the business decisions, appreciated in most countries of the world.
Key Words: business ethics, ethical dilemma, corruption, industrial espionage, cultural relativism.
JEL Classification: A13, M16
INTRODUCTION
The ethical-related issues have been approached since ancient times and have represented
the foundation of different religions and life styles. The ethics can be found in all aspects of human
activity as the individuals have been preoccupied with the quality of their behavior towards the
people around. Even if they do not purposefully intend to improve their relations with the others,
people always evaluate their behavior from the point of view of their correctness.
Thus, we can consider that the ethics represents a mental process systematically developed
to identify and evaluate the differences between the way it is and the way it could be the result of a
human action or activity in order to improve the human behaviors in society.
The ethics has been an important part of the economic environment in the twentieth century.
Within this period, different social groups have manifested in what regards both the public security
against some political manipulations, and the consumer awareness, in general, regarding the
necessity to take responsibilities by the organizations to find a fair solution for various ethical
issues.
Nowadays, consumers and pressure groups appear to be increasingly demanding firms to
seek out more ethical and ecologically sounder ways of doing business. The media also constantly
seems to be keeping the spotlight on corporate abuses and malpractices. And even firms themselves
appear to be increasingly recognizing that being ethical (or at the very least being seen to be ethical)
may actually be good for business.
On the other hand, within this period, the business practice has also outlined the fact that all
extraordinary decisions are based both on the financial element as well as on the ethical one.
190
As a result of the conjugated action of these factors, the ethics has become an integrating
part of the contemporary business environment.
Business ethics is the study of business situations, activities, and decisions where issues of
right and wrong are addressed (Stanwick and Stanwick, 2009, p. 5).
According to this definition, business ethics covers the hole spectrum of interactions
between firms, individuals, society and the state. In other words, business ethics is a complex as
business itself. It is not an optional accessory to business life or a mere enthusiasm of the
philosophers and moralists; business ethics is how the people conduct their business affairs, from
the basest fraud to the highest levels of excellence (Grace and Cohen, 2005, p. 1).
Also, some specialists consider that business ethics begins where the law ends. Business
ethics is primarily concerned with those issues not covered by the law, or where there is no definite
consensus on whether something is right or wrong. Discussion about the ethics of particular
business practices may eventually lead to legislation once some kind of consensus is reached, but
for most of the issues of interest to business ethics, the law typically does not currently provide us
with guidance. (Stanwick and Stanwick, 2009, p. 7).
During the past few decades, the globalization process has progressively eroded the
relevance of territorial bases for social, economic and political activities, processes and relations.
As business became less fixed territorially, corporations increasingly engaged in overseas markets,
suddenly finding themselves confronted with new and diverse, sometimes even contradicting
ethical demands. Moral values, which were taken for granted in the home market, may get
questioned as soon as corporations enter foreign markets.
Thus, contemporary countries have a different stability level and development level of the
institutions that govern them from a social, political and social level, through their fundamental
cultural level and, thus, through their capacity to outline, approach and solve ethical issues. In many
countries, this capacity is considerably diminished by poverty, poor education, a limited access to
information, corruption and a nonfunctional political environment.
Although contemporary nations present important differences from an economic, cultural,
political and social point of view, we may observe a great resemblance between the unethical
behaviors manifested by the transnational corporations, but also by many companies with
international activity, on the markets of these nations, frequently resorting to: corrupting various
officials of the host states (in order to obtain governmental facilities), disrespect to the human
rights, offering false information regarding the financial status of the company and fraudulent
publicity (on the basis of spreading this information), using underage employees, informational
piracy, industrial espionage, wasting natural resources, sexual discrimination, deliberate pollution
etc.
From a managerial perspective, the ethical problems manifested in the arena of international
business represent real ethical dilemmas for the contemporary managers as they generate, at least on
a short term, a conflict between the organizational economic performance (evaluated by
measuring the turnover, the costs and the profits) and its social performance (evaluated by
measuring the ethical responsibilities to the people outside or inside the organization) (Hosmer,
1987, p.3).
Competition in international business is such that ethics can appear to be a handicap, if not
downright irrelevant. Many business people consider that business has only two choices: to behave
unethically or fail, and they argue that the survival of the company should not be jeopardized in
order to fulfill an ethical obligation when their competitors are not behaving ethically.
In my opinion, it is unconvincing, both in domestic and in international market, to dramatize
the difficulties of matching competitors ethically by claiming that the competitors tactics are
designed to destroy all rivals. The survival of most businesses does not depend on one decision, and
191
if the matter is very serious, then being unethical in order to save the company simply changes the
nature of the risk.
My opinion is based on the analysis of some major sources of ethical issues in the
international business environment and some behaviors with ethical implications of some
multinational companies. According to this, I have reached the conclusion that, though an unethical
behavior may generate a series of immediate advantages, on a long term, this will negatively affect
the organization to a greater extent than the sum of advantages initially obtained. These aspects are
presented hereinafter.
MAJOR SOURCES OF ETHICAL ISSUES IN INTERNATIONAL BUSINESS
Although the ethical issues identified in international affairs are extremely numerous and
different, I consider that most of them mainly originate in five fundamental sources of ethical
dilemmas, synthetically presented in Table no. 1.
Thus, one of the most important ethical dilemmas that international managers must face is
that of corruption, respectively the opportunity of paying a governmental clerk, providing this
action leads to making some business, employing local labor force and, implicitly, increasing the
organizational efficiency and the living standard in the respective community.
In most developed or underdeveloped countries, the bribe is a daily aspect, which led to the
opinion that in such countries, the governmental payments are an indivisible side of a successful
business. Many of the multinational companies that have applied such practices motivate that they
are determined by their competitors who put them into practice and they do not want to stay behind.
More than that, the American transnational corporations (respectively most transnational
companies in contemporary economy), are guided in international operations after a series of
regulations, among which FCPA Foreign Corrupt Practices Act, adopted in 1977 in the United
States of America.
FCPA is a document that underlines the practices permitted and, respectively, interdicted to
the American economic agents on the foreign markets, from the perspective of their ethical
character. Among the interdicted practices stipulated in this document, there are (Fadiman, 1991, p.
30):
Offering or paying some amounts of money to different political parties, candidates or
foreign public clerks, holding influential positions, which they may use in order to support
the organization to get or keep some business;
Forms of indirect payment - companies are forbidden to pay if they know or suspect that
any part of that sum will get to an illegal fund or for corruptive activities.
On the other hand, FCPA stipulates that lubrication bribe, used to persuade the public
clerks of inferior level to develop a normal activity and not to disadvantage the business with
relevance with the competitors, it is permitted. Although the maximum limits of this type of
payment are not specified, the American law imposes keeping some rigorous records regarding the
payments made.
For example, the company Lockheed, constructing aircrafts, faced such a situation on the
Japanese market. Lockheed paid 12 million dollars to the Japanese Prime Minister, to the president
of the Japanese Airlines Association, as well as to other seven political persons in order to
facilitate its business on the respective market.
When revealed, the company motivated that the payments made to the enumerated officials
represents less than 3% of the profits obtained by selling the model L-1011 and that, anyway,
according to the federal laws, such payments are not interdicted (Baron, 1996, p. 664), although,
obviously, such practices are not by far ethical.
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The managers of the transnational corporations that face with such financial demands from
some governmental officials on the foreign markets where they act may solve these demands in an
ethical manner, without having the risk to break the relations with the host state if they respect the
following three general principles:
1. respecting the basic human rights;
2. respecting local traditions;
3. making the difference between good and bad by examining the context (Certo, 2002, p.
136).
More precisely, the managers of the transnational corporations may respond to such
demands in an ethical manner if they apply one of the following methods:
donations in money in order to create or develop various public services (such as building
hospitals or roads) for the host state, correspondingly promoted and managed, may increase
the public appreciation to the organization and prevents the money disappearance in private
pockets;
donations in goods or services may be medical equipments for hospitals, computers for
schools or aids for underprivileged persons and, if promoted correspondingly, may facilitate
the future development of the business and they are absolutely ethical;
donations in jobs refer to employing some persons in the host country in some projects
meant to sustain the organizational activity, but also to increase their trust in it. For
instance, Coca-Cola hired, in Egypt, six hundred persons to plant hundreds of acres with
orange trees, recuperating the respective land from the deserted zone, and obtained thus an
increase of confidence from the Egyptian community, without violating the principles of
business ethics (Fadiman, 1991, pp. 34-35).
Table 1. Major sources of ethical dilemmas in the international managers activity
SOURCES OF ETHICAL
DILEMMAS
FUNDAMENTAL ETHICAL ISSUE
Corruption Is it ethical to make a payment to a governmental clerk providing it depends on
succeeding in a business?
Industrial espionage Is it ethical to use some information about the competitors activity, obtained
through methods that are at the edge of the law?
Relation with the environment Is the organizational behavior ethical, though it has the possibility to go over the
environment standards imposed by the legislation, staying competitive, is satisfied
to respect them?
Relation with the employees Is it an ethical behavior for the organization to apply different personnel policies
regarding employment, promotion and remuneration of the employees on different
markets where it acts?
Relation with the consumers Is it ethical for the behavior of an organization which does not completely inform
its target consumers about the features of the offered product and which has big
prices for the key products in order to maintain the consumers health and life,
even though the legislation in the host country allows it?
Source: The authors conception
Industrial espionage is another unorthodox and absolutely illegal method which
transnational corporations use in order to go ahead of their competitors.
John Pepper, the general manager of Procter & Gamble faced such an ethical issue, and the
manner in which he solved it may represent a real model for al contemporary organizations.
Thus, a few years ago, Pepper was informed by his managers that the company employees
responsible for the competition analysis (department which studied and predicted the movements
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of the main competitors) set a system that allowed them to spy the activity of their main competitor,
respectively Unilever.
These employees contracted a company which, in its turn, had contracted other twelve
smaller companies whose employees entered the property of Unilever pretending to be market
analysts and they analyzed the garbage resulted from the productive process of the main production
unit.
Thus, it seems that the so-called analysts obtained enough secret information about the
products and the production processes of Unilever in order to make the company face some
competitive issues.
When he found about his employees initiative, John Pepper stopped the action, fired the
responsible employees and turn the issue public, both inside his organization and outside it.
Then he informed Unilever about the measures he adopted and accepted this companys
solicitation to supervise the activity of Procter & Gamble for one year by an impartial auditor to
prevent using any of the information obtained illegally (Dessler, 2004, p. 26).
Another source of ethical issues that multinational companies have to face is their relation
with the environment.
Being aware of the devastating effects of the post-war wild capitalism, we face the
conception according to which protecting the natural environment must be considered a major
social task of humankind and, especially, of its representatives in the business world.
Presently, the international organizations must respect not only the national legislation
regarding environment protection, but also the one of the host countries and the international
regulations that get tougher and tougher sanctions in case of disrespecting them.
In spite of all this, there is a big temptation to break these rules, as the costs required to obey
them often significantly diminish the companies profits and competitive capacity. Many times,
famous names in the economic international business were involved in pollution scandals, with
lasting effects in the reputation and the image perceived by the consumers.
One of the numerous examples Mitsubishi Corporation which, in 1989, was boycotted by
the activists in the organization called Rainforest Action Network, who accused the company of
being responsible to a great extent for the destruction of the forests in the S-E Asia, South and
North America and Siberia.
The boycott aimed at the products of two companies that are members of the above
mentioned corporation: Mitsubishi Motor Sales of America and Mitsubishi Electric America. The
boycott ended in 1998. In December 2001, nine companies belonging to the international company
Mitsubishi Corporation were fined by the European Commission with 313.7 million Euros, as the
1990s represented a cartel to keep the high price of non-charcoal paper.
In November 2002, Mitsubishi Corporation declared itself ready to start immediately to
respect the international regulations regarding forest exploitation (Werner and Weiss, 2004, p.
354).
The relation with the employees is another important aspect upon which the managers of
the multinational corporations must make ethical decisions, without compromises. The managers
have the heavy task to create a climate of respect and mutual confidence, by respecting the rights of
the executive personnel that are subordinated to them. The employees will really get involved into
their tasks, for the success of the organization, only if they have a certain status at their workplace,
liberty, intimacy, and a fair salary.
As poverty is often, in underdeveloped countries, a good reason to ignore the fundamental
human rights and liberties, the organizations must not only respect the law but also respect the
traditions of employment and personnel remuneration. This attitude will only worsen the situation
of these people who are ready to work even for less than they need to survive.
194
As a consequence, the multinational companies must fulfill the minimum legal provisions
with what they consider to be necessary to increase the respect of the employees in the host
countries and to improve their living standard.
An interesting example is the one of Levi Strauss, which set a system of evaluating the
opportunities to approach each country apart in order to develop businesses. This system specifies,
among other things, that the company will not initiate or continue the businesses in the countries
where there are frequent violations of the fundamental human rights.
After applying this evaluation system, the company decided to withdraw itself from Chinas
market, due to the fact that here there was compelling work and a lack of decent conditions
regarding the situation of the employees less capable to protect their rights.
This decision was even harder to adopt as the withdrawal meant losing some important
business and, especially, sacrificing some opportunities of future substantial development.
In spite of all this, the company had a major benefit. According to the declaration made by
the general manager, no other action of the company enjoyed any spontaneous and important
support, coming from the people all over the world (Grace and Cohen, 2005, p. 212).
The relation with the consumers is almost a permanent source of ethical dilemmas for
contemporary managers. Thus, starting with practicing some exaggerated prices up to spending
huge amounts to promote their products, starting with practicing excessive value added taxes, using
cheating practices of packaging, promoting and selling, starting with bringing into the market some
products that do not correspond from the point of view of quality and security up to the planned
moral usage, the cases of unethical behaviors of the organizations in their relation with the
consumers face an impressing diversity.
The worst situations are the ones in which the organizations violate not only the ethical
business principles, but also the consumers fundamental rights, which takes them in front of the
law, in case of such practices.
For instance, the biggest ethical challenge faced by McDonalds in recent years concerns
issues of health and nutrition. With critics claiming that a diet of fast food has been a major
contributor to escalating rates of obesity, McDonalds, as the worlds leading fast food company,
has inevitably been first in the firing line. Among the arguments made by its critics are that the
company has failed to provide a balanced menu, that it provides insufficient nutritional information
and guidance, and that it actively encourages consumers (especially children) to make unhealthy
choices, for example by promoting super size portions.
In this context, it was no surprise that the attack in the US quickly escalated to litigation. An
initial lawsuit against the firm, brought on behalf of two New York children, was filed with great
publicity in 2002. This accused the fast-food chain of misleading young consumers about the
healthiness of its products, and understandably stirred up fears that food companies could come
under the similar sort of legal attacks that hammered the tobacco industry in the 1990s. Although
the initial lawsuit was dismissed, elements regarding deceptive advertising were reinstated as
admissible following appeal in 2005. So, whilst the company continues to regard the suit as
frivolous, the threat of future litigations still unmistakably hangs over the company (Stanwick and
Stanwick, 2009, p. 38).
Also, the organizations promote, numberless of times, a customer manipulation, if not
illegal, at least unethical. Thus, suggesting that chewing gum replaces brushing the teeth is an
example of unethical manipulation, as, in reality, false mastication only spoils the teeth and
sickening the stomach, and the artificial sweeteners lead to the appearance of some mouth microbial
cultures.
The issue of the clients unethical manipulation is based on the fact that a large part of the
persons in the organization find what happens and think that they, their families and friends could
be the clients unfairly treated by these companies (Pleter, 2005, p. 523).
195
CONSEQUENCES OF UNETHICAL BEHAVIOR IN INTERNATIONAL
BUSINESS
The categories of ethical issues and the examples presented above represent arguments on
the basis of which we may say that, for international affairs, the ethical issues are numerous and,
often, more difficult than the national ones (this was also because of the fact that the international
managers dispose of less information regarding the political, economic, social and cultural context
of the issues that must be decided upon). In the developed or underdeveloped countries, the
situation is also complicated by the fact that there are no institutions checking the obeisance of
some ethical business rules.
For these reasons, many multinational companies are tempted to ignore or even severely
violate the business ethical principles on the external markets approached. They operate, from the
point of view of the business ethics, under the power of cultural relativism (Grace and Cohen,
2005, p. 2000), adapting its ethical behavior to the cultural particularities and the local economic
practices, succeeding in approaching and maintaining with success on the markets often dominated
by suspicious practices.
The risks of the organizations that apply such practices are significant.
Thus, practice has demonstrated that the disadvantages and the costs the company must
cover in case the unethical behaviors are revealed to the public are higher than the costs required
avoiding them. Big companies all over the world had to support serious consequences when their
suspicious practices have come into light.
In my vision, an organization which chooses to adopt an unethical behavior, regardless its
reasons, makes it, without realizing, on a long term, season in a circle, that takes her out of the
market.
Therefore, any unethical behavior of the organization will represent a continuous source
of expenses, in order to hide it from the partners interested in its activity. At the same time, any
secret represents a weak pint of the organization, which turns it vulnerable in front of the
competitors. Obviously, the more unethical are the manifestations of the organization, the more
vulnerable it gets to the competitors attacks.
Many times, regardless of the size of the efforts made for the organization to hide its
unethical attitudes, they are revealed and divulged to the large public (most often, by mass media or
its competitors).
Divulging these unethical behaviors will have a negative effect upon the reputation of the
international organization, especially on the developed markets, where the legislation stipulates
pretty tough sanctions. Also, losing the fame of the organization or the rumors regarding its
dishonesty may determine the decrease of sales and the clients may choose different providers.
For example, a study about the impact of discovered unethical behavior on the performance
of a companys stock revealed that unethical behavior that is discovered and publicized has a
negative impact on the stock price for an appreciable period of time. Unethical behavior, therefore,
decreases a firms wealth. An example of this type of unethical behavior would be a tobacco
company charged with hiding evidence about the health risks of smoking cigarettes. As a result
many shareholders sell their shares, and other investors lose interest in buying stock in the
company (DuBrin, 2008, p. 70).
196
Figure 1. Consequences of an unethical organizational behavior (The authors conception)
On the markets of the less developed countries, on the other hand, in most cases of public
disclosure of various unethical business practices and behaviors, the business people and the
managers community stays strange, passive and quiet in front of these incorrect manifestations.
This tranquility sends the public a clear negative message, much more eloquent than any other
declaration regarding the ethical standards and principles assumed in the activity of an organization,
whatever that is.
On the other hand, we must take into account the fact that the big transnational corporations
have their origins in developed countries, where business fair play is very important and, thus, the
organizations have a lot to lose in case of disclosing some unethical behaviors as, beyond any legal
sanctions, they will be abandoned by a series of clients and business partners.
The situation of Nike is well-known, as its image was pretty spoiled after the disclosure of
some unfair actions of the corporation in 1997 in New York.
The American public was simply scandalized finding out that Nike sport shoes for children,
for which the American parents pay between 100 and 180 dollars are produced for only 5 dollars
by Nike. The complete amazement was when some Pakistan and Indonesian kids were presented
broidering the Nike logo on the company products for only 2 dollars per day.
Those who observed it for the very first time were the teenagers from a social centre in
Bronx, who initiated a protesting action in front of the supermarket Nike-Town. Around 200
teenagers emptied in front of the security agents bags full of old Nike sport shoes. What amazed the
Nike managers even more was the declaration made by a thirteen-year old girl who said on a
national TV channel: Nike, we made you, we will break you! (Werner and Wiess, 2004, p. 22).
After this event, the greed of the Nike managers became public and hit in the image of the
corporation, which it has not been repaired so far.
An organization, which tries to get rid of the accusations regarding the suspicious
transactions, cannot be concentrated anymore upon the objectives and the purposes on a long term,
does not pay the required attention to the competitors that go over it. Such an organization wastes
its resources trying to decipher the situation in which it is and the reasons for which it got there, and
this look to the past is the consequence of neglecting the ethics (Tierney, 1999, p. 61).
5. The
company
dissapearance
1. Violating the
business ethical
principles
3. Affecting the
fame/reputation
of the
organization
4. Losing
various clients
and business
partners
2. Wasting the
company
resources to hide
the unethical
behaviors
197
We must not neglect the fact that a large part of the unethical behaviors fight against the
organization itself, sooner or later. For example, even if an organization succeeds in avoiding the
fiscal institutions selling goods without an invoice, such a behavior becomes a major risk for the
entrepreneur, as the employees will understand that there is the possibility and, sooner or later,
they will experiment their own stealing methods, confiscating the business (Pleter, 2005, p. 521).
Such behaviors do not spare the organization from its interior force and the employees
support, which do not trust it and its managers. The ethics may be considered from this point of
view the interior force of any organization. No investor should initiate any business unless
interested in ethics as, from the very beginning, this is meant to fail.
On a long term, the organization will face a lack of confidence both inside and outside, the
negative image that it formed being able to generate important financial losses or even to disappear
from the market.
Unfortunately, an ethical behavior does not necessarily provide a greater efficiency in the
individual or organizational activity. Thus, an organizational policy refusing to make various
payments to the governmental officials in the countries where this practice is self-understood may
generate costly delays and even losing some businesses of the company in the respective countries.
Also, an ethical behavior from the organizations may not be visible for the other
participants at the market or the society activities, or, even if it is visible, may not be rewarded
correspondingly. For instance, an increased availability of an organization regarding employing
people with disabilities, although fair from an ethical point of view, it is often inefficient from an
economic point of view.
Highly ethical behavior and socially responsible acts are not always free. Investing in
work/life programs, granting social leaves of absence, and telling customers the absolute truth about
potential product problems may not have an immediate return on investment.
From an antagonistic perspective, respecting the business ethical principles may generate
a series of important advantages for the contemporary organizations.
Thus, first of all, promoting an ethical behavior provides the company protection both
against the competitors unethical behavior and the possible abuses from its own employees.
More precisely, the employees ethical behavior in the relations with the economic and social
environment where the company develops its activity protects the organization from any possible
disloyal practices.
Another important aspect refers to the fact that a big part of the ethical dilemmas and issues
may be known before the organizational plans be implemented and the anticipatory solution of all
the ethical issues saves to time, money, effort and resources and, mostly, increases the
organizations reputation (Sikula, 1996, p. 74).
Besides, the organic integration for some ethical responsibilities in the organizational
culture and, implicitly, in the employees mentality, will create a positive image in the perception
of the large public, that will regard it with confidence and will be tempted to support its actions.
Recent evidence also suggests that high ethics and social responsibility are related to good
financial performance. A recent perspective on the relationship between profits and social
responsibility is that it works two ways. More profitable firms can better afford to invest in ethics
and social responsibility initiatives, and these initiatives in turn lead to more profits.
Sandra A. Waddock and Samuel B. Graves conducted a large-scale study that supports the
two-way conclusion. The researchers analyzed the relationship between corporate social
performance and corporate financial performance for 469 firms, spanning 13 industries, for a two-
year period. Many different measures of social and financial performance were used.
It was found that levels of corporate social performance were influenced by prior financial
success. This suggests that financial success creates enough money left over to invest in corporate
social performance. The study also found that good corporate social performance contributes to
198
improved financial performance as measured by return on assets and return on sales. Waddock and
Graves concluded that the relationship between social and financial performance may be a virtuous
circle, meaning that corporate social performance and corporate financial performance feed and
reinforce each other (DuBrin, 2008, p. 71).
CONCLUSIONS
No nation can survive and flourish without common moral and social values. Ethical
problems and dilemmas abound in any economy, regardless its level of economic development. At
international level, they get higher dimensions and generate superior effects.
Nowadays, the power and influence of business in society is greater than ever before.
Business has the potential to provide a major contribution to our societies, in terms of producing the
products and services that we want, providing employment, paying taxes, and acting as an engine
for economic development.
How, or indeed whether, this contribution is made raises significant ethical issues that go to
the heart of the social role in business in contemporary society.
In conclusion, although an ethical behavior may not be profitable all the time, an
unethical behavior frequently generates substantial losses, especially on a long term.
That is why it is important for the contemporary organizations to understand that, regardless
the nature of some unethical consequences and the timing horizon to which they report, on a long
term, they represent considerable costs.
More than that, the consequences of such practices are not counted only to the limit of the
sanctions received as fines, but also in the terms of worsening the international business
environment, by creating an attitude a suspicious attitude from the society with respect to the
motivations and the methods used by all the organizations that act in the respective field of activity
(Baron, 1996, p. 572).
Eventually, this attitude leads to intensifying the governmental actions developed in order to
prevent and legally punish such actions.
On a long term, it is more efficient to find a balance between the exigencies of the economic
affairs and those of the society, as it is obvious that the businesses are no longer evaluated
according to their profitability, but also according to the moral standards and ethical principles that
govern them.
Contemporary managers must be aware that it is absolutely necessary for the organization
they manage to get a certain moral attitude in business, that they must regard above the legal side
and apply the standards based on personal integrity, moral conscience of the organization and the
consumers long-term welfare.
Besides, it is obvious that no matter how tough are the governmental constraints and the
international sanctions regarding the unethical behaviors, the only solution to shape an ethical
business environment is to create an ethical culture for more and more investors, managers and, of
course, consumers.
REFERENCES
1. Baron D.P. (1996), Business and its environment, Second Edition, Prentice Hall, New
Jersey.
2. Certo C. S. (2002), Modern management, Teora Publishing House, Bucharest.
3. Dessler G. (2004), Management. Principles and practices for tomorrows leaders,
International Edition, by Pearson Education Inc., Upper Saddle River, New Jersey.
4. DuBrin Andrew (2008), Essentials of management, Cengage Learning, Inc., Boston, USA
199
5. Fadiman J. (1991), Special Report, A travelers guide to gifts and bribes, in Ethics at
Work, A Harvard Business Review, Paperback, United States of America.
6. Grace D., Cohen S. (2005), Business ethics, Third Edition, Oxford University Press, Oxford.
7. Hosmer L. T. (1987), The ethics of management, Homewood, Illinois, United States of
America.
8. Pleter O. T. (2005), Business administration, Second Edition, University Book Publishing
House, Bucharest.
9. Sikula A. Sr. (1996), Applied management ethics, Richard D. Irwin, a Times Mirror Highes
Education Group Inc. Company, United States of America.
10. Stanwick P., Stanwick Sarah (2009), Understanding business ethics, International Edition,
Prentice Hall
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House, Bucharest.
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FDI FLOWS IN THE ERA INTERDEPENDENCIES
Assistant PhD. Student Angela-Nicoleta COZORICI
Assistant PhD. Student Simona BUTA
angelac@seap.usv.ro
simonab@seap.usv.ro
Abstract:
This paper presents the dramatic changes they have gone through foreign direct investment. Thus, through
them, globalization has become a normal component of the existence of each of us through the goods and services
purchased through the workplace, the act of communicating or leisure time. An overview of the total volume of FDI in
the period 1970-2008 shows that they have had a significant increase over the years, except during the years 2001-
2004, when their progress was tortuous and will then resume rise, even above levels previously achieved. The global
economic crisis has temporarily halted this trend, but the medium term it will certainly be resumed.
Unusual size of economic and financial crisis in progress raises major problems on the trend and capacity of
transnational companies to continue to invest and expand abroad. Declining profits, reduced access to financial
resources, declining market opportunities and risking possible worsening of the current global economic downturn are
obvious causes for the decline in FDI flows. This, in turn, is causing concern among host countries, especially
developing States, which relies heavily on international investment to fund growth and new jobs. Overcoming the crisis
will bring about a change of the global economic order, but this will not only be able to influence positively the role
played by FDI in the world economic circuit.
Keywords: foreign direct investment, globalization, financial markets, scientific and technical progress,
economic crisis
JEL Classification: F21
1. INTRODUCTION
The globalization of world economy is characterized primarily by information and links
stability relations, financial, technology between countries. A special significance in the emergence,
development and international relations have to maintain those investments. These are the material
support of economic and social development of States.
Growing degree of integration of international financial markets leaves its mark on how to
run a full orientation and international financial flows. Acceleration of globalization is a
characteristic of the beginning of XXI century, and international flows of direct foreign investment
are the main manifestation of this process.
With the globalization of foreign direct investment has become a normal component of the
existence of each of us through the goods and services purchased through the workplace, the act of
communicating or leisure time.
2. GLOBAL FOREIGN DIRECT INVESTMENT
The significance and consequences of foreign direct investment have sparked the interest of
states and led to a fierce competition to obtain capital. An equally important goal could not be left
solely to market forces or the level of microeconomic decision characteristic of entrepreneurs
individually. Analyzed global, FDI goes predominantly to developed countries and developing
countries show an interest for such investments because they, in addition to foreign capital inflows,
also need experience of leading and organizing activities, know-how and ability to penetrate
markets.
201
Between globalization and foreign direct investment is unique match in both directions.
Thus, FDI represents both the excitation factors of globalization and its manifestations in the
economic sphere; they also contribute to the transformation of developing countries in developed
countries, thus changing world economic order based on new relationships forces and new actors on
the world market.
We can not deny that without significant gains FDI host countries, in different forms of
capital inflow, creating new jobs, technology transfer, strengthen purchasing power and increasing
contacts with the world. It would be unrealistic if we did not confirm the benefits that they
generated foreign direct investment flows increased scientific and technical progress in the world,
even in less industrialized countries, the development of world trade growth, improve living
standards and more effective exploitation of economic resources.
An overview of the total volume of FDI in the period 1970-2008 shows that they have had a
significant increase over the years, except during the years 2001-2004, when their progress was
tortuous and will then resume rise, exceeding the previously achieved levels.
13346
26567
54076 55887
207273
341144
1381675
973329
1697353
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
1970 1975 1980 1985 1990 1995 2000 2005 2008
Toate economiile lumii
Figure 1. FDI global flows (inflows) in the period 1970-2008
(U.S. dollars at current prices and exchange rates in force, in millions)
Source: made by author based on UNCTAD data, Major FDI indicators (WIR 2009)
1970 1975
1980 1985 1990
1995 2000
2005
2008
S1
1
4
. 1
5
1
2
8
. 5
9
4
5
1
. 5
5
0
6
1
. 9
7
5
2
3
9
.1
1
1
3
6
1
.6
7
9
1
.2
1
3
.7
9
5
8
7
8
.9
8
8
1
.8
5
7
.7
3
4
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
1.400.000
1.600.000
1.800.000
2.000.000
Figure 2. FDI global flows (output) in the period 1970-2008
202
During 1987-1997, global FDI flows have seen a doubling every five years, but a significant
increase was recorded in the year 1999, when FDI flows almost saw a significant boom, compared
with the previous period.
Figure 3 . FDI global flows (inflows) in the period 1987-2000 (U.S. dollars at current prices and
exchange rates in force, in millions). Source: UNCTAD, Major FDI indicators (WIR 2009)
Fig.nr. 4 - FDI global flows (output) in the period 1987-2000 (U.S. dollars at current prices and
exchange rates in force, in millions). Source: UNCTAD, Major FDI indicators (WIR 2009)
0
2 0 0 . 0 0 0
4 0 0 . 0 0 0
6 0 0 . 0 0 0
8 0 0 . 0 0 0
1 . 0 0 0 . 0 0 0
1 . 2 0 0 . 0 0 0
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 0
E c o n o m i i l e n c u r s d e d e z vo l t a r e E c o n o m i i l e n t r a n z i i e
E c o n o m i i l e d e z vo l t a t e E c o n o m i i l e e m e r g e n t e
U E
Developing Economies Economies in transition
Developed Economies Emerging economies
EU
203
0
200000
400000
600000
800000
1000000
1200000
1400000
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
0
Toat e ec onomi i l e l umi i E c onomi i l e n c urs de dez vol t are
E c onomi i l e dez vol t at e E c onomi i l e emergent e
UE
Figure 5. Foreign direct investment flows (inputs) by types of Economies in the period 1987-
2000 (U.S. dollars at current prices and exchange rates in force, in millions)
Source: made by author based on
UNCTAD data, Major FDI
indicators (WIR 2009)
Figure 6. Foreign direct investment flows (output) by types of
Economies in the period 1987-2000
After 1999, global sales of subsidiaries of transnational corporations have always been more
than two times higher than world exports, making direct foreign investments more important than
trade in terms of provision of goods and services to foreign markets.
The first decade of the twentieth century was characterized by tortuous evolution of global
FDI flows. From a peak level reached in 2000, was passed in the period 2001-2004 the reduction in
volume of world FDI flows in 2002, reaching the lowest level, as in 2006 to resume its upward
trend, exceeding even in 2000, and in 2007 to a record high.
The global economic crisis has temporarily halted this trend, but the medium term it will
certainly be resumed. Overcoming the crisis will bring about a change of the global economic order,
but this will not only be able to influence positively the role played by FDI in the world economic
circuit.
All world economies Developing Economies
EU
204
1.381.675
820.430
629.675
565.160
734.892
973.329
1.461.074
1.978.838
1.697.353
0 500.000 1.000.000 1.500.000 2.000.000
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 7. FDI flows (inflows) in 2000-2008
It seems that foreign direct investment peaked in 2007. FDI inflows at global level in 2007
increased with 30%, reaching the unprecedented number of 1.978 billion USD in the annual report
elaborated by the UNCTAD.
The 2007 flows surpassed the previous record held since 2000 by almost 600 billion USD,
despite the global financial and credit crisis that began in the second half of the year. However,
global economic downturn caused a reduction in FDI in 2008.
Table 1 - FDI flows (inflows) on the types of
economies in the period 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Developing
Economies
256.883 215.421 175.935 183.994 290.397 329.292 433.764 529.344 620.733
Transition
economies
6.998 9.725 11.293 19.901 30.308 30.948 54.548 90.866 114.361
Developed
Economies
1.117.795 595.284 442.448 361.265 414.186 613.089 972.762 1.358.628 962.259
Emerging
economies
104.448 88.672 64.930 58.259 96.136 86.982 109.946 147.991 151.359
EU 680.729 378.322 308.738 259.424 223.341 498.440 590.305 842.311 503.453
Source: UNCTAD, Major FDI indicators (WIR 2009)
FDI inflows to developed countries reached 1.358 billion USD in 2007. United States
remained the largest recipient of FDI, followed by UK, France, Canada and the Netherlands. Being
at the epicenter of the crisis, developed countries have suffered a contraction in total FDI inflows in
2008, which can not be said about developing economies, which have begun to feel the impact of
the crisis later.
205
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Economiile n curs de dezvoltare Economiile n tranziie
Economiile dezvoltate Economiile emergente
UE
.
Fig.nr. 8 - Evolution of FDI flows (inflows) on the
types of economies in the period 2000-2008
Source: made by author based on data from the above table
FDI inflows into developing countries reached their highest level of USD 529 billion, an
increase of about 21% over the previous year. While South Asia, East, South-East Asia and Oceania
are responsible for half of all FDI in developing countries, Latin America and the Caribbean
recorded the largest increase, 36%. Inflows to West Asia have increased in recent years and they
have exceeded those to Africa from 2004. However, investment in Africa also reached on an
unprecedented level. In plus, least developed countries attracted 13 billion USD of FDI in 2007,
once again a record number.
1213794,768
745662,1349
536572,4673
563399,4161
929640,8588
878987,6477
1396915,53
2146521,639
1857734,031
0 500000 1000000 1500000 2000000 2500000
2000
2001
2002
2003
2004
2005
2006
2007
2008
Toate economiile lumii 1213795 745662 536572 563399 929641 878988 1396916 2146522 1857734
2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 9. Foreign direct investment flows (outputs) in the period 2000-2008
FDI outflows from developed countries increased even faster than inflows, exceeding them
by more than USD 450 billion in 2007. Here too USA has maintained its position as the largest
source of FDI. Developing countries have continued to gain in importance as sources of FDI, with
investments reaching 285 billion USD, mostly as a result of outward expansion of transnational
corporations in Asia. Between developing economies and transition, the top three largest
Developing economies Economies in transition
EU
206
beneficiaries of FDI from developing countries were China, Hong Kong and the Russian
Federation.
Situation of FDI outflows in the period 2000-2008, on different types of economies are as
follows:
Table 2. Flows of fdi (output) on types of Economies in the period 2000-2008
Anul 2000 2001 2002 2003 2004 2005 2006 2007 2008
Developing
Economies
134.799 82.882 49.642 45.540 120.445 122.707 215.282 285.486 292.710
Developed
Economies
1.075.804 660.034 482.283 507.183 795.061 741.972 1.157.910 1.809.531 1.506.528
Emerging
economies
27.005 32.553 15.014 17.736 41.280 37.678 75.450 84.032 79.025
EU 795.250 429.725 264.763 285.030 377.329 609.733 697.193 1.192.141 837.033
Source: UNCTAD, Major FDI indicators (WIR 2009)
0
5 0 0 . 0 0 0
1 . 0 0 0 . 0 0 0
1 . 5 0 0 . 0 0 0
2 . 0 0 0 . 0 0 0
2 . 5 0 0 . 0 0 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8
Ec o n o miile n c u r s d e d e z v o lt a r e Ec o n o miile d e z v o lt a t e Ec o n o miile e me r g e n t e UE
Figure 10. Evolution of FDI flows (output) on types
of economies in the period 2000-2008
Source: made by author based on data from the above table
Regarding the stock of FDI global level, it also reached a maximum level in 2007, which
reflects the scale of the activities of nearly 79.000 transnational corporations around the world that
own about 790,000 foreign affiliates. Sales, value added and exports of these subsidiaries have
increased by 21%, 19% and 15% in 2007.
Developing Economies Emerging economies
Developed Economies EU
207
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
14.000.000
16.000.000
18.000.000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Fluxuri Stocuri
Flows Stocks
Figure 11. Evolution of FDI flows and stocks (entries) in the period 2000-2008
Year 2008 marked the end of a cycle of increasing foreign direct investment at global level,
with global flows decreasing with more than twenty percent. As a result of the global financial
crisis, the ability of companies to invest decreased by reducing access to financial resources, both
internally and externally, and their tendency to invest has been seriously affected by the collapse of
economic growth prospects and risks.
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
14.000.000
16.000.000
18.000.000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Flux uri St oc uri
Flows Stocks
Figure 12. Evolution of FDI flows and stocks (output) in the period 2000-2008
The current global financial crisis is probably the most severe for global financial system
from one that started the Great Depression of 1929. This went much further of the financial sector
and seriously affected the real economy.
208
0 % 2 0 % 4 0 % 6 0 % 8 0 % 1 0 0 %
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
E c o n o m i i l e
n c u r s d e
d e z vo l t a r e
E c o n o m i i l e
d e z vo l t a t e
E c o n o m i i l e
e m e r g e n t e
U E
Figure 13. The percentage of FDI flows (output) on types of economies in the period 2000-
2008 (%of total)
Source: made of author based on UNCTAD data, Major FDI indicators (WIR 2009)
Unprecedented levels of cross-border fusions and acquisitions, reflecting a continuous trend
of consolidation of companies, contributed substantially to the overall increase in FDI. Therefore,
cross-border mergers and acquisitions, which have been involved in investment funds almost
doubled, reaching USD 461 billion, another record, being responsible for more than a quarter of the
value of these transactions around the world.
A new feature of global FDI is the emergence of sovereign investment funds in the position
of direct investors. Although the amounts run by sovereign investments under the form of FDI
remain relatively low, they have been growing in recent years.
Mortgage crisis that occurred in the United States in 2007 has affected financial markets and
created liquidity problems in many countries, leading to a higher credit costs. However, the ability
of firms to invest abroad appears to have been the least affected. The sudden depreciation of the
dollar has stimulated FDI in United States. Overall trend of government policies remain as an open
gate for FDI. UNCTAD annual study on changes that have occurred in national laws and
regulations that may affect investments and operations of transnational corporations suggests that
the national authorities continue to transform investment climate of their countries into one
attractive to TNCs. In 2007, from almost 100 policy changes identified by the UNCTAD as having
potential influence on FDI, 74 proposed to transform the economic environment of the host country
into economic environment more conducive to foreign direct investment, despite concerns and
political debate multiplication regarding the development of protectionism.
The slower growth and financial disorder in the global economy has led the financial
liquidity crisis and credit markets in many developed countries, which led to a significant decrease
in mergers and acquisitions activities. In the first half of 2008, the value of these transactions has
been with 29% lower than in the second half of 2007. UNCTAD estimations regarding the decrease
of about 10% of FDI flows in 2008 compared by the 2007 have come true, and then, these
estimations are not more optimistic implying a higher prudence on the investments plans of TNCs.
However, foreign direct investments continue to gain importance as a form of international
economic transactions and as an instrument of international economic integration. The financial
motivation bases investment decision for both investors and the recipient country.
In what concerns the foreign investor, it is important for him:
financial benefits in the form of dividends which can distribute them totally or in
certain proportions, according to the laws of the host country of the investment;
tax benefits as reductions and exemptions of taxes, customs taxes etc.;
Developing
Economies
Developed
Economies
Emerging
economies
EU
209
monetary benefits in terms of foreign exchange and banking services.
If we consider the recipient country of investments, financial strategy aims to increase profit
the companies made by foreign investment, the possibility to collect the taxes immediately (VAT,
payroll taxes, lands, etc.) or in the future, after passing the exemption period.
However, ultimately, the effective flows of FDI to the receiving countries depend on the
investment decisions that transnational corporations takes, decisions that are influenced by the
many factors and which operates on two different channels, but intimately connected:
the level of macroeconomic and political factors, whose influence on decision-making
in international investments can be evidenced and understood by the specific
instruments of the general country risk analysis;
the level of microeconomic factors, whose influence is highlighted by company
specific risk analysis.
CONCLUSIONS
Therefore, for better understand the delicate and complex mechanisms of decision-making
must to know insights the influence factors mentioned.
Like other of economic activities, foreign direct investment has gone through dramatic
changes since the end of 2008. Unusually size of economic and financial crisis in progress raises
major problems regarding the tendency and the ability of TNCs to continue to invest and expand
abroad. Declining profits, reduced access to financial resources, declining market opportunities and
risking possible worsening of the current global of economic downturn are obvious causes for
decline in FDI flows. Declining profits, reduced access to financial resources, declining market
opportunities as well as the risk of worsening of the current global economic recession are obvious
reasons for decrease of FDI flows. This, in turn, causing concern among host countries, especially
in developing states, which are based heavily on the international investments for finance economic
growth and creating new jobs.
REFERENCES
1. Goldstein, I., (2005), Foreign direct investment vs foreign portfolio investment, Goldstein itay,
Working Paper 11047, National Bureau of Economic Research, Cambridge,
http://www.nber.org/papers/w11047
2. Lee, H., (2006), Foreign Direct Investment, Portfolio Investment, and Interstate Conflict, Paper
presented at the annual meeting of the The Midwest Political Science Association, Palmer
House Hilton, Chicago
3. Lipsey, R.E., (1999), The role of foreign direct investment in international capital flows, In
International capital flows, edited by Martin Feldstein, Chicago: University of Chicago Press for
the NBER
4. Prelipcean, G., et. al., (2006), Investiiile strine directe n economiile emergente i adaptarea
multinaionalelor n contextul globalizrii, Editura Didactic i Pedagogic R.A., Bucureti
5. UNCTAD, (2008), Trade and development report: Commodity prices, capital flows and the
financing of investment, Geneva
6. World Bank, (2009), Global Development Finance 2009: Charting a Global Recovery,
http://go.worldbank.org/JMGYIA32M0
7. http://www.carnegieendowment.org/
8. http://www.unctad.com/
9. http://www.capital-flow-analysis.com/
10. http://www.fpif.org/reports/international_financial_flows
210
ECONOMICS OF LONG TAIL, A CHALLENGE FOR BRANDING
Andreia Gabriela ANDREI
Ph.D. student, F.E.A.A., University Al. I. Cuza of Iasi, Romania
andrei.andreia@gmail.com
Andrei DUMEA
Ph.D. student, F.E.A.A., University Al. I. Cuza of Iasi, Romania
dumeandrei@gmail.com
Abstract:
This paper investigates what Economics of Long Tail is bringing to branding. Economics of Long Tale
literature highlights new Web 2.0 business models that enables a greater degree in satisfying exactly what motivates
consumers most: being treated as individuals not as masses; access to an increased offer variety including custom
products; lower prices. Our paper finds out that brand leadership and corporate branding provides the appropriate
business philosophy for facing the challenges of the Long Tail. They just have to upgrade themselves with Web 2.0 tools
for organizing the day by day cooperation with users. The consequence will be a great pot of customers becoming one
of the company's resources directed to deliver the promised brand value following the long-tail rule. Beside users'
driven brand sindicalization directed to change perceptions, reinforce attitudes, and create loyalty, the major
consequence will be a deep integration of brand's users in the brand nurturing culture. The brand value will go beyond
the usual jargon and customers will be able not only to embrace the brand experience but to actually build it, to be a
part of it. Our statement that brand leadership and corporate branding provides the appropriate business philosophy
for coming years is supported by at least four of today's most innovative and successful brands, that leveraged the Long
Tail as part of their businesses: Amazon, Google, Facebook and Apple.
Key words: long tail branding, brand management tailoring long tail economics, economics of long tail, brand
leadership, corporate branding
JEL Classification: M31, O33
1. INTRODUCTION
Proliferation of Internet-based communication channels and social media like blogs,
podcasts, online video and social networks give voice to millions of consumer opinions. While
mainstream media continues to play a vital role in disseminating mass and general information,
these social channels are major levers of influence through online conversations, giving rise to a
new style of marketing that is characterized by conversation and community (SNCR, 2008). The
fact is the failure of marketers control in the conversation and increasing the importance of word of
mouth, referrals and social marketing. It is a totally new, decentralized information flow that brand
communication must cope with.
But it is not just that. Web 2.0 age has lead to new Web 2.0 business models that feature
both attractive and disruptive characteristics: low cost of entry; massive reach; ability to target
niche customers; ability to have meaningful interaction between participants; attractive
demographics; threat of replacing existing physical goods and services (e.g., CDs, newspapers);
economics of Long Tail (KPMG International, 2009). Suppliers can use unlimited capabilities due
to infinite storage and demands that were unable to be met prior to the Long Tail become realized.
Long tail businesses can treat customers like individuals using their active contribution in the
product innovation process. Lower prices, unpopular and niche products along with personalized
taste satisfying become economically viable to offer. So, it is not only about experiencing a
paradigm shift in product promotion and communication strategy; it is about a much profound
paradigm shift comprising the entire business approach and brand management.
211
2. THE LONG TAIL PHENOMENON
In 2004 Anderson has coined the term The Long Tail to describe the phenomenon that
niche products make up a large share of total sales. Describing the effects of the Long Tail
Anderson argued that products with a low sales volume can collectively make up a market share
that rivals the best-sellers if the distribution channel is large enough. But the distribution and sales
channel opportunities created by the Internet often allow such a large product placement. Amazon's
book sales was used as example for showing that the total volume of low popularity items exceeds
the volume of high popularity items. (Anderson, 2004).
Some of the most successful Internet businesses like Amazon (retail), eBay (auctions), iTunes
Store (music and podcasts) and Google (web search) have leveraged the Long Tail as part of their
businesses because it is economically viable to sell unpopular products where inventory storage and
distribution costs are insignificant.
2.1. LOWER PRICES AND DIVERSE, NICHE PRODUCTS OFFERING WHERE
LONG TAIL WORKS
When storage and distribution costs were high, only popular products were generally
offered. Since Long Tail works a wide range of products become available with a large enough
array of choices for satisfying minority tastes. The Long Tail encourage product diversification and
niche category offering. As Anderson said, this is the difference between push and pull, between
broadcast and personalized taste. Long Tail business can treat consumers as individuals, offering
mass customization as an alternative to mass-market fare. They make everything available, pull
customers down the tail with lower prices and help customers to explore and find out what they
need. [1]
Brynjolfsson et. all showed that, while most of the discussion about the value of the Internet
to consumers has revolved around lower prices, consumer benefit from access to increased product
variety in online book stores is ten times larger than their benefit from access to lower prices online.
They showed that the primary value of the Internet to consumers comes from releasing new sources
of value by providing access to products in the Long Tail (Brynjolfsson et. all, 2003).
2.2. PARETO'S 80/20. THE SHIFT FROM BEST-SELLERS TO NICHE PRODUCTS
Many markets have traditionally been dominated by a few best-selling products. Pareto
Principle describes sales concentration in 80/20 rule - a small proportion of products (20% ) in a
market generates a large proportion of sales (80% ). In 2006 Brynjolfsson, Hu and Simester found
that the Internet markets shifted the balance of power from a few best-selling products to niche
products that were previously obscure. The authors discussed also about the amplified effect of
Long Tail, including the growth of markets serving smaller niches. By lowering search costs
Internet markets increase the collective share of hard-to-find products, thereby creating a longer tail
in the distribution of sales. By analysing data collected from a multi-channel retailing company,
Brynjolfsson et. all showed empirical evidence that the 80/20 rule needs to be modified to a 72/28
rule in order to fit the distribution of product sales in the Internet channel. As companies invest in
ever-more sophisticated information technologies that allow consumers to actively and passively
discover products that they otherwise would not have considered, and as consumers gain more
experience using these IT-enabled tools, Brynjolfsson et. all findings suggest that product sales will
become less and less concentrated. The balance of power will continue to shift from a few best-
212
selling to niche products more and more easier to be discovered by consumers. They estimate that
the Long Tail phenomenon will have a profound impact on a companys product development
strategy, operations strategy, and marketing strategy (Brynjolfsson et. all, 2006).
2.3. SOCIAL INNOVATION COMMUNITIES
In their quest for products that are customized for their own needs, users are willing to tell
the producer what they want and how it should work. Since 1986 Eric von Hippel noticed the
importance of user innovators who share their ideas with manufacturers (free revealing) for
enabeling those producers to offer the product they want (von Hippel, 1986). In 2009 he reports an
empirical research made in 2007 showing that about 20% of the user-innovators surveyed reported
transferring their innovations to other users and/or equipment suppliers and the majority of these
did so at no charge to recipients (von Hippel, 2009).
In 2005 Eric von Hippel defined the user-led innovation model concluding that innovation
becomes more user-centered (von Hippel, 2005). Today Web 2.0 features the decreasing cost of
communication and information sharing. Using Web 2.0 interactive tools, companies can give their
users a voice enabling an organized cooperation where users perform a big part of the innovation
work. As a consequence long-tailed user driven innovation is gaining importance allowing
companies to rely on users of their products and services to do a significant part of the innovation
work. Using a long-tailed innovation strategy company is taping into a large group of users that are
in the low-intensity area of the distribution. These groups of users act like social innovation
communities for the company if they are provided with tools and infrastructure to perform the trial
and error process of innovation, share information, test and diffuse the results.
LONG TAIL MARKETING
The low cost and high degree of information sharing has led businesses to implement a series of
long tail marketing techniques, most of them based on extensive use of Internet: new media
marketing (using social networks and online communities to extend the reach of marketing to the
low-frequency, low-intensity consumer in a cost effective way, often through fan pages or profiles
on social networks, blogs, RSS feeds and webcasts); buzz marketing (strategic transmission of
commercial information from person to person in an online or real-world environment using word
of mouth); viral marketing (intentional spreading of marketing messages via social networks, video
sharing sites and e-mail with an emphasis on the casual, non-intentional and low cost); Pay per
Click and Search Engine Optimization with focus on long-tail keywords which have less
competition and can be extremely profitable in terms of a lower cost per action and higher return on
investment because they often exhibit a higher conversion rate by up to 200% compared to short-
tail generic keywords (Mitchell, 2009).
3. LONG TAIL BRANDING
In 2005 Anderson, the one who coined the term The Long Tail and wrote five books on
this topic shared his opinion about brands' history:
In the first half of the 20
th
century, consistently high quality products were relatively
scarce. Product brands prevailed. Over time, more and more products entered the market and shelf
space became the scarce good. Power shifted to retailer brands. Now ... the shelf space constraints
evaporate ... and the scarce good become customer's attention.
We are moving from product-centric brands to customer-centric brands. Product-centric
brands represent promises about products (or retailers) buy this product from us because you
213
can trust that it will be a quality product at good value. Customer-centric brands offer a radically
different promise buy from us because we know and understand you as an individual customer
and we can tailor an appropriate bundle of products and services to meet your individual needs
better than anyone else.
Anderson suspects that the center of gravity of brands is shifting so much from products to
customers that tomorrow's most powerful brands probably won't be companies at all. They'll be the
customers themselves. ... Brand power will shift downstream from the producers to the
consumers ... and the brands that matter most will be the tastemakers... These are the filters you
trust (Amazon, Google, smart software for finding the good stuff, individual tastemakers from
celebrities to critics to editors or simple mavens with influential blogs) who point you to the niche
(or mainstream) stuff you wouldn't have found on your own. And because you trust them, you're
willing to follow their recommendations, voyaging down the tail with confidence. [2]
3.1. BRAND MANAGEMENT WINNING MODELS: BRAND LEADERSHIP AND
CORPORATE BRANDING
In the recent years successful companies start using brand management as a part of the total
management process and not just as a marketing activity. In this perspective, first theorized by
Aaker and Joachimsthaler in 2000 when they introduced the brand leadership model, the brand
management process acquires both strategic and visionary perspective. Brand is the pillar of the
organization and the brand manager is in the top, being a strategist as well as communications team
leader (Aaker and Joachimsthaler, 2000). Creating and delivering brand value become the drivers of
the business strategy. Brand strategy gives the focus and direction by providing a platform that
enables consistency in all actions and activities.
Due to the importance of a multidisciplinary approach in order to manage multiple brands
and interactions with multiple stakeholders some businesses shift their focus from product brands to
corporate branding (de Chernatony, 1999; Hatch & Schultz, 2003; Urde, 2003; Aaker, 2004)
The corporate brand represents the organization and reflects its heritage, values, culture, people, and
strategy. It is defined primarily by organizational associations, and thus can develop and leverage
organizational characteristics, as well as product and service attributes (Aaker, 2004).
The organizations core values are the guiding light of the brand building process, both
internally and externally. They are built into the product, expressed in behavior, and reflected in
communication (Urde, 2003).
Brand leadership and corporate branding leads to brand consistency.
3.2 BRANDING IN THE WEB 2.0 AGE
This paper states that brand leadership model and corporate branding provides the appropriate
business philosophy for facing the challenges of the economics of the long tail. Since 2001 Doyle
noticed that a good tactic would be to consider alternative media in addition to advertising (Doyle,
2001). In 2010 best practices consider advertising as a good tactic in addition to alternative media.
And a big contribution in these alternative media is payed by the long tailed marketing techniques.
Due to the mass adoption of social media and especially of social networking sites (SNSs) we can
talk about their dominance in the Attention Age of Web 2.0. Consumer-consumer communication
produces today a significant share of the amount of information available about products and
companies (Universal McCann, 2008). Therefore businesses need to target social media users for
inducing consumers discussions according to the objectives of the brand's performance.
214
Having the brand as a top priority for the top management who integrates brand building
into the overall business concept all resources are directed to deliver the promised value in an
integrated way, through products, services, communications, personnel behavior and organizational
culture. The result is a unique and valuable customer relationship leading to positive word of mouth
and good referrals across social media platforms enabling a competitive social marketing and brand
growth. But with a brand building process addressing the four challenges (1. the organizational
challenge, 2. the brand architecture challenge, 3. the brand identity and position challenge, 4. the
brand building program challenge) as they were detailed in the Aaker's brand leadership model
(Aaker & Joachimsthaler, 2000; Aaker, 2004) the only big change for brand lead businesses will
remain in the following years to pay enough attention to Web 2.0 and to use the Internet based
technologies to enable an organized cooperation with their users, giving them a voice and relying
on their contribution in the process of innovation and brand value creation. The consequence will be
a great pot of customers becoming one of the company's resources directed to deliver the promised
brand value following the long-tail rule. Beside users' driven brand sindicalization directed to
change perceptions, reinforce attitudes, and create loyalty, the major consequence will be a deep
integration of brand's users in the brand nurturing culture, in the process of brand building. The
brand value will go beyond the usual jargon and customers will be able not only to embrace the
brand experience but to have the feeling of belonging, of being a part of it.
3.3. SUCCESSFUL BRANDS THAT LEVERAGED THE LONG TAIL AS PART OF
THEIR BUSINESSES
Our statement that brand leadership and corporate branding provides the appropriate
business philosophy for coming years is supported by at least four of today's most innovative and
successful brands, that leveraged the Long Tail as part of their businesses: Amazon, Google,
Facebook and Apple.
Behind each of these great brands, there is a clear vision and a strong leadership: Jeff Bezos
at Amazon, Sergey Brin and Larry Page at Google, Mark Zuckerberg at Facebook, Steve Jobs at
Apple. Bringing their creative visions to life, these strong leaders crafted such enduring experiences
that, as Loebman says, we live in the world they create for us and pay good money to do so[3].
Arguing corporate branding approach, in 2003 Urde said that an organizations core values must be
the guiding light of the brand building process, both internally and externally. They must be built
into the product, expressed in behavior, and reflected in communication (Urde, 2003).
Google's purpose To organize the world's information and make it universally accessible
and useful." [4] , is used as example in 2010 by Loebman for warning about the importance of
defining organization's unique essential value to the world.
He says: This language clearly and compellingly tells the world why it needs Google,
what value Google brings to the world, and how Google is different from every other organization
on the planet. With a complete understanding of its purpose, consumers can anticipate what their
relationship with Google will be, both now and in the future. As long as it sticks to its mission and
doesn't do anything "off-brand", Google will always be relevant whether we interact with the brand
on - or offline in the future. All of this meaning, derived from one simple sentence as expressed by
two strong leaders: Sergey Brin and Larry Page.[3]
Indeed, all Google's products, behavior and communication reflects the unique essential
value they are offering. Even when they are playing with their let's say mimetic logo they are
delivering in an exquisite way the promised value of making information universally accessible and
useful. In the same time Google's brand portfolio is satisfying simultaneously mainstream and
niche taste. Google Labs, maybe the most widely available organized cooperation for innovation
and product development between a company and users, demonstrates that Google is a real
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customer-centric brand integrating his consumers in the process of value creation and brand
building, as Google declares in their culture statement: Our commitment to innovation depends on
everyone being comfortable sharing ideas and opinions. [5]
4. CONCLUSIONS
This paper reviewed Economics of Long Tale theory in an effort to explore possible
matching points with existing branding models which would lead to a branding model adapted to
Web 2.0 Age.
We found out that both Long Tail and brand-lead businesses have a common root: their
customer centered approach oriented to delivering the promised value.
As a plus, Long Tail business deeper integrates the customer in the company's processes of value
creation, enabling a greater degree in satisfying exactly what motivates consumers most: 1. being
treated as individuals not as masses; 2. access to an increased offer variety including items outside
their geographic area and rare or custom, personalized products; 3. lower prices.
Satisfying these three inner needs of consumers which strongly motivates them was only an
aspirational goal before Long Tail worked due to the impossibility of targeting large groups of users
that are in the low-intensity area of the distribution and because of the much higher costs for:
storage & distribution, product innovation & diversification, marketing research, brand-consumer
interaction, brand communication.
Our paper finds out that brand leadership and corporate branding provides the appropriate
business philosophy for facing the challenges of the Long Tail. At least four of today's best
practitioners of the Long Tail Economics are brand-lead businesses: Amazon, Google, Facebook
and Apple.
Web 2.0 and social networks aren't just offering more media choices but are a first step for
meaningful interactions with consumers which leads to a deeper customer integration in the brand
building process. Consequently, following the long tail rules, this will enable brands to offer
exactly what strongly motivates consumers: being treated as individuals not as masses; access to
diverse, rare or custom products; lower prices.
Already applying the appropriate business philosophy, the challenge for brand-lead
businesses remain to upgrade themselves with Web 2.0 tools for organizing the day by day
interaction with Internet users.
Overall, our results may prove beneficial both for researchers and practitioners. For
researchers it is a starting point for further empirical investigations in long tail branding area. For
practitioners our results may prove beneficial for integrating social media in their branding strategy.
ACKNOWLEDGEMENTS: This paper has benefited from financial support from the strategic
grant POSDRU/88/1.5/S/47646, co financed by the European Social Fund, within the Sectorial Operational Program -
Human Resources Development 2007-2013.
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Leverage and Clarity. New York, Free Press.
3. Aaker D. (2004), Leveraging the Corporate Brand, California Management Review, 46 (3), 6-18.
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Estimating the Value of Increased Product Variety at Online Booksellers, Management Science,
Vol 49, No. 11.
7. Brynjolfsson E. , Hu Y. and Simester D. (2006), Goodbye Pareto Principle, Hello Long Tail.
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8. de Chernatony L. (1999), Brand Management Through Narrowing the Gap Between Brand
Identity and Brand Reputation, Journal of Marketing Management, 15, 157-179.
9. de Chernatony L. ( 2001), From Brand Vision to Brand Evaluation, Butterworth-Heinemann,
Oxford.
10. de Chernatony L. & all (2001), Building on Services Characteristics to Develop Successful
Services Brands, Journal of Marketing Management, 17, 645-669.
11. Doyle P. (2001), Building Value-Based Branding Strategies, Journal of Strategic Marketing, 9,
255-268.
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13. [5] Google, The Google Culture. http://www.google.com/intl/en/corporate/culture.html
14. Gault F. & von Hippel E. (2009), The Prevalence of User Innovation and Free Innovation
Transfers: Implications for Statistical Indicators and Innovation Policy, MIT Sloan School of
Management Working Paper no. 4722-09, Cambridge, MA:MIT pp.29.
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16. von Hippel E. (2005) , Democratizing innovation, The MIT Press.
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21. Society for New Communications Research (2008), New Media, New Influencers and
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KNOWLEDGE DYNAMICS AND THE CONCEPT OF BA
Junior Assistant, PhD Student Ruxandra BEJINARU
ruxandrab@seap.usv.ro
Abstract:
Throughout the present paper work we undertake a theoretic approach through the fundamental research
method and deduction method regarding the concept of ba and the ways it contributes to knowledge creation within
an organization. For the papers introduction we considered to present a basic review for the concepts of knowledge
and knowledge dynamics. Within the content of the paper we present the concept of ba mainly from the Japanese
authors perspective Nonaka and Konno and we argue the types and characteristics of this seldom debated concept.
We approached this subject because we found it challenging to further contribute to building perfection, and we dont
necessarily mean the realitys perfection. But, maybe the perfect mental projection of ideals and perspectives represents
the first step towards accomplishing them. We carefully pondered the discussions upon the concept of ba and this led
us to elaborate this paperwork, the bottom line of which is to convince that good knowledge shelters within an
appropriate system/context, and well refer to it as ba. Studying the specialty literature as well as observing practice,
we came to believe that acquisition of good/ valuable knowledge does not help a company but temporary unless that
company multiplies the good effects of knowledge. Towards the end, our research leads to the conclusion that
organizations must accept ba as a tool for knowledge creation.
Key words: knowledge dynamics, knowledge creation context, knowledge management, conversion processes
JEL classification: M10, M14, M21, L20.
1. KNOWLEDGE AND KNOWLEDGE DYNAMICS
Nowadays, it has been widely agreed that a defining aspect of the New Economy is the
continuously increasing importance of knowledge. The most ostentatious item of the present is
knowledge and as we have already got used to, it cant be described neither by a couple of issues
nor within a few phrases, as todays facts are strongly interdependent and out of these may arise the
strangest events. At the moment the hottest debate issue is knowledge, and there are various
interpretations and arguments to this concept even if some are sceptical about its worth.
In order to make sure we point into the same direction, we shall further discuss some of the
definitions of knowledge. In recent years, the phrase knowledge management has been used, to
describe the efforts of organizations to capture, store, and deploy knowledge (Preece et al, 2001).
Other definition reflects knowledge in a pragmatic sense: Knowledge is a fluid mix of framed
experience, values, contextual information, and expert insight that provides a framework for
evaluating and incorporating new experiences and information. It originates and is applied in the
minds of knowers. In organizations, it often becomes embedded not only in documents or
repositories but also in organizational routines, processes, practices, and norms. (Davenport and
Prusak, 1998) We believe that knowledge is very much a contextual concept and a better
understanding may arise out of its framework because it is multifaceted and has multilayered
meaning. But recurring to the knowledge creation theory, knowledge represents a dynamic human
process of justifying personal beliefs as part of an aspiration for the "truth". People need more
knowledge in order to better comprehend the phenomena occurring within their environment. Now
the man is preoccupied more about knowing: what, when, why, how, or who. If the industrial era
was creating its wealth with machinery which was replacing human work, today is considered that
more than 60% of workers in the USA are knowledge workers and they are regarded as the
employees who manage with symbols and not machines.
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In our words, knowledge represents something bigger than information, data or signs and
we shall use the representation of a pyramid to explain the differentiations. Continuing on this
approach we identify signs as being the base of the hierarchical structure and we define them as
graphic representations which were invented by men in order to enhance communication with
others. For example the letters of an alphabet or the numbers, which used separately they dont have
any meaning but they start to make sense when they are used together in a certain context.
(Davenport & Prusak, 2000) Data are groups of signs that give the expression of an event or a
process characteristic. For example, a table filled in with the daily temperatures of one month
constitutes a set of data. We shall stress that data of their own, do not possess significance but they
borrow it within the context they are in. Therefore we need quality raw material data, in order to
obtain quality information. Stepping forward to an upper level, we find information, which has
enclosed the meaning. Otherwise, information is sets of data that lead to semantic differentiation
and this information represents raw material for building up knowledge. (Bratianu et al., 2010)
Knowledge is information processed to the purpose of achieving comprehension of
phenomena occurring within our environment (Bratianu, 2008a, b).
Figure 1. Representation of knowledge
We consider opportune to emphasize the differences and similarities between information
and knowledge. An attempt to present these, made Gurteen in his article Creating a Knowledge
Sharing Culture - published in the Knowledge Management Magazine, vol.2, in 1999. The author
says that knowledge is often regarded as richer information and we consider it quite elusive. We
try to separate these more clearly by using the concepts of know-how, of know-why and the
metaphor of a cake. Thus, the molecular analysis of the cakes composition represents the data
less useful in many cases because a single piece of data has no meaning unless the context is
understood you might not even realize that we are talking about a cake. Therefore, data needs to
be transformed to information. Writing down a list of ingredients means building up information
which is more useful and is much probable that an experienced cook would deduce that is the
recipe of a cake as data are given a context.
However, Polanyi said that "We can know more than we can tell". According to him,
knowledge that can be expressed in words and numbers only represents the tip of the iceberg of the
entire body of possible knowledge. Polanyi classified human knowledge into two categories:
explicit and tacit. At this point the cake recipe represents the explicit knowledge and transmits the
know-how of making the cake. Even so, for a beginner, those presented above are not enough
because he/she needs knowledge gathered throughout experience tacit knowledge.
Even if we have clearly distinguished the stages preceding the superior level of knowledge
and each ones significance, in theory, we cant tell exactly how it works for each individual. Some
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persons knowledge may be anothers raw material, as data or information because each person has
a personal background of knowledge and practice and of course a specific cognitive system
allowing him/her to perceive things in a unique manner.
2. NONAKAS SECI MODEL
We consider knowledge is dynamic through its nature and continuously moves between
receivers. Knowledge may transform from one type to another, respectively from explicit
knowledge into tacit knowledge and the other way around. The same piece of knowledge may exist
within different forms for different persons.
Knowledge dynamics represents multiple transfers of knowledge throughout four processes
of conversion: socialization, externalization, combination, internalization. These processes take
place due to the two ways of expressing knowledge, tacit and explicit. Following we shall discuss
each types role within the organization.
Knowledge has a specific dynamic that could be described like an innate human
characteristic and the various ways that knowledge moves around the world are not influenced or
triggered by someone or something, they evolve naturally. The various types, stages and transfers
of knowledge were later influenced by men, after long observations, judgments and finally
comprehension for using it for the benefit of their work.
The famous Japanese scientists Nonaka and Takeuchi developed a research and discovered
that the employees of a Japanese company had the ability of transforming tacit knowledge into
explicit knowledge throughout a dynamic process of interaction, or more simple throughout
proximity. The result of this research was the conception of their famous concept of knowledge
dynamics which is represented by the knowledge spiral. The knowledge spiral expresses the
continuous transformation of knowledge throughout the four stages of conversion.
S1-socialization; S2-externalization; S3-combination; S4 internalization.
Figure 2. Knowledge conversion processes
We mentioned several times about the conversion processes and at this point we have to
give a brief description of each. The first process and the most important is the socialization
process. The knowledge stock grows out of another persons tacit knowledge, and can be captured
throughout observation and imitation. There is not a precise order for the conversion processes
evolution but we shall further discuss about externalization. This process speaks out the tacit
knowledge and converts it to clear, articulated explicit knowledge. When tacit knowledge must be
put into words, people use metaphors, analogies, description, gestures and also body language. The
third process is combination. This is a very personal stage when each individual deals with his old
and new knowledge. Within the combination process knowledge is mixed and sorted in order to
integrate into the individuals knowledge background. The fourth process is internalization and
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here the conversion happens the other way around, meaning that explicit knowledge is absorbed by
each individuals cognitive mechanism and stored in a specific manner. Once this process is also
complete the knowledge spiral starts all over. The existence of knowledge dynamics was not
invented by man but was created as a theoretic reasoning in order to enhance comprehension.
(Bratianu, et. al., 2010)
It has been widely agreed that knowledge represents a commodity for each organization
with respect to development and accomplishment of goals and preserving their competitive
advantage. For nowadays companies, the competitive advantage doesnt necessarily represent a
dominant position on the market but their capability of developing their knowledge as an intangible
and difficult to replicate resource that is something more powerful. (Teece, 2004) Knowledge
dynamics is crucially important for correctly understanding the way organizations work.
3. BA THE FOUNDATION FOR KNOWLEDGE CREATION
We approached this subject because we found it challenging to further contribute to its
spreading, integration and growing within organizations.
We carefully pondered the discussions upon the concept of ba and this led us to elaborate
this paperwork, the bottom line of which is to convince that good knowledge shelters within an
appropriate context. We shall further describe what this context consists of and how it works, and
well refer to it as ba.
The concept of ba was discussed for the first time by the Japanese philosopher Kitaro
Nishida and afterwards developed by Shimizu. Later, Professor Ikujiro Nonaka adopted the concept
in order to develop another model for knowledge conversion, similar to the SECI model, presented
in the previous section of the paper: Socialization - Externalization Combination - Internalization.
According to the philosophic approach of Professor Kitaro Nishida, ba represents a context that
harbors meanings. (Nonaka & Konno, 1998) Thus, we may consider that ba is a shared space
within knowledge creation is enhanced.
Studying the specialty literature, we came to believe that acquisition of good/ valuable
knowledge does not help a company but temporary unless that company multiplies the good effects
of knowledge. In order for good knowledge to spread continuously there are some compulsory
aspects to consider: -good knowledge projection; -good knowledge presence (through acquisition or
creation); -good knowledge sorting; -good knowledge diffusion; -good knowledge preservation; -
knowledge transformation.
Ba is like a context within which lay the prerequisites for a new life new knowledge.
Accorsi and Costa say that according to Nonaka, Toyama and Konno (2000) knowledge creation is
a continuous, self-transcending process through which one transcends the boundary of the old self
into a new self by acquiring a new context, a new view of the world, and new knowledge. They
believe that knowledge is created through interaction between individuals or between individuals
and their environment. These authors proposed a model of knowledge creation, combining three
elements: 1) the SECI (socialization- externalization-combination-internalization) process; 2) the
emergence of ba (a context to share knowledge); 3) knowledge assets (inputs, outputs, and a
moderator of the knowledge-creating process). The authors also believe that these elements must
interact with each other organically and dynamically. (Accorsi & Costa, 2008)
We consider that the name of ba corresponds to that enabling context and was brought to
light by the necessity to express the appropriate conditions for the development of SECI process.
Ba may exist wherever the conditions allow knowledge emergence and relationship emergence. It
is dynamic by nature and combines only dynamic elements as:-people, -time; -places. More
precisely, ba is an impact function of three dynamic components. It is unique and irreproducible
and it can be identified not through its form but through its effects. We stress the effects aspect as
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this is the first notable sign of a certain ba. If we identify the happenings (the effects) then we can
search for the connections between elements and draw the imaginary shape of ba. Of course the
issue is not to practically built patterns of ba but to comprehend what does it stand on.
Nonaka, Toyama and Konno (2000) presented four types of ba: originating ba,
interacting ba, cyber ba, and exercising ba. We further describe the characteristics that each
ba consists of:
Originating ba is defined as the individual and face-to-face interactions, where the
individuals share experiences, feelings, emotions and mental models. It is associated to the
socialization process from the SECI model and offers a context for socialization: the only way to
capture the full range of physical senses and emotional reactions, such as ease or discomfort, which
are important elements in sharing tacit knowledge. It is an environment where such feelings as care,
love, trust and commitment, emerge, forming the basis for knowledge conversion among
individuals.
Interacting ba is defined as collective and face-to-face interaction, where individuals
mental models and abilities are shared and converted into common terms and concepts. It is
associated to the externalization process from the SECI model and offers a context for
externalization, where individuals tacit knowledge is shared and articulated through dialogues
amongst participants. The articulated knowledge is also brought back into each individual, and
further articulation occurs through self-reflection. This type of ba is more consciously constructed
than originating ba, as the right individuals are brought together in order to interact, to exchange
information, to share experiences and enrich themselves throughout all these. Tacit knowledge is
articulated through metaphors, expressions or non-verbal language.
Cyber ba is defined as collective and virtual interactions. It offers a context for the
combination of existing explicit knowledge, as explicit knowledge can be relatively easy to transmit
to a large number of people in written form. Information technology, through such things as on-line
networks, groupware, documentation and databanks, offer a virtual collaborative environment for
the creation of cyber ba.
Exercising ba is defined as individual and virtual interactions; it associated to the
internalization process from the SECI model and overall, it offers a context for internalization.
Here, individuals embody explicit knowledge that is communicated through virtual media, such as
written manuals or simulation programs. Exercising ba synthesizes the transcendence and
reflection through action. Within this stage explicit knowledge is best learnt through practice and
this way is assumed by the individual and instantly becomes another piece of tacit knowledge, very
personal and difficult to express its new form. (Accorsi & Costa, 2008)
The word "ba" is a Japanese term which roughly translates into the English word "place".
The Kanji ideogram of ba has two parts: the left side means ground, boiling water or that
something/someone is rising and the right side means to enable. One side expresses the potential
and the other side suggests some kind of engine that gives a direction. The ideogram refers to the
yin and yang philosophy of permanent transformation. (Javary & Faure, 2002)
We have to understand ba like the shared space that is serving as a foundation for
knowledge creation and that knowledge is embedded in ba. If knowledge becomes separated from
ba it becomes information. Information can exist in media or networks, knowledge cannot, it is
intangible. (Nonaka & Konno, 1998)
4. ANOTHER TYPE OF BA CONNECTING BA
The dynamic characteristic of ba makes it flexible and the concept is always reconsidered
within novel approaches. We previously referred to the four types of ba as being the basic ones
and used their description in order to enable the comprehension of the concept. Whether it is
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tangible or intangible it generates effects if it is real. Even if the ba cant be perceived with our
sight or with our physical senses it can be viewed with our mind, by identifying it, by judging it and
by getting to its feedback. Originating and exercising ba are physical spaces, interacting ba is
mental, and cyber ba is virtual but connecting ba is a positive mix of these and technology.
Connecting ba can operate with any kind of knowledge, but explicit knowledge (electronic) is
easier to transmit through P2P KMSs (Peer-to-Peer Knowledge Management Systems) than tacit
knowledge. Explicit knowledge depends on how accomplished people are at expressing their tacit
knowledge in a perceptive way to others. The individual internal process of converting knowledge
(tacit to explicit) cannot be replaced by technology but technology can support the process.
Technology is a communication and collaboration facilitator, mainly for dispersed people.
Connecting ba enables collaborators to actively share knowledge because they are embedded in
ba, and have
a flexible and objective environment to support it. (Accorsi & Costa, 2008)
We consider that working on providing any type of these environments will lead to
knowledge flow and knowledge creation. There is not an end point to this process but for sure there
is a start point.
Knowledge is boundary-less, dynamic and if not used at a specific time or place, shall lose
its value. Use of knowledge requires the concentration of knowledge resources at a certain space or
time. Ba is the place for resource concentration of knowledge assets and intellectualizing
capabilities within the knowledge creation process, ba collects applied knowledge and integrates
it. An example of ba is a project team, a place where people of several different capabilities are
brought together in order to generate knowledge. Nonaka showed us some great examples of ba -
specifically designed- to enable knowledge creation and sharing in companies such as NTT
DoCoMo and Toyota.
5. CONCLUSIONS
The approach of this subject gave us the opportunity to have a contribution for completing
the description of ba and to align to the variety of interpretations.
Towards the end, our research leads to the conclusion that organizations must accept ba as
a tool for knowledge creation. The atmosphere of ba may be recognized within the
communities of practice and within the learning organizations.
The quality of the ba context depends on the components of the social capital and it
consists in an appropriate Service of Social Networks. Designing the social context may be possible
through using the existing body of networks as mean of interacting with the organizations social
capital. And it can also be done by changing and managing physical workplace.
We also conclude that the management of knowledge in the organizations is fundamentally
about creating an environment that is conducive to and encourages to knowledge creation, sharing
and use. In order to pursue the previous as objectives, the organizations should be guided by the
enabling conditions presented in this paper.
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THE GROUP AND THE TEAM IN MILITARY ORGANIZATION
PhD. Student Sofronia Petric PUIU
puiusofronia@yahoo.com
Abstract:
The paper includes introductory information regarding the group in the military organization as well as
some conceptual assignation regarding the working groups and teams, their types and finally the designation of the
group, its training and its reconstruction.
The most ancient and largely spread classification of the work group stipulates their differentiation
according to the degree of formality and the type of relations among its members.
According to such a classification we have on the one hand the formal groups, and the informal groups on
the other. The former ones are organized after norms, laws and regulation established in an official manner.
Another distinction will be made on the principle considered by some others essential for the increase of
work performance. Levine and Moreland thought that the degree of ability belonging to the team members (ability
is defined as the mixture between autonomy and power) represents such a fundamental criterion which may
explain the higher or lower performance in each situation.
A simple specification of the types of groups and working teams has revealed a series of characteristics.
Still, a more developed psychosocial analysis would be imposed as a necessity. Although we do not give up to
the distinction made between group work and team work, the term group work will be preferred in the following
pages because of its greater use among the specialist of the psychological and psycho organizational literature.
Keywords: officer, military leader, captain, competence, sub unit.
INTRODUCTION
The idea of group has always fascinated the thinkers, disregarding the fact that these were
psychologists, sociologists, anthropologists, ethnologists and so on. Trying to define or to
difference the groups from other types of human communities (the crowd, the horde, the gang), as
well as studying their psychology has left a mark in the history of psychology or sociology,
especially in the case of social psychology.
Freud used to talk about collective psychology. Le Bon about the crowds psychology, but
both had in mind the psychological forces that master and stimulate the human actions and
interactions. Despite the studies undertaken throughout time, the concept of group has remained a
confusing one or, as two authors said a while back, it has remained the most confusing (Anzieu,
Martin), for the French language, at least.
As the papers for social psychology indicate (Aebischer, Leclerc, Golu, Neculau) things
didnt get better with the passing of the time; on the contrary, the situation has become more and
more difficult. The confusion has increased because, together with the general concept for group,
other concepts appeared, like that of nominal group, experimental group, diagnostics group.
Recently, other concepts appeared, like: task group, work group, labor group and work team.
Out of all these we are interested only in the last two, if we are to choose the perspective of
the organizational managerial psychology. Our concerns with these two terms are the following:
to insist upon conceptual delimitation, to create a psycho social description of the work groups,
and then to focus on the problems connected with practical actions undertaken in connection with
work groups, namely designing and formation actions, and finally, their reconstruction.
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CONCEPTUAL DELIMITATION
The concept of team has been created by Leavitt, who promoted the idea that the team
represents the core unit of an organization. Leavitt also talked about the team organization. In the
opinion of some French authors, this idea illustrates the mental and organizational revolution that
demanded the structuring of work and organization around and through the team, the teams being
the ones that are formed, evaluated, rewarded, promoted or laid off. The interest for the team, which
is seen as a main unit in the functioning of an organization, has increased throughout time. Many
organizations resorted to conducting team work, and this idea isnt seen anymore as a source or
manifestation of organizational problems, as it happened with Hawthorne, but as solutions to many
organizational problems, including the ones that are related to productivity.
But what is the difference between groups and teams in an organization? For some authors,
there is no real difference between the two terms. Daft and Guzzo indicated that the only difference
comes from the context in which these two are used.
So, the concept of group is frequently used by psychologists and it has its origin in the
research connected with the structure, the processes and the dynamic of groups undertaken by social
psychology, whereas the concept of team is encountered only in the business context. As it results,
the two concepts are interchangeable.
Jean Francois Leroy has the same point of view: the reading technical and theoretical
papers that founded the movement of organizational development, and articles about the
psychological and social changes that occur in organizations, indicates the interchangeability of the
concepts of group and team.
This happens because theoreticians and consultants want to indicate the fact that the primary
unity of the organizational system is the group-team, and not the individuals. Also, the resort to the
two interchangeable concepts has to do with the fact that they can prove a teams superiority over
the individuals or even over a number of persons that work individually. With the passing of time,
most authors tried to find some different elements between the two concepts.
Roger Mucchielli, who published a book entitled Le travail en equipe, indicates in the first
pages that the team is a typical primary group that dominates the spirits unity, cohesion, the inter-
human connections, personal commitment, the members adhesion to a group, with which they can
identify, the convergence of efforts to carry out certain tasks, activity that leads, in the end, to
common work.
But guessing that the team cannot be totally lapped over the primary group, Mucchielli tries
to identify in it a series of distinctive notes in contrast with the work group. To situate the teams on
a continuous unclear of what we understand through the concept of group, he recurs to the groups
classification based on the phases/stages of group development.
He classifies the following types of groups: the nominal groups or pseudo-groups are
formed from a conglomerate of persons united together by an external force; merged groups based
on interpersonal trust; groups with conflicts that guide their existence after the concept of tension;
unitary groups with members that find solutions or fulfill tasks; these groups concentrate their
actions around the idea of personal commitment and co-responsibility at work.
Mucchielli says that the work team is part of the unitary groups category. Making the
distinction between the groups focused on tasks and the ones focused on themselves, Mucchilelli
indicates that the teams are equally oriented towards the task and themselves. Anyway, the teams
are sensitive groups, a group extracting its sensitivity from its vigilance, on the one hand, and on the
other hand from the groups intensity of reaction at any external intervention on the task and the
groups composition.
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The members of sensitive groups show loyalty towards the group, personal commitment and
identification with the group. The idea is that the team is little more than a simple group, it being
clearly focused on relationships and the need of performance.
Before Mucchielli, another French psychologist wrote: The team strives to create mediation
between two basic humane desires: the wish for efficiency and the wish for privacy, for affective
communication. In the same year, in another paper (La dynamique des groups), Maisonneuve
wrote that the concept of team included terms such as enthusiasm, collective effort, solidarity, and
sometimes magical invocation, fact that causes its use in the conjunctive (we must promote a real
team).
The years 1980-1990s bring new specifications when it comes to making a distinction
between the concepts of group and team. The team is thought to be something more than a group of
people that have a common objective, and the superiority of the term is given by the individual
contributions that are considered to be complementary.
He noted that a team is good, in the sense of efficient, if its members can work as a team
even when they arent together, thus contributing to a sequence of activities than to a common task
that requires their presence in a certain place or at a certain moment in time. For most authors, the
group is a gathering of two or more people that interact with each other by sharing tasks that have a
common purpose, and the distinction between a group and simple gathering of people is done
through interaction and inter-relationship. And the team is a group, but it is a particular type of
group because it has three specific properties:
- The members action is interrelated and coordinated
- Each member has a private role that is specified
- There are common purposes and objectives
Two French authors give us an exact definition for the concept of team. They write that the
team is a formal regrouping that has a specific work which is well-defined in a given space, with
inter-member and inter-team connections that are mainly prescribed by the organization. (Savoie,
Mendes)
The attributions considered essential for team work are:
- The existence of a social system perceived as an entity of members and by any known
observer with this system;
- The respective social system is complete, but when it comes to completing purposes its roles
are different and inter-dependent;
- The system is collectively responsible for one or more tasks; the fulfillment of these tasks
help to evaluate the system;
- The system operates in an environment that has expectations from it.
Out of all these, the last two attributes are the ones that differentiate the team from the
group: it is about the existence of rights and duties in regard with the environment and about the
collective responsibility of the engendered results. These two characteristics stop the transfer of the
data from the field of group dynamic over the work teams.
The debate of the distinction between work group and the work team has the following
conclusion: all the work teams are groups, but not all groups are work teams. Work team is a
particular kind of group that falls in the same category with the committees, taskforces, departments
and boards. The team is a group, but the group cannot be a team (Johnson, Johnson). A group
consists of people working together, but who can easily work one without each other. A team is a
group of people who cant work, at least not efficiently, without the other members of their team
(Spector).
The groups are defined by Mc Shane and Von Glinow as assemblies of persons that are in a
unique relationship. From this point of view, all teams are groups because they have people with
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unique relations, but not all groups are teams because the teams have people that are held together
through their interdependence and their need to collaborate in order to achieve the common
purposes (McShane, Von Glinow).
Bigger or smaller differences between the group and the work team are encountered with
other authors (Gibson, Ivancevich, Donnelly, Muchinsky). Another interesting point of view is
given by Katzenbach and Smith who dont include the team in the generic assembly constituted by
the work groups.
Having as a starting point two axes (a teams level of efficiency and the impact on
performance), the two authors establish five types of groups versus teams: the work groups, the
pseudo-team, the potential team, the authentic team, and the high performance team. The first two
prove to have the same impact over the concept of performance if the result of work has the same
quality; the potential team surpasses the work group in terms of efficiency; the authentic team and
the high performance team are higher than the two axes. That differentiates the work team and the
work group is the final result and the nature of responsibilities. A work group is based on the
individual contributions of the members that lead to a product of collective work (Katzenbach,
Smith). The two authors make it clear that the choice is between group work and team work.
More important than the distinction between the group work and the team work is the
underlining of another idea, namely refreshing the research in the field of work teams: even though
the team represents one of the oldest social technologies of production and from this point of view
doesnt know any revolutionary aspect, it gets special attention from the researchers in the
administration of human resources.
How can we explain this? Certain authors (Shea, Guzzo) believe that the explanation is the
great importance that teams have in the working environments. Other authors appeal to the idea of
efficiency: The current enthusiasm for team work in organizations reflects a deeper recognition of
the fact that this way of work offers the promise of a more rapid progress than the one obtained
through individual action or through the mechanistic approach of work 9West, Borril, Unsworth).
One has to also take into consideration that team work (or group work) is favorable both for
the organization and the individual. Handy enumerates ten reasons that convince organizations to
use team work, group work or committee work (to assign work; to manage and control work; to
resolve issues and take decisions; to process information; to inform and collect ideas; to test and
confirm decisions; for coordination and connections; to increase the employment rate and the sense
of involvement; to negotiate and solve conflicts; to benefit from past experience).
In their turn, the individuals use teams, groups, committees to: satisfy their social needs of
affiliation; to mark the limits of their own self-concept; to obtain support and help in the
accomplishment of their own objectives; the distribution and help in a common activity like: the
achievement of a product; the accomplishment of a task; fun; support; creation (Handy).
Two French authors recently said that there are at least three reasons that determine the
managers to build work teams: team work improves individual efficiency; it improves the efficiency
of the production unities; it improves the global efficiency of organizations.
TYPES OF WORK GROUPS AND TEAMS
The oldest and best known classification of work groups foresees their distribution as a
consequence of the degrees of formality and distribution of the relationships between members.
This classification creates the formal groups arranged by norms, laws, official regulations and
informal groups, generated by the psychological, inter-subjective relationships between members.
The first two are created by an authority, whereas the others appear as a consequence of the
socio-affective preferences that the members have for each other; the formal groups are also called
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the official ones, and the informal groups are called the unofficial. In the specialized books there are
various subcategories of the two main groups.
So, the formal groups are divided into command groups (leadership groups), their main task
being to coordinate and organize other peoples activity; and task groups focused on task
accomplishment.
The informal groups are subdivided into interest groups and friendship groups, their main
stimulating agent being slightly different the interest as motivation, and friendship with its
sympathetic and social-affective touch (Greenberg, Baron, Gibson Ivancevich, Donnelly).
Another classification of work groups, specific for the organizational environments, is
proposed by Sales and it starts from the technologic system of production. He establishes four types
of work groups, namely:
- The lethargic group (little performance; underpaid; the members are poorly trained;
activities without interaction, fact which generates the groups lack of enthusiasm and
internal unity; there is no established leader).
- The erratic group (with members that have poor professional training, low social standards;
the tasks dont vary and the work is based on physical effort; the interactions between
members are confusing, unpredictable, the cohesion is occasional; their leaders often create
conflicts).
- The strategic group (its members are well prepared, well paid, fact which makes them feel
secure; the work tasks are individual, but have a higher degree of human interaction; the
group has internal unity, and its members are active, influential, with a great desire to
participate).
- The conservatory group (its members are highly qualified, with a high social status; it is
characterized through individual system of operation, various dispersion in the organization,
low level of interaction, but a strong sense of identity; it has a reasonable level of internal
unity; its members tend to be conservative during negotiations, but exercise great pressure
on the accomplishment of the specific objectives).
Sayles classification gives us three conjugated criteria:
- The hierarchical level (to carry out certain tasks and to lead)
- Profession (qualified or unqualified work)
- A groups distinctive characteristics as psychosocial unity (the members frequency of
interaction; the degree of cohesion; the awareness or unawareness of group unity).
The organizational culture gives us the opportunity to adapt a new typology of work groups.
Allcorn had four types of groups (homogenous, institutionalized, autocrats, intentional), the first
three being part of the offensive groups, and the last of the non-offensive groups. In Allcorns
opinion the offensive groups are the ones that offer protection and collective or individual defense
against anxiety that is a result of group affiliation, while the non-offensive groups are considered to
be desirable at the work place, and are characterized through the members participation in a non-
offensive way.
Recent classifications of work groups add new varieties to the groups and they are, in fact,
particularizations of the ones already presented. So, Mullins talks about task and technological
groups, managerial or decision-taking groups. The typology of the work groups is also extremely
varied. Two of these typologies draw our attention, first because they are specific to the
organizational environments, and second because, in one way or another, they are going to be taken
over and continued by other authors.
The first typology is the one suggested by Larson and La Fasto: teams that can work out
problems, creation and tactical teams. The first are formed when the organization is dealing with a
problem and it must be solved urgently and economically. Their task is to find as many solutions as
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possible, so that the organization can choose the best one. The creation teams are approximately the
same as the solution teams; the only difference between the two is that the first ones are focused on
discovering new and original solutions.
The tactical teams have as a task to carry out well defined plans. To accomplish such an
objective, the tasks must be well defined, and the members roles must be unambiguous. The three
types of work teams are different through the originality of the created product (some provide
unoriginal solutions, some provide original and creative solutions), through the degree of
involvement (some only think or create the solutions, whereas others are a direct part of their
practical construction).
Another typology of work teams is inspired by the criterion considered by some authors as
being essential to the augmentation of work performance. Levine and Moreland think that the
degree of habilitation of the members of a work team habilitation is seen as the mixture between
autonomy and power represents the basic criterion that explains the high or low performances of
work teams.
Sundstrom and its partners, took into consideration the teams habilitation degree, and came
up with four types of teams: traditional, advisory, on-the-spot, semi-autonomous. The traditional
work teams are created by a leader, to which the other members have to report directly; as a
consequence, the relationships between members are discontinuous; also, there is no interaction in
the accomplishment of common objectives (if these exist). The advisory work teams are enriched
with the power to recommend solutions for the organizational problems, especially for the technical
ones.
Their solutions are put forward to the hierarchical forums that analyze them, after which
they accept or deny them. The on-the-spot work teams are created when there is a need to find
solutions for problems; such teams have the power of decision, obviously, in the limits of a mandate
determined by time. They establish their own way of organization, in order to find solutions for the
given problems.
The semi-autonomous work teams are made up of interconnected members that are
collectively responsible for the planning and control of work; these teams are assisted by a
coordinator that assures the link with the organization. The teams are responsible for results. We
can observe that the two criteria the autonomy and the power degrees of the members and of the
team as a whole- increase as we go up from the traditional teams that are improperly called teams,
to the semi-autonomous teams, included in the organizational structures that take decisions. Then,
while the traditional teams have as a main function the fulfillment of tasks, even though they arent
included in the organizations hierarchical linear structures, the advisory ones, even though they
arent integrated in the organizations hierarchical linear structures, must respect a standard
protocol to find solution for problems.
As for the on-the-spot teams these are included in the so-called matrix structures, at the end of the
hierarchical line. Their products risk not to be chosen the organizations leadership.
Instead of the concept of semi-autonomous team, some authors prefer to call them self-
managed, self leaded, self - designed, sometimes with the interchangeable use of all these terms; at
other times, with the specification that there is strict difference between these terms. For example,
the self-designed teams are responsible for their definition as work teams, they decide the way to
accomplish certain tasks and decide how to accomplish them.
The self-managed teams choose their leaders, carry out the tasks, but are autonomous when
it comes to organizing work. There are authors that associate autonomy with work enriching or
widening. For example, when a work team integrates its functions on the support ones
(maintaining, receiving, and sending) it becomes connected with the other teams, fact that makes
her to be considered as semi-autonomous, even though it has an immediate leader.
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We indicated previously that there are authors that take again the old classifications. Daft
refers to the self-leaded teams; Lemoine indicates a new series of tasks, like: taking part in process
of creating objectives; deciding the production objectives; the connection between the individual
expectations and the collective purposes all these tasks create new types of work teams; Mc Shane
and Von Glinow enumerate the teams based on organizational structures, the self leadership ones
and even the virtual teams, which lose in the process a great deal of their private nature.
The plain enumeration of the work teams and groups has underlined a series of their
characteristics. We consider that a more detailed characterization is necessary. Even though we
dont let go to the idea of difference between the work groups and teams, we continue to believe in
the concept of work that is highly used in the psychosocial and psycho-organizational literature.
BIBLIOGRAPHY:
1. Boncu, tefan The Psychology of the Social Influence, Polirom, Iai, 2002
2. Golu, Pantelimon - The Psychology of Social Groups and of Collective Phenomena, Miron,
Bucharest, 2004
3. Neculau, Alexandru (coord) The Group in the Social Psychology, Polirom, Iai, 2003
4. Neculau, Alexandru - The Groups Dynamic. Basic Texts, Polirom, Iai, 2004
5. Neculau, Alexandru - Social Psychology Textbook, Polirom, Iai, 2001
6. Neculau, Alexandru - The Role of Leaders in the Group Dynamic, Scientific Press, Bucharest,
1999
7. Zlate, Mihai The Social Psychology of School Groups, Political Press, Bucharest, 1992
8. Zlate, Mihai The Social Psychology and the Industrial Organization, Political Press, 1995
9. Cole, Andrew The Management of Personnel, CODECS, Bucharest, 2000
10. Golu, Pantelimon Fresh Perspectives over the Social Groups Psychology, Polirom, Iai, 2001
11. Rovena Frumuani, Daniela Human Resources and Organizational Development,
Cavallioti, Bucharest, 2000
12. Johns, Garry Organizational Behaviour, Economic Press, Bucharest, 1998
13. Landry, Samuel The work Group and Its Psychology, Economic Press, Bucharest, 1999
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THE ROLES PLAYED BY THE TEAM MEMBERS IN THE HUMAN RESOURCES
PERFORMING MANAGEMENT
Master Student Paul IVAN
ivanpaulstudent@yahoo.com
Abstract:
Teamwork - a feature of modern leadership, lead to performance if the team members are sharing the same
vision, understanding the objectives of the organization, communicating, cooperating and helping each other, living
and acting after the same principles, norms and values. Team gains more and more a decisive role for the success of
the organization and even if the leader is strong and well-intentioned, its results are the effect of all those people that
make up the community.
Only by highlighting the skills, talents, inclinations and experience of staff, promoting the principle "all for
one and one for all" and some healthy interpersonal relationships we create favorable conditions to obtaining superior
results.
The company presented in the case study fits very well in the elements mentioned above, the importance of
human resources in general and of the team in particular, represents some of the most important reasons of senior
management.
This paper is based on theory of the assumed roles in the team and, as practical application I applied the test
for determining the Belbin team roles in the Betty Ice company's financial accounting department. Applying this test
was meant as a method for improvement of the effectiveness of teamwork within the organization and tried to see if the
team studied is well formed from the perspective of the theory of team roles. Results revealed that a close-knit team has
different and complementary roles and its success is based precisely on the existence of as many roles proposed by
Meredith Belbin.
Keywords: team roles, the Belbin test, teamwork, individual profile, group
JEL Classification: O15, D23
1. INTRODUCTION
The human resources are the most important asset of an organization. They are very
important and have diverse and unpredictable attributes. Man, with all its facets, is more than
unique and is transferring to his work transfers this uniqueness. Almost invariably rational
individuals will tend to organize themselves in various types of social groups. From the perspective
of each individual, the group membership means certain benefits. These benefits bring with them
some kind of existential fulfillment of a certain person.
On the other hand, the benefits involve different associated costs: the individual freedom of
action is limited, there are some constraints or rules of behavior. However, only individuals together
as a group are stronger and can propose important objectives, which reflect the essential advantage
of the structure of groups/management teams within organizations.
The transition from group to team is based on steps that may or may not occur. We can still
live in the same office colleagues as a normal group or we can create together a team which is able
to generate synergy. The synergy is the certification of the team and with it we create "added
value", which means that the whole is greater than the sum of its component parts.
It should be noted that teamwork does not mean the annulment of personality of its
members, erasing differences, ignoring what they have every single notes. To live among people
within a community means, among many others, to respect and comply with the rules of the
organization, to remain ourselves, to have and express the own point of view, to think with our
heads, to respect the personality, dignity and interests of others.
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Teamwork has become increasingly an imperative, an essential requirement for achieving
superior results. Training and use of teams in resolving basic tasks proved to be extremely
important in promoting a modern leadership.
The leader, no matter how valuable and experienced is, may not include all the activities that
currently runs the organization. In fact, as leadership practices shows, the performing leaders have
around competent people with strong personality and proven skills with specific work skills and
habits in common.
This is one of the reasons to achieve remarkable results by leaders: to build an uniform
team, deeply and continuously involved in major problems of organization. This explanation is
confirmed in this paper where is presented an example of successful management teams the Betty
Ice Company of Suceava.
This paper presents some concepts considered important to the team management as part of
human resource management. The practical part of the work will present the test results from the
application of Belbin test - a method of building effective teams developed by the English specialist
Meredith Belbin.
2. THE HUMAN RESOURCE MANAGEMENT TEAM
If we observe carefully the teams, we find that their members have well-defined roles. This
observation is based on the effort of managers to identify and assign each member, the appropriate
role. For years, the research management focused almost exclusively on the individual
person. Organizations were concerned about the qualifications, experience, individual
achievements. In fact, everyone knows that the ideal man for a particular job cannot be found.
Thinking of a good manager we will draw up an endless list of qualities. Can one man to
meet all? But there is a solution the teams. They may meet more often the qualities we need. In
addition, it is unlikely that everyone on the team want to leave or get injured at the same time. So,
not the individual but team manager is the tool that provides a sustained and lasting success. In
most cases, the team performance exceeds the individual performance of team members.
Team spirit is the key to great performance. Success is due jointly, mutual aid, recovery
potential and actual creative work of individual, trust, respect and honesty in interpersonal relations,
ethical conduct dignified and accepting a collective responsibility for the achievements and failures.
The concept of team has many definitions in the literature, many of them often by
reference to the group and transition-team group.
One example is G.A. Cole (2000) who considers that team is something more than a group
of people who have a common goal - is a group where individual contributions are considered
complementary. Collaboration, working together is fundamental note of the work team.
George Militaru (2005) defines team as a group whose individual efforts result in a
performance that is greater than the sum of individual results. Therefore, a working team generates
positive synergy through coordination of effort.
According to George Ardvoaice (2008) a team has a clearly defined objective and by
common and collective action generate synergy, people get more than if they work separately. The
team is not a collection of individuality. Their quality and performance are determined by the
amount of interaction between members as a component. Team creates synergy, which means that
the whole is greater than the sum of it up, the relationship between parties is also an intrinsic part of
the whole.
Ioan Pastor (2005) defines the team as a group of people who work under a chief.
Relationships between group members are dependent; they satisfy predetermined tasks to achieve a
common goal. Although the quality of a team is influenced by the quality of each individual, it
constitutes a distinct entity.
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Constantin Rosca, Mihai Varzaru and Ion G. Rosca (2005) consider the team a group of
organized individuals together, led by a leader and acting within a context for the same purpose.
Referring to a real team, Aurel Burciu (2008) presents the following defining features:
- a small number of members;
- some qualifications/complementary skills;
- a full understanding of the purpose;
- a product/service jointly produced;
- a clear conception about work/jobs;
- a sense of mutual responsibility.
3. THE TEAM ROLES BY MEREDITH BELBIN
As we have seen above, one of the reasons to achieve remarkable results by leaders is to
build a homogeneous team, deeply and continuously involved in major problems of organization.
But how we can build a successful team?
The answer seems to rely heavily on Meredith Belbin's research from the Centre for
Research and Training Industry Cambridge. For the first time stated that managers who want to
build teams only with very intelligent people can fail. Contrary to expectations, the most disastrous
team is made up exclusively of very intelligent people. Belbin and his research team identified eight
roles (a role later added) that can be played by the team members.
Dr. Raymond Meredith Belbin was born in 1926. He completed graduate and doctoral
studies at Cambridge University. The first post-doctoral research position is held at Cranfield
College (now Cranfield School of Management at Cranfield University) working as a Research
Fellow. His early research focused mainly on older workers in the industry. Next, he returns to
Cambridge where he joined the Department of Education Industrial Education. During this period
(the last years of the decade in 1960) is invited at the Administrative Staff College in Henley-on-
Thames where he made over several years the study for his book (in 1981). But the enshrining and
the recognition of his results did not appear immediately. In 1996, Belbin, and his son Nigel,
founded Belbin Associates to publish and promote his research findings.
The Belbin Team Roles theory is the result of over nine years of research conducted by Dr.
Meredith Belbin and his team in the field of human behavior and contribution at work. The result of
this research was first published in 1981, and team roles theory was immediately recognized and
accepted by academia and business as an important tool for the human resource management.
Meredith Belbin defines the team role as "a person's specific tendency to behave, contribute
and interact with others." Belbin and his team identified nine such roles representing unique
combinations of positive and negative aspects of behavior. In practice, a person is able to address
two, three or even four favorite roles. The same person may hold several roles, which to address
them when the situation requires and a number of roles that is not appropriate which actually she
have to avoid. This distribution of roles derives from profile to be achieved by capturing their
perception and the perception of observers (colleagues, managers, subordinates, employees,
customers, etc.) on that person's behaviour.
In addition to the personal profile can be achieved a profile of the post held by that person.
Multitude of information obtained at the individual level, at the posts and at the whole team makes
the team roles theory an excellent tool for individual assessment, management of personal
development, building and team development, team management, selection of candidates for a
particular job and management education. The evaluation of behavioral characteristics is done in
terms of two types of perceptions: the own perception and the perception of its observers. One of
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the advantages of applying this theory is precisely this possibility to capture the perception of
observers: the people who interact and come into contact with the person observed.
The aggregation of subjective information obtained from each observer allows identifying
the dominant behavioral characteristics of the person observed. These dominant features are
providing credibility from the feedback provided by many people. And finally, what really counts is
how a person is perceived by those who come into contact, rather than what that person thinks
about his behavior.
The comparison between their own perception and the perception of observers is a key issue
in management teams. In this case it is important to relate the perception of observers and to
understand why there are differences between the two perceptions, when they exist. This can be
achieved by further investigation, assessments, discussions with all types of observers (managers,
colleagues, subordinates), by encouraging them to provide feedback and by an increased attention
for understanding the feedback.
The individual profile of team roles helps us a better understanding of ourselves; explain to
us some approaches and preferences in terms of a concept, of the nine types of behavior and
contribution at work place. If we can to find ourselves in the light of these roles, we can certainly
understand those around us by using the same process. Through team roles we can better
understand and interpret the information we hold about ourselves and people we work with.
Table 1 summarizes the strengths and weaknesses of the profiles suggested by the Belbin
Team:
Table 1: Summary of roles within a team, by Meredith Belbin
ROLE NAME FUNDAMENTAL CONTRIBUTION PERMITTED WEAKNESS
PLANT Creativity, imagination, able to solve
difficult problems
Ignore details, often too preoccupied to
communicate effectively
RESOURCE
INVESTIGATOR
Enthusiasm, communication, search-friendly
occasions, he makes useful links
Overly optimistic, quickly loses interest
COORDINATOR Coordinate chair, clarifies goals, decision
capabilities and empowerment
May prove propensity to manipulation,
sometimes delegate their tasks to others
SHAPER Dynamism, oriented perseverance, courage
in overcoming obstacles, faces pressures
Challenging attitude, hurts the feelings of
others
MONITOR
EVALUATOR
Discernment, critically constructive,
strategic thinking
The inability to make followers, being
overly critical
TEAM WORKER Cooperation, diplomacy, perceptive attitude,
avoiding friction
Undecided in some cases, easily influenced
IMPLEMENTER Discipline, seriousness, efficiency, initiate
practical measures
Inflexibility, slowness in detecting unusual
opportunities
COMPLETER
FINISHER
Methodical and conscientious attitude, detect
errors and omissions, meet deadlines
They make too many worries, refractory to
delegation of responsibility, formalist
SPECIALIST Decided prosecution intended, is capable of
self-initiation, providing knowledge and
skills that few people possess
A limited contribution to a narrow field,
delaying the technical details, fails to
perceive the big picture
(Processed from Gerald A. Cole, Staff management, Ed Codecs, 2000, p. 97 and http://www.belbin.com/rte.asp?id=8)
4. THE TEAM ROLES AND THE PERSONAL DEVELOPMENT
Individual profile roles in the team can decide which areas we should develop so as to
improve our individual performance.
The first starting point is given for comparison between the nature of the tasks we currently
perform, that these types of contributions required on one hand and our team profile on the other
235
hand. Might be where we need to develop some secondary roles because in this way we have to
naturally address those aspects of our work which require those roles. Understanding the nature of
skills required by the tasks they fulfill and specific behaviors of team roles we need to decide in
which direction we need to develop and which are the best ways to achieve this. This decision is
especially important if we discussed future career steps and future requirements that we will face.
The second starting point for personal development is the comparison between its
perception, the perception of observers and a decision on which action must take to "equalize" the
two perceptions. A successful person is characterized by a good correlation between own
perception (what he thinks about himself) and the perception of observers (what colleagues think
about it). To achieve this correlation, if it does not occur, there are two options. The first would be
that person to adjust their own perceptions based on the perception of observers; the second would
be the person to better promote their sites for some asset that they are perceived as such by
observers.
The third point of departure is the team's requirements for specific roles. It could happen
that the team members may not address naturally a role asked by the specific objectives and the
context of the team. In this case a person may decide to develop a secondary role to "fill the gap" in
the team. In this case we could talk about a natural decision for personal development or about a
sacrifice that makes a person in the interest of the team. In the latter case it is preferable that this
sacrifice will not last long enough to generate a less motivation for that person.
The development objectives of team roles may be included in the overall personal
development plan and can be combined with the performance evaluation system. The evaluation of
the team roles can be repeated at regular intervals of time to determine how the profile evolves over
time, to what extent personal development objectives have been achieved and what still to be done.
5. CASE STUDY: ANALYSIS OF TEAM ROLES AT SC BETTY ICE SA
Company Presentation
Information about company for 2009:
Turnover: 20 million
Profit: 890.000 Euros
Total investment: about 32 million
Production capacity: 120 tones (60-65% use)
The top five ice cream producers in Romania: Nestl, Betty Ice, Top Gel, Kubo IceCream and
Alpin '57 Lux, all of them are holding over 60% of total market
The Romanian ice cream market its estimated at 120 million Euros. The Betty Ice
Company was founded in 1994, and after months and years of searching, testing, Betty Ice
succeeded to become what it is today - a company that has a strong influence on the Romanian ice
cream market, the second largest ice producer. The factory was operational in 2007 but the last
buildings, including reception and the offices were completed in 2008. In only two years the
company succeeded to reach the second place in the country, selling ice for 17.5 millions euros and
struggling with the well-known multinational company Nestle.
The company's development is based on the acquisition of the last-generation machines,
Betty Ice is now one of the most modern ice cream plant in Europe with a capacity of about 100
tons of ice per day. Main target of the company is focusing on distribution, thus aiming to go as
close as it possible to the final consumer. Other departments which the businessman wants to
develop are the production and logistics; the marketing part its important, too. If, at beginning, the
product was promoted by itself, now the marketing plays an important role in promoting business
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strategy. The interest of Betty Ices board is to increase market share, to produce new sorts of ice
cream to satisfy consumers refined requests.
Although is a production company, in which the technical level of the machineries is very
important for the quantity and quality of the final good, the human resources are a permanent
preoccupation for the businessman, Vasile Armenean. There are aprox. 380 permanent and seasonal
employees, involved in the production, the distribution sectors, and at the offices. On this last group
we focused our research.
THE RESEARCH DEPLOYMENT
This research tried to identify the team roles within one of the department from Betty Ice
Company. After the consultation with the manager, I decided to apply the Belbin questionnaire at
the Financial and accounting department, which includes a number of five employees, but the test
has been filled also by the inspector of human resources, who works in the same office with the
finance department employees.
The team roles can be determined through a questionnaire that has a series of statements
grouped into several categories. These statements describe various behaviors and attitudes
manifested in the team and they have to be ranked in ascending order. A full assessment involves
both the own perception and the perception of others. The teammates must complete the same test
for their colleague. Differences between results are not very high, maintaining the main profile, but
can occur different side profiles. The www.belbin.com website provides detailed reports determined
by testing Belbin profiles and in addition, there is a computer program that can automatically
calculate employee profile.
There are two versions of the Belbin test, the first with nine profiles and the second with
eight profiles. Since the test version with nine profiles requires additional resources from both sides,
I decided to apply the test with eight Belbin profiles. In addition, this version is much easier to fill
by the employee and the results of previous tests have shown that the hierarchy in terms of the
dominant role is preserved, no matter how is done the research.
Tested employees had enough time, as long as they need; besides the test itself, employees
were asked to write the department where are working, full name, current position, previous
position (to see if the profile matches) and e-mail address (for sending the results interpretation).
The questionnaires were evaluated using a special scale for determining the scores related to
each profile. Which profile obtains the highest scores thats the dominant role and the following
scores in descending order are showing secondary roles. As it can be seen bellow, there are few
people who have a very limited number of profiles; the majority of them are "interpreting" a
different role if different situations. The roles that have the highest scores are most often used by
the team members.
The results were communicated via email with a description of the main features of the
determined profiles. Later the company manager received a list of all existing profiles within his
team and a few recommendations for each employee.
The respondents may use information received to develop those roles that are required to
work. Also, if they wish to make a career plan, roles may be of real help because they'll search
those jobs that are more appropriate for them.
Also, if a team lacks certain roles, some employees may decide to develop some of theirs
secondary roles to fill the needs of the team, but this situation must not take very long time, in order
not to generate the de-motivation. Evaluation team roles can be repeated to determine how personal
profiles can change themselves. In a full assessment (own perception and the perception of
observers) that person will be helped to correct differences between the two perceptions, either by
adjusting the perception by others, or through increased his unnoticed trump cards.
237
RESULTS AND RECOMMENDATIONS
Meredith Belbin believes that we dont have good roles and bad roles in a team; the
important thing is to have all the roles for a successful team. For the financial accounting domain,
Belbin analysis revealed specific roles (ME, IMP, CF) for these activities, characterized by
accuracy and routine.
After applying the test for employees the following results were obtained:
- C. ILIE
Current position: Financial Director
Previous position: Financial Director
Main profile: TEAM WORKER (TW)
Side profile: MONITOR EVALUATOR (ME), SHAPER (SH)
TW are those who are most supporting the team. The profile of this employee fits very well
with the position of Financial Director. He keeps the team together, helps others, is very loyal and
appreciates new ideas. While acting with care, he can be indecisive sometimes when he is placed in
stressful situations. But he is important also because he counteract the misunderstandings, although
sometimes he may be the source of some problems (he is a SH also).
Being ME, too, he has very good mental skills, the ability to judge carefully and take all
factors into consideration, a benefit for the financial department.
In my opinion, its important the focusing on TW because a leader who generates conflict
and also try to settle the conflicts may create confusion for the team. Also, because he is not the
only TW from this team he can leave this role to another colleague.
TW can present sometimes a lack of flexibility and responsiveness to the new ideas and
even the avoiding of the decisions. The leader of a TW must always expect to competition for the
positions or partisan attitudes.
- D. CREU
Current position: Economist
Previous position:
Main profile: RESOURCE
INVESTIGATOR (RE)
Side profile: PLANT (PL)
In this case, I believe that the PL is the role she should focus because every team needs new
ideas. In addition, she acts in an original and radical style, recommended for a team which is facing
the company's financial problems and issues. PL is the team member with the highest power of
imagination and intelligence. Also, as a RE, she has many relationships and interacts well with all
kinds of people.
At the same time, the team leader could encourage more the RE qualities (relaxed, sociable,
"good guy", very interested in what happens around him, positive) because the finance domain does
not put a high value on socialization. Sometimes the leader can create specific tasks to encourage
the profile (is the only RE in this team).
The leader of a RE should expect from him at the loosing of the interest after the
fascination shots down. Sometimes they are tempted to keep the information for themselves or to
underestimate the value of others ideas.
- VALENTINA H.
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Current position: Accountant
Previous position: Accountant
Main profile: IMPLEMENTER (IMP)
Side profile: COMPLETER-FINISHER (CF), MONITOR EVALUATOR (ME)
Choosing this person for the position of accountant can be considered a successful
election. The IMP has developed a very practical sense, a great self-control and he is
disciplined. They work hard and address the problems in a systematic manner. IMP is a fair person
for the company they work and he is less interested in pursuing own interests.
An entrepreneur is always wishing an accountant dedicated to organization and work. In
adition, a good accountant should be honest and fair in the first place which it fits perfect on the
IMPs features. He is sincere, honest and trustworthy. He not gets discouraged and for a decision,
he will develop an implementation program. For a group of people and a goal, he will develop a
viable organization. He works effectively, systematic, methodical, but he can become inflexible.
Furthermore, as CF he has a capacity to complete the work, pays great attention to detail and
is always cautious and concerned. The clear and precisely thinking offered by ME its great for
accounting.
The leader of an IMP must take care because sometimes this profile can manifest a lack of
loyalty towards the organization and he can be the launcher for some unconstructive critics.
- DORINA A.
Previous position:
Main profile: MONITOR EVALUATOR (ME)
Side profile: IMPLEMENTOR (IMP), COORDINATOR (CO), PLANT (PL)
As I mentioned earlier, the domain is influencing the typology of the roles. In other words,
if these employees had been worked in other fields, the structure of the roles would look completely
different. It is clear that the ME and IMP roles are beneficial for the financial and economic
professions.
As in the previous case, the PL should be developed further. It's very possible that this role
would have more clout, but because of the job profile (not creativity to the fore) the employee had
to develop other roles as required.
For this employee the CO profile could be developed because are useful features for the
group: the concerning for the objectives, the manner in which she evaluates the resources and
distributes the activities in the team.
The leader of a ME can expect from critics sometimes clumsy, constant negative remarks. In
addition, it is known that the ME will compete with a CO or a PL.
- MIHAI B.
Previous position:
Main profile: TEAM WORKER (TW)
Side profile: COORDINATOR (CO), IMPLEMENTOR (IMP)
As a team member, TW always tries to support the team and several TW ensure greater
cohesion within the group and durability over time. Honesty, integrity and trust from the IMP
profile are beneficial for the profession.
It is very possible to appear conflicts between CO and the team, so it is very important to
determine exactly who will play this role, because the different visions of the team can create
problems.
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Just like in the case of the other TW, its appropriate to mention here the lack of flexibility
and receptiveness to new ideas coupled with the decisions avoidance. The competition for position
or partisan attitudes also remains valid in this case.
- MARIA B.
Current position: Secretary HR Inspector
Previous position: Referee Database
Main profile: COMPLETER FINSHER (CF)
Side profile: TEAM WORKER (TW), MONITOR EVALUATOR (ME)
CF is sometimes called "the fearful" because he is always afraid of what could go wrong.
The settling in the position of Secretary is a pretty good solution for this profile since CF is always
caring and concerned for the team, takes care of orders, meeting deadlines and program fulfilling.
The position of Secretary requires attention to details and the CF is focused on them,
sometimes ignoring the major objectives. The TW qualities maintain the team spirit, but the ME
gives less cheerfulness, warmth and spontaneity, and these characteristics are important for a
secretary.
The leader must take care in what activities is involved the CF because its criticisms and
concerns will "bulldoze" team morale. In addition, quite often the CF forgets the overlook in favor
of all the details.
CONCLUSIONS
The human resources are the most important "wealth" of an organization and the Betty Ice
manager known this very well. The importance of team and human resources can be seen every day
in the work environment, in the attitude of employees, in the good opinion they have regarding the
senior management.
I met in this company a close-knit team, which contains almost all of Meredith Belbin roles,
either dominant or secondary. As a matter of fact, each employee has been elected by the general
manager and this is one thing to praise.
For team leaders, Belbin's theory may have the following advantages:
- Improve the team performance and assure the success;
- Is a support for recruitment, staff evaluation, personal development, career planning, advice and
guidance
- A superior understanding of behavioral factors and interaction at work
- Enriching the knowledge base and its management tools
- Improving the performance of the organization.
The development objectives for team roles can be included in the overall personal
development and can be combined with the performance evaluation system. The evaluation of the
team roles can be repeated at regular intervals to identify how personal profile evolves over time, if
the personal development objectives have been achieved and whats still to be done.
In the future, Belbin's theory will find an increasingly more practical applicability. The
Belbin profile may appear in the CV of the candidates and the specialists will be able to make the
Belbin profile for different jobs within the company and many others.
A survey at least interesting can involve the establishment of two teams (one based on
traditional methods of team building and the other based on Belbin's theory) and comparing the two
teams to see in which one the synergy is higher and the work is more efficient.
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BIBLIOGRAPHY
1. Ardvoaice, G. Liderul si munca n echip, Ed. Antet XX Press, Prahova, 2008
2. Belbin, R. M. Management Teams : Why They Succeed or Fail, Elsevier Butterworth
Heinemann, Amsterdam, 2004
3. Burciu, A. (coord.) Introducere n management, Ed. Economic, Bucureti, 2008
4. Chasovschi, C. E. Cercetri privind managementul resurselor umane n contextul dezvoltrii
regionale, Ed. Didactic si Pedagogic, Bucureti, 2006
5. Cole, G. A. Managementul personalului, Ed. Codecs, 2000
6. Drucker, P. Despre decizie si eficacitate, Ed. Meteor Press, 2010
7. Huczynski, A., Buchanan, D. Organisational Behaviour An Introductory Text, Prentice
Hall, Harlow, 2001
8. Lefter, V., Deaconu, A. (coord.) Managementul resurselor umane. Teorie i practic, Ed.
Economic, Bucuresti, 2008
9. Manolescu, A. Managementul resurselor umane, Editura Economic, Bucureti, 2003
10. Militaru, G. Comportament organiza, Ed. Economic, Bucureti, 2005
11. Nicolescu, O., Verboncu, I. Managementul organiza , Ed. Economic, Bucureti, 2007
12. Pastor, I. (coord.) Managementul firmei , Ed.
Risoprint, Cluj-Napoca, 2005
13. Roca, C., Vrzaru, M., Roca I. G. (coord.) Resurse umane. Management i gestiune, Ed.
Economic, Bucureti, 2005
1. http://ro.wikipedia.org/wiki/Meredith_Belbin
2. http://www.belbin.com/rte.asp?id=8
3. http://www.ceo.md/belbin
4. http://www.edurom.ro/profil-belbin.html
5. http://www.rosscon.ro/BelbinTeamRoles.asp
6. http://www.zf.ro/profesii/rolurile-de-echipa-belbin-i-2946591/
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5ECTION 3
ACCOUNTING - FINANCE5
242
REFLECTIONS ON THE NATURE OF ACCOUNTING
Professor. Dr. Elena HLACIUC
Professor. Dr. Rusalim PETRIS
1. The model of the accounting process. Historical dimension;
2. Accounting as technique;
3. Accounting as Art;
4. Accounting as Science;
5. The Accounting Paradigm
Abstract:
The beginning of accounting can be understood as representing an answer to the social command launched
by the economical-social life. The model,
Economical-social activity Technique (Art) Science
Acted for a long time in accounting. The knowledge domain revolution generated its changing into:
Science Technique (Art) Economical-social activity
Starting from here, the study presents the series of conclusions reached by the authors in interpreting the
dimensions of accounting as: technique, art, science. The finally of the study presents the current accounting paradigm
in its meaning, an exemplary scientific achievement.
Key words: accounting, scientific achievement, technique, art, science, accounting paradigm
1. THE POSITION OF ACCOUNTING AT THE END OF THE NINETEENTH-
CENTURY ECONOMIC CULTURE. SCIENCE AND ART
Worldwide, as we draw closer to the late nineteenth century, the concern deepens on the
fitting, ordering and summarizing of the accounting principles. In this age of crystallization of
science and technology concepts in accounting, the great controversy in which most renowned
authors of this century were caught was fought on the nature of accounting.
Tonzig, RPCoffy, Vincenzo Gitti, Giovanni Massa, Louis Deplanque, Adolphe Guilbault,
Eugene Lautey, Giuseppe Cerboni, J.Fr.Schr considered accounting as a science like any other,
with its field of application, which studied certain phenomena and reached general knowledge, just
as in other sciences.
Ed Dgranges Sr., Ed Dgranges Jr., Morrison, Joseph Barre, Augier, in their definitions of
accounting, considerate it to be an art.
Rothschild sees in it a body of records and supporting documents. The new accounting
knowledge, spread later to us, and about a literature can be spoken of only from the nineteenth
century.
With the establishment of trade schools appear the first seeds of own thinking, which
received more and more precise shapes as approaching the end of the century.
Bucharest, Iasi and Brasov became the main commercial centers of education in Romanian
but also the cradle of Romanian culture and economic accounting. Theodor Stefanescu in
243
Bucharest, Constantin Petrescu in Iasi, I.C. Pantu in Brasov contribute to the development of
Romanian accounting thought and their names shine in the constellation of authors in this field.
Except Theodor Stefanescu, whose design in accountancy is definitely mingled at the end of
the century, and editions of his work will not be changed in the twentieth century, and C. Petrescu
and I.C. Pantu will manifest as the most important authors of this science in the first decade of the
new century. Although their influence was felt in the nineteenth century, their thought will remain
in the twentieth century.
As the end of the century draws near, the number of accounting literature volumes in
Romanian increases. In the accounting departments of business schools activated, in the last quarter
century, 34 teachers in Romania and four teachers at the business school in Brasov.
Among them, Paul P. Eliade and C. Neamtu were not only teachers, but made history with
interesting accounting papers.
Paul P. Eliade, director at the Ploiesti Trading School prints, in 1875 the Encyclopedia of
trading, commerce and its operations and keeping records in single and double entries with various
applications"[1].
C. Neamtu, professor of accounting, chief accountant of the National Bank and director of
the Commercial School in Craiova, prepared for the use of third grade secondary and for the
professional and vocational of level I and II a paper entitled: "Brief notions of accounting, business
forms and registers "[2].
G.P. Alesseanu, GrigoreTrancu-Iasi, M.I. Mihailescu, Thomas Voiculescu are professors
and researchers that reach full scientific maturity in our century and that are found in the head of
accounting renewing action in the first four decades. Under their names a valuable accounting work
will be printed.
In the research front line join other forces. Zamfir Petrescu, sub-director of the Agricultural
Bank, published in 1897 a "Theoretical and practical treaty of accounting and administration for
commerce, agriculture and the bank"[3], Major A. Iarca printed in 1890 "Study on administration
and accounting[4] and Camelia Crainic, professor of accounting and mathematics makes an
"Accounting Course" in two volumes for the use of vocational schools for girls [5].
Even if the last ones contribution to the advancement of accounting knowledge in Romania
remains modest, they have the merit of trying to broaden the aim of science to other fields of
accounting of stock movements than trade.
In the Romanian economic culture T. Stefanescu [6] had contributions, by the formation of
30 business school graduates promotions in Bucharest, while being the organizer and first director
of the National Bank accounts in Romania, and the promoter of the accounting science in the last
three decades of the nineteenth century.
T. Stefanescu wrote and printed a "Course of Double Entry Accounting", a "Basic
Accounting Course" and a course on "Commercial Correspondence" [7].
It is a work that has kept pace with time. Only an exceptional man as Th. Stefanescu,
characterized by a prolonged robust scientific and spiritual youth, could hesitate to make further
achievements in the form and content of his treaty, and even make changes in his thinking. This
explains the large difference from one edition to another until the appearance of the fifth edition [8].
He learned accounting with L. Toussaint, but was also known in some way to be influenced
by the work of Godfroid, IG Courcelle - Seneuil and Joseph Barr [9].
He adopted a critic position towards the treaty of Guilbault with his treaty Industrial
Accounting and Management" or towards IE Queulin with "perpetual inventory" [10]. He met the
views of Gabriel Faure, Lefevre, Joseph Garnier, Leautey, Gautier.
In his work, the theoretical side is chained tightly to the applicative side. "The scientific
form, says the author, forms the actual accounting and record keeping is its application. This
differentiation does not meet the first two editions (1874 and 1881).
244
In the subsequent editions, however, Th.tefnescu defines accounting as "the science
which teaches the art of setting the accounts and brings them together to complete the trade of the
house or any other public house, which manages funds." [11]
The scientific part of accounting is regarded as the soul, and keeping records is considered
to be the body.
2. THE BATTLE OF OPINIONS, DETERMINING FACTOR IN THE PROGRESS
OF SCIENCE IN ACCOUNTING
Science - says JD Bernal, is an evolving complex of knowledge, built on the sequence of
thoughts and ideas, but more than that on the experience and actions of a large number of thinkers
and workers ... It is a continuous discovery of new facts, laws and theories, often criticizing and
destroying as much as it builds. However, the entire edifice of science never ceases to grow. It is
permanent, so to speak in order to repair things a little bit, but at the same time, it is always in
use.[12]
Reflecting on the continuing process of knowing maturity and refining knowledge about the
nature of science concept, prof. Dumitru Rusu, Doctor of Sciences made the following statement:
"In science the law of battle of opinions acts. Some theories are born so to die sooner or later. In
this report, any science is open. Viewpoints appear constantly, along with more and more new ways
of solving in all areas and particular sciences. [13] "
Indeed, there are few economic subjects that could have generated, with the flow of time, a
literature so rich and varied as accounting. Its entire written history, written from its first grouping
into a system of knowledge and to this day is a testament of the relentless struggle of views, in
whose purifying fire were conceived its truths, principles and theories of this science.
If we try to locate the geographic area of the accountings evolution in Romania, even here
we are witnessing strong upheavals caused by live confrontations between ideas, current thinking
and scientific schools. Their way of being and the affirmation of creativity roam Romanian
accounting.
The character and nature of accounting, the expansion of its sectors, new tests of making
changes in the digrafic background, theory and results of expenditure accounts, order and
accountability are certainly doctrinarian concerns that the Romanian accounting thinking, especially
in this first half century tried to clarify things.
Feebler in the first decades, the struggle of opinions is getting worse as the pure economic
theory created by Professor dr.Ioan N. Evian turns into a new school of thought.
The columns of journals and periodicals: Revista General de Comer i Contabilitate,
Buletinul Contabililor, Observatorul Social-Economic, Analele Academiei de nalte Studii
Comerciale i Industriale from Cluj - Brasov, Arhiva Contabil, the journalALACI, etc.
established true groups that facilitated along with the Circle of Commercial Studies and the
Congresses of The Court of Certified Accountants and Accounting Experts, the movement of the
new in the accounting theory and technique.
2.1. NATURE AND CHARACTER OF ACCOUNTING
Is accounting a science or not? This is the question that has been called into question within
specialist circles and generated a ferment since the fourth decade, reaching its maximum intensity in
the next decade.
The problem of defining the nature and character of accounting is not new.
The first milestones in raising the status of accounting scholars have undoubtedly been the
245
emergence of the first accounting theory, the one of personification, by Ludovico Flori, which
published in Palermo in 1633, his treaty Trattato del modo di tenere il libro doppia [14].
But accounting was given, as other sciences, just over two centuries to be received with full
rights in the family of science with its own status. As a tribute, its most authorized representative,
R.P. Coffy [15] is given membership of the Academy of Sciences.
A. Tonzig, Fr. Villa, G. Cerboni, F. Besta, Hgli, J. Fr. Schar, Ad. Guilbault and E. Lautey,
to mention only the most representative, based since the end of last century the scientific nature of
the accounting science and her independent nature.
For us, Th. Stefanescu, C. Petrescu and I.C. Pantu, three peaks in Romanian thinkers of the
late nineteenth century were unanimously in referring to the status of accounting science as
independent, different from its engineering or art.
How can it be explained then that the problems seemed clarified are called into question
once more and that they generate controversy that is manifested with great tenacity even after a
quarter of a century? What sides of the old concepts are covered and how are they put under the
shadows of the knowledge reflector? And what new accomplishments are we looking for? These
are issues that we sought to decipher in the struggle of opinions that I put under this paragraph.
*
With the establishment - during the two decades that border the nineteenth and twentieth
centuries, of Commercial Academies in all European countries, the economic enterprise becomes
more and more an object of research for economists. "Study on the company" does become a
subject in the educational plans of these places of economic culture.
To this objects shaping and the refining of the method of Science Enterprise, the German
school has undeniable merits.
J. Fr. Schar, E. Schmalenbach, H. Nicklisch, F. Scmidt, Fr. Leitner, teachers at various
commercial academies and school developers brought their contribuion to the prosperity of this new
discipline.
Aiming to investigate "all the phenomena taking place inside an enterprise, establishing
their causality and correlation, related to the target aimed at and the conditions in which the results
are obtained, formulated on the basis of the findings, the general principles that make up the an
organic system independently [16]. It was natural that the science of enterprise was to meet here
with the one that, as said by W. Sombart referring to accounting has long formed an isolated island
in the great ocean of empiricism [17].
That is how, in the domain of balance sheet and accounting issues, the German researchers
lined up in two fronts of thought. A group headed by Schar, Berliner, Gomberg and Oswald make
an independent science out of accounting.
A second group having as the main representatives Schmalenbach, Alder Osbahr, Leitner,
Schmidt were less concerned about the theoretical side of accounting. Having no intention of
creating a separate science, they understood accounting more as a technical method of value
calculation with very broad application to study business [18].
These struggles are echoed in the economic thought from us. In Romania, the Enterprise
Science was brilliantly represented by teachers at the Academy of High Commercial and Industrial
Studies in Bucharest, Virgil N. Madgearu, G.Mladenatz, G. Bungeteanu and Victor Slavescu. They
were able to find room for new disciplines without violating the borders of other sciences.
Except for the last two, others did not stop on accounting even if each of them held the title
of chartered accountant.
246
If they were not preoccupied with the research of accounting issues, the influence of
enterprise science in addressing accounting firmly concerned George Badea [19], one of the former
students of Professor V. Slavescu.
Although he seems to be a great-personality student of Professor Spiridon Iacobescu, he
approaches the ideas professed by him especially in the classification of accounts. He considered, as
Sp. Iacobescu did too, the enterprises patrimony as being distinct from the patrimony of the
entrepreneur.
The emergence of the "Commercial and Public Accounting Course" was the first
professional event in our literature that considers accounting as a "method of enterprise science."
Under the influence of H. Fayol's work, "Administration industrielle et gnrale" George
Badea considered accounting as one of the six economic functions of an enterprise. It is regarded as
a manifestation of the accountant which records movement exerted on those assets "according to
certain rules and in certain enchainment. [20]
It is the conclusion reached by Professor G. Badea, "rebelling" [21] against Prof. Spiridon
Iacobescu whom he considers "the most ardent supporter of the accounting-science."
From an obvious shortage of information, Professor G. Badea restricted preoccupations for
basing accounting as a science to the ones of Prof. Sp. Iacobescu, after which he raised the minuses
of legal and economic conception of representing the patrimony at the rank of limitations of
accounting-science. So were violated basic norms of rational thinking.
By the end of the decade, except for the fourth, there was found no other mentioned echo of
this work.
If, at the Academy for High Studies in Trade and Industry, the thesis saying that accounting
is a technique, method or tool of science enterprise caught roots, the situation was completely
different in the younger sister of Cluj-Brasov.
Here at the country's second Trade Academy, under the influence of the current German
economic school that considered accounting as a technique, and especially under the influence of
Professor Nicklisch, Professor John N. Evian outlines his conception [22].
Considering that he also took classes of enterprise economy he investigated, from the
"purely economic" point of view, the accounting. He kept these concerns after 1943 as the head of
the General and Applied Accounting Department within the Commercial Academy in Bucharest.
In a paper published in 1940 under the title "Theories of accounts Professor Ion N. Evian
definitely attributes to accounting the quality of art of accounts, or technique, but not science,
accounting remaining to be seen as an arithmetic supplement to the enterprises economy[23]. It
seems that this meaning was not so "definitive" since, in his work "Double Accounting", published
six years later, accounting is not only given the quality of art of accounts but also the ones of
calculating costs, counting or comparative statistics and preliminary calculating, it becoming "just
something so synonymous with the art or technique of keeping accounts or of calculating [24],
being regarded as the tool of enterprises [25] or the economic enterprises calculation technique
[26].
How does Prof. I. N. Evian argue the above statements?
Accounting is not designed to study economic phenomena, but only to register the elements
developed by the science of economic enterprises.
Until then (1940) it wielded problems "that it did not have the power or the call to examine."
[27]
So is explained, says the author, why a lot of concepts, such as depreciation and accounts for
rectification generally, were completely misunderstood and falsely explained by accounting, as also
due to the accounting techniques failure to reflect the real nature of an enterprises expenditure the
expenditures definition as "asset blanks took place[28].
247
Since the study of economical phenomena from the enterprises is taken and continues to be
taken from the "accountings back" by "the science of enterprise economy", the latter tends to
acquire also the theory of accounts. Therefore, accounting is devoided of it scientific part regarding
this sector of computing.
The role of accounting would be limited, in Prof. I. N. Evians concept, to that of
"establishing the account plan which intervenes in qualifying and recording accounting matters, as
also applying the principles of permanent and universal value, established by the science of
enterprise economy." [29]
He would eventually return to this idea in the introduction of his work "Double Accounting" where,
stopping on the relationship between accounting and keeping records, affirmed that "to keep records
of an enterprise is not synonymous with the three other accounts which include all kinds of
calculations ... it is still much-needed to modern enterprise as the keeping of records [30] " and that
"to be accountant is totally different than being a keeper of journals" him actually having to be the
leader of the modern enterprise. [31]
Such a statement of position-especially coming from a servant of an economic culture as it
was the Academy for High Commercial and Industrial Studies could not be ignored by the
Rumanian specialist research and accounting world.
The causticity of the style, the direct attack against the patrimonial legal-economic school
make even the responses of the current accounting-science to become, sometimes, too
vehement.
From the whole battle of ideas, the current of the Romanian accounting thinking this domain
as a science is strengthened out, and the literature was enriched with new studies on this issue.
In fact, concerns about the nature of accounting research, attempts to establish it as an independent
scientific, occurring most often as a resonance of similar events throughout Europe, but inserting
into the process of maturation of Rumanian accounting doctrine, were met even before the year
1940.
In clarifying the doctrine on this subject, studies of Prof. M.I. Mihilescu [32] occupy a
prominent place.
After publishing a study in 1916 called "The role of registries in education and six years
later The science of accounting and its relations to other sciences, Professor M.I. Mihailescu
printed in 1926 one of the most interesting studies in those time when the emphasis was placed on
the social function of accounting.
The paper "Science of patrimony order the sociology of accounting" whose ideas are
found in "Treaty on accounting" continues over the years on the same level of concern in
"Accounting Paradoxes".
"Accounting is the social science that has, as object, order, whatever the branch of activity,
given the labor association with the capital, in order to obtain, through its investigative methods, a
best result of human action efforts, as an individual, moral or legal person, and to determine the
systems and methods of experimentation stating order and results in an accurate and fair action,
highlighting the responsibilities of factors. [33] ". This is in Professor M.I. Mihailescus concept a
complete definition because it specifies the proximate genus, the specific difference and the
purposes of accounting. Through it includes "the universality of the facts and not their limiting to
trade or industry, the field of application of the accounting encompassing all human activity that has
in regard labor and capital. [34]"
Accounting, as a science, has nothing to do with figures from the registers but has to teach
us how these figures should be coordinated within a framework, follow the laws, basic principles
and specific rules. [35]"
248
Between this way of seeing accounting and the Italian doctrine of the time, which made out
of the "Ragionerie" a complex of administrative, economic, computing and recording method ideas
there is a big difference, as even the author liked to clarify.
Accounting is not a conglomeration of sciences but an independent science, whose object is
"order in administrative, economic actions and their exact, fair finding in order to get a good result
from the association of labor with capital. [36] ". From a certain point, there can be made a
connection between this conception and the nearby encountered in French doctrine, in the sense
that, in both, accounting is regarded as an independent science. The author wishes to point out the
difference between his view and the French doctrine in the sense that while some believe
accounting "is a branch of mathematics" and others "a political economy [37] " he considers as
belonging to the social sciences, with its individuality.
Since laws form the basis of any science as soon as is found that accounting includes
scientific laws, which are the basic system for keeping records and operations recording methods
and modalities, it will be proven out until that accounting is a science [38]. Once formed, the
accounting science "should cease to belong to this or that country or age, by becoming the power of
observation out of time and space. [39] "
The regularity that "any accounting fact has to be recorded into two accounts at the same
time, each opposing each other" is raised by Professor M.I. Mihailescu to the rank of fundamental
law of the "double entry system".
In his view, the old principle is perpetuated, that says "the account that receives is the debtor
and the account giving is the creditor." The control represented by the equality DEBIT = CREDIT
is put at the base of the double-entry accounting system and elevated to the rank of law.
Accounting is a science that can be experienced in all branches of human activity. This
makes her stand in relationship with math, legal science, economics, business terminology and
technique.
Laws, rules and principles drawn from experiencing one science in the domain of other
sciences belong to the experienced science [40] stated Prof. M.I. Mihailescu [41].
Here then, in several studies appeared in the first four decades of the century, are
investigated many of the scientific aspects of accounting, of her connection with other sciences and
an attempt, with many original elements, to fundament it as "the science of patrimonial order.
Even though the work of Prof. MI Mihailescu in accounting could not exceed certain limits,
he saw in accounting the science that by order, education, equity, and providing the stipulation
"what provides contributing to the cleaning professional mores of the individual, family and state
[42] remains the scientific heritage of accounting as a serious study of a paper less studied
accounting. His work opened the way to new research.
Indeed, after a quarter century after the appearance of "Science of accounting and its
relation to other sciences," tefan Ioan Dumitrescu [43], Professor at the Academy for High
Commercial and Industrial Studies of Bucharest published "Elements and principles of accounting
science" casting a bridge to Prof. M.I. Mihailescus work. He too considers that accounting is a
science which teaches us to build the system that we use in managing wealth. "It is not the
computing says prof. tefan I. Dumitrescu - but the wealth management science, which some call
this patrimony order (see M.I. Mihailescu) [44].
In a paper published 26 years later, the proximity of opinion between the two teachers will
go up to giving the name of "science of patrimony order" as an expression synonymous to "
accounting science and preferred to the one used in this paper of 1947 "Science wealth
management. [45] ". The categories with which operates Professor tefan I. Dumitrescu are
"accounting science" and accounting. He used the former referring to the accounting as "science
of wealth management." When reference is made to the calculations system allowing the coverage
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and mastering of all economic phenomena and operations of a patrimony, the author uses the term
of "accounting".
Concerned with establishing the character and nature of accounting, skillfully using the
deductive method, he concludes that all conditions to consider accounting as a science are met. It is
permanent and universal, it has laws [46] and principles distinct from other sciences which, once
determined, remained the same for all, forever and can be considered wherever they are and they
would be investigated [47]. The science of accounting carries the seed of scientific and
philosophical thought [48].
He defines accounting as "a science that teaches us how to build mental, logical and rational
reckoning system, which we use taking into account the social laws that govern relationships
between individuals and the economic laws that define and govern the acts and events the exchange
of a wealth management constituting a patrimony [49]. "
Just as Prof. I.C. Pantu from Brasov had characterized the Romanian accounting literature,
40 years before, under the influence of the French literature and particularly of E. Lautey and Ad.
Guilbault, Professor St. I. Dumitrescu consideed the accounting science as part of the group of pure
reason sciences. Within the classification of science made by Bacon, the Romanian teacher set its
place the first group, that of pure mathematics. And when he operated with the classification of
sciences made by the philosopher and sociologist Auguste Compte, the place still in the group of
the mathematical sciences [50].
Participating in scientific controversies carried out on the character and nature of
accounting, he was against the employment of the accounting science within "the branch of social
sciences" as alleged by Prof. Sp. Iacobescu and general legal and economic patrimonialist schools.
In support to this argument, he brought as argument that the accuracy of which is capable of this
science, the accuracy of which this science is capable, accuracy foreign to social sciences. "We can
not consider accounting as a branch of social sciences - said Stefan Dumitrescu-because it is part of
the exact sciences, from mathematics. It is a kind of arithmetic with applications to trade with
application to what happens within a patrimony. [51] ". Just as Prof. M.I. Mihailescu did long
before by signaling the limits of the definition given to the accounting science by Professor Sp.
Iacobescu and serving up the same argument, he would also consider that it is not accounting the
science that deals with equal record exchange, but its technique, since science does not deal with
records. Instead, it is a science in that it shows us the laws by which you can keep track of research
and exchange of documents through their analysis, by showing how to get from them, without
mixing, the results and statements wanted [52].
Expressing his belief that a science of economic enterprise can not exist [53], he expresses
his disagreement towards prof.I.N.Evian, which seeing the prism of enterprise study considered it as
an arithmetic supplement to thee latter as something synonymous with the art or technique keeping
journals". The works would be about the same with the statement that medicine considers that
chemical and biological sciences are a practice, technique or art of preparing medicines. [54]
Except closest collaborators of Profesorului I. N. Evian, among which may be considered
Prof. I. Tarta, Dr. C. Purcrete, Dr. M. Birau, most authors of works in accounting saw in it an
independent science. Arguments in support of this differed depending on the school or the current
in which each belonged to.
By formulating a first response of the patrimonialist legal-economic school Prof. I. N.
Evian, published in 1940 under the title "Theories of accounts" Dr. P. Drgnescu-Brates, published
in the columns of the General Journal of Commerce and Accounting in September 1941 the article
Accounting - the Arithmetic Supplement of the Enterprise Economy Science?" [55].
Prof. I. N. Evians considerations on accounting are estimated to be the result of more
confusions. Him, dealing more with companies would not have known that the subject of an
enterprises accounting is formed not only by its wealth but the "patrimony". Also, the author of
250
"Theories of accounts" dealt with "the entrepreneur" in relation to net assets and results, and not of
the subject of natural or legal patrimony, the only one that has the right to the objects or the
elements patrimonial along with his rights.
Participating in scientific dispute generated by the emergence of "Theories of accounts",
Professor Sp. Iacobescu published in the columns of the "Bulletin of Accountants" journal, in the
months August-October 1942 observations on the study leas by I. N. Evian and his response to the
critique the latter made to the legal-economic theory of the representation of patrimony [56].
Referring to the assertion of Prof. I. N. Evian, Prof. Sp. Iacobescu states "Knowledge, classification
and the application of accounting laws is the work of the Accounting Science, when accounting
records, and how they are presented, may meet the qualifications of technical or more of an art,
without diminishing its main quality as Accounting Science [57].
Pausing on the same subject, Prof. C.G. Demetrescu, from the legal and economic
patrimonialist school, would gather, in a study published in 1947 under the title "Accounting -
science or not?" arguments to highlight the degree to which it meets all the requirements of a
science.
"A grave error that challenges the accountings nature as a science and count as technique, he says
in this study, is that nothing shows that accounting would not meet with success every condition
required for a science [58] ".
Among the authors who enjoyed, in the accounting world, a full recognition of their
scientific authority, Prof. V.M. Ioachim and Prof. D. Voina, two authors who wrote in accounting
only when they had something to say, supported accounting as a science.
Prof. Vasile M. Ioachim [59] considers accounting as "the science that deals with the rules,
then seeks systematically by using numbers, changes of a patrimony as a whole and in the elements
composing it, to have the patrimony status at any time, with the effects and causes of changes.[60] "
He shares the conception Prof. Sp. Iacobescu that "the science of accounting character is
revealed not in a specific classification of functions or the accounting theory - but a much higher
concept of establishment, description and formulation of truth in a particular area of human activity
[61].
Professor Dr. Dumitru Voina [62] participated, as expected, in the scientific dispute
regarding the character and nature of the accounting involved, this great school man and economic
culture, the tireless researcher on the field of accountinscience g.
In several studies and treaties he states and demonstrates its scientific nature and character
as independent science [63]. But, he reserves to the dispute with representatives of business
economics in our country whose leader was Prof. I.N. Evian a study entitled "The position of
accounting to the study of economic holdings - Accounting is an independent discipline" (Brasov,
1946). It soon became his the reference work and, by its author's scientific integrity of the argument
gains legally scientific controversy in the Romanian accounting thinking.
Filtering the value of the non-value from the rich accounting literature, avoiding to think
through quotes, Prof. D. Voina succeeds to substantiate accounting as an independent scientific
discipline and to clarify its position to the enterprise economy science.
Accounting and the accounting technique are, in his conception, two different things.
"Accounting is a creative laboratory from which came out principles, theories and rules
relating to stock movements made by carrying out economic and social phenomena. Instead, the
accounting technique contains concerns for the practical application of useful principles that govern
the digital movement of expression values. [64] " If one takes into account that it works for
knowledge and motion value representation with objective methods, that it has principles and
theories that have to be judged by the movement of values and functions and accounts are based,
that operations of compared calculation ensure more power knowledge and preliminary calculation
gives power provision, that it is useful, it has a special vocabulary and has created a specific
251
language, represents the answer to the question whether accounting met specific characteristics of
science -stressed Prof. D. Voina which is affirmative [65].
The term "accounting" defines the independent scientific discipline with its own status in the
family of social sciences, the economics system.
As a science, accounting has developed its own theoretical construction of a logical system
of an amount of axioms, principles, laws, regularities, concepts and theories by which the
condensation of knowledge on the group of facts and of phenomena which form its object study.
In the universe of value movements expressed in money and economical-juridical relations
causing legal settlements, regardless of the type of economic-social entity to which it is
circumscribed, accounting guides thinking both in the causal explanation and in predicting the
future course of facts and phenomena ranging the object. Like any science, accounting also has its
own object, a specific method, discovers laws and establishes regularities of it and has a vocabulary
of its own.
Based on cognitive fund established under the fundamental concepts, the principles, laws,
regularities, hypotheses and theories, accounting has developed and perfected a special technique,
adapted to each type of economic-social entity.
The transition from the plan of theoretical thinking to the plan of accounting applied to the
realities of a certain area (autonomous, businesses, public institutions, etc..) under specific
conditions of time and space, is completed in an information system (accounts, check balances,
balances, cost and price calculations, benchmarking, forecasting calculations) that together have
become accustomed - in Romanian - to be defined also by using the term of accounting.
2.2. CONCERNS FOR SIZING ACCOUNTING CALCULATIONS THE
ROMANIAN ECONOMIC THINKING
As science that governs knowledge the movements of commensurate values and the legal-
economic relations causing settlement in money from the social-economic units, the accounting
progress did not stop even for a moment.
Switching from a certain degree of knowledge condensation, providing causal explanation
of the future course of the group of facts and phenomena that have been established for her subject,
to a superior level marked the development of accounting as a science.
In terms of method, accounting bases a system of calculations.
If the elements - and we can say even significant elements - of the accounting calculation
system, consideration could be incurred empirically, ranking it in time before outlining the new
science, the completion and improvement of the calculation system was done after that, by science
intervention. For, as J.D. Bernal said, "science is a way to understand how to do something to make
it better". [66]
Every time, the progress in science had a beneficial influence on the accounting computing
system that was called to substantiate.
Naturally, the influence did not manifest in only one direction. Perfection in the computing
technique and applied accounting - occurring most often as the imperative of social-economic life
development stimulated, in turn the development of the accounting science.
One can say that the classic trend PRODUCTION - TECHNOLOGY SCIENCE acted
in the evolution of the accounting computing system, in outlining its sectors and its relations with
the accounting science close to today.
From the rapid development of the Italian republic trade was born the idea of improving the
system of simple bookkeeping, and without any doubt in the counter of a Venetian banker was
formed the scientific system of double entry [67].
252
In an era when the double entry seemed to be reigning easily in big business, the simple
entry still resisted.
Until the late nineteenth century, the accounting calculating system had fully taken shape
only in the accounts and balance sheet sectors.
The seeds of new computing sectors emerged with the creation of capitalist enterprise began
to bear fruit. In particular, firms producing goods for markets made a purpose out of gain and a
reasoning to exist.
The calculation of costs and short-term results, setting budgets, while benchmarking the
progress of work and space were the new values of the calculation sheet [68]. To ensure their
computing sectors less scientific rigor, accuracy, clarity and flexibility enjoyed by the accounts,
economic thinking is concerned about the new dimension of computer accounting system.
In the forefront of these concerns we find German economic thinking. A product of these
worries in terms of scientific theory and practical applications were the setting down of rules for
accounting organization (Grundstze fr Buchfhrungslinien) subject to the Ordinance RKW of 11
November 1937.
Under the name "Rechnungswesen", the accounting rules include the full set of calculations
in an undertaking, namely:
(A) the accounts and balance sheet sector
(B)-costing computing
(C) the statistical calculation sector
(D) preliminary calculations (budgetary).
Stressing the principle of general calculation, Schmalenbach said: "Where there is no
organic link between them of all forms of general calculation, there double work can not be
avoided... A general inorganic calculation means lack of discipline in the enterprise"[69]. In the
view of Professor Wilhelm Kalveram, representative of the economic higher education in Reich
Committee for Economy Exploitation, the sector of accounting based on double entry had to receive
the function of harmonizing all figures and calculations employed all forms of business. It would
therefore be a spine on which all other calculations would be built on. [70]
The Romanian accounting thinking did not remain passive in the turmoil of trying to resize
the accounting computing system. Concerns for the development of the statistical function for the
system of accounts and cost improvement are met with Prof. George Alesseanu. The cost
calculation was taken care of Prof. I. Grbacea from the Academy of Advanced Commercial and
Industrial Studies in Cluj in the first work of industrial accounting of our specialty literature
published in 1927 under the title "Industrial Organization and Accounting." In his conception, the
calculation of cost price is considered as the "businesss compass" serving to the control of various
parts of manufacturing. "The figures of this section, as Prof. I. Grbacea said - give the entrepreneur
real profitability of both the company and of all phases of production. [71] "
Victor Slavescu [72] is noted in the accounting literature with an interesting study on the
balance sheet since 1928. In his Critical Analysis of the enterprises balance sheet he sees the
balance not only as a technical accounting work (on this issue he does not stay too much) but as a
source of information about the company structure, composition and organization of forces
available in connection with property matters at hand. It also shows the results obtained in a given
period, indicates but does not determine. "Determination of gain, he says, is not a function of the
balance sheet, but of the profit and loss account, which accompanies and completes the balance
sheet [73].
In his conception, "the balance reflects a statement in figures of the situation at a time, on an
enterprises patrimony and funds employed for its purchase, made up according to fixed rules and
principles of accounting".[74]
253
This study is an analysis model of changes in wealth, of the debt, earnings, profitability,
liquidity and risks of an enterprise based on the balance sheet. For the analytical results to be
reliable or at least close to the truth a series of balance, over several years, should be investigated,
said Victor Slavescu, and at the same time to submit a list available items compiled in such a way,
that to allow valid judgments and assessments".[75]
"The Inventory and Balance Sheet show to a company leaders the running business,
indicating them caution, reserve or change in their working methods, if the results are negative, or
list them for future guidance, if results are positive". [76]
In connection to an economic plan, a financial plan and a detention review, all three
regarded as absolutely necessary calculations to be made before the establishment of an economic
unit, references are found at Prof. Sp. Iacobescu and Alex. Sorescu. [77]
Budgetary control "can be applied, states since 1936 C. Drobota [78] - in all commercial and
industrial enterprises and in general to all forms of human activity". [79]
The general budget of the company rests, in his reasoning- on five partial budgets relating to
sales, production, procurement of materials, expenses and the financial aspect. Two of the three
tracking methods are based on the budget execution accounts. Of these one is calling out orders and
accounts and the other balance sheet accounts. The third statistical method serves on statistic
processes for budgetary control.
In conclusion, until 1942 important steps were made in our development of new calculation
sectors [80], however they themselves were most often treated as something co-existing outside the
sector of accounts. If, however, also connections would have been tried in the calculation sector,
they appeared as simple as possible variants, and not organic development.
The first attempt to resize accounting computing system in the Romanian specialized
literature is due to prof. I. N. Evian. This in a statement made as part of a conference on Normarea
contabilitii ntreprinderilor de stat i particulare din Romnia, organized by the Association of
Chartered Accountants developing the theme "What is accounting ?"[81].
"The identification of accounting recording with accounting is an outdated concept, which
applies to past ages but not to the current century overall progress in all technical and scientific
fields". [82]
Accounting refers to "the whole business or technical computing or the technique of
computing" and usually consists of four kinds of calculation, namely:
(A) single or double-entry;
(B)- computing or cost calculation;
(C)- statistics or comparative counting
(D) pre-counting or the enterprises budget [83].
"Watching them in order of their application in time, these four types of calculation allows
to state that the budget plan is before the others and is directed exclusively toward the future, that
cost calculation goes along with the cost of production of enterprises, but is directed towards future,
while accounting and statistical count is still in the process of production, especially that accounting
is oriented toward the past, only encompassing historical figures, while the statistics counting,
although processing the material provided by the accounting process, it is still oriented towards the
future".[84]
Promoter of the current of renewing of the Romanian accounting thinking, prof. Dumitru
Voina was also concerned about sizing the accounting computing system. Though the word
accounting - this eminent teacher says- is used more in a narrow sense, expressing the principles by
which the movements of values are processed and the technique of applying these principles, "it can
and should be used as a comprehensive expression that indicates not only that relates exclusively to
the accounts and records, but also other operations connected with the whole mechanism of figures
from an exploitation".[85] To achieve its fundamental goals of science that governs the movements
254
of values that are causing economic and legal relations phenomena "accounting wants to embrace
the whole mechanism of figures" and carries out its operations into four sectors.
To include "the accounts sector", "the cost computing sector", the compared calculation
sector (statistically) and the preliminary calculation of the (budget) sector within the sphere of
accounting does not mean that the concept of accounting undergoes dilution with heterogeneous
ingredients" . "These four sectors and sometimes that of the cost are not isolated but in mutual
relationship, being coordinated in a unique and organic framework"[86].
In 1947 was published in "Social-Economic Monitoring", year XIV, Series II (No.1-6-
Dec.1947), an interesting study signed by Prof. D. Rusu, entitled "Accounting for the studies
program of foreign universities
The concerns of accounting thinkers in different countries prove to have had the same trends
to indicate the position of accounting, its subject matter and the laws governing the processing of
accounting. From here were opened the ways to adopt a framework of accounts. It would thus offer
the opportunity of unifying accounting technique, a fact from which economic life, especially social
work communities, will gain greater benefit."
As for the views of economists in accounting thinkers in the above study, prof. D.Rusu
highlights, more especially prof. Finneys opinion at Northwestern University, editor of the Journal
of Accountancy, the department of students, Chicago.
The following tri-account concept is presented:
Asset = Liability + Equity
With the six accounting laws, as follows:
1. If an asset increases........... and is debited
another asset is reduced
or a liability increases
or increases the equity
.. and is credited
2. If an asset is reduced ..... and is credited
another asset increases
or reduce a liability
or reduces equity
.. and is debited
3. If a liability increases .. and is credited
another liability is reduced
or increases an asset
or equity shrinks
.. and is debited
4. If a liability is reduced ..... and is debited
another liability increases
or reduces an asset
or increases the equity
.. and is credited
5. If equity increases ... and is credited
another asset increases
or reduces the liability
.. and is debited
6. If equity is reduced .. and is debited
another asset is reduced
or increases the liability
.. and is credited
The author presents for the first time in the Romanian economic literature, conceptions of
prestigious scientific personalities of accounting. The author insists on the dimensions of
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accounting as a science and states: "A scientific discipline whose principles are more specifically
outlined by the thinking scholars in different countries, is accounting. Its laws and principles have
not, indeed, brought a revolution in the economic space. Accounting made a name for itself in the
social and economic life, and has contributed and still contributes largely to the progress of
mankind, inspiring by its knowledge and method confidence in future actions.
Even since 1947, Prof. D. Rusu envisages, using the original works of authors from across
the ocean, the new dimensions of accounting.
Benchmarking, cost calculation, the presentation of comparative data using index numbers,
the problem of incidental costs, production costs, interest cost as part of the calculation of recovery
and generally the valuing calculation receives, shows Prof. D. Rusu, a significant development in
the representative work of American literature "Principles of Accounting."
"Accounting as a science is a sum of accumulated and established accounting rules, made
systematically, regarding in general principles governing the application of these rules as laws"..."
It is clear that the study of accounting thoroughly discovers the power of analysis, creates skills in
healthy thinking and facilitates accurate trial from cause to effect, and vice versa". [87].
On the sectors of accounting calculation was also concerned prof. Dumitru D. Haigan,[88]
from the Academy of Advanced Commercial and Industrial Studies in Cluj-Brasov. By
"accounting," he means "all calculations to be made and kept within an economic enterprise
regardless of what they refer to."
Accounting covers five sectors of expenses such as:
(1), the actual accounting and the balance sheet;
(2) own cost-calculation or reckoning;
(3) business-economic statistics;
(4)-budgeting or cost estimate;
(5), calculating the short term result.
Prof. V.M . Ioachim therefore saw that when in accounting "sectors of computing"[89] or
"ways and forms of calculation [90] we find ourselves in the field of accounting technique and not
science.
As for the technical application, accounting in larger companies followed step by step the
progress made abroad, including in the work of accounting: budget, calculation, statistics [91].
For the progress of humans, science is more today than it was in the past. It can be
appreciated that in the future its role will increase.
That governs accounting regularities. Parallel efforts to achieve new stable accumulation of
knowledge concerns fall more facets to create its system of calculation. This accounting technique
has become increasingly dependent on science.
Without neglecting the development of accounting as a science that takes place under its
domestic laws, and influence is worth mentioning that the progress of productive forces, scientific-
technical revolution and the contemporary social order weather here continues to be felt on its
evolution. It is an action mediated by improvement and rationalization occurring in its calculations,
in the accounting technique.
REFERENCES / ENDNOTES
[1] The paper has 283 pages, and the problems treated are: current accounts, definition of keeping records, the
purpose of keeping records, the formation of parties, the problem of accounting simple and double entry.
[2] The annual has 56 pages and is prepared according to the 1899 curriculum and is printed in Craiova.
[3] Tratatul teoretic i practic de Contabilitate i administraie pentru comerciu, agricultur i banc contains
462 pages and is the first work including, in a "treaty" knowledge of management and accounting as required
256
by a "true and good accountant" for him to "become the right hand of the employer".inerea registrelor and
contabilitatea propriu zis are considered to be the two branches of accounting. Zamfir t. Petrescu is the
adept of the account personification theory and consideres accounting to be the science of accounts. As Th.
tefnescu, he considers the journal as the basis of any accounting.
[4] The study printed in Bucharest at the Carol Gbl printing works is 61 pages long.
[5] Vol. I, for IV grade shows up in 1900 and vol.II destined for the V grade is printed a year later.
[6] Note: Born in Bucharest in 1842, his parents were merchants. After the lower school ended at "St. Sava
highschool, goes from 1864 to the first school of commerce established in Romania in that year. From 1867,
after the school of commerce and until 1870 served as chief accountant and later as a procurator of the
Company for the exploitation of oil. Attended, during this period, the commercial law course of V. Boerescu
and of Political Economy of Al. Vericeanu and prepared "very diligently". Named as general secretary of the
Ministry of Cults and Public Instruction from 1879. Making a name for himself, due to the general culture and
special qualities as organizer, the General Assembly of Shareholders of National Bank of Romania, founded in
1880, chose him as director on 15 July 1880. To document the institute in organizing this first issue goes to
France where he investigated the Bank of France, Marseille and Versailes Banks. After 30 years of brilliant
and fruitful teaching activity, he is retired from teaching in 1901, remaining as Director of National Bank of
Romania until November 7, 1909 when at the age of 67 he dies.
[7] Interesting referrences on accounting in Noua lege de organizare i nouele programe ale colilor de
comerciu, Bucharest, 1904.
[8] Especially Edition VII of 1908.
[9] Especially when speaking of the application Accounting in the management of railways.
[10] About the technique of reflecting in the General Merchandise account.
[11] Ibidem, p. 9.
[12] Bernal, J. D., tiina n istoria societii, Bucureti, Ed. Politic, 1964, p.18.
[13] Rusu, D., Teorii i siteme de conducere a contabilitii pe plan mondial, p.33.
[14] The simple principle of Luca Paciolo that there is no receiving without giving continued by Ludovico Flori
in a theory considered by J. Fr. Schar as the first theory of ( Ioachim V. M. -Momentul Rusu Abrudeanu n
evoluia cunotinelor contabile.Buc.,1940,p.9)
[15] Coffy, R.P., Tableau synoptique des Principes Gnraux de la Tnue des livres parties doubles, Paris, 1833.
[16] Cf. Slvesc, V., Obiect, metod i doctrin n tiina ntreprinderilor, Bucureti, 1927, p.33.
[17] Sombart,W,. Lappoge du capitalisme, vol.II, Paris, citat dup Ioachim V.M.,Tratat de contabilitate, cu
aplicaie la industrie, vol.I, Bucureti, 1944, p.24.
[18] Also see Slvescu, V., Quoted Paper p.50.
[19] Became professor at the School of Administrative Sciences and Documentation in a book he published under
the title Curs de contabilitate comercial i public speeches made to the students between the years
1929/1930 and 1930/1931. Besides this, he also publishes Metoda contabilitii n partid dubl i cteva
noiuni din legea contabilitii publice, Bucureti, Tip., Lupta, 1942.
[20] Badea, C. George, Quoted Paper, prefa, p.III.
[21] This attribute was seen in Revista General de Comer i Contabilitate nr.12/1931,p.530.
[22] Data on the life and the accounting work of prof. Ion N. Evian presented in annexe nr.3.
[23] Evian, Ion N., Teoriile conturilor, Cluj, Imprimeria Fondul Crilor Funduare, 1940, p.11.
[24] Evian, Ion, N., Contabilitatea dubl - nelegerea raional a economiei acestui sistem de nregistrri
contabile, Bucureti, 1946, p.8.
[25] Ibidem, p.160.
[26] Evian, Ion, N., Contabilitatea industrial, Bucureti, 1947, p.3.
[27] Evian, Ion, N., Teoriile conturilor, op.cit., p.11.
[28] Ibidem, p.14.
[29] Ibidem, p.11.
[30] Evian, Ion, N., Contabilitatea dubl...p.8.
[31] Ibidem, p.8.
[32] Data on prof. M. I. Mihilescu are presented in annexe nr. 3.
[33] I. M. Mihilescu, tiina ordinei patrimoniului - Sociologia contabilitii, Bucureti, Tip.Rsritul, 1926,
p.54.
[34] Ibidem, p.56.
[35] Mihilescu,M.I., Paradoxe contabile, Bucureti, Inst.de Arte Grafice ranu & Co, 1939, p.8.
[36] Ibidem, p.55.
[37] Ibidem, p.56.
[38] Mihilescu, M.I., Tratat de contabilitate, op.cit., p.7.
257
[39] Mihilescu, M.I., tiina ordinei patrimoniului - Sociologia contabilitii, p.57
[40] Here's how he supports this sentence: It is wrong to believe that if the facts of accounting can be represented as
a mathematical equation that would be a mathematical law. DEBIT = CREDIT is not a law but a mathematical
accounting system based on serial records, but this law is so precise that the formula may be a mathematical
equation ( tiina ordinei patrimoniului, p.21).Also, the fact that the rights registered in different accounts or
debt arising from transactions between the parties can not conclude that accounting knowledge would "depend
on the legal science" (Ibidem, p.61). The fact that science is about accounting: capital, labor, production,
consumption, cost, etc.. can not be concluded that it is part of political economics branch economy (p.61). The
relationship of science and technology accounting agricultural equipment, industrial, commercial, banking,
etc.. to obtain other views of the same order, i.e. we have "outsourced accounting in agriculture in agriculture,
accounting in industry, trade accounting, bank accounts (Tratat de contabilitate, p.21).
[41] Ibidem, p.21.
[42] Cf. Mihilescu, M. I., tiina ordinei i patrimoniului, p.74.
[43] Data on the life and accounting work of prof. tefan Ioan Dumitrescu are presented in annexe nr. 3.
[44] Dumitrescu, tefan, I., Elemente i principii de tiin contabil, Bucureti, 1947, p.30.
[45] Cf. Dumitrescu, tefan, I., i Toma, Dimitrie, Principii ale contabilitii, Bucureti, EDP, 1973, p.11.
[46] Seeing in the law "the regularity of succession", Professor Stefan I. Dumitrescu summarizes the following four
laws of science accounting:
(1)- Law of equal contrast, the estimate of everything that moves in or coming out of a property is equal to the
same patrimonys antithesis;
(2)- Any economic phenomenon can not change by its thesis and antithesis than the substance and the legal or
capital relation which includes results;
(3)- Accounting can not catch than events relating to: patrimony covered by the system. It does not catch and retain
foreign phenomena;
(4)- In an accounting system can be caught only acts and phenomena that are measurable, i.e. can quantized and
estimated, as expressed through a common denominator (Quoted Paper, p.39).
[47] Quoted Paper, p.7.
[48] Ibidem, p.40.
[49] Ibidem, p.72.
[50] Over the years he will revert to this appointment and in view of its scientific character he would conclude that
it "may be considered to be a borderline discipline, closely related to other sciences: mathematic, legal and
economic (Cf. Dumitrescu, t. I. i Toma, D., Principii ale contabilitii, Quoted Paper p.17).Quoted Paper.,
p.35.
[51] Dumitrescu, tefan, I., Elemente i principii de tiin contabil , p.25.
[52] Ibidem, p.25.
[53] Ibidem, p.1.
[54] Ibidem, p.26.
[55] Drgnescu-Brate, P., Contabilitatea Suplimentul Aritmetic al tiinei Economiei ntreprinderilor? In:
Revista General de Comer i Contabilitate nr.9/1941, pp.354-362.
[56] Extract from Bulletin of the accountants, the study appears in the same year under the title "Problems of
philosophy. Critical remarks concerning the theories of accounts ".
[57] Iacobescu, Spiridon, Probleme de filosofie contabil, Bucharest, 1942, p.13.
[58] Demetrescu,C.G., Contabilitatea este sau nu tiin?, 1947, p.31.
[59] Data on the life and accounting work of prof. Vasile M. Ioachim are presented in annexe nr.3.
[60] Ioachim, dr .V. M., Tratat de Contabilitate cu aplicaie la industrie,vol.I, Contabilitate general, Bucureti,
Inst.de Arte grafice Bucovina, 1944, p.5.
[61] Ioachim, dr. V. M., Momentul Rusu Abrudeanu n evoluia cunotinelor contabile, Bucureti, 1940, p.20.
[62] See annexe nr.3.
[63] These studies were especially taken into consideration: Universalitatea materiei contabile (Observatorul
Social-Economic, Braov, Anul X, Seria II), Nr.2-3, Martie-Iunie 1943), Sectoarele de calcul ale contabilitii
(Observatorul Social-Economic, Anul X, seria II,nr.4, Iulie-August 1943) and the universitary mannuals: Curs
de contabilitate general (Braov,Ed.Academiei,1944) and Contabilitatea general (Braov, Ed. Academiei,
1947).
[64] Voina,D., Poziia contabilitii fa de studiul exploatrilor economice-Contabilitatea este o disciplin
independent, Braov, Institutul de Cercetri Economice i Sociale, 1946, p.69.
[65] Voina, D., Contabilitate general, Braov, Ed. Academiei, 1947, pp. 21
[66] Bernal, J. D. quoted work, p.23.
258
[67] Of this truth an illustrious predecessor. Leon Say,seeks to persuade us in an interesting statement read at the
meeting of the Academy of Moral and Political Sciences in France from 19 dec.1885 entitled Priviri asupra
contabilitii n partid dubl translated into Romanian by Alex. Tnsescu i published n Rev. General de
Comer i Contabilitate 1924, pp.322-328; 344-351.
[68] Cost calculation is given greater prominence in the accounting literature only in the second half of last century.
Thus: In France Ad.Guilbault work is concerned Trait de la comptabilit et dadministration industrielle
appeared in 1875, putting the accounting industry and cost calculated with accounting controlled by a serious
foundation (Also see V. M. Ioachim, Tratat de contabilitate, vol.II, Bucureti, 1945, p.14 .u.).The American
businesses increased competition compels them to pass the leadership of the "empirical" in their scientific
organization. The Taylorist movement renewed all and therefore accounting too. Prof. Charter Harrison,
Member of the National Association of Cost Accountants established in 1919 becomes the promoter of
scientific fundamenting the science of costs (see Petru Drgnescu-Brate Congresul de Contabilitate de la
New-York, Bucureti, 1930, p.38). In Germany, E. Schmalenbach prints in 1925 his work Grundlagen der
Selbstkostenrechnung und Preispolitik in which he gathered all the ideas about costing troubling since 1899
(see Ion V. Tarta: O reform de normare a contabilitii cu un apendice despre bilanul unitar, Braov, Tip.
Astra, 1945, p.13 .u.). Soon after, in the accounting literature appears the idea of quarterly or even monthly
gross balances, made only on the basis of accounting without editing the inventory. Lilienthal Mler Dr. in
Fabriksorganisation, Fabrikbuchfhrung u. Selbstkosterechnung, appeared in Berlin in 1926, gives the first
monograph in which not only he exposes these ideas in theory but then applies it to a factory of sewing
machines (see V. M. Ioachim, op. cit. vol.II, p.15). Stopping on sector of budget calculation, it should be noted
that the idea of budget is not so recent in accounting. At least in public accounting it is very old. In England
and other European countries and economic plans they were known even before the introduction of the use of
budgetary control in the United States (Act of June 10, 1921 "Budget and accounting bill"). In France the
introduction of the economic plan is due in large measure by H. Fayol whose ideas on this issue saw the light
of day in "Administration industrielle et gnrale" published in 1916. After the 1920 economic crisis in the
U.S. are beginning to appear works recommended "budget" as a means to successfully fight against the crisis.
James Mc Kinsey publishes "Budgetary Control" in 1922 in New York. Then follows: Fordham-Trugley with
Organisation and budgetary control in manufactoring (New-York,1924), Coonley Howard with The
development of industrial budgetary control (Prag,1924), Brure Henry and Lazarus with Business budget
and budgetary control (New-York,1926). In Europe, Dr.Ing.M.R.Lehmann, decicates a chapter to the budget
in his work of 1925 Die industrielle Kalkulation. Then follows prof. Martin Lohman with Der
Wirtschaftsplan der Unternehmung Die Kaufmannische Budgetrechnung (Berlin, Leipzig, Wien, 1930). The
preoccupations are continued by Schmalenbach in his 1931 paper Die Aufstellung von Finanzplnen and
taken throughout the RKW, where he held the position of president of the accounting sector, until the
legiferation of 1937.
[69] Schmalenbach, E., Der Kontenrahmen, G. A. Gloeckner, Verlagsbuchhandlung n Leipzig,1939,p.5 quoted by
Ion, V., Tara , O reform de normare a contabilitii cu un apendice despre bilanul unitar, Braov, 1945, p.14.
[70] Grbacea, Dr. I. I., Organizare i contabilitate industrial, Bucureti, Inst. de Arte grafice Mercur, 1927,
p.71.
[71] Cf. Tara, Ion, V., quoted, p.28
[72] Data on the life and accounting work are presented in annexe nr. 3.
[73] Slvescu, Victor, Analiza critic a bilanului unei ntreprinderi, Bucharest, Curierul judiciar, 1928, p.11.
[74] Ibidem, p.6.
[75] Ibidem, p.17.
[76] Ibidem, p.14.
[77] Iacobescu, Sp. i Sorescu, Al., Curs de Contabilitate Comercial General, vol.I, op.cit., pp.181-185
[78] Corneliu Drobot printed: Bugetul, bilanul i contabilitatea ntreprinderilor (1936); Rezerve i amortismente
n ntreprinderi (1938), precum i lucrrile: Controlul bugetar (1939). Tiprete n 1943 Analiza bilanului cu
aplicaiuni speciale i formulare tip bilan i cont de profit i pierdere pentru ntreprinderile de asigurare.
[79] Drobot, Corneliu, Bugetul, bilanul i contabilitatea ntreprinderii, Bucureti, 1936, p.1.
[80] Presented by the works of Prof. V. Slvescu, Analiza critic a bilanului unei ntreprinderi (Buc.,1928) and of
prof. Bungeteanu, Const., Bilanul i rentabilitatea ntreprinderii (Buc.,1935) and Rentabilitatea ntreprinderii
i preul de cost (Buc., 1935).
[81] The conference takes place at 25
th
of November 1942.
[82] Evian, I. N., Contabilitatea dubl-nelegerea raional a economiei acestui sistem de nregistrri contabile,
op.cit., pp. 12-13.
[83] Evian, I. N., quoted., p.8 .u.
[84] Evian, Ion, N., Contabilitatea industrial, Bucureti, 1947, pp. 62-63.
259
[85] Voina, D., Contabilitate general, Op.cit., p. 27.
[86] Voina, D., quoted., pp.26-27.
[87] Walton-Accounting Langer, Lectura 1, p.1. Citat dup D. Rusu, Contabilitatea n programul de studii la
universitile din streintate, 1948, p.9.
[88] Prof. Dumitru Haigan public n 1945 o lucrare intitulat Studierea bilanului cu ajutorul statisticii
precedat de un studiu aprut tot n acelai an Statistica ntreprinderii economice i bilanul.Noiuni
preliminare. Un an mai trziu continu seria studiilor asupra bilanului cu Analiza bilanului unei
ntreprinderi pe timp de 10 ani.
[89] Termen folosit de prof. D. Voina.
[90] Termeni preferai de prof. I. N. Evian.
[91] Ioachim, V. M., Tratat de Contabilitate, vol.I, op. cit., p.23.
260
THE IMPLICATION OF THE ACCOUNTING PROFESSION IN THE ACCOUNTING
REGULATION FOR MICRO-ENTITIES IN THE ACTUAL ECONOMIC CONTEXT:
DEBATES AND OPINIONS
Professor PhD. Ramona NEAG
ramona.neag@ea.upm.ro, ramonaneag@yahoo.com
Assistant PhD. Student Irina Doina PCAN
irina.pascan@ea.upm.ro
Lecturer PhD. Student Ema MACA
ema.masca@ea.upm.ro
Assistant PhD. Beatrice Anemari TEFAN
beatrice.stefan@ea.upm.ro
Petru Maior University, Trgu Mures, Romania
Abstract:
The accounting profession has been and continues to be, undergoing changes in terms of their market place
and in the regulatory environment of their different jurisdictions. Based on the study of the recent European literature
on the field of the reduction of disclosure requirements for the micro-entities and considering the results of a
research accomplished by our team in Mures county, Romania, regarding the opportunity for different accounting
requirements for the Romanian micro-entities, this paper aims to identify the role of the Romanian accounting
profession in the accounting regulation for so called micro-entities. Whether and in what extent the Romanian
accounting professions should be involved actively in the process of accounting regulation? The organization of a
debate on this subject by the Romanian accounting regulator with the accounting profession is opportune?
Professional accounting bodies are pointing out the trends and future issues that accountants need to be aware of and
either explicitly or implicitly, suggest ways in which the profession has to develop. The Romanian accounting
profession is prepared for these ways. Some of these questions may find answer in our paper. Our conclusions
underline the idea that the active participation of the accounting profession in validating or invalidating some
Romanian accounting requirements may be considered an important step.
Key words: micro-entities, accounting regulation, disclosure requirements, accounting profession,
simplification, administrative burden
JEL Classification: M 41
1. RECENT IDEAS IN THE EUROPEAN FIELD REGARDING THE NECESITY
FOR SIMPLIFICATION AND REDUCTION OF COSTS RELATED TO ACCOUNTING
AND AUDITING
In the context of better regulation, the European Commission considered opportune to
simplify the legislative framework for European businesses, in co-operation with the European
Parliament and the Member States of the European Union. The stated objective is to ensure that the
Community legislation in the fields of company law, accounting and auditing corresponds to
todays business needs and allows European businesses to compete more effectively and to be more
successful in a highly competitive global environment. This initiative represents a part of the
Commission concerns regarding the reduction of administrative burdens, especially for the SMEs.
A first step towards this direction was made since 2003, when, by the Recommendation
2003/361/CEE, the Commission defined the micro, small and medium-sized enterprises based on
three criteria. The second article of the Recommendation defined the micro-entities as companies
with less than ten employees, a turnover below two millions Euros and/or a balance sheet total
below two millions Euros [1]. The consultations with Member States however indicated that these
thresholds are too high for accounting purposes.
261
Nowadays, the micro-entities are subjected to the same accounting regulations as large
entities, but, over time, the European Union found that extensive reporting rules applied to those
entities were not commensurate with their specific accounting needs, created additional costs and
might hinder efficient use of capital for productive purposes.
These ideas and suggestions were initially discussed with Member States in the Accounting
Regulatory Committee (ARC) during several meetings held since December 2006
i
.
The European Council of 8 and 9 March 2007 underlined, in the Presidency conclusions, the
importance of reducing the administrative burdens in order to stimulate the European economy,
considering the possible advantages that can be created for the small and medium sized entities. The
necessity of a joint effort from both the European Union and Member States to reduce
administrative burdens was also emphasized. Accounting and auditing have been identified as areas
in which the administrative burdens on companies within the Community can be reduced.
As a result of these discussions, in June 2007, the Commission published a report [2]
identifying the changes that could affect the accounting directives. One of the measures proposed
was to introduce, in the Fourth Directive, a new category of entities, the so called micro-entities and
to exempt micro-entities from the application of the accounting directives.
Stakeholders were invited to give their views on whether they agree with the exemption of
micro-entities from the scope of the Fourth Directive and on the possible definition for these micro-
entities (less than ten employees, balance sheet total below 500.000 Euros and turnover below
1.000.000 Euros).
In March 2009, the Commission of the European Communities issued a Proposal for a
Directive of the European Parliament and of the Council amending Council Directive 78/660/EEC
on the annual accounts of certain types of companies regarding micro-entities [3]. The mentioned
proposal suggests that a category of micro-entities as the smallest enterprises could be introduced
into the EU legislative framework. The Commission Proposal defines the micro-entities as
entities that, at the date of the balance sheet, do not exceed two of the three following criteria:
balance sheet total of 500.000 Euros, net turnover of 1.000.000 Euros and/or average number of
employees in the financial year of 10.
Subsequently, the Directive 2009/49/EC of the European Parliament and of the Council of
18 June 2009 amending Council Directives 78/660/EEC and 83/349/EEC regarding certain
disclosure requirements for medium-sized companies, stipulates the reduction of disclosure
requirements for the small and medium sized entities. The objective of this Directive is to reduce
the administrative burden regarding certain disclosure requirements for the medium-sized
companies and to eliminate the obligation to draw up consolidated accounts.
In February 2010, the European Parliament discussed (first reading), the Draft Legislative
Resolution on the proposal for a directive of the European Parliament and of the Council amending
Council Directive 78/660/EEC on the annual accounts of certain types of companies regarding
micro-entities, presented by the Committee of Legal Affairs [4].
The mentioned Draft refers to the fact that the micro-entities are often subject to the same
reporting rules as larger companies. Those rules put a burden on them which is not in proportion to
their size. Therefore it should be possible to exempt micro-entities from the obligation to draw up
annual accounts, even if such accounts provide an input for statistical information. However, micro-
entities must still be subject to the obligation to keep records showing the company's business
transactions and financial situation as a minimum standard to which Member States remain free to
add further obligations.
Member States may provide for an exemption from the obligations under this Directive for
companies which on their balance-sheet dates do not exceed the limits of two of the three criteria
from the proposal for a directive.
262
At the same time, when implementing Directive 78/660/EEC, Member States should take
into account the specific conditions and needs of their own market. So, it is underlined the fact that
Member States have the possibility to exempt or not the micro-entities from the obligations stated
in the Fourth Directive, taking into account the specific conditions and needs of their own market.
2. STUDY ON THE OPPORTUNITY FOR DIFFERENT ACCOUNTING
REQUIREMENTS FOR ROMANIAN MICRO-ENTITIES
In November 2009, the Ministry of Finance issued the Order no. 3055 for the approval of
the accounting regulation in conformity with the Fourth Directive of the European Economic
Communities [5]. The mentioned Order abolished the Romanian accounting regulation in force
until 31 December 2009 (the Order 1752 from 2005 for the approval of the accounting regulation in
conformity with the Fourth Directive of the European Economic Communities). Considering the
recent release of this new regulation, we expected to find within the provisions of this Order aspects
related to the debates at European level.
But, as we pointed out in a paper published in 2009 [6], although the Fourth Directive aims
to reduce the disclosure requirements for the small and medium-sized entities, the new Romanian
accounting regulation amplifies those requirements and contains even more complex provisions,
compared to the old accounting regulation.
Next, we present some requirements from the new accounting regulation, which we consider
to be burdensome or too complex for the accounting of a micro-entity:
The presentation of the users of the financial information follows the provisions from the
Framework for the Preparation and Presentation of Financial Statements issued by IASC. But, the
users of the financial statements published by the micro-entities are rarely the investors, the
employees, the suppliers, the customers and the general public. The real users of the financial
statements prepared by the micro-entities are mainly the lenders (banks) and the government and
other agencies. We consider that it would have been more useful if the Romanian regulation
presented the real users of the financial statements, with their specific needs, considering the
specific conditions and realities from our country.
The use of a new concept, the normal capacity of the production facilities, concept taken
from IAS 2 Inventories. Generally, the determination of the cost of conversion using the normal
capacity of the production facilities implies difficult calculation. We consider that the effort and
the costs to produce this information are too high in relation with the benefits provided.
A similar issue related to the cost-benefit report is the evaluation of property, plant and
equipment and of intangible assets. In the new regulation, the value in use can be established by
specialists or by the employees from the technical or economic department of the entity. For the
micro-entities, all of those estimations, required to the specialists or employees, increase the costs
and also we are not convinced that the financial information will be fairer than before. If so, who
will be the user of this fairer information?
The new regulation presents many aspects according to IAS 36 Impairment of assets. It
presents requirements from IAS 36 in order to assess whether there is any indication that an asset
may be impaired and an entity shall consider accordingly the indications related to internal and
external sources. We consider that the micro-entities do not have the capacity to organize the
analysis of impairment and all the techniques presented for those cash flows cannot be realized with
the employees of these companies.
A significant error correction, as stated in the Order, may not be necessary to the real users
of financial information provided by micro-entities. In our opinion, the correction of these errors
263
may be reflected in the profit and loss account when these errors occur. Even if the error is
significant, whose decisions can be influenced?
We consider that R&D expenses are, usually, not significant in the total assets of the balance
sheet, which is why the requests provided in the mentioned Order are not adequate for the micro-
entities. We consider that a more appropriate requirement can be that from IFRS for SMEs: An
entity shall recognise expenditure incurred internally on an intangible item, including all
expenditure for both research and development activities, as an expense when it is incurred unless it
forms part of the cost of another asset that meets the recognition criteria in this IFRS.
Our opinion is that the complexity of derivatives disclosure is not required for the micro-
entities. The options, forwards and swap operations may not be used by these companies because
the transactions are too complex for the so called micro-entities.
The Order refers to the time-value of money in estimating the value of provisions.
Considering the time-value of money, specialized persons must actualize the provisions and this
process will generate a supplementary cost on behalf of the micro-entities. Does the cost-benefit
report justify this approach?
The extended presentation of the internal control could be justified if the regulation will
provide compulsoriness for some companies (classified using the definite criteria) to organize this
activity. The internal control can be viewed as a supplementary cost. For some types of entities, a
cost-benefit analysis is also required.
Based on some provisions from the new Romanian accounting regulation, presented above,
we can state that, in out opinion, the new accounting requirements are too complex for the
accounting of a micro-entity.
In order to substantiate this statement and to test the opportunity for different accounting
requirements for the accounting of micro-entities, in early 2010 we accomplished an empirical
research on the entities from Mures County [7].
We chose the questionnaire as the research method. The questionnaire was delivered
directly to the respondents and, in most cases, filled by accountants, especially by those who work
as CPA. The sample consists of 203 entities from Mures County. 85 questionnaires were returned,
achieving a response rate of 41.88%.
We used the turnover and the total assets value in order to identify the size of the surveyed
entities. The thresholds that we considered for the two mentioned criteria were chosen taking into
account the thresholds for the micro-entities presented in the EU proposal (turnover less than
1.000.000 Euros and total assets less than 500.000 Euros) and thresholds used in the Romanian
accounting regulation (turnover 7.300 Euros and total assets 3.650.000 Euros) in order to
differentiate the entities that must prepare a full set of financial statements from those that prepare
simplified financial statements.
Next, we present briefly the results of our study, results that reflect the opinions of
accounting professionals from Mures County regarding the accounting regulation in case of
Romanian micro-entities.
Using the question Do you consider that the Romanian accounting regulator (the Ministry
of Finance) should issue different accounting regulations for the Romanian entities classified in
relation to certain thresholds? we tested whether the respondents agree with the idea of simplifying
the accounting requirements. A number of 66 respondents, representing 77.65% from the total
number of respondents, answered positively to the idea of different accounting regulations for
entities classified in relation to certain size criteria. The idea of simplification, validated by 77.65%
of respondents, is also sustained by the answers received for the question regarding the appropriate
criteria that can be used in order to define the micro-entities in our country. We presented the
criteria proposed to define the micro-entities at European level (turnover less than one million
Euros, total assets less than two million Euros and number of employees less than 10), and the
264
respondents were asked if, in their opinion, those criteria can be used in order to define the micro-
entities in Romania. At the mentioned question, 69.41% of respondents validated the three criteria
proposed at European level for the definition of the micro-entities.
So, the respondents confirmed the need for simplification and agreed with the presented
thresholds; still, they were reticent about the possibility of requiring the micro-entities to prepare
only a limited number of financial information. Almost 53% of respondents consider that the
standard format of the financial statements required to the Romanian entities must be maintained.
We also noted that, for entities with turnover over 7,300,000 Euros and total assets over 3,650,000
Euros, the idea of a standard format dilute (only 33.33% of these entities are positive to the standard
format).
We wanted also to see the opinion related to cash accounting versus accrual accounting for
micro-entities. The results can be surprising because the idea of simplification is not connected
with cash accounting for micro-entities. Accrual accounting is the option for 44.71% of the
respondents. It is also interesting that 32.94% consider that the entities should have the possibility
to choose between cash accounting and accrual accounting.
So, the answers received confirmed that it is necessary to classify the entities according to
their size and to introduce in the Romanian accounting regulation the micro-entity as a different
category of entity, but we doubt that those who answered Yes figured out what simplification
would really mean.
In order to test whether the accounting professionals from Mures County consider that the
Romanian accounting regulation in force is still too complex relative to the needs of the real users
of financial information provided by the surveyed entities, we asked the respondents to identify if
the requirements that we presented (taken from the new accounting regulation) are justified or not
for a micro-entity. We included in the questionnaire the following requirements from the
Romanian accounting regulation, that we consider too complex for a micro-entity:
the recognition of internally generated intangible assets in the research phase or in the
development phase;
the recognition of goodwill;
the amortization methods;
the impairment test for the property, plant and equipment and for the intangible assets;
the fair value measurement of property, plant and equipment at the date of the balance sheet;
derivatives;
the use of the normal capacity of the production facilities in order to establish the costs of
conversion;
correcting material errors through retained earnings;
the assessment of the present value of provisions;
the necessity of internal control.
Also, the respondents were asked to mention other requirements that they consider
unjustified for a micro-entity, but none of them presented such requirement.
Contrary to our expectations, the results show that the respondents opinions are generally
divided almost evenly. Still, there are some cases where respondents consider that the requirements
presented are justified for the accounting of a micro-entity. We are referring to the requirements
about the amortization methods, the correction of material errors through retained earnings and the
necessity of internal control. From the total number of respondents, 84.71% consider that the
presentation of amortization methods is justified for a micro-entity, 85.88% and 60% have the
same opinion regarding the correction of material errors and, respectively, the necessity of internal
control.
However, 62.35% of the total number of respondents considers that one of the presented
requirements is too complex for a micro-entity, namely the derivatives.
265
We have expected the respondents to believe that the requirements from the accounting
regulation are too complex for micro-entities, but the results of our study invalidated this
assumption.
In conclusion, our study revealed that, even if the majority of respondents (accounting
professionals from Mures County) consider that the simplification of accounting requirements is
adequate for entities with turnover less that 1,000,000 Euros and total assets less than 500,000
Euros, still the requirements from the Romanian accounting regulation in force are not considered
to be too complex for micro-entities.
Considering the fact that many respondents are accounting professionals, we believe that,
for some of them, the idea of simplification is connected with the idea of implicit diminishing of the
work they perform to various entities in the area. A question mark remains regarding the validation
of these results, considering the possible subjectivism of respondents.
3. THE IMPLICATION OF ACCOUNTING PROFESSION IN THE ACCOUNTING
REGULATION OF MICRO-ENTITIES
In the light of the actual concerns al European level regarding the reduction of
administrative burdens in case of micro-entities by diminishing the disclosure requirements, on
one side, and of the recent issue of a new accounting regulation addressed to all Romanian entities
as from January 1
st
, 2010, on the other side, we can not ignore some questions that we have in mind
and we will try to answer them, based on European experiences and personal opinions:
Whether and in what extent the accounting profession from Romania should be involved in
the settlement of accounting regulation? Is the organization of a public debate with the accounting
profession by the Romanian accounting regulator opportune?
It is important to mention the example of an important body of professional organizations,
the ICAEW (The Institute of Chartered Accountants in England and Wales), which, based on the
concerns at European level, initiated a public debate in order to make sure that the European Union
proposal will have a positive impact on the business field. This is an example that can be followed
by many professional organizations at European level and, why not, by CECCAR (the Romanian
accounting body)!
For 20 years we are witnesses to a process of accounting regulation for which the main actor
was and still is the Ministry of Finance. Although we wish for an overture, this thing is not going to
happen.
Maybe it is time for the accounting profession, through its representative organism, to be
involved more actively in aspects related to accounting regulation. Even if there is no express
request, CECCAR, by its organisation at county level, could anticipate certain changes in the area
of accounting regulation and validate or invalidate them based on some pertinent answers obtained
from the professionals and from the entities they work for. CECCAR represent a force through
weight and professionalism, so we can not be ignored! The example of other professional
organisations (such as ICAEW) should be followed. The results of a questionnaire can be ignored;
but for how long?! The frequent exposure of some results validated at the level of Romanian
profession will necessary represent a voice that must be heard!
Based on the results from Mures County, we can ascertain a reticence about the
simplification of accounting regulation, because this could imply, according to some voices, the
diminishing of the activity of the accounting professionals. We believe that things must be analysed
with lot of responsibility and the ideas that arise at European level should be brought out among the
accounting professionals.
The relief of entities from the obligation to draw up financial statements too consistent and
irrelevant (in some cases) for the potential users of financial information, may have positive effects,
266
by the concentration of material, human and financial efforts on the identification and analysis of
certain essential information for the management of micro-entities.
Initially, the accounting law no. 82 from 1991 presented very few provisions related to the
organization of managerial accounting, and the regulations about the organization of financial
accounting, contaminated with lots of fiscal provisions in continuous change, made difficult
enough the entities activity. Those were the premises that conduct to the misunderstanding of the
law, regarding the obligation to organize managerial accounting. So, the accounting professional,
used to analyse in the light of the obligation to organize managerial accounting, refusing to ask
himself about its utility and necessity or, simply, was adapted to the system of cost calculation
found at the entity level, without making the effort to ascertain if that is the optimal system for cost
calculation. If only the cost calculation is taken into account, the system will be simple; but, if the
manager needs more information, a more elaborated system can be built, with various options and
possible scenarios.
CONCLUSIONS
We consider that the accounting profession from Romania has the resources needed in order
to have amore important position in the accounting regulation process. The idea underlined in the
previous section related to the active participation of the accounting profession in validating or
invalidating some accounting regulations in Romania can be an important step to follow. The
knowledge and the debate of ideas that concern the European Union represent, in our opinion, an
act of professionalism. We can not express opinions without analyzing the recent ideas and
discussing them. In this direction CECCAR should be more involved.
We are aware of the fact that the Romanian regulator is not willing to make concessions, at
least not for the moment. Whatever the present effect of such an approach, the future of accounting
regulatory act must be appropriate to the accounting profession.
From our point of view, the entities should have the possibility to use different accounting
regulations, even national regulations, the main criteria for this choice should be the enterprises
size. The micro-entities could be the beneficiary of accounting regulations issued by the accounting
regulations bodies at national level. [8] An accounting regulation established at national level can
easily decide the simplification needed for so called micro-entities.
ENDNOTES:
1
Some of these discussions can be found on the website of the European Commission: Simplifying the business
environment for companies, http://ec.europa.eu/internal_market/company/simplification/index_en.htm. The final study
Study on administrative costs of the EU Company Law Acquis is available on-line at:
http://ec.europa.eu/internal_market/company/docs/simplification/final_report_company_law_administrative_costs_en.
pdf.
BIBLIOGRAPHY
1. European Commission (2003) Commission Recommendation of 6 May 2003 concerning
the definition of micro, small and medium-sized enterprises, available on-line at http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:EN:PDF
267
2. European Commission (2007) Communication from the Commission on a simplified
business environment for companies in the areas of company law, accounting and auditing,
available on-line at
http://ec.europa.eu/internal_market/company/docs/simplification/com2007_394_en.pdf
3. The European Commission, 2009, Proposal for a Directive of the European Parliament and
of the Council amending Council Directive 78/660/EEC on the annual accounts of certain
types of companies as regards micro-entities, available on-line at http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52009PC0083 :EN:HTML
4. Committee of Legal Affairs (2010) Report on the proposal for a directive of the European
Parliament and of the Council amending Council Directive 78/660/EEC on the annual
accounts of certain types of companies as regards micro-entities, available on-line at
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A7-
2010-0011+0+DOC+PDF+V0//EN
5. Ministry of Finance (2009) Order 3055 from 2009 for the approval of accounting
regulations in accordance with EU directives
6. Ramona Neag, Ema Maca, Irina Pcan, Accounting regulation for micro-entities and IFRS
for SMEs - an actual debate, 4th Audit and Accounting Convergence Annual Conference,
Babes Bolyai University, Cluj Napoca, nov 2009.
7. Ramona Neag, Ema Maca, Irina Pcan, Research on the field tests in Mures County
Romania regarding the opportunity for different accounting requirements for small
entities and micro-entities, Journal of Accounting and Management Information Sytems,
Vol. 9, No. 2, 2010, pp. 305-328.
8. Ramona Neag, IFRS for SMEs are an Accounting Solution for SMEs and Micro-entities?,
2
nd
World Multiconference on Applied Economics, Business and Development (AEBD10),
Kantaoui, Sousse, Tunisia, May 3-6, 2010, ISBN 978-960-474-184-7
268
THE RECONCILIATION BETWEEN NET INCOME AND EQUITY OF THE PARENT
COMPANY AND CORRESPONDING VALUES IN CONSOLIDATED FINANCIAL
STATEMENTS *
Professor PhD. Stefano AZZALI
Stefano.azzali@unipr.it
Professor PhD. Luca FORNACIARI
l.fornaciari@libero.it
Universit degli Studi di Parma, Italy
Abstract:
In group accounting, the reconciliation between net income and equity of the parent company and their
corresponding value in consolidated financial statements is becoming increasingly relevant. In Italy, the Reconciliation
Statement (RS) has been required for all listed companies by the Commissione Nazionale per le Societ e la Borsa
(CONSOB) since 2006.
This paper illustrates the results of a study of the consolidated financial statements of 100 companies listed on
the Milan Stock Exchange from 2003 to 2009, and represents around 72.40% of the capitalization of the entire stock
market. The study is based on a verification of the presence and location of the RS in the financial statements of our
sample companies. The study also consists of an analysis of the RS models studied and their content (consolidation
adjustments) that show the differences between Net Income and Equity of the parent company and those of the
consolidated financial statement. The study concludes with a proposal for a RS that may provide a solution to the issues
emerging from the study.
Keywords: consolidated financial statements, net income and equity, reconciliation statement, listed
companies, group accounting
JEL classification: M41
1. THE PURPOSE, INFORMATION FUNCTION AND REGULATORY FRAMEWORK
As regards the structure and transparency of the consolidated financial statements, special
care was given to the reconciliation between net income and equity of the parent companies and
their corresponding values in consolidated financial statements. The RS is a quantitative module
which demonstrates the effect that the consolidation procedure produces on the group units partial
value systems, the latter being the objects of analytical aggregation (Rinaldi, 1999, 269).
This document is relevant only in the consolidated financial statement, because its purpose
is to reconcile the synthesis values of the parent companys financial statement with the
consolidated values and illustrates the adjustments which result from the consolidation procedure.
The information flow that must result from the RS is of fundamental importance, as it allows the
reader to understand the economic reasons underlying the divergences between the two kinds of net
income and equity. In order for the documents to effectively achieve their objective, they must
represent not only a mathematical reconciliation of values (Rinaldi, 1999, 270), but also content
which is able to represent the economic reasons for the consolidation adjustments.
Readers of the consolidated financial statements will be able to understand the effects of
resource transfer between subsidiaries, as well as the origin and quantity of the unrealized intra-
group margins, which are eliminated with the consolidation procedure. As a consequence of the
lack of transparency (Andrei, 2006, 129) in both national legislation and IAS/IFRS concerning
intra-group transfer, the RS should be formulated in such a way as to overcome this legislatory
deficiency and provide sufficient information for an analysis of this transfer.
As far as the importance of the RS in the groups financial statement is concerned, neither
DecreeLaw 127/91 nor International Accounting Standards require this document. In fact, only
269
certain researchers (Azzali, 2008; Bertoni, 2009, 260; Caratozzolo, 2002; Fellegara, 2000; Rinaldi,
1999; Teodori, 2003; Terzani, 1992), Italian professional sources and CONSOB consider the
document to be important for groups and as such, think it should be included in the informative
notes or in the management report.
In fact, before the introduction of IAS/IFRS, the RS was prepared and included in the
consolidated integrative notes, because this was stipulated by Italian Accounting Standards (OIC
17) and especially by CONSOB. As previously mentioned, IAS/IFRS did not require this
document, and companies listed on the Milan Stock Exchange or companies which had shares or
bonds attributed to the public, prepared and included the RS in their management report, because
this was stipulated by CONSOB in its DEM/6064293 of July 28, 2006. The gradual spread of this
type of document in consolidated financial statements to Italian groups was determined and
enforced by Italian Accounting Standards and CONSOB, but also by the numerous interventions of
researchers, who had long recognized the major informational role of the RS. As for the content
stipulated by the sources above, only Italian Accounting Standards, in 1996 version, proposed a
format with minimal content.
From an analysis of the legislation, and the annexed Accounting Standard report, a
significant aspect emerges which, as we will demonstrate, could limit the RSs informational role.
Here, particular reference is made to the typology of the values to be reconciled. In Italian
Accounting Standards and in CONSOB, the presentation of a statement reconciling equity values
and the net income that results from the parent companys financial statements with its consolidated
values is regulated. Reconciling these amounts means preparing Reports which, on the one hand,
represent only a part of the consolidation adjustments (parent company adjustments) and, on the
other, fail to describe other significant consolidation adjustments in many groups (non-controlling
partners consolidation adjustments) .
The representation of partial values, as a consequence of consolidation adjustments, as well
as the absence of specific information on non-controlling partners reduce the informational role of
the RS prepared using these models, because they do not allow full understanding of the complex
effects generated by the consolidation procedure. This model does not enable someone outside the
group to know how the internal management policies that drive the intra-branch resource transfer
influence the determination of the performances of controlled companies, and especially of those
belonging to non-controlling partners that have invested in these companies.
According to Azzini (Azzini, 1975) the group is an enterprise made up of two or more units
which are juridically independent but economically dependent on one administration.
The difference between the group and other companies is that the group has juridically
independent branches which allows it to acquire resources, such as risk capital, using the stock
market. This particular characteristic of the group generates non-controlling partners (Azzali, 2006)
who have invested resources in the companies controlled by the parent company, and need the
safeguard provided by the Consolidated financial statement. According to this viewpoint, the RS
should contain not only the reconciliation of the parent companys synthesis values, but also the
reconciliation of non-controlling partners values.
2.RESEARCH OBJECTIVES AND THE SAMPLE
The role of the RS within consolidated financial statements prompted a study of the
companies listed on the Milan Stock Exchange, and aimed at verifying its real informational
potential. The objective was to analyze the structure, content, and types of information that financial
statement reader can deduce from reading different formats of RS presented by listed Italian parent
companies, and to evaluate their effectiveness.
270
The research was based on a RS analysis made in the financial statements of a number of
selected companies from 2003 to 2009 based on the stock market capitalization of April 30, 2010.
Of the 328 companies listed on that date, we excluded the following:
- companies listed after December 31, 2009;
- banks;
- insurance companies;
- companies no longer listed on April 30, 2010
- foreign companies.
At the end of the selection, of the companies remaining, those taken into consideration were
the 100 enterprises with the greatest stock market capitalization, representing around 72.40% of the
companies listed on April 30, 2010, excluding banks and insurance companies.
In the period studied, the legislatory framework for preparing the consolidated financial
statements of listed companies evolved as follows: in 2003 and 2004 national regulatory was applied
(Decree law. 127/1991), whereas from 2005 to 2009 consolidated financial statements were
prepared according to IAS/IFRS. CONSOB published DEM/6064293 (2006, July) which stipulated
that the RS in the management report was to be annexed to the financial statement. CONSOBs
action is useful but does not solve the informational problem resulting from IAS/IFRS, i.e., the fact
that neither content model nor guidelines are provided makes space/time comparisons difficult.
A verification of the presence of the RS and its position in the financial statements of our
sample companies was made, followed by a qualitative analysis of the content of the RS prepared.
Finally, two RS models have been proposed which may provide a solution to the issues that have
emerged during our study.
3. THE QUALITY OF RS INFORMATION IN SAMPLE COMPANIES
As a result of the evolutionary nature of the regulatory framework, the first two aspects we
investigate are the presence and position of the RS in financial statements.
Table 1. The presence and position of the RS in the consolidated financial statement
Is there an RS in the
consolidated financial
statement?
If so, where is it collocated?
Year
Yes No In the notes
In the
management
report
Between the
statements
2003 92.86% 7.14% 100.00% 0.00% 0.00%
2004 95.92% 4.08% 100.00% 0.00% 0.00%
2005 45.92% 54.08% 88.89% 2.22% 8.89%
2006 94.90% 5.10% 37.64% 58.06% 4.30%
2007 97.96% 2.04% 34.38% 60.42% 5.20%
2008 97.96% 2.04% 31.25% 65.63% 3.12%
2009 97.96% 2.04% 28.13% 68.75% 3.12%
In Table 1, we can see that the transfer to IAS/IFRS leads to a net reduction in RS
presentation. In fact, in 2003 and 2004 almost all of the consolidated financial statements of the
sample applying Decree Law 127/91 (92.86% and 95.92%, respectively) presented the RS,
whereas in 2005, in the first financial statement prepared according to IAS/IFRS only 45.92% of the
groups analyzed included this document in their consolidated financial statement (less than half of
the groups who had included it in 2004). In 2006, however, there was a net growth of groups
271
tending towards the RS: 94.90% of companies from our sample included it in the management
report as stipulated by CONSOB (58.06%) or in the notes (37.64%). As for the 2007, 2008 and
2009 statements, the percentage grew to 97.96. The increase recorded in 2006 justifies the
intervention of CONSOB, who imposed the RS in its financial statement at the beginning of that
year. This statement recorded a regulatory gap in IAS/IFRS, which meant the absence of this
consolidated financial statement format in 2005. From 2003 to 2005 the RS was included in the
financial statement notes (Table 1). From 2006 to 2009, however, most of the groups included the
statement in their management report, complying with CONSOB specifications: we do not agree
with the measure because it lead to the RS being included in a document which is not part of the
financial statement. However, the behavior of companies which included the RS in their financial
statement from 2005 onwards was considered positive (Table 1).
Table 2. The reconciled values of the RS
RS reconciles:
Does RS show comparable
values?
Year
equity net income
equity and net
income
Yes No
2003 0.00% 0.00% 100.00% 53.85% 46.15%
2004 0.00% 0.00% 100.00% 54.26% 45.74%
2005 0.00% 0.00% 100.00% 37.78% 62.22%
2006 1.08% 0.00% 98.92% 35.48% 64.52%
2007 2.08% 0.00% 97.92% 44.79% 55.21%
2008 2.08% 0.00% 97.92% 46.88% 53.12%
2009 2.08% 0.00% 97.92% 45.83% 54.17%
Keeping in mind the significant growth in the number of RS in this period, we investigated
the content of the documents presented by the companies in our sample. As regards reconciled
synthesis values, the statements presented reconcile both equity and net income. Similarly (Table
2), almost all financial statements that present RS reconcile both synthesis values (100% in 2003,
2004 and 2005; 98,92% in 2006; 97.92% in 2007, 2008 and 2009), in most cases presenting a single
statement, while only a small number prepare financial statements presenting two documents: one
reconciling net income and one equity. From Table 2, we can see that few companies from the
sample reconciled only equity for the 2006-2009 period, while in no case was only net income
reconciliation proposed.
The corresponding values of the previous years are important because they allow the reader
to appreciate, in terms of time, the overall impact on the consolidation adjustments and allow a first
evaluation of the effects produced by the managerial policies of the group.
As regards these corresponding values, the figures show a less than satisfactory result. In
fact, for the whole period under consideration, a significant number of companies presenting the RS
(Table 2) describe only one years adjustments, with no information with which to make a
comparison.
What is also evident is the incongruous behavior of a part of the selected companies who
changed their attitude in the period from 2003 to 2009, which meant that:
- some companies presented information about previous years going back only a few years;
- other companies changed their behavior several times, repeatedly altering the indications of
the comparative information and their mission.
The absence of information about the consolidation adjustments of previous year and the
incongruity of the companies behavior reflects negatively on the comparability over time of RS
272
information. Later we will analyze the structure, content and analyticity of the documents presented
as these constitute the essential elements on which the usefulness of the statement depends.
As for structure and content, the results of our research prove two prevailing statements: in
the first statement (statement A) the values recognized in the parent companys financial statement
are reconciled with the parent company values recognized in the consolidated financial statement;
in the second statement (statement B) the values indicated in the parent companys financial
statement are reconciled with the values of the full consolidated financial statements (including the
values of any non-controlling partners). The two formats can be created in two different ways
depending on how the consolidation adjustments are represented.
Statement A
Italys most widely-used statement over the period (Table 3) was the one which reconciled equity
and net income of the parent companys financial statement with their consolidated synthesis values
.
Table 3. Companies that used statement A
RS reconciles only the values of the parent company
Consolidation adjustment only (e.g. Table
4)
Year
with non-
controlling
partners (A)
without non-
controlling partners
(B)
Consolidation
adjustment of the
group only. With non-
controlling partners
(C)
(e.g. Table 5)
A + B + C
2003 42.86% 8.79% 20.88% 72.53%
2004 42.55% 12.76% 18.09% 73.40%
2005 26.67% 15.55% 26.67% 68.89%
2006 27.96% 12.90% 23.66% 64.52%
2007 27.08% 11.46% 25.00% 63.54%
2008 25.26% 16.85% 25.26% 67.37%
2009 28.13% 17.70% 22.92% 68.75%
Statement A provides information on the effects of the consolidation procedure, referring
only to the inherent values of the parent company, but does not give any information on the effect
produced by the consolidation adjustment on the non-controlling partners in subsidiaries. This
limits the informational usefulness of the RS as it does not allow non-controlling partners to
appreciate the effects of the consolidation adjustments on their values. The usefulness of a model
without information about non-controlling partners does not allow the RS to focus on the
informational objective for which it was prepared as it provides only partial information, limited to
the parent company, and becomes, as such, unhelpful to non-controlling partners.
The RS, which reconciles only the synthesis values of the parent company, can be prepared in two
different ways (statement A1 and A2), which differ only in consolidation adjustment values.
273
Table 4. Statement A1
Equity Net income
X X-1 X X-1
Equity and Net Income in the parent
companys financial statement
Parent Company Consolidation
Adjustments:
- Business Combination
- Unrealized intragroup gain/loss
- Tax effect
Parent company Equity and Net Income in
the Consolidated Financial Statement
Statement A1, which reconciles the equity and net income of the parent company with
consolidation values, represents only the parent companys consolidation adjustments. Research has
shown that, for the period in question, it is the most widespread model within the groups whose
format reconciles only the synthesis values of parent companies (Table 3, column A).
Table 5. Statement A2
Equity Net income
X X-1 X X-1
Equity and Net Income in the parent companys
financial statement
Full Consolidation Adjustments:
- Tax effect
Consolidated Equity and Net Income
(Non-controlling shareholders Equity and Net
Income in the Consolidated Financial
Statement)
Parent company Equity and Net Income in the
Consolidated Financial Statement
Statement A2 illustrates the full consolidation adjustments (see those belonging to the parent
company and non-controlling partners). The algebraic sum of these adjustments with the equity and
net income values of the parent companys financial statement determines the synthesis values of
the group and, takes into consideration the values related to non-controlling partners, the parent
company equity and net income in consolidated financial statements.
Statement B
Although to a lesser extent (compared to statement A), the RS of net income and equity
recognized in the parent companys financial statement with the consolidated synthesis values of
274
the group are also widely used by the companies: moreover, this statement, does not allow
analytical representation of the consolidation adjustments of the subsidiaries synthesis values.
Table 6. Companies that used statement B
The RS between the synthesis values of the parent company and those of the
group
Year Consolidation adjustment of
parent company (A) (example
Table 7)
Consolidation adjustment of
group (B) (example Table 8)
A + B
2003 21.98% 1.10% 23.08%
2004 21.28% 1.06% 22.34%
2005 26.67% 2.22% 28.89%
2006 30.11% 2.15% 32.26%
2007 28.13% 4.16% 32.29%
2008 26.32% 2.10% 28.42%
2009 25.00% 2.08% 27.08%
Statement B took two different forms in Italy (B1 and B2), which also differed in content.
Of the two possible configurations, statement B1 (Table 7) was more wide spread than the format
illustrated in Table 8. When reconciling net income and equity of the parent company with the
groups consolidated synthesis values, the most widely-used configuration only illustrates the
consolidation adjustments of the parent company, providing similar information to that of
Statement A1 (Table 4).
Table 7. Statement B1
Equity
Net
income
X X-1 X X-1
financial statement
Parent company Consolidation Adjustments:
- Tax effect
Parent company Equity and Net Income in the
Consolidated Financial Statement
Non-controlling shareholders Equity and Net
Income in the Consolidated Financial Statement
Statement B1 shows the net income and equity of non-controlling interests, but with no
fractions or analysis of their consolidation adjustments. Usually, the synthesis values of the non-
controlling partners are only used to reconcile the net income and equity of the parent company
with those of the group.
275
As illustrated in Table 7, net income equity recognized in the parent companys financial
statement, algebraically added to the consolidation adjustments of the parent company, determine
the consolidated synthesis values of the parent company. Then, by adding the net income and equity
of non-controlling interests we can determine the groups consolidated synthesis values.
Table 8. Statement B2.
Equity Net income
X X-1 X X-1
financial statement
Full Consolidation Adjustments:
- Tax effect
Statement B2 (Table 8), however, illustrates full consolidation adjustments (parent company
adjustments and non-controlling interest adjustments), providing information similar to that of
statement A2 (Table 5).
Of our study show that the use of different RS is the result of the absence of a regulatory
framework and mean reduced comparability. Another important aspect that emerges from this
study, on the RS structure, refers to the in-time uniformity of the sample companies behaviors. In
the period studied (2003-2009), a significant number of companies used various formats, even
modifying their behavior several times. This negative scenario together with the significant
percentage of companies that do not include their values from the previous year (Table 2)
considerably limit the in-time comparability of the information provided by the RS.
Referring to the content of the documents prepared by the Italian companies, the first
element analyzed concerns the effects generated by business combinations (Gavana, 2008); in the
period of time studied, this information is represented in the RS of almost all of the companies in
the sample (Table 9).
Table 9. The effects of business combinations.
Does RS describe the effects of
business combinations?
Does RS show information about
goodwill?
Year
Yes No Yes No
2003 92.31% 7.69% 44.05% 55.95%
2004 92.55% 7.45% 45.98% 54.02%
2005 97.78% 2.22% 36.36% 63.64%
2006 97.85% 2.15% 35.16% 64.84%
2007 96.88% 3.12% 36.56% 63.44%
2008 96.88% 3.12% 36.56% 63.44%
2009 95.83% 4.17% 35.87% 64.13%
The majority of companies present synthetic and aggregated information on the effects
generated by business combinations; this does not allow an understanding of how the goodwill and
revaluation of each acquired company is determined.
276
Our study also evaluated whether the documents prepared by the Italian companies describe
in sufficient detail the consolidation adjustments generated from:
a) recognition of amortization (National Law) and impairment of goodwill;
b) elimination of intra-group transaction;
c) elimination of dividends.
It is significant that the informational quality of the RS depends on the transparency of its
content. The detailed presentation of these adjustments is extremely important because it allows the
consolidated financial statement reader to study the effects generated by the consolidation
procedure thoroughly and also allows the reader to identify the adjustments that had a greater
influence on the preparation of the consolidated financial statement. Great importance is also
attached to the adjustments seen in letters b), c), useful in understanding the typology of intra-group
operations and especially the effects generated on the net income and equity of the group.
In relation to the adjustments indicated in the previous list, the analysis shows (Table 10)
that most of the companies offer information on the distribution of dividends,
amortization/impairment of goodwill and unrealized intra-group profit. Similarly, some of the
companies have an item called Other consolidation adjustments (or other synonym), which along
with the adjustments deriving from the business combination, when present, are the only RS content
of these companies. In such cases, excessive synthesis impairs the informational capacity and
transparency of the RS analyzed.
Table 10. Consolidation adjustments in the RS
Does RS show analytic consolidation adjustments resulting from amortization
and/or goodwill impairment, the elimination of unrealized intra-group profits and
margins of dividends paid by subsidiaries
Year
Yes No
2003 85.71% 14.29%
2004 80.85% 19.15%
2005 66.67% 33.33%
2006 78.49% 21.51%
2007 83.33% 16.67%
2008 81.25% 18.75%
2009 81.25% 18.75%
The absence of an adequate analytical framework for a significant percentage of the sample
companies represents one of the negative elements brought out by the study, which damages the
transparency of the statement, not allowing the reader of financial statements to understand the
causes of the consolidation adjustments of such values, and significantly limiting the capacity of
these statements to fulfill their informational function.
Finally, although none of the RS analyzed contain comment notes able to adequately
illustrate the reconciliation adjustment, these details were not imposed by the legislators even
though their presence would guarantee that financial statement readers would better understand the
effects generated by the consolidation procedure.
4. THE TRANSPARENCY REGARDING THE RECONCILIATION OF
SYNTHESIS VALUES OF NON-CONTROLLING PARTNERS
The study conducted on reconciliation statements made by the companies listed on the
Milan Stock Exchange from 2003 to 2009 brought to light numerous issues which, impair the
informational capacity of the report and the transparency of the consolidated financial statement. In
particular:
- the limit of in-time and space comparability generated by a lack of uniformity;
277
- the abuse of syntheticity that characterizes most of the reports and the absence of
information capable of explaining in what way the consolidation procedure;
- the belongingness of the group impacts on the non-controlling partners synthesis values,
represents, undoubtably, the most important weaknesses of most of the RS analyzed. Taking into
account the issues discussed and the reduced informational capacity of the Italian companies
format, hereinafter we propose two types of RS (Table 11 and 13) which differ only in the
analytical details of the information concerning non-controlling partners. In fact, both formats
present consolidation adjustments that affect the synthesis values of the parent company and those
of non-controlling partners, the latter being subdivided according to the subsidiary in which the
non-controlling partners are present.
The format in Table 11 describes a synthetic impact of consolidation adjustments on the
values belonging to parent company and non-controlling partners. It considers the starting value of
non-controlling partners (Table 11, Non-controlling shareholders Equity and Net Income in the
subsidiaries financial companies) to be the algebraic sum of the shares of equity and net income
of non-controlling partners expressed in the financial statements of all subsidiaries in which the
parent company does not have 100% of the equity.
Table 11. Synthetic RS
200x 200x-1
PN RN PN RN
Equity and Net I ncome in the parent companys financial statement 0 0 0 0
Business combinations:
elimination of investments in subsidiaries
elimination of subsidiaries fair value equity
composed by:
equity
tangible assets revaluation/impairment
intangible assets revaluation/impairment
goodwill
badwill
0
0/(0)
0/(0)
(0)
0
0
0 0
(0)
0
0
0 0
Amortization and impairment test:
amortization of tangible asset revaluation
amortization of intangible asset revaluation
goodwill impairment
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
Homogenization of the financial reporting. In paticular:
of the accounting standards;
of the currency.
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
Subsidiaries net income of parent company (0)/0 (0)/0 (0)/0 (0)/0
Intra-group gain/loss from trade relations:
Unrealized in the 200x
Realized in the 200x
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
Unrealized intra-group gain/loss from transfer of equipment (0)/0 (0)/0 (0)/0 (0)/0
Business combinations between subsidiaries (0)/0 (0)/0 (0)/0 (0)/0
Elimination of dividends distributed by subsidiaries (0) (0) (0) (0)
Tax effect (0)/0 (0)/0 (0)/0 (0)/0
Parent company Equity and Net Income in the Consolidated Financial
Statement (A)
0 0 0 0
278
Non-controlling shareholders Equity and Net Income in the
subsidiaries financial companies
0 0 0 0
Equity group of the non-controlling partners:
tangible assets revaluation/ impairment
intangible assets revaluation/ impairment
goodwill
0/(0)
0/(0)
0
0/(0)
0/(0)
0
goodwill impairment
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
Homogenization of the financial reporting. In paticular:
of the currency.
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
Unrealized intra-group gain/loss from transfer of equipment (0)/0 (0)/0 (0)/0 (0)/0
Business combinations between subsidiaries (0)/0 (0)/0 (0)/0 (0)/0
Tax effect (0)/0 (0)/0 (0)/0 (0)/0
Non-controlling shareholders Equity and Net Income in the
Consolidated Financial Statement (B)
0 0 0 0
Equty and net income in the consolidated financial statement (A+B) 0 0 0 0
Unlike the outcome of the reports which reconcile only the synthesis values of the financial
statement of the parent company with group values, this format (Table 11) presents more complete
and more transparent information to the financial statement reader. In fact, this model allows us to
investigate the effects generated by the consolidation procedure on the complex synthetic values of
non-controlling partners, providing information that the most widely used Italian reports do not
contain.
Despite its high level of transparency, the model proposed is not widespread in our country.
Few of our sample companies (Table 12), used this model in the period of time studied, due to the
lack of national legislation. National accounting standards (OIC 17) and CONSOB guidelines
regulating the preparation of the RS for companies using the IAS/IFRS, explicitly stipulate
reconciliation only for the equity and net income of the parent company.
Table 12. Companies that used synthetic RS
Year %
2003 4.40%
2004 4.25%
2005 2.22%
2006 3.22%
2007 4.17%
2008 4.21%
2009 4.17%
279
Table 11 shows the synthetic effects of consolidation on the values of the non-controlling
partners in the group but does not allow us to understand the ways in which the consolidation
process acted on each subsidiary.
Although not used in Italy, the second format (Table 13) allows us to thoroughly study these
effects as it indicates the values of non-controlling partners subdivided into units of subsidiaries.
In Table 13, where the presence of two subsidiaries with non-controlling partners was hypothesized,
the separate representation of the equity and net income shares of the non-controlling partners of
each unit, guarantees a much higher level of transparency than that of the first format.
The structure of the document analyzed offers informational details which describe how
belonging to a certain company group acts on equity and net income of each subsidiary in which
non-controlling partners are present. This model illustrates these effects, dividing them according to
the synthesis values of each subsidiary statement to enable the reader to understand:
- how much of the subsidiary financial statement in which non-controlling partners are present is
the result of internal resource transfer taking place between the units making up the group, and
how much represents the results of third-party exchanges;
- the effects of consolidation adjustments on the synthesis values of the statement pertinent to the
non-controlling partners.
To enable the reader of consolidated financial statements to understand the economic
reasons behind the differences between the synthesis values of the financial statement and the
consolidated ones, in the format analyzed the adjustments must be subdivided according to the
typology of the consolidation operations they originate from.
With the help of Table 13, we can see the analytical description of the effects induced by the
presence of the participants belonging to the subsidiaries, with shares of up to 100%. For some
companies, this model shows the economic reasons for the difference between the cost sustained by
the parent company and the acquired equity. This difference is divided according to the interest
share of the parent company and the non-controlling partners.
The proposed models allow the financial statement reader to appreciate the
over/understatement of the groups net income and equity, (Azzali, 2002, 105 and 152). The second
model (Table 13) allows the reader to appreciate the over/understatement of net income pertinent to
each subsidiarys non-controlling partners with non-total participation, while at the same time
allowing a deeper level of investigation than the model in Table 11.
The Annals of The"tefan cel Mare" University of Suceava. Fascicle of The Faculty of Economics and Public Administration Vol. 10, Special Number, 2010
280
Table 13. Analytical RS
PARENT COMPANY SUBSIDIARIE Alfa SUBSIDIARIE Beta CONSOLIDATED F.S.
200x 200x-1 200x 200x-1 200x 200x-1 200x 200x-1
E NI E NI Eh Em Eh NIm Eh Em Eh NIm Eh Em Eh NIm Eh Em Eh NIm E NI E NI
Equity and net income in the financial statement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Business combinations:
elimination of investments in subsidiaries
elimination of subsidiaries equity
tangible assets revaluation/impairment
intangible assets revaluation/impairment
goodwill
badwill
(0)
0
0/(0)
0/(0)
0
0 0
(0)
0
0/(0)
0/(0)
0
0 0
(0)
0/(0)
0/(0)
0
0
0/(0)
0/(0)
0
0
(0)
0/(0)
0/(0)
0
0
0/(0)
0/(0)
0
0
(0)
0/(0)
0/(0)
0
0
0/(0)
0/(0)
0
0
(0)
0/(0)
0/(0)
0
0
0/(0)
0/(0)
0
0
(0)
0
0/(0)
0/(0)
0
0 0
(0)
0
0/(0)
0/(0)
0
0 0
goodwill impairment
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
(0)
Homogenization of the financial reporting. In particular:
of the currency.
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
(0)/0
Unrealized intra-group gain/loss from transfer of equipment (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0
Subsidiaries net income (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0
Business combinations between subsidiaries (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0
Elimination of dividends distributed by subsidiaries (0) (0) 0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0)
Tax effect (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0 (0)/0
Entity and net income of any companies after consolidation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
281
In fact, the Table 13 model provides a percentage of the non-controlling partners net
income, that is over/understated or generated by intra-group transactions at the reference date of the
consolidated financial statement. The RS used by Italian listed companies does not provide a
sufficient exchange of information for an evaluation of the groups consolidation adjustments. The
analytical details with which the consolidation adjustments are presented assume major importance,
because they allow us to eliminate certain weaknesses from the regulatory framework of
consolidated financial statements of both National sources and International Accounting Standards.
The deficiency concerning intra-group transfers that characterizes the consolidated financial
statements made in compliance with Decree Law 127/91 is not redressed by introducing
IAS/IFRS. In fact, the standards do not require inclusion in the notes, of the details which specify
the origin, size and effects that the intra-group transfers have on determining net income and the
equity. The RS can compensate, at least partially, for this informational deficiency, but in order to
achieve this it must be prepared analytically, as illustrated in the proposed models, to specify the
economic nature of intra-group operations.
The informational potential of both models would certainly be best presented in the
consolidated financial statement notes, and being thus located would offer analytical information
regarding the intra-group transfers presented in the RS, as well as the way in which the adjusted
values resulting from the consolidation procedure were determined. This solution, which represents
a real improvement in consolidated financial statement transparency, should be structured in such a
way as to ensure the reader gets an overview of the operations taking place in the administrative
period between the groups units, and to allow interdependency, which, in general, characterizes
these changes.
As proposed in the literature on the adoption of the International Accounting Standards in
Italy (Andrei, 2006, 146), the network of internal relations could be described and the contractual
conditions of intra-group transactions could be offered. Moreover, details required to enable the
reader to fully understand how the adjusted values were obtained could be added to this information
flow.
The quantitative dimension (offered by the RS with structure and analysis as in Table 11 and
13) and the qualitative dimension (offered by the notes) of the information provided on the intra-
group exchanges, as well as the informational detail of operations between the group and third-
parties should, therefore, enable the consolidated financial statement user to fully understand the
managerial policies which, in their complexity, characterize the group.
ENDNOTES
* This study is the result of cooperation between Stefano Azzali and Luca Fornaciari who wrote
paragraphs 2 and 3, and paragraphs 1 and 4 respectively
REFERENCES
1. Andrei P. (2006), Operazioni interne al gruppo, in Andrei P. (a cura di), Ladozione degli
IAS/IFRS in Italia: concentrazioni aziendali e bilancio consolidato, Giappichelli, Torino.
2. Azzali S. (2002), Il reddito e il capitale di gruppo. Valore e sua determinazione nei gruppi
aziendali, Giuffr, Milano.
3. Azzali S. (2006), Reddito e patrimonio dei soci di minoranza, in Andrei P. (a cura di),
Ladozione degli IAS/IFRS in Italia: concentrazioni aziendali e bilancio consolidato,
Giappichelli, Torino.
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4. Azzali S. (2008), Gli schemi del bilancio consolidato, in Rinaldi L. (a cura di), Bilancio
consolidato, Il Sole 24 Ore, Milano.
5. Azzini L. (1975), I gruppi aziendali, Giuffr, Milano.
6. Bertoni A. (2009), I documenti che compongono il bilancio consolidato, in Prencipe A.-
Tettamanzi P. (a cura di), Bilancio consolidato, Egea, Milano.
7. Caratozzolo M. (2002), Il bilancio consolidato di gruppo. Profili economici e giuridici, Giuffr,
Milano.
8. Fellegara A. M. (2000), Il raccordo tra patrimonio netto e risultato della capogruppo e
patrimonio e risultato del bilancio consolidato, in Marchi L. (a cura di), L'applicazione dei
principi contabili nei bilanci delle imprese. Best practices della comunicazione economico-
finanziaria, Il Sole 24 Ore, Milano.
9. Gavana G. (2008), La natura e il trattamento contabile delle differenze di consolidamento, in
Rinaldi L. (a cura di), Bilancio consolidato, Il Sole 24 Ore, Milano.
10. Rinaldi L. (1999), L'analisi del bilancio consolidato, aspetti critici dell'apprezzamento
dell'economicit di gruppo tramite la lettura, l'analisi e l'interpretazione del bilancio
consolidato, Giuffr, Milano.
11. Teodori C. (2003), Il bilancio consolidato. La metodologia di costruzione e il profilo
informativo, Giuffr, Milano.
12. Terzani S. (1992), Il bilancio consolidato, Cedam, Padova.
283
FINANCIAL MANAGEMENT WHEN INTERESTS ON DEBT ARE NOT FULLY
DEDUCTABLE. THE ITALIAN CASE STUDY
Assistant Professor Ph.D. MSc. Alberto LANZAVECCHIA
alberto.lanzavecchia@unipd.it
Assistant Professor Ph.D. Lucia POLETTI
lucia.poletti@unipr.it
Assistant Professor Ph.D. Beatrice RONCHINI
beatrice.ronchini@unipr.it
Full Professor Giulio TAGLIAVINI
giulio.tagliavini@unipr.it
Faculty of Economics, University of Parma, Italy
Abstract:
Purpose: Corporate finance management rules are written under the assumption that financing costs are
deductible from taxable income. If this assumption is relaxed, such management rules needs to be revised. How do
managers maximise operating margins and returns if this assumption no longer holds true? We faced this issue using
both an algebraic and a simulation approach. By defining numerical analysis models, we bypass algebraic profile and
skills, which might become too complex for practitioners.
Methodology/approach: The recent tax reform introduced in Italy, that creates a partial tax deduction for
financing costs, offers a case study. We reviewed traditional management tools and we proposed an analytical model
for a simulation approach to measure the effect of these new tax rules on the optimal financial leverage and the
maximum firm leverage.
Findings: We demonstrate that the new regulation might have a deep impact on not sufficiently profitable
companies. We also outline that the regulation is not addressed to highly profitable firms which could be the target for
a taxation system aimed to an excess profits redistribution. The recent tax reform ultimately did not address the key
issue for the Italian political economy: to strengthen the corporate financial structure and to reduce excess profit
generation.
Originality/value: We propose a new set of guidelines for financial management wherever financing costs
would no longer be deductible from taxable income by linking a well known theoretical framework with a practitioners
approach.
Keywords: financial leverage, corporate taxation, accounting ratios, Italy.
JEL classification: G32, G38, H25, H32, K34, M49.
1. INTRODUCTION
Corporate finance management rules mirror a deeply rooted awareness that draws from a
large body of academic literature. These rules are written under the assumption that financing costs
are deductible from taxable income (e.g. generate tax shields). However, if this assumption is
relaxed, such management rules need to be revised. The recent tax reform introduced in Italy, which
creates a partial tax deduction for financing costs, offers a case study to review traditional corporate
finance management rules.
Managers quest for corporate value maximisation is founded on instruments aimed to
increase operating margins and returns on invested capital. How do managers maximise corporate
value wherever tax shields on interest baring debt vanish?
We faced this issue using an algebraic approach, by revising the existing well known
accounting ratios and cash flows statement and, alternatively, we run a simulation approach. By
defining numerical analysis models we bypass algebraic profile and skills, which might become too
complex for practitioners.
284
This article is structured as follow. Section 2 presents the current Italian taxation system
which affects corporate financial leverage by limiting the tax deduction of financial interests from
gross profit. Section 3 presents financial analysis based on accounting ratios, cash flows and
corporate values that need to be the revised wherever a country's tax laws include partial
deductibility from gross profit of financial interest on debt. Section 4 presents an analytical model
for a simulation approach based on MatLab
. The simulation model makes it possible to provide

some insights on what financial approaches would fit the new regulatory context. Concluding
remarks are provided in Section 5.
2. CORPORATE CAPITAL STRUCTURE AND ITALIAN TAX RULES
Since the seminal work of Modigliani and Miller (1963), it is widely known and accepted
(Brealey and Myers, 2003) that there is a rational link between financial structure and corporate
market value. The optimal capital structure trades-off present value of tax benefits and the expected
insolvency costs (Copeland and Weston, 1988) to maximise firms equity value. Actually, the
optimal capital structure depends on other factors, including the regulatory framework for banking
activities, uncertainty about the company's expected operating income and the corporate governance
(Jensen and Meckling, 1976; Harris and Raviv, 1991).
Tax rules do always influence company decisions about investments, financing and business
locations. Such decisions are based on the general assumption that financing costs are fully tax
deductible: for every dollar value of financial costs deducted from gross income, the firm gains a
tax shield on the marginal corporate tax rate.
In the presence of high leveraged companies, tax authorities should wonder if these financial
decisions were pulled by economic fundamentals or were pushed by tax avoidance. Indeed, there
might occurs situations where the suspect about the latter is concrete: where shareholders "lend
themselves money," either by setting collaterals to secure a bank loan or by underwriting bonds
instead of new equity issued by their holding company. Since collaterals fully back the loan granted
by a bank, it is difficult to understand why a shareholder should provide an indirect guarantee for
the company instead of financing it directly unless by doing so they gain some tax benefits. Such
triangular transactions put in place an effective scheme for tax avoidance. As long as the personal
tax rate on interests is lower than the corporate tax on profit, the shareholders gain a tax arbitrage.
This gain is even higher in case of funding directly the firm by underwriting bonds instead of
equity.
Rajan and Zingales (1995) found evidences that Italian companies are the most leveraged
among G-7 countries, and that the main determinant were the relative tax advantage of financial
debt.
Not surprisingly, the rationale underling the set of fiscal laws that Italian government
introduced since 1995 it was therefore towards the aim of contrasting such tax avoidance schemes.
2.1. THE SET OF FISCAL LAWS AGAINST HIGH FINANCIAL LEVERAGE IN ITALY
o Act no. 549/1995: the aim of this law is to prevent companies from raising capital by issuing
debt which pays above market interest rates {1} to their shareholders rather than by increasing
equity capital. Since personal tax rate on financial income is lower that corporate tax rate on
profit (e.g. 12,50% vs 36% at that time, 27% as from 2008), share-bondholders gain a net tax
arbitrage. To prevent this tax avoidance scheme, this law establishes that interest on bonds,
whose yield is above a market-defined ceiling, cannot be deducted from taxable income.
o Act no. 425/1996: it is addressed to companies' practice of securing bank loans using money or
securities (other than shares) set as a collateral. Such transactions are still permitted but this law
285
reduced the tax benefits by increasing (from 12,50% to 32,50%) the tax burden on personal
income on financial instruments if they are set as a collateral on bank loans.
o Act. No. 446/1997: it introduces a regional tax on productive activities (the IRAP), levied on the
net value added derived in each Italian region by resident company. The net value added
does not include labour costs, extraordinary items and financial revenue and expenses. The
ordinary tax rate is 3,9% (as from 2008) and it is not deductible from gross profit.
o Act no. 244/2007: this is the fundamental act which introduces the partial tax deductibility of
interest expenses. Under this new rule, interest expenses are fully deductible up to an amount
equal to the interest income accrued in the same tax period. Any excess over that amount is
deductible to the extent of 30 percent of gross operating income (roughly equal to earnings
before interest, taxes, depreciation, and amortization EBITDA). Any interest expenses
exceeding 30 percent of EBITDA may be carried forward for deduction in subsequent tax
periods, to the extent that the net interest expenses (that is, those exceeding interest income)
accrued in such tax periods are less than 30 percent of each periods EBITDA. For tax periods
beginning on or after 1 January 2010, the portion of EBITDA not used up in the deduction of
interest expenses and financial charges pertaining to a period may be added to the EBITDA of
subsequent tax periods.
In the following sections our main concern is on the effects on financial management
generated by any rule which limits the deducibility of financial expenses from taxable income, such
the one Italy experiences since 2008.
3. IMPLICATIONS FOR FINANCIAL ANALYSIS
Whenever a country's tax law includes partial deductibility from the gross profits of
monetary costs {2} and, more specifically, of interest on debt financing, {3} the traditional rules for
the financial analysis of balance sheet ratios, cash flow and corporate values need to be adapted.
Indeed, making interest expenses only partially deductible from corporate profit means that the
financial analysis of this intermediary situation differs from both situations of full taxation
(Modigliani and Miller, 1963) and no taxation (Modigliani and Miller, 1958).
As such, this section examines the adjustments to the traditional financial analysis based on
financial ratios, cash flows and corporate market value.
3.1. EFFECTS ON STRUCTURED FINANCIAL RATIO ANALYSIS
Return on equity (ROE), along with return on assets (ROA), is one of most widely used
general measures of corporate financial performance (Rappaport, 1986, p.31). Since ROE
represents the ultimate result of structured financial ratio analysis (Fierer et al., 2004, p. 68), also
called Du Pont analysis (Stowe et al. 2002, p. 85; Correia et al., 2003, pp. 5-19), this contributes
to its popularity among analysts, financial managers and shareholders (Monteiro, 2006).
ROE can be broken up into three separate ratios as follows:
ROE =
equity
earnings
equity
asset
assets
sales
sales
earnings
=
(1)
The three ratios of (1) can be described, respectively, as profitability, asset turnover and
financial leverage. At first glance, this seems to be a good synthesis of operating, assets and
financial management results. However, equation (1) has some serious flaws as a measure of
performance (Firer, 1999, p. 35; Pars, 1980, p. 367; Rappaport, 1986, p. 43; Boyd, 1989).
An alternative formulation for ROE, presented by Zakon (1968), leads to the following
decomposition:
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ROE = [ROI + (ROI - I) x D/E] x (1-k) x (1-t) =
equity
earnings
, (2)
where ROI = return on invested capital (defined as the sum of D+E)
D = net interest-bearing debt
E = book value of equity
I = net interests
k = - (earnings before tax)/(earnings before tax extraordinary items)
t = - taxes / earnings before tax
The greater explanatory power of (2) comes from the fact it separates the contributions of
three management areas: operating activities (e.g. ROI), financing activities (the spread ROI I
and the leverage effect), and extraordinary (1-k) and tax activities (1-t).
All corporate finance manuals (Berk and DeMarzo, 2008; Brealey and Myers, 2003;
Copeland and Weston, 1988; Eitman et al., 2007; Van Horne and Wachowicz, 1992; Lumby and
Jones, 2003; Ross et al., 1993) treat the tax variable residually, as an external factor not governed
by management. The impact of taxes is merely an algebraic step that adjusts the gross results of the
three management areas.
Such an approach is sound if the company's costs are deductible from its income and there
are no revenues that enjoy beneficial taxation (e.g. interest income, dividends and capital gains). If
we relax this assumption, analysis based on balance sheet ratios needs to be adjusted to account for
increased or decreased tax payments when compared to the theoretical marginal payments. This
influence of taxes on financial analysis is tied to the need for the manager in charge of corporate tax
planning - both for operating and financing activities - to be held accountable.
As such, (2) is adjusted with the following new formulation:
ROE = [ROI + (ROI - I) x D/E] x (1-k) x [(1-T) * ] =
equity
earnings
, (3)
where, in addition to the abovementioned symbols:
T = marginal tax rate burden,
= (1 - t) / (1 - T) (4)
Since (1-T) is calculated on the basis of perfect equivalence between book and taxable
income while (1-t) expresses the effective tax burden, the coefficient (lambda) measures the
degree of alignment between accounting and taxable income. In other terms, it measures the impact
of the fiscal inefficiency of managerial decisions taken when determining the taxes on earnings.
The management in charge of corporate tax planning now has a clear goal: increase [(1-T) *
] by acting on the two components: the local tax system and the fiscal inefficiency of decisions.
The new proposed formulation of ROE in (3) benefits the following items:
it does not change ROI: ROI is a pre-tax ratio and so the presence or absence (or some
situation in the middle) of taxes should not change its value;
it does not change the spread (ROI - I): since the new tax treatment does not alter ROI and
the gross cost of financing is not affected by taxes the spread has to remain the same;
it does not directly influence choices about the composition of liabilities (the debt equity
ratio): the fact that financing costs are not deductible does not depend solely on leverage, but
also, for example in Italy, on three variables: gross profitability, the cost of the financial debt
and, finally, the amount of financial debt taken on. As such, it would be incorrect to simply
make the level of debt (D/E) the cause for the interest not being deductible from gross
income;
287
the coefficient shows the decree of misalignment between accounting and taxable income:
this is the starting point that should be used by management for optimisation.
Finally, at this point it seems worthwhile to note that the other financial ratios derived from
decomposing ROE are not influenced by the solution in (3): if the operating management is not also
responsible for the fiscal impact of its decisions, then measuring its performance is in no way
influenced by the company's fiscal efficiency.
3.2 EFFECTS ON CASH FLOWSTATEMENT ANALYSIS
Entities need cash to conduct their operations, to pay their obligations and to provide returns
to their investors (IASF, 2008). The provision of transparent and useful information on market
participants is essential for an orderly and efficient market (Fama, 1970).{4}
Under IAS 7 all entities shall prepare a statement of cash flows in accordance with the
requirements of the Standard. IAS 7 sets out that the statement of cash flows must show the
financial flow for the period in question, classifying them into one of three areas:
Operating activities: the main revenue-producing activities of the entity that are not
investing or financing activities.
Investing activities: the acquisition and disposal of long-term assets and other investments
that are not considered to be cash equivalents.
Financing activities: activities that alter the equity capital and borrowing structure of the
entity.
Nonetheless, individual transactions can include cash flows that are classified differently.
For example, when the repayment of a loan includes both interest and capital, then the interest could
fall under operating activities and the capital under financing activities. Alternatively, the entire
cash flow could be placed under financing activities. It is unclear whether the payment of interest
falls under operating or financing activities.
The payment of taxes faces a similar problem. IAS 7 established that the payment or
reimbursement of income tax be placed under operating activities, unless it can specially be
included under financing or investment activities. Moreover, once taxable income has been
calculated from the sum of the interest payable on financing activities, it follows that a part of the
operating taxes fall under financing activities. If this is the case, then we have to consider whether it
is necessary to divide cash flows for taxes according to the various areas that resulted in such taxes.
The operating cash flow of two companies that have identical economic margins and returns
on capital, but different financial structures, should be identical (hence the value of the business is
equal). If the cash flow from operations would include all income taxes, then such equivalence
would be breached: an higher leveraged company would show greater financing costs which could
be deducted from taxable income. As a result, it would have a lower tax burden, thus increasing the
cash flow from operations artificially.
This is reason why operating cash flow is calculated net of taxes linked to operating
activities, but gross of any impact from financing activities (unlevered after-tax cash flow). Hence,
it is incorrect to calculate unlevered after-tax cash flow net of all operating taxes on the company or,
even worse, net of interest expenses. By contrast, it is necessary to divide the taxes into the
respective areas from which they originate.
Table 1 provides a numerical example. The lower section of the table shows three possible
ways of displaying the statement of cash flows. The reclassified version in column C is the one we
prefer. Each of these three methods of displaying cash flow has the following in common:
profit;
changes in the net financial position;
cash flows from and for shareholders.
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In column A, "Gross cash flow from operations" is the sum of EBITDA and operating taxes.
Financing costs are placed under financing activities without subtracting the tax shield they
generate. Using this approach, the "Gross cash flow from operations" is 196. Net of Capital
expenditures (Capex), unlevered after-tax cash flow amounts to 296.
Table 1 - Cash flow statements (Euro 000)
Year n
Revenues 1,150.00 1,150.00 1,150.00
EBITDA 300.00 300.00 300.00
EBIT 190.00 190.00 190.00
Net financial items - 94.0 - 94.0 - 94.0
Extraordinary items 10.0 10.0 10.0
Earnings before tax 106.0 106.0 106.0
Taxes - 54.0 - 54.0 - 54.0
Earnings after tax 52.00 52.00 52.00
A B C
Earnings after tax 52.00
EBITDA 300.00 300.00
Amortisation and provisions 110.00
Operating taxes -54.00 -52.25
Gross cash flow from operations 246.00 162.00 247.75
+/- Working capital changes -50.00 -50.00 -50.00
Cash flow from operations 196.00 112.00 197.75
Capex 100.00 90.00 100.00
Marginal taxes on Capex -2.75
UNLEVERED AFTER-TAX CASH FLOW 296.00 202.00 295.00
Net financial items -94.00 -94.00
Marginal tax impact on net financial items 25.85
Fiscal inefficiency for financial items -1.10
Changes in net debt -197.00 -197.00 -197.00
Dividend -5.00 -5.00 -5.00
Fiscal inefficiency for operating activities -23.75
In column B, "Gross cash flow from operations" is the sum of the net profit and non-
monetary costs (amortisation and provisions). Calculating cash flow for operations in this manner
is, in our opinion, wrong on two reasons: including both the financing costs (94) and all taxes (54)
do not split marginal taxes levied on financial and extraordinary items. Moreover, the financing
costs are no longer included under the financing activities in any way. This approach results in a
lower "Cash flow from operations" (112) and a lower "Unlevered after-tax cash flow" (202).
In column C, "Gross cash flow from operations" is the sum of EBITDA and the marginal
taxes on EBIT, calculated as follows:
Corporate Taxes = Marginal corporate tax rate x EBIT = 27.5% x 190.0 = 52.25.
The investment activities correctly show an inflow of 100, but they are also the net of the
marginal taxes generated by the capital gain (effect of the decision to disinvest) of 10 in the profit
and loss account. The marginal tax implication of this activity can easily be calculated:
289
Corporate Taxes = Corporate tax rate x Extraordinary items = 27.5% x 10 = 2.75
Thus, cash flow from operations and unlevered after-tax cash flow equal, respectively,
197.75 and 295.00. "Cash flow from operations" is not influenced by financial decisions in any way
{5} (debt level, cost of debt, various types of financing, etc.) and operating activities are valued as
if they were a company without any debts and that pays its own taxes.
Finally, Unlevered after-tax cash flow is split among the residual claimants of corporate
value: financial creditors, the government and shareholders.
In column C, the cash flows from and to capital providers clearly highlight the marginal tax
shield on financing costs:
Tax shield on interests = Corporate tax rate x Net financial items = 27.5% x 94 = 25.90
and the higher taxes due to the partial deductibility of interest from income:
Maximum deductible interest = maximum share allowed x EBITDA = 30% x 300 = 90.0
Excess that cannot be deducted = net interest - maximum deductible interest = 94 90 = 4.0
Reduced tax shield for interest = Excess that cannot be deducted x marginal tax rate = 4 x 27.5% = 1.1
Logically, by only stripping the fiscal inefficiency from the financing activities, the item
"Fiscal inefficiency in operating activities" refers, in a residual and undifferentiated manner, to the
increased taxes (compared to the theoretical marginal ones) generated by the other two areas
(operating and investment activities):
Fiscal inefficiency for operating activities = Taxes - operating taxes - marginal taxes on Capex + tax
shield for interest - reduced tax shield for interest = 54.0 52.25 2.75 + 25.90 1.1 = 23.75
The "Reduced tax shield for interest" and the "Fiscal inefficiency in operating activities"
show, in monetary terms, the misalignment between theoretical and effective taxes. As such, they
provide objective parameters that a corporate tax planner can seek to minimise.
The logic used to display information in column B is conceptually wrong and harmful. In
column A, it is misleading but easy to understand. Column C seems to be the best, but it might be
too sophisticated for practitioners.
3.3 EFFECTS ON COMPANY ASSESSMENT
The two main approaches to analysing company value are Economic Value Added (Stewart,
1991) and discounted cash flow (Hirshleifer, 1958). Both methods provide the same result
(Shrieves, 2001) since accounting, finance and financial mathematics do not create or destroy value,
but they describe it in their own language.
Economic Value Added (EVA) is simply the difference between net operating profit after
tax (NOPAT) and the weighted average cost of capital (WACC):
EVA = NOPAT [ WACC x (D+E)] (5)
If there is perfect equivalence between the book and market value of capital, then a positive
value indicates excess profit compared to the expectations of capital investors (Young and OByrne,
2001).
This method is based on the clear separation between operating activities (NOPAT) and
financing activities (included in WACC and capital employed). As long as the taxes in NOPAT are
not the only taxes on gross profit, but the theoretical or effective ones due on EBITDA, then
NOPAT is not influenced by financing activities in any way. Therefore, national tax laws that allow
290
interest to be partially deducted from gross income (or tax exemptions on financial income) have no
impact on NOPAT. {6} Nevertheless, excess profit would be influenced due to the increased
effective taxation of financing interest.
In order to isolate the effect on the financing costs caused by partial deductibility from corporate
taxes, we propose two alternative adjustments {7} on accounting data:
adjusting capital employed by adding equity-equivalent reserves to capital;
adjusting after-tax WACC.
The assumption underlying the adjustment to employed capital is that increased taxation due to
local tax laws can be seen as reducing the profit (corporate value) of equity and bond investors. As
such, the increase in taxes becomes an "equity equivalent" capital taken by the government, which
has a marginal opportunity cost that is the unadjusted WACC:
equity equivalent = non-deductible interest x marginal tax rate.
The rationale of the adjustment to WACC is that the partial deductibility of the interest
results in an increased effective cost for the debt after tax, since the tax shield is only applicable to
the deductible interest. The employed capital is unadjusted, while the adjusted WACC increases as
the percentage of the financing costs that cannot be deducted increases:
WACC adjusted = _ _
= =
+ =
m
j
j j
n
i
i i
k Wk t k Wk WACC
1 1
*
) 1 (
, (6)
where:
Wk
i
= the i-th capital share of the total financing capital;
k
i
= gross cost of the i-th type of entirely deductible acquired capital;
t = marginal tax rate on the interest expense
Wk
j
= the j-th capital share of the total financing capital;
k
j
= gross cost of the j-th type of capital acquired that is not deductible
Obviously, company performance is not different in one reclassification model or the other,
it is merely represented differently. The role of the CFO is to manage the capital charge payable on
operating performance. The EVA method, as a value-based management tool, provides an objective
parameter for setting company goals (Zimmerman, 1997).
In evaluating corporate value based on discounted cash flow analysis, firm value is given by
the net present value of forecast unlevered after-tax cash flow .
Partially deductible interest can be treated in two different ways:
[1] by adjusting forecast unlevered after-tax cash flow;
[2] by adjusting WACC.
The first method calculates WACC as a discount rate, assuming interest is fully deductible, and
subtracts the present value of the lack of the tax shield from the present value of cash flow:
EV =
, , , ,
_ _
= =

+ +
n
t
m
k
k
t
t
t
WACC LTS WACC FCF
1 1
1 1
(7)
The second method of calculation indexes the forecast unlevered after-tax cash flow to
WACC, adjusted to the amount of interest that is not deductible from income (this is the same as
adjusting after taxes WACC in the EVA method): :
EV =
, ,
_
=
+
n
t
t
t
WACC FCF
1
*
1
, (8)
291
where:
_ _
= =
+ =
m
j
j j
n
i
i i
k Wk t k Wk WACC
1 1
*
) 1 (
.
Both methods produce the same result. However, we believe the first option is preferable,
since company managers are more used to planning results and fixing goals in economic terms
(earnings and cash flow) rather than in terms of the future cost of capital. {8}
If the interest expense is partially (or totally) non-deductible, then the value of the company
is divided differently among the residual claimants, namely the government, debt and equity
investors. In this case, the financial analyst and the company's management must correctly allocate
the amount to be paid to the state as a consequence of marginal decisions.
ROI, operating cash flow, NOPAT and unlevered company value - key parameters in their
respective areas and analysis methods - provide the same conclusions. All of these are methods of
measurement that aid value-based management in assigning the responsibility for ineffective tax
decisions to the appropriate directors.
Company finance has never created value, but rather it has allocated it between the government
and investors. If the financial decisions made by managers result in different tax treatments, then
the financing activities of companies are not external to the creation of value. The financial
management of a company can reduce company value when marginal decisions are made that
reduce investor wealth or the reinvestment of cash flows. The cost incurred by the company is the
opportunity cost of the lost capital. Only measuring methods that support value-based management
correctly assign this cost to the manager who made the decision that created it.
4 . AN ANALYTICAL MODEL FOR FINANCIAL ANALYSIS
In Section 3, we proposed a correction to the traditional financial ratios analysis and other
financial approaches in order to assess what financial policies are encouraged or discouraged by a
regulation which limits costs deduction from taxable income. Our proposed solution was succinct
and straightforward to use but it hides the drivers of tax efficiency. Thus, the formula appears
simple, but closer examination reveals hidden links between variables which are not easy to
understand and to manage.
In order to unveil these hidden links, we run simulations on an electronic spreadsheet, which
does not require the creation of an algebraically compact analysis model. The simulation model
provides some insights for financial management. In a second stage, we shall suggest a compact
analytical formula and assess its functionality and how well it meets the needs of financial analysts.
Our first simulation is an assessment of the impact of the new regulation given changes to
operating margins. Table 2 provides an example of our reclassification model.
292
Table 2 - Profit and loss accounts
New profit and loss account Year 1 Year 2 Year 3
Revenue 1,300,000.00 1,300,000.00 1,300,000.00
Monetary operating costs - 1,200,000.00 - 1,190,000.00 - 1,180,000.00
EBITDA 100,000.00 110,000.00 120,000.00
Amortisation - 70,000.00 - 70,000.00 - 70,000.00
Operating profit 30,000.00 40,000.00 50,000.00
Maximum deductibility of financing costs - 30,000.00 - 33,000.00 - 36,000.00
Net financing costs - 56,000.00 - 56,000.00 - 56,000.00
Taxable financing costs - 30,000.00 - 33,000.00 - 36,000.00
Gross result - 26,000.00 - 16,000.00 - 6,000.00
Taxable income - 7,000.00 14,000.00
Taxes - - 1,925.00 - 3,850.00
Increased taxes - 7,150.00 - 6,325.00 - 5,500.00
Net result - 26,000.00 - 17,925.00 - 9,850.00
Adjusted net financing costs - 65,862.07 - 64,724.14 - 63,586.21
Gross result - 35,862.07 - 24,724.14 - 13,586.21
Taxes 9,862.07 6,799.14 3,736.21
Net earnings - 26,000.00 - 17,925.00 - 9,850.00
Financial debt 700,000.00 700,000.00 700,000.00
Equity capital 300,000.00 300,000.00 300,000.00
Total capital employed 1,000,000.00 1,000,000.00 1,000,000.00
Interest rate on debt 8% 8% 8%
Tax rate 27.5% 27.5% 27.5%
ROE - New -8.67% -5.98% -3.28%
ROI - New 3.00% 4.00% 5.00%
Debt equity ratio - New 2.33 2.33 2.33
Interest coverage ratio - New 0.46 0.62 0.79
Old Profit and Loss Account Year 1 Year 2 Year 3
Net financing costs - 56,000.00 - 56,000.00 - 56,000.00
Gross result - 26,000.00 - 16,000.00 - 6,000.00
Taxes 7,150.00 4,400.00 1,650.00
Net earnings - 18,850.00 - 11,600.00 - 4,350.00
ROE -6.28% -3.87% -1.45%
ROI 3.00% 4.00% 5.00%
Debt equity ratio 2.33 2.33 2.33
Interest coverage ratio 0.54 0.71 0.89
The partial deductibility of the interest expense becomes increasingly important as ROI
drops, having a significant impact when ROI drops below 10%. In companies where the operating
margin is very small, the impact is substantial (Fig. 1).
293
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%
ROI
R
O
E
ROENew ROE
Figure 1 The new tax effect on ROE depending on ROI
The impact on the ability to repay the debt and to incur financing costs is less clear (Fig. 2).
In the proposed new reclassification system, the interest coverage ratio now has different values
before and after the introduction of the new partial deductibility regime for financing costs. A
standard reclassification system would not have resulted in a different interest coverage ratio, since
there is no difference in EBIT (there is a shift from profit to taxes, but the overall result does not
change) and in financing costs. This is despite the fact that the ability to cover financing costs has
been reduced: the higher the financing costs the larger is the portion of the operating profit used to
pay the extra taxes. This is why we feel that our reclassification model is more useful for financial
analysis. By taking the ratio between the standard numerator and the financing costs, including the
effects of the partial deductibility, we feel we are correctly measuring the degree to which the
margins are absorbed by the financing activities.
The simulations support our intuition. A reduction in operating margins increases weakness
in covering financial expenses - measured by the ratio between gross income and the financial cost
of revenue. This idea is straightforward but imprecise in terms of quantification. Figure 2 shows this
effect.
294
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%
ROI
EBT/ nterest New EBT/ nterest
Figure 2 - The new tax effect on interest coverage ratio depending on ROI
The analysis showed the effects produced by the new regulation for both high margin
companies (limited) and low margin ones (important and, after a certain level, very important). The
simulation model takes into consideration a normal/average composition of liabilities and then
verifies what happens as ROI changes.
Now let us consider a company with a fairly good ROI (13%), and let us check the
operational impact linked to the implementation of a financial policy that has a different approach
to debt or equity. Figure 3 summarises the general details {9}. When the debt level increases, there
is a modest decrease in the interest coverage ratio given high margins and a sharp drop in the value
of the company analysed. For a company with high margins, the new rules do not result in an
unsustainable degree of financial distress, but - significantly in reduced profitability for
shareholders and, as a result, a reduction in the equity value. The incentive created by lawmakers
works even when the laws themselves do not have a major impact on a company's ability to service
its financing costs.
295
-
200.000
400.000
600.000
800.000
1.000.000
1.200.000
10% 20% 30% 40% 50% 60% 70% 80% 90%
D / (D+E)
E
q
u
i
t
y

v
a
I
u
e
-
5,0
10,0
15,0
20,0
25,0
E
B
I
T
/
I
Equity value New Equity value Old EBIT/I New EBIT/I Old
Figure 3 The new tax effect on corporate value and the interest coverage ratio.
Figure 4 is a zoom in on Figure 3, focusing on higher ranges of debt. It should be noted that
the interest coverage ratio does drop noticeably, but not dramatically. However, the value of the
company changes quite substantially. A financial policy of favouring debt - an aspect that the
lawmakers are avowedly against - is discouraged through the corporate value mechanism.
-
200.000
400.000
600.000
800.000
1.000.000
1.200.000
60% 70% 80% 90%
D/ (D+E)
E
q
u
i
t
y

v
a
I
u
e
-
0,50
1,00
1,50
2,00
2,50
E
B
I
T
/
I
Equity value New Equity value Old EBT/ New EBT/ Old
Figure 4 The new tax effect on corporate value and the interest coverage ratio (zoom on
higher leverage).
Rules which introduce a limited deductibility of financing costs discourage financial debt.
An interesting way to examine this aspect is to recalculate the maximum level of debt that a
company could rationally assume. Figure 5 provides such an assessment and applies a methodology
that is quite close to how the problem is generally dealt with by practitioners.
Chief financial officers seldom know, and even more rarely apply, the optimal firm capital
structure. The logic behind the optimal mix between debt and net asset value is thoroughly covered
296
in general corporate finance education and has become extremely important for financial
management. Indeed, analysts often worry about measuring the maximum level of debt that a
company can take on or about the degree of growth in existing debt that would not result in an
unacceptable amount of risk or that would not lead to a drop in ratings.
To ensure the paradigm is coherent with such conduct, a model has been created that
assesses the debt level such that the interest coverage ratio does not drop below 1.7. This level is
proposed here as the lower danger threshold that should never be crossed, otherwise the company
might face bankruptcy costs. As was highlighted before, a specific way of calculating the interest
coverage ratio was developed and takes into account the direct tax implications. Figure 5 shows that
the maximum debt level does not change with a low ROI, but it does have some effect, although not
highly significant, for a high ROI. Figure 5 also shows a possible debt level that absolutely
minimises the tax burden. It is known that the use of debt is a more efficient financial policy, in
terms of tax, than using proprietary capital. The corrective measure proposed reduces this basic
advantage, but does not undercut it. Indeed, the debt level that minimises the tax burden is well over
the rational level of debt in terms of financial balance. This shows that a policy of debt has become
less advantageous, but still has some benefits.
-
200.000
400.000
600.000
800.000
1.000.000
1.200.000
3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%
ROI
Maximum leverage Old Maximun leverage New Optional for lowest taxes
Figure 5 The new tax effect on optimal capital structure
Is it possible to define an analytical formulation for ROE and interest coverage ratio
formulae that that could provide direct support for financial management without having to develop
a specific reclassification and analysis model on an electronic spreadsheet? To answer to this
question we used MatLab, and more specifically Symbolic Math Toolbox (Tab. 3).
Table 3 - The MatLab procedure
syms K I D E P t TAX EBITDA % Am GP Roi Ofi EBIT Leverage
P = GP - TAX;
EBIT = EBITDA - Am;
GP = EBIT - I;
K = E + D;
Roi = EBIT / K;
EBITDA = Am + I + TAX + P;
GP = EBITDA - Am - I;
297
TAX = % * GP + % * Ofi;
t = TAX / GP;
Ofi = (I - EBITDA * 0.3) ;
Roe = (Roi + ( Roi - I / D )*D/E) * (1-t);
Ebit = P + I + TAX;
Leverage = D / E;
OldRoe = (Roi + ( Roi - I / D )*D/E) * (1-%)
pretty(OldRoe)
NewRoe = simple(Roe)
pretty(Roe)
OldEbitOf = Ebit / I
pretty(OldEbitOf)
NewEbitOf = simple( Ebit / (I + Aliq*Ofi) )
pretty(NewEbitOf)
OldRoe = ((EBITDA-Am)/(E+D)+(( EBITDA-Am)/(E+D)-I/D)*D/E)*(1-t)
NewRoe = -(-GP+t* GP +% *Ofi)*( EBITDA-Am-I)/ GP/E
OldEbitOf = (GP-TAX+I+t* GP+t*Ofi)/I
NewEbitOf = (GP-TAX+I+t*GP+T*Ofi)/(I+t*(7/10*I-3/10*Am-3/10*GP))
The formulations indicated above obviously suffer from not being didactically clear.
However, this disadvantage is, in the end, of little import. These formulations are perfectly able to
support an analytic approach to estimating the result. To test the power of these formulations, we
tested the differences in ROE before and after the change in the deductibility of interest expenses.
The Figure 6 in three dimensions shows the difference in ROE as the ROI and Degree of
indebtedness parameters change. The deviation in terms of percentage points of ROE is measured
on the vertical axis. As can be seen, following the introduction of the new limits on deductibility,
ROE can only get worse. Furthermore, this decline is slightly progressive as debt climbs and is
strongly progressive as profitability decreases. This likely shows the primary dysfunction of the
mechanism.
Figure 6 The new tax effect on ROE depending on EBITDA and capital structure
298
Figure 6 shows the progression of the difference function of the financial distress parameter.
Once again, it can only worsen. In this case, the trend is slightly progressive as debt increases and
strongly progressive once profitability drops. Lawmakers wanted to create a mechanism that
penalised companies for increasing debt levels and that was generally indifferent to profitability.
The mechanism is very sensitive to profitability and not overly sensitive to increased liabilities;
indeed, it is probably less sensitive than was desired.
It is necessary to update the traditional methods of assessing performance since these were
devised in a context in which taxes were proportional to the net result of financing costs. Our
explorations highlighted the following points.
The additive formula of ROE is no longer suitable and needs to be reconsidered.
One way to re-frame the problem is to create a simulation model using an electronic
spreadsheet. Following this line, according to us, the best solution seemed to be to examine the
consequences of the non-deductibility of financing costs that directly burden financing activities.
An alternative way to consider the analytical problem is to fine tune a new version of the
traditional models. This is not a good solution in terms of the "compactness" of the final result and
the ability to explain the solution.
The methodological tools we used led to the following considerations: companies that have
good margins are discouraged from following a policy of high financial leverage because it would
effect the value of the company; companies that have lower margins are seriously penalised;
companies that choose to increase debt are far more rapidly faced, possibly without being fully
aware of it, with the prospect of not being able to meet their financing costs. This means that it is
easier to enter a situation of financial distress.
5. CONCLUSIONS
In the last decades, Italian banks provided financing at a cost that could be sustained by
corporations due to a direct tax benefit. Over the long run, this created a situation in which
companies were heavily leveraged and consequently riskier and less able to withstand an economic
downturn. This was the situation that Italian lawmakers intended to address by establishing
disincentives for companies to increase their financial leverage. Under the new rules, as from 2008,
interest expenses can be deducted from taxable income up to an amount corresponding to the 30%
of company EBITDA. The desired results will only be achieved if entrepreneurs and financial
directors create new analytical methods and management rules that fit the new context.
The methods used to analyse performance are typically based on estimating and managing
corporate value. Such tools assume that financing costs can be deducted from income. Hence, it is
revealing to look at what happens to value creation whenever this assumption no longer holds. The
new tax rules not only influence economic performance, but also financial performance.
We examined the effect of the new tax rule on the optimal financial leverage and the
maximum sustainable level of debt in corporations. A management approach based on a highly
leveraged financial structure is dangerous both for companies and the economy as a whole. We
agree with the financial regulations designed to encourage companies to increase their equity capital
base. However, we are not confident that such measures are effective. We demonstrated that the
new regulation might have a deep impact on companies that are not sufficiently profitable (e.g.,
start up and/or fast-growing companies or in a highly competitive environment), but such firms are
not necessarily inadequately capitalised. On the other hand, we also pointed out that the regulation
is not addressed to highly profitable firms (at least whenever they are well capitalised too), which
could be the target for a taxation system aimed at excess profits redistribution.
299
Our models therefore allow us to conclude that while the new rule impacts the mean of the
Italian firms, it ultimately did not address the key issue for the Italian political economy: to
strengthen the corporate financial structure and to reduce excess profit generation.
+
Corresponding Author.: Department of Economics and Management, University of Padova, Via del Santo
33, I-35123 Padova PD, Italy. Tel.: +39 049 827 4060; Fax: +39 178 2208411.
ENDNOTES
{1} The limits are: twice the ECB official rate, for bonds and other securities traded on regulated markets in EU
countries or placed through public offerings; the ECB official rate increased by two-thirds for bonds and other securities
that are different from those mentioned previously.
{2} Tax adjustments to gross profit is found in the tax rules in effect in Albania, Bangladesh, Bulgaria, Chile, Croatia,
Cyprus, the Czech Republic, Egypt, Hong Kong, Iceland, India, Israel, Italy, Malta, Montenegro, Norway, Peru, Poland,
Russia, Saudi Arabia, Serbia, Singapore and Thailand. See KPMG International [8].
{3} In addition to Italy, Albania also has rules limiting the deductibility of interest expenses from income. By contrast,
Russia and India have tax laws that allow for better tax rates on interest income. See KPMG International [8].
{4} We are aware, however, that financial officers view earnings, not cash flows, as the most important metric reported
to outsiders [24].
{5} On closer examination, using leasing fees rather than renting or amortization costs implicitly introduces financing
costs into the operating activities. However, this is not an aspect that falls under the purview of this paper.
{6} NOPAT is only influenced by tax laws that allow partial deductibility (or non taxation) of operating costs and
earnings. In such cases, it is best to isolate the marginal tax implication of these rules using an appropriate adjustment to
operating taxes. It is the company manger in charge of tax activities that has to improve the company's EVA by
minimising the items "Adjustments on operating taxes" and "Operating taxes." Should the performance of a manager of
an EVA centre be measured "after effective taxes" (and the manger is also responsible for the tax implications of his/her
decisions), the item "Adjustments on operating taxes" would be unbundled from the group level and allocated to each
EVA centre.
{7} See Dierks and Patel (1997) for examples showing how Stern Stewart adjusts GAAP accounting statements to
arrive at EVA.
{8}Graham [31] proposes a mathematical model to analytically estimate the marginal tax benefit of financing costs that
are deductible from the value of equity.
{9}This graph, and the ones that follow, refers to the situation taken as an example and described in the support file,
which has already been noted. The size of the example is directly linked to the specific case, but the relations between
the variables are of general worth.
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301
ANALYSIS ON THE IMPACT OF NON-COMPLIANCE WITH ACCOUNTING
PRINCIPLES BY COMPANIES, IN TERMS OF EXTERNAL FINANCIAL AUDIT
FILTERS
PhD. Associate Professor Ovidiu-Constantin BUNGET
ovidiu.bunget@feaa.uvt.ro
Lecturer PhD. Student Alin-Constantin DUMITRESCU
alin.dumitrescu@feaa.uvt.ro
West University of Timisoara, Faculty of Economics and Business Administration, Timisoara
Abstract:
In order to demonstrate that there is a direct link between compliance with accounting principles and
auditors opinion, which, of course, is filtered through professional judgement, the study starts from information
provided by a representative medium-sized audit company located in the western part of Romania. The research
starting point is represented by audit opinions expressed on statutory audit engagements for financial years ended 31
December 2008 and 31 December 2009, respectively. The study pursued the typology of audit opinions expressed for
clients in portfolio during the two consecutive years and aimed to find explanations for the auditor issuing other
opinions than qualified opinions on one hand, and on the other hand it aimed to establish the effects of non-compliance
with accounting principles on the annual financial statements and, implicitly, on the audit opinion. Generally speaking,
non-compliance with accounting principles in the preparation of the annual financial statements represents one of the
elements that generate the change of the audit opinion, and the main causes for this type of behaviour from the side of
audited companies are resulting from the influence of fiscal decisions, window dressing and inadaptability to the
conditions of the economic and financial crisis. The relevance of the conclusions is based not only on the prerequisites
and character of treated information, but also on their practical confirmation, by means of checking them with the
involved business environment (investors, shareholders, administrators, business executives).
Key words: financial audit, accounting principles, audit opinion, financial crisis, taxation
INTRODUCTION
Our approach is based on actual findings of a representative audit company located in the western
part of Romania. The purpose of our research is pragmatic, and aims to bring in front of
practitioners, academic environment and students relevant information about non-compliance with
accounting principles. We selected this topic based on considerations related to how operational
management of the audit company wants to know the reasons for changing the audit opinion on one
hand, and on the other hand, we intended to disseminate the findings among stakeholders. The
research approach is pragmatic, starting from the representative portfolio of the audit company
(member of the Chamber of Financial Auditors), by means of analysing audit reports and opinions
issued for two consecutive financial years, 2008 and 2009 respectively. This has allowed us to use
vertical comparatives (for the same audit client), but also horizontal comparatives (clients from the
same industry).
RESEARCH COMMUNITY
First we have identified the statistical population represented by companies audited as of 2008 and
2009. Thus, the structure of client portfolio audited as of 31 December 2008, according to activity
field, is presented in table no. 1:
302
Table 1. Structure of client portfolio audited as of 31 December 2008
Economic
sector
No. of
companies
Weight
in total
Industry 13 26,0%
Real estate 8 16,0%
Constructions 6 12,0%
Automotive 6 12,0%
Clothing 5 10,0%
Tourism 3 6,0%
Trade 3 6,0%
Transports 2 4,0%
Other fields 4 8,0%
TOTAL 50 100,00%
Source: own processing based on data received from the audit company
We observe a significant weight of productive units industry, real estate, constructions,
automotive and clothing represent 76%of the total number of clients.
Figure no. 1 Clients audited as of 31 December 2008 according to their activity fields
As of 31 December 2009 there were 9 additionally contracted audit engagements, and 7 clients were
no longer audited thus the structure is as follows:
Table 2. Structure of client portfolio audited as of 31 December 2009
Economic
sector
No. of
companies
Weight
in total
Industry 13 25,0%
Real Estate 10 19,2%
Constructions 7 13,5%
Tourism 5 9,6%
Clothing 5 9,6%
Automotive 5 9,6%
Trade 2 3,8%
Transport 2 3,8%
Other fields 3 5,8%
TOTAL 52 100,00%
Source: own processing based on data received from the audit company
Structure of client portfolio audited in 2008
Industry
Real Estate
Constructions
Automotive
Clothing
Tourism
Trade
Transport
Other fields
303
As of 31 December 2009, the weight of real estate and tourism sectors increased thus, the weight
of productive units - industry, real estate, constructions, automotive, tourism and clothing represents
86.5%of the total number of clients.
Figure no. 2. Structure on activity fields - clients audited as of 31 December 2009
AUDIT OPINION TYPOLOGY VS. ACCOUNTING PRINCIPLES
Our next objective pursued the typology of audit opinions issued by the audit company for the
financial years 2008 and 2009 (Fig. no. 3).
Thus, we noticed an increase by 10 of the number of companies for which an unqualified opinion
was issued, and a decrease by 8 of the companies for which an unqualified opinion was issued,
while for two companies we noticed the impossibility of issuing an opinion, both at 31 December
2008 and 31 December 2009. This trend is presented in Table no. 3:
Figure no. 3. Types of opinions issued for years 2008 and 2009
Structure of client portfolio audited in 2009
Industry
Real Estate
Constructions
Tourism
Clothing
Automotive
Trade
Transport
Other fields
Types of opinions issued
for years 2008 and 2009
4
44
2
0
14
36
2
0
Unqualified
Qualified
Impossibility
Adverse
2009
2008
304
Table no. 3. Trends in audit opinions typology from 2008 to 2009
Unqualified Qualified Impossibility Adverse TOTAL
Evolution in the no. of
opinions in 2009 vs.
2008 10 -8 0 0 2
out of which
new clients 5 4 0 0 9
old clients 5 -12 0 0 -7
Further, the study pursued the evolution in the structure of clients audited in 2008, but also for new
clients where 2009 was the first audit performed by the audit company. Thus, of the 10 clients that
received unqualified opinions, half were also audited in 2008 and half are new clients.
The decrease in the number of companies that received unqualified opinions (by 8) consists of four
new companies that were audited for the first time as of 31 December 2009 on one hand, and the
decrease by 12 of those audited in 2008 5 companies switched from a qualified opinion as of 31
December 2008 to an unqualified opinion as of 31 December 2009, and 7 is the number of
companies for which no statutory audit has been contracted as of 31 December 2009, but which
were audited as of 31 December 2008 and received a qualified opinion.
If up to this point we presented the specifics of companies that represent the basis for this case
study, from now on we analysed the number of accounting principles breaches that were disclosed
in statutory audit opinions, both as qualification and explanatory paragraphs. The absolute number
of errors detected both for 2008 and 2009, but also the weight of affected principles in the total
number of errors are presented in Table no. 4
Table no. 4
Principle
Errors
detected
in 2008
Errors
detected
in 2009
Weight
in total
errors in
2008
Weights
in total
errors in
2009
Deviations
from
weight
Continuity 11 16 5,2% 8,0% 2,9%
Method consistency 41 33 19,2% 16,6% -2,7%
Prudence 102 96 47,9% 48,2% 0,4%
Matching 32 33 15,0% 16,6% 1,6%
Separate valuation 7 7 3,3% 3,5% 0,2%
Intangibility 0 0 0,0% 0,0% 0,0%
Netting 20 14 9,4% 7,0% -2,4%
Prevalence of economics 0 0 0,0% 0,0% 0,0%
Materiality 0 0 0,0% 0,0% 0,0%
TOTAL 213 199 100,0% 100,0% 0,0%
It may be noted that the prudence principle is most often breached, both in 2008 (47.9%) and in
2009 (48.2%), followed by the method consistency principle and matching principle. The
significant weight of non-compliance with the prudence principle shows the trend of accounting
information producers to dress the financial position and performance out of various reasons:
management remuneration based on entities performances, fulfilment of performance conditions
for renewing credit lines, participation in tenders or obtaining new financing from credit
institutions, tax implications of depreciation recognition, which by non-deductibility creates the
false impression that managers would increase the tax base, which actually has a neutral character,
305
as expenditure recognised for accounting purposes reduces exclusively the accounting result, while
the tax result stands at the same level as before any impairment recognition.
If we look closer to the issue of prudence breach, we can conclude that it is human nature to
disclose a decorated image of a specific aspect. The implications on non-compliance with this
principle have been treated amply in a previous sub-chapter.
Also, the tax reason is the one that led to the breach of method consistency principle, which mainly
affects non-current assets that are recognised at fair value only in respect to buildings (due to how
tax on buildings is established). This occurs only once in 3 years, an interval that I would call a
tax one. In periods when real estate markets are highly fluctuating, buildings should be revaluated
annually, and the sufficient regularity required by accounting regulations decreases at the level of
one financial year. All other categories of non-current assets were revaluated only when the law
expressly provided that, and afterwards assets entered into the patrimony are evaluated at historical
costs. Thus, for the same assets category companies use two different accounting treatments.
The breach of the matching principle appertains to creative accounting practices (Bunget, 2005)
when we can have two main scenarios: if the results of the year are negative, management tends to
charge more expenses to this year, although this is not appropriate, because the outcome will be the
creation of hidden reserves or occult reserves, or, if performances are positive, but because there
is no place for recognition of additional expenses this is delayed, hoping that results of future
financial years will bear the costs of previous years.
0
20
40
60
80
100
120
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Accounting priciples affected and observed during audit
engagements for financial years 2008 and 2009
2008
2009
Figure no. 4. Dynamics of errors arising from non-compliance with accounting
principles during financial years 2008 and 2009
306
Additional information is obtained by analysing the dynamics of each principles weight. The
economic and financial crisis is an important external factor that impacts compliance with
accounting principles. As everybody knows, 2009 was marked by the global economic crisis broken
out back in 2008, whose effects were felt in Romania during the next year, which was also fed by
the political climate in late 2008 underlined by elections which aspect contributed to bitter
hiding of as many negative economic and social issues as possible, with serious consequences for
Romanias budget deficit and, implicitly, for the existence of economic entities. As a consequence,
the going concern principle was most threatened by errors during financial year 2009 compared to
2008. The absolute increase of this principles weight in total errors was of 2.8% - from 5.2%
(weight in 2008) to 8%in 2009, and the relative one was of 54%.
Thus, in terms of graphics, this dynamics is presented below:
2,88%
2,67%-
0,35%
1,56%
0,23%
0,00%
2,35%-
0,00%
0,00%
-3,00% -2,00% -1,00% 0,00% 1,00% 2,00% 3,00% 4,00%
C
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lity
Figure no. 5. Dynamics of errors resulted from non-compliance during 2008 and 2009
307
The matching principle is the next principle for which we noted an error increase of 1.56%. Errors
that affect prudence principle and separate evaluation of assets and liabilities principle also
increased by 0.35%, and 0.23%respectively.
By contrast, there are principles for which noted errors decreased in 2009 compared to 2008:
method consistency by 2.67% and netting principle by 2.35%. The explanation is that during 2009
most companies have performed the revaluation of tangible assets (considering the cyclicality of the
3 tax years discussed above on one hand, and that the last legal regulation was GD 1553/2003 on
revaluation of tangible assets and assessment of fixed assets input value, which optionally provided
the revaluation possibility the last value surplus recognised in the fiscal value; cyclicality is 2003
20062009). The explanation for the netting principle consists in the fact that anyway the final
result is not affected, and entities management chose to breach other principles with direct effect
on results.
CONCLUSIONS
The analysis of information and data provided by the study allowed us to draw the following
conclusions:
The study pursued the structure of audit opinions typology for clients audited in 2008, but also
for new clients 2009 was the first year audited by the audit company. Thus, of the 10 clients
that received an unqualified opinion for the 2009 financial statements, half were also audited in
2008, and half are new clients;
The decrease by 8 in the number of companies that received an unqualified opinion consists of
four new companies that were audited for the first time as of 31 December 2009 on one hand,
and the decrease by 12 of those audited in 2008 5 companies that switched from a qualified
opinion as of 31 December 2008 to an unqualified opinion as of 31 December 2009, and 7 is
the number of companies for which no statutory audit has been contracted for 31 December
2009, but which were audited as of 31 December 2008 and received a qualified opinion;
Prudence principle is most often breached, both in 2008 (47.9%) and in 2009 (48.2%), followed
by method consistency principle and matching principle;
The significant weight of non-compliance with prudence principle shows the tendency of
accounting information producers to dress the financial position and performance, out of
various reasons: management remuneration based on entities performances, fulfilment of
certain performance conditions for renewing the credit lines, participation in auctions or
obtaining new financing from credit institutions, tax consequences of certain impairment
recognition;
Tax reasons led to the breach of method consistency principle. The most affected assets
category is represented by non-current assets that are recognised at fair value only in respect to
buildings (due to how tax on buildings is established). This occurs only once in 3 years, an
interval that I would call a tax one. In periods when real estate markets are highly fluctuating,
buildings should be revaluated annually, and the sufficient regularity required by accounting
regulations decreases at the level of one financial year. All other categories of non-current
assets were revaluated only when the law expressly provided that, and afterwards assets entered
into the patrimony are evaluated at historical costs. Thus, for the same assets category
companies use two different accounting treatments
The economic crisis is an important external factor that impacts on compliance with accounting
principles. As a consequence, the going concern principle was most threatened by errors during
financial year 2009 compared to 2008. The absolute increase of this principles weight in total
errors was of 2.8% - from 5.2% (weight in 2008) to 8% in 2009, and the relative one was of
54%.
308
BIBLIOGRAPHY
1. Bunget Ovidiu Constantin Contabilitatea romneasc: ntre reform i convergen,
(Romanian accounting: between reform and convergence), Economic Printing House, Bucharest,
2005
2. Bunget O.C. - Audit-financiar-contabil, (Financial-Accounting Auditing), Mirton Printing House,
Timisoara, 2010
3. Dobroeanu Camelia, Dobroeanu Laureniu Audit concepte i practici. Abordare
internaional, (Audit Concepts and Practices. International Approach), Economic Printing
House, Bucharest, 2001
4. Malciu, Liliana - Contabilitate creativ, (Creative Accounting), Economic Printing House, 1999
5. ***- Financial Audit 2006. Standards. Code of Ethics IFAC (International Federation of
Accountants), Irecson Printing House, Bucharest, 2007
6. ***- Accounting Law no. 82/1991, republished in Romanias Official Gazette no. 48/14 January
2005
7. ***- Order of the Ministry of Public Finance no. 3055/2009 for approving accounting regulations
in accordance with the European Directives
309
A PREDICTION MODEL FOR THE ROMANIAN FIRMS IN THE CURRENT
FINANCIAL CRISIS
Dan LUPU
danlupu20052000@yahoo.com
Andra NICHITEAN
andra9992002@yahoo.com
Abstract:
The study consists in gathering the financial information for a group of listed companies, in difficulty and
economically viable, in 2007-2008, in order to create the warning signals for financial companies in difficulty using
econometric linkages between indicators. For each company, we consider a set of 14 financial indicators, which reflect
the company's profitability, solvency, asset use, company size, were calculated and then used in the study. Analysis of
links between financial indicators was used to allow comparison, seeing that the two types of companies distressed and
viable are two distinct groups, suggesting that the rates used are sufficiently useful to predict subsequent financial
difficulties.
Keywords: prediction bankruptcy, financial indicators, listed company
JEL Classification: C10
INTRODUCTION
The study consists into collection of the financial information for a group of listed
companies in difficulty and economically viable in the period 2007-2008, in order to create early
warning signals for financial companies in difficulty using the following econometric methodology
principal components analysis and subsequent, multivariate discriminant analysis. For each
company, it is considering a set of 14 indicators, which reflect the company's profitability,
solvency, asset use, and size of company, were calculated and then used in the study. Principal
components analysis was also used to reduce the dimensionality of data space and to allow
comparisons, seeing that the two types of companies viable and in difficulty are two distinct groups
suggesting that the rates used are sufficiently useful for anticipate further financial difficulties.
The following three sets of data were analyzed separately:
- First year data to predict the difficulties a year in advance
- The second year, given the difficulties to predict two years in advance
-And two-year cumulative data to predict the danger of bankruptcy with a year earlier.
Taking this into account, the purpose of this paper is to collect financial information for a
group of Romanian companies in difficulty and viable listed in RASDAQ market in 2007-2008, for
which data were available, in order to create early warning signals for companies in difficulty using
several types of models and methodologies, which were chosen based on results of similar studies.
Since the bankruptcy prediction has been extensively studied for several decades, many
methodologies were quite accurate in forecasting its results.
For this study, public financial informations for 2007-2008 were collected from sites on the
Bucharest Stock Exchange and the Ministry of Finance. The sample consisted of 100 companies
listed on RASDAQ, with similar characteristics were included in the same category III-R market.
The choice of this sample from a total of 1645 companies listed on RASDAQ was made in order to
have two equal groups of companies "insolvent" and "viable", as well as most previous studies of
bankruptcy prediction.
310
A company with financial difficulties indicates that its obligations to its creditors are
honored with difficulty or not at all, and even then it can lead to bankruptcy. Since there is no
standard definition for classifying companies into "bankruptcy" and "viable", however, is more
difficult to decide which companies to classify the reasons therefore, only the simple case of a
company in bankruptcy or non-bankruptcy , the status is pretty obvious, but for non-financial data
are less available. Referring to other similar studies for companies in difficulty, however, Yanhui
Zheng (2007), Psillaki, Tsolas and Margaritis (2008)), we followed the same main criteria for
appropriate classification of companies. Therefore, a company was considered "failing" if it had
losses and arrears for at least two consecutive years.
Following this classification rules, there were 55 Romanian companies in difficulty in 2008
in RASDAQ market, of which 50 have all necessary information for all years 2007-2008. To
summarize, to have two equal groups of companies in ,,difficulty'' and ,,viable'' for this study were
chosen 50 companies in difficulty, for which financial information was available and 50 other
companies viable, similar in terms of asset size and industry, who were chosen at random.
As noted in Scott (1981), many of the variables that were most frequently used in empirical
analysis does not withstand to a strong analysis, but their use is primarily on their popularity in the
literature and the success of prediction in previous research. Thus, the selection of main financial
indicators set for this study was based on previous results presented in the literature, but also limited
to financial data provided by the Bucharest Stock Exchange and the Finance Ministry. Therefore,
there were 14 indicators calculated for the purpose of this study and grouped into four distinct
categories, reflecting the company's profitability, solvency, asset utilization, and size. The definition
of each of the 14 indicators is presented in the table below.
As we noted, some financial indicators have been transformed through the application of
natural logarithms, while others are expressed in percentages. The aim was to bring all values to a
similar scale.
The profitability is represented by the profit margin (I1), calculated as net profit or net loss
divided by turnover, return on assets ROA (I2), calculated as the ratio between net profit and total
assets, return on equity ROE (I3), which is the ratio net profit of total equity and, profit per
employee (I4) and operating income per employee (I5). All these indicators are common measures
of financial performance management and, therefore, are vital in the study of financial bankruptcy.
Getting a higher rate of profit is an objective to be pursued by any enterprise manager. The
profit rate shows the net result for the combined effects of liquidity, asset management and debt
management. Economic rate of return (ROA) is the rate of return on all capital raised it from its
owners and creditors. Return on capital invested by owners (ROE) is the largest rate of a firm
depending on its value as shareholders decide whether to invest or withdraw from a deal.
Ohlson (1980), Lennox (1999) and Zulkarnain (2001) showed that profitability is an
important factor in determining firms in difficulty. It is expected that firms with high returns have a
lower likelihood of bankruptcy. Therefore, the relationship between them is negative.
Financial indicators
I1 profit margin net profit / turnover * 100
I2 ROA net profit / total assets * 100
I3 ROE net profit / total capital * 100
I4 profit per employee net profit / employees
I5 operating income per employee ln (operating income / employees)
I6 current rate current assets / current debts
I7 debt capital total debt / total capital * 100
I8 debt on total assets total debt / total assets * 100
I9 working capital per employee working capital / employees
I10 total assets per employee ln (total assets / employees
311
I11 size ln (total assets)
I12 rotation speed of stocks turnover / stocks
I13 debt collection speed Clients / daily sales
I14 rotational speed of Total Assets turnover / total assets
The borrowing is also an important element to be analyzed because it measures a company's
ability to meet its financial obligations, thereby avoiding corporate failures. Financial indicators are
the current rate (I6), calculated as the ratio between current assets and current liabilities, debt
capital (I7), which is calculated as total debt divided by total capital, debt on total assets (I8),
calculated as total debt divided by total assets.
The current ratio, defined as general liquidity, indicates the extent to which short-term
creditors' rights are covered by the value of assets that can be converted into cash when needed.
This indicator measures the volume of external financing compared to that of financing provided by
owners. As its value is greater, the more your business depends more on its creditors, and the higher
risk associated with (as all liabilities on company balance granting rights to third parties). A high
ratio implies a high risk for creditors. They will take into account the current banking rules and
regulations. Usually an acceptable value for most of the activity is <0.5. A small report
demonstrates the company's ability to increase their volume of loans, subject to a corresponding
cash flow (which would allow future debt service pay).
The last, explain to what extent a company relies on debt financing rather than equity and
provide information on a company in insolvency and its ability to secure additional financing for
good investment opportunities. This indicator is to ensure that creditors are protected in the future.
Debt ratio is a general indicator of borrowing and is calculated as the ratio between total
liabilities and total assets. Normally, the debt ratio should be less than or equal to one, from the idea
that the volume of debts must be less than or equal to the total value of assets.
Another aspect of the economic activity of a company is described on how assets are used.
This can be measured by financial indicators such as working capital per employee (I9), and total
assets per employee (I10).
Another factor that appears to discriminate between companies is size, which is measured as
the natural logarithm of total assets (I11). Large companies normally have a large base of assets
compared to smaller companies. Ohlson (1980) found that size was a significant factor in viable
companies into bankruptcy. It is expected that the relationship between these two variables is
negative, the larger the size of a company, the more likely than distress or even bankruptcy.
How effectively the firm uses the assets available to continue to be of concern to financial
managers, to ensure a certain balance between turnover and the firm's assets. In our analysis, three
indicators are used to determine the efficiency with which assets are used: rotation speed of stocks
(I12),
the control of size and value of the stocks is one of the keys to success in business: a company
cannot work without the stocks, yet too many stocks can result in a financial jam immobilizing the
money with which they were purchased; debt collection speed (I13) shows the number of days
between the time of delivery of goods, works and that of their payment being received and
rotational speed of Total Assets (I14), measures the efficiency with which the company uses the
machines and equipment available.
THE ANALYSIS RESULTS
Several prediction models and methodologies have been used in model search
which has the best precision sample and identify the financial indicators that are most relevant in
predicting bankruptcy. The study was divided into two main parts, therefore, the main types of
312
methods and methodologies used. Each part focuses on the following data sets separately:
- The first year, when financial reports are only used 2008 to anticipate financial problems a year
earlier
- The second year, when using only financial ratios of 2007 to predict financial problems two years
before
- And two-year cumulative data, when using all financial reports for 2007-2008 to predict financial
problems a year earlier.
For each of the four sets of data, descriptive analysis was done to be better informed about
the nature of correspondence between all 14 variables differences in average for each of the two
types of companies, and any other features that may become useful in studying prediction.
DESCRIPTIVE STATISTICS
First, the average values of each of the 14 indicators for both types of companies in
difficulty and viable were calculated and presented in the tables below.
First we notice that the indicators of profit margin, ROA, ROE, and profit per employee of
companies in difficulty have negative values for all data sets considered and, therefore, as expected,
lower than those of viable companies.
Moreover, it appears that companies in difficulty is based more on debt, compared to
approximately 2.148708 debts to total assets compared to only 0.96 viable businesses when
considering the first year and by 2.04 for companies in difficulty, compared to 0.91 when using
second-year data set, only 2.09 compared with 0.92 when using panel data aggregated over two
years.
Viable Difficulty
2007 Mean StDev Mean St Dev
I1 10.82479 11.38512 -34.45628 40.40124
I2 8.25948 6.327937 -17.0408 15.55741
I3 13.21857 10.31793 -68.5923 130.6802
I4 19218.63 21786.24 -21299.44 25995.44
I5 12.06727 0.800222 11.21147 0.940313
I6 2.718859 2.845516 0.790733 0.624125
I7 0.869944 0.885322 8.348254 34.72631
I8 0.969296 1.017546 2.148708 3.527405
I9 153960.0824 428024.4795 79237.22359 188920.0552
I10 12.06851 0.941081 11.5934 1.050876
I11 18.35842 1.41169 17.06504 1.4854
I12 72.72488 119.3099 137.4066 156.2796
I13 65.25417 49.1016 137.4168 189.5652
I14 2.15978 8.352594 2.178537 3.557583
Other indicators recorded big differences between the values of financial ratios for
companies in difficulty and viable are the speed of rotation of stocks (72.72 compared with 137.4 in
the first year, 73.4 compared with 260 the second year and 74.29 compared with 196.99), speed
collection of receivables (65.25 compared with 137.41 the first year, 67.12 compared with 404.56
the second year, 67.28 compared with 271.41 for the two years combined).
Viable Difficulty
2008 Mean StDev Mean St Dev
I1 9.97103 10.627 -43.658 56.8396
313
I2 7.61864 6.811976 -18.749 14.90872
I3 11.16147 9.52645 -48.7624 45.89776
I4 23009.19 28002.60 -35526.45 45897.95
I5 12.2842 0.845462 11.35644 1.045958
I6 3.772982 6.022482 0.706671 0.659681
I7 0.89034 1.135865 7.477664 18.30257
I8 0.910566 1.009141 2.043756 2.835615
I9 189864.3523 415153.9754 125523.2265 371182.8428
I10 12.32601 1.000133 11.88447 1.158533
I11 18.58411 1.368526 17.02965 1.494515
I12 73.40595 100.3051 260.3918 706.8726
I13 67.12583 46.26435 404.5692 1765.453
I14 1.147772 1.845883 1.822412 2.457775
Viable Difficulty
Cumulative Mean StDev Mean St Dev
I1 10.3979 10.2424 -39.057 40.7396
I2 7.93906 5.18239 -17.8949 12.2739
I3 12.1900 8.08787 -58.6773 78.6023
I4 21113.9 23804.1 -28412.9 31108.8
I5 12.1757 0.81337 11.2839 0.94135
I6 3.24592 3.94737 0.74870 0.61110
I7 0.88014 0.94557 7.91295 24.2853
I8 0.93993 0.9602 2.09623 3.07112
I9 170621.6648 416151.5714 101846.9588 276379.5889
I10 12.1818 0.96989 11.7585 1.07799
I11 18.4624 1.37803 17.0388 1.47403
I12 74.2933 108.251 196.996 374.435
I13 67.2850 47.0314 271.410 914.135
I14 1.76326 4.67461 1.86402 2.68270
Another indicator that has extremely low values for companies in difficulty is the current
rate, for the first year compared 2.71885914 to 0.79, for the second year compared with 3.77 0.70,
0.74 years compared with 3.24 for cumulative years.
Average firm size indicator values are quite close between viable companies in difficulty,
for all tables (18.35 compared with 17.06 for the first year, showing that both companies in
difficulty and in need of non-original sample was chosen for reasons well of similarity.
The following table shows the univariate analysis to identify the financial indicators that
have the greatest ability to differentiate between companies with the difficult financial situation and
viable for all three tables.
The results show that financial indicators, with a significant difference at 0.05% for 2007
are: profit margin (I1), ROA (I2), ROE (I3), the current rate (I6), liabilities total assets (I8), size of
company (I11) stock rotation speed (I12) and debt collection speed (I13).
Viable Difficulty Mean differences
2007 Mean Mean t-statistic sig
I1 10.82479 -34.456282 7.320 .000
I2 8.25948 -17.0408 10.856 .000
I3 13.21857 -68.5923 4.368 .000
I4 19218.6349 -21299.44 8.793 .061
I5 12.06727 11.21147 4.833 .078
I6 2.71885914 0.790733 4.748 .000
I7 0.869944 8.348254 -1.522 .135
314
I8 0.969296 2.148708 -2.233 .030
I9 153960.0824 79237.22359 1.992 .052
I10 12.06851 11.5934 2.270 .088
I11 18.35842 17.06504 5.752 .000
I12 72.72488 137.4066 -2.085 .042
I13 65.25417 137.4168 -2.502 .016
I14 2.15978 2.178537 .364 .718
In 2008, the financial indicators discovered in previous year remain the same, with the
observation that stocks variable rotational speed disappears, the sig is higher than 0,005.
2008 Mean Mean t-statistic sig
I1 9.97103 -43.658 6.446 .000
I2 7.61864 -18.749 11.153 .000
I3 11.16147 -48.7624 8.171 .000
I4 23009.19616 -35526.4524 7.555 .000
I5 12.2842 11.35644 4.959 .000
I6 3.772982 0.706671 3.676 .001
I7 0.89034 7.477664 -2.526 .015
I8 0.910566 2.043756 -2.886 .006
I9 189864.3523 125523.2265 2.323 .024
I10 12.32601173 11.8844782 2.259 .028
I11 18.58411075 17.02965529 6.627 .000
I12 73.405954 260.391882 -1.870 .067
I13 67.12583 404.569284 -1.357 .181
I14 1.147772 1.822412 -1.500 .140
The financial indicators, with a significant difference at 0.05% for the years 2007-2008
(combined) are: profit margin (I1), ROA (I2), ROE (I3), profit per employee (I4), the current rate
(I6), debt capital (I7), liabilities total assets (I8), company size (I11) stock rotation speed (I12) and
debt collection speed (I13).
To conclude, these are significant differences for each of the three data sets:
- First-year data set: I1, I2, I3, I6, I8, I11, I13 and I12
- Second-year data set: I1, I2, I3, I6, I8, I11 and I13
- Two-year cumulative data set: I1, I2, I3, I4, I6, I7, I8, I11, I13 and I12
Cumulative Mean Mean t-statistic sig
I1 10.397911 -39.057 7.964 .000
I2 7.93906 -17.8949 13.629 .000
I3 12.19002 -58.677366 6.172 .000
I4 21113.91552 -28412.94622 8.866 .000
I5 12.17574 11.28395 5.086 .000
I6 3.245921 0.748702 4.588 .000
I7 0.880142 7.912959 -2.041 .047
I8 0.939931 2.096232 -2.582 .013
I9 170621.6648 101846.9588 2.512 .015
I10 12.18181072 11.75854339 2.311 .025
I11 18.46244042 17.03885258 6.246 .000
I12 74.293317 196.996441 -2.261 .028
I13 67.285048 271.410633 -1.594 .117
I14 1.763264 1.864023 -.128 .899
315
CONCLUSIONS
Through this article we try to identify which financial indicators are important in the
construction of a bankruptcy function for the Romanian companies. Applying traditional models
(Altman, Beaver, Conan Holder) in Romania does not automatically lead to expected results, due to
their specificity: market analysis, its characteristics, financial ratios used. The importance of this
study is the discovery of important financial indicators for companies in Romania. Future
extensions of this study may include the use of discriminant analysis for discovery of predictive
functions for bankruptcy.
REFERENCES
1. Altman Edward I. Hotchkiss Edith (2006) Predict and Avoid Bankruptcy, Analyze and Invest in Distressed
Debt, Third Edition, John Wiley & Sons, New York,
2. Balcaen, S. Ooghe, H. (2004) 35 Years of studys on Business Failure: An Overview of the Classic Statistical
Methodologies and their Related Problems, Vlerick Leuven Gent Working Paper Series 2004/15
3. Kahl, Matthias, (2002) Economic Distress, Financial Distress, and Dynamic Liquidation, Journal of Finance,
57, 135168.
4. Ohlson, J. (1980) Financial Ratios and the Probabilistic Prediction of Bankruptcy Journal of Accounting
Research, 18, 109-131.
5. Shumway, T. (2001) Forecasting Bankruptcy More Accurately: A Simple Hazard Model Journal of Business,
74, 101-124
6. Vernimmen Pierre (2005) Corporate finance Theory and Practice, John Wiley & Sons,
7. Winkler, R. L. (1994): Evaluating Probabilities: Asymmetric Scoring Rules, in Management Science, vol. 40
(11), pp. 1395-1405, 1994
316
ACCOUNTING KNOWLEDGE IN FORESTRY'S DECISION SUPPORT SYSTEMS.
LITERATURE REVIEW.
Ph.D Student Ec. Daniela I. POSTOLACHE (MALE)
Alexandru I. Cuza University of Iasi, Romania
males_daniela@yahoo.com
Abstract:
Accounting information, processed through modern type of decision support systems, in appropriate economic
analysis framework, using previous experience, gives extra knowledge to forestry managers. In our paper, we
conducted a literature review, in the field of decision support systems used in international forestry, but also about the
Romanian prospects and achievements in this area. Our results are useful to researchers and developers of decision
support intelligent solutions, to forestry accounting researchers and forestry managers in order to be aware of new
discoveries in the field, to managerial accounting researchers interested in using economic models for decision support
tools development. Our study reveals that these systems were, at first, designed to solve relatively simple management
problems. Nowadays, modern systems have to cope with increasingly more challenges of adaptive management and
sustainability requirements. To achieve optimal results such systems must be designed like integrative solutions and
need to include accounting information and accounting knowledge. The efforts of Romanian practitioners and
researchers to improve internally used decision making solution, and to improve the forestry management are notable.
However, in the Romanian computer-based decision support solutions framework, account information is not
synthesized, it is not complete and does not store a stock of knowledge to provide assistance to the manager at any
time.
Keywords: forestry accounting systems, managerial accounting, forestry decision support, decision support
systems, knowledge-based systems, accounting knowledge
JEL Classification: D6, D8, M15, M41, Q23
1. INTRODUCTION
Forestry practice involves management of complex systems at various spatial scales, from
the lower site level, to the national forest. The activity is based on a set of information and
knowledge with a very broad spectrum and has a strong impact on social and economic
development.
More so, in forestry, we can speak about complex economic processes and the need to assist
decision with a reservoir of knowledge available at the proper time. Regarding this, an appropriate
solution that will support forest management act, is offered by intelligent computer systems that can
provide alternative economic decision.
2. FORESTRY MANAGEMENT AND ACCOUNTING. OVERVIEW.
Forestry practice requires constant correlation between forest management in the
biodiversity conservation spirit and directing towards economic efficiency. Purely economic
management is unacceptable because it would decimate the trees with diameters in the ranges
surrounding timber and construction assortment size. Moreover, the opportunity cost for
management of biodiversity only, is too high. (Buongiorno and Gilles, 2003) [6]
Experts consider that, regarding the allocation of resources in forestry, economics are
important milestones in the decision process, (Lubello, 2008; Davies and Richards, 1999) [22], [9],
even when environmental management objectives are a priority, such as developing a forest
conservation program case. This context also imperatively involves to compare costs or alternatives
that may be followed. (Lubello, 2008) [22]
317
There are researchers who believe that the image currently reflected in the accounts in
forestry, about forest entities environment, processes and results is incomplete and even distorted in
some subdomains. (Kazana and Kazaklis, 2008; Jbtl, 2008) [19], [17] There are proposals to
extend the image both for internal needs of the forestry sector and in order to help users of
information from this sector. (Jbtl, 2008; Turland, 2007)[17], [37]
A large number of researchers (Turland, 2007; Rauscher et al., 2007; Willows et al, 2003;
Pearce, et al., 2002) [37], [30], [39], [27], emphasizes in their studies that, in forestry, planning
must take into account: uncertainty and atypical natural phenomena that has always been specific in
the sector, risk factors (including economic ones) and force majeure events that may occur
accidentally.
In Turland view, the economic major risk factors are:
3. financial risk caused by changes in the cost, caused by labor costs or pest control chemicals
costs, for example;
4. financial risk caused by selling price evolution;
5. economic risk on the scale of taxes, on interest or exchange rate variation;
6. regulatory risk on products trade which may occur, for example, in the forest certification
process. (Turland, 2007)[37]
When a particular domain knowledge is used to solve difficult problems that appear in practice,
to explore existing opportunities and to make decisions that enhance the performance, then such
knowledge is creating economic value. (Rauscher et al., 2007) [30] In terms of knowledge of forest
accounts incorporated into appropriate computer systems, it can successfully assist decision under
uncertainty, reducing the risks associated with certain economic or financial alternatives, leading
default management process optimization.
Unfortunately, according to some studies (Eom and Kim, 2005; Ellis et al., 2004; Mowrer et
al., 1997) [14], [13], [26] financial and accounting knowledge integration in decision support
systems relevant in scientific literature, including forestry literature, equally as development of such
systems for accounting, are accomplished at alarming low rates.
According to Eom and Kim survey, of the 154 DSS (Decision Support Systems)
applications of operational management, described in the literature of scientific interest, only 6.49%
of systems are designed for financial sector, while accounting systems are not at all represented.
Moreover, the work team of researchers led by Mowrer concluded that of the 24 ecosystem
management systems analyzed, only 15, ie 62.5%, integrates economic analysis possibilities, and, in
the four of them ( 16.7% of total) this feature is made explicit.
MODERN DSS IN FORESTRY
Decision support systems are particularly important, as they have the ability to add and
select from the multitude of variables, information and knowledge, those truly relevant to informed
decision. (Ellis et al., 2004) [13]
From all of these, knowledge-based expert systems have the ability to capture specific
knowledge of an area and to mimic human expert strategy to solve problems in that area. (Britton et
al., 2005)[4] In the cited paper the concept of expert system is defined in a unique way. An expert
system is, in the researchers vision, a computerized system which subscribes to the following
logical syllogism: n experts (somebodies) input their knowledge into the system. The system
outputs its inputs to a non-expert (anybody else). A non-expert (anybody else) knows more than n-1
experts (somebodies). In short, an expert system helps many somebodies turn anybody into a
somebody. After this exciting presentation of the concept, the study's authors noted that
developing an expert system appeal both to knowledge about human reason and the knowledge
318
about information technology, as a preamble to describe the design and characteristics of such
solutions.
Numerous studies have evaluated the usefulness of fuzzy logic systems and neural networks
in economic and industrial applications. (Lin et al., 2004) [21]. The three researchers even suggest
an integrated neural fuzzy system to prevent the risk arising from misstatements of income, such as
the U. S. well-known accounting scandals, Enron and WorldCom. In their study, Ellis et al., (2004),
[13] states that, in agro-forestry, computer applications for decisions support reach their goals,
when they aggregate various sources of information and relate its to user needs and resources. The
complexity of natural resource management is given by the diversity of resources, interests,
objectives, constraints or categories of owners involved. According to the authors, intelligent
solutions for this area should take into account simultaneously environmental objectives, the
production objectives of owners and society needs.
From a detailed analysis of forest decision support systems, Reynolds (2005) [32]
concluded that, while in the early years its was designed to solve relatively simple problems of
management, modern systems are required to meet the challenges generated by forestry ecosystem
management, sustainability and adaptive management.
In his 2005 study, Reynolds looks at the key requirements for such systems in the U.S., the
characteristics of such solutions in the U.S., how they succeed to meet requirements and existing
opportunities for their development prospects. One of the three systems presented by Reynolds
(2005) [32] is Ecosystem Management Decision Support System-EMDS. Created since 1994 by
the U.S. Forest Service, EMDS is now developed by the Institute of Redlands University,
California. This system integrates NetWeaver logical inference engine to evaluate forest planning
and Criterium DecisionPlus decision modeling engine to assess management priorities. (EMDS
Web page. <http://www.institute.redlands.edu/emds/Default.aspx>) [43].
These engines are used for creating the knowledge base and they are developed trademarks
of Rules-of-Thumb Inc., and respectively, InfoHarvest Company.
(EMDS User Guide,
<http://www.institute.redlands.edu/emds/manuscripts/docs/EMDS%20User%20Guide.pdf>) [43].
Criterium DecisionPlus combines a visual user interface, brainstorm site, a flexible
mechanism for setting variables, ways of achieving the original analysis and generate
comprehensive reports to help decision makers to formulate, validate and communicate complex
decisions. Can be obtained decision importance criteria ratings, and standard queries, using the
rules.(InfoHarvest Inc., 2002) [45].
Since 2009, the analysis carried out using EMDS, support the decision on forest-fuels
budget allocation. Models used in the early development of the system were mainly oriented to bio-
physical considerations, and included only a few socio-economic factors. Yet managers were more
interested in using the results provided by these models to determine budget allocation to agencies
and department regions. Regarding it, was found that it was necessary to expand the coverage of
decision support solution to adequately address the multiple purposes for which it was designed.
(Reynolds, 2010) [31]
So, after the use of expert systems in practical forestry, it is concluded that for best results,
this type of systems should include information and accounting knowledge and be designed in the
form of integrative solutions.
Slovakia set of decision support models for selection of harvesting treatment and selection
of harvesting technology, OHTS (Optimal harvesting technology selection), includes both
environmental and ergonomic criteria, as well as economic criteria. This system was
developed in the NetWeaver environment, which is connected with EMDS solution. Models
designed in the system are based on morphology terrain data (digital landscape model), information
319
about the structure of forest stands (age, species, varieties), soil type, type of forest roads and their
condition, equipment usually used for harvesting in a given area, the costs of such operations.
Of economically point of view following criteria are considered: wages and taxation,
depreciation, yield issues, repairs and maintenance, auxiliary materials costs, profits, losses that
occur in harvesting. (Tuek and Majlingov, 2010)[36]
4. FORESTRY MANAGEMENT AND ACCOUNTING IN ROMANIA
Regarding the Romanian forestry policy in this area, only in 2002 started a Forestry
Development Project, initiated by the Government with World Bank support, and according to
documents published on the project web site (<http://www.forestier.ro> [47]), the objectives of
project are:
[1] improving the management of state forests by expansion the capacity and technological
innovation for sustainable environmental policies and efficient forest managent;
[2] assisting development of a pilot system for forest management in support of private forest
owners.
To achieve the objectives were detailed five project components:
Component 1: Establish Systems to Ensure Sustainable Management of Private Forest Lands
1.a. Strengthening the Department of Forests, with emphasis on the Forest Inspectorates activity
1.b. Support for the Development of National Association of Private Owners (APPR)
1.c. Monitoring and information management system.
Component 2: Mitigate the Consequences of Restitution on Management of State Forest Land
2.a. Supporting Reform and Strategic Development of the NFA-Romsilva
2.b. Rehabilitating and expanding the forest road network
Component 3: Support Increased Productivity and Competitiveness of Forest Industries :
establishing the Forest Business Information Center (ForsBIC)
Component 4: Building Public Support for Sustainable Forest Management : preparing and
implementing a public awareness strategy and campaign
Component 5: Project Management and Monitoring.
(<http://www.forestier.ro>[47])
Within 1.c. Component, Bucharest INDACO company had the task of creating Forest
Monitoring and Information Management System (FMIMS).
According to the company website,
(<http://www.indaco.ro/resurse/prezentare/prezentare_ro.pdf> [44]), development of this system
was based upon analysis of forest resources and forest land, technical, administrative and
operational data, in order to achieve sustainable forest management objectives.
The system consists of three modules:
FOR-MIS: model, gather and process information from the field (forest districts), providing
multiple reports. This module operates based on a hierarchical organizational structure.
FOR-MIS has an open architecture using a metadata-driven model (MDA);
FOR-GIS is reporting and view in geographical format module, creating thematic maps
based on information taken from the module FOR-MIS;
320
FOR-CES through this module the system model and store, at indicators level, the concept
of an warehouse.
(<http://www.indaco.ro/resurse/prezentare/prezentare_ro.pdf> [44])
Currently, this system is used to support decisions at the Ministry of Environment and
Forests.
In the National Forest Agency (NFA), at this time, is not used a particular system to support
decision, but it was decided to implement an integrated information system for introducing the
relevant information in acquisitions, sales, warehouse, immobile assets and financial accounting.
The system will provide reports to assist decisions for optimal performance of the Agency's current
significant activities. (Contu, 2008)[8] The system to be implemented will be an Enterprise
Resources Planning system , called Charisma ERP (Dinca and Miu, 2008)[10] and will have the
following structure:
General Accounting Module;
Suppliers Accounting and Payments Module
Customer Accounts and Receipts Module
Immobile Assets Module
Inventory Management Module
Management Accounting Module
Treasury Accounting Module
Acquisitions Management Module
Contracts Module
Human Resources Module - personal inventory and payroll
eAuction Module
PDA Data Acquisition
Data Timber Processing Management
Web Portal
Document Management.
(Contu, 2008) [8]
That computer solution aims to satisfy the following "business needs" (Contu, 2008) [8] :
PB1: Need for unified and centralized management of technical and economic data set to be stored
and tracked in the computer system, removing additional activities, integration and homogenization
of data received from the territory.
PB2: Necessity to achieve business flows and approved documents, from the activity objects of the
NFA Romsilva in a uniform manner, using the computer system, for better coordination of technical
and economic processes of NFA.
PB3: Lack of integrated information system leading to the inability to obtain necessary reporting to
administrative authorities and policy makers (or obtaining with great difficulty).
PB4: Need to streamline business, financial and management process of NFA Romsilva.
PB5: Need to allow transparent forest acquisition management of NFA Romsilva (by facilities of
informing the public) respecting the rules established by law for public auctions.
PB6: Need for real-time traceability of timber in production, transport and storage in RNP Romsilva
activity.
PB7: Need to plan and to pursue the acquisition budget of RNP Romsilva according to law and
according internal procurement procedures.
PB8: Annual evaluation of wood possibility of cutting streamlining.
PB9: Necessity to monitor the standing timber, harvested timber and purchasing services contracts.
(Contu, 2008) [8]
321
To solve business problems and needs have been defined following described business goals
to be reached by implementing the system:
OB1: IT components must use a single model, relational database model, so that different entities
may not be duplicated in its.
OB2: IT system should enable management accounting information for a unit with complex
structure, composed of several branches, orderly in several layers of decision, with operational,
separate and cumulative reporting functions.
OB3: IT system will manage chart of accounts, and will integrate all accounting periods and
accounting records.
OB4: The IT system will allow accounting information to be detailed, as an instrument for tracking
and analysis of functional structure.
OB5: Providers accounting system must generate effective tools for control Romsilva payments, to
optimize payments time and ensure a system of approving the payments. It must manage
information about vendors, system to record invoices from suppliers, and other transactions (debit
notes, credit, advance payments, etc.) .
OB6: Customer accounting module will provide support for customers activities, with the aim to
achieve a rigorous control of the amounts due and received by NFA Romsilva. Module will manage
customer information, both data definition and historical relations with them.
OB7: The IT system will include accounting of immobile assets, providing both financial functions
(values, depreciation, transactions) and a transparent management of their physical (physical
inventory, location in space).
OB8: The IT system will need to enable inventory management of items defined in the NFA
Romsilva activity.
OB9: IT systems should include management accounting: the collection of direct costs and indirect
costs, items of expenditure, automatic allocation of indirect costs and administrative overheads,
outcome establishment.
OB10: IT system should provide a tool to achieve NFA Romsilva automatic cash-flow correction
control and cash-flow forecast.
OB11: Acquisitions module should create supply optimization activities prerequisites and policies
to ensure compliance with company conditions of supply work.
OB12: IT system should enable definition and monitoring of contracts, from negotiation phase until
closure or annulment. (Contu, 2008) [8]
MOdels for AdapTIVE forest Management (MOTIVE) is a European project under
Framework 7 for Research and Technological Development (FP7: ENV.2008.6.2.1.6. Development
of models of adaptive forest management) that seeks an investigation into management strategies
for climate and use of land changes adaptation.
This project takes place over four years, with completion in 2013, attended by 20 partners from 14
European countries, Romania is represented by a team from the Faculty of Forestry, University
"Stefan cel Mare", Suceava. About the project, from the presentation on dedicated website, we find
out that particular attention will be given to conditions of uncertainty and risk in terms of how they
will be taken into account in improved systems, to assist decisions.
(MOTIVE 2010 Web page. <http://www.motive-project.net/index.php?P=42> [46]). Remains to be
seen what degree of importance is assigned to accounting knowledge, in terms of the objectives of
this project.
5. CONCLUSION
It requires, in Romania, to start a process of creating accounting knowledge-based intelligent
systems to provide decision support to forestry managers. A first step in this direction would be to
322
build a forest specific accounting knowledge base for a forest district in order to improve decision
making at this level.
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326
ACCOUNTING INFORMATION IN THE CONTEXT OF GLOBALIZATION
PhD. Student Alexandra-Daniela SOCEA
alexandra.socea@yahoo.com
Abstract:
The evolution of national economies is influenced by forces acting globally. In this regard, operating, financial
and investment decisions have significant international implications. Most of them are based on accounting
information, which must be remarked by quality from all points of view. Since the accounting information range of
users is diverse and their information needs are at least as diverse, interpretation of accounting informations quality is
characterized by subjectivity. The users requirements are evolving in a rapidly rhythm and accounting must
continuously adapt to the new informational requirements. Through their nature and content the accounting
informations contributes to substantiate the decisions of various categories of users: current and potential investors,
employees and unions, customers, financial and commercial lenders, government and its institutions, state, public. In
the current international context, an accounting information able to satisfy users needs is more than ever necessary. By
its nature and functions, accounting disciplined the economic life, directing it toward profitable alternatives. Equally,
the accounting rigor has cultivated the sense of trust in business, has developed the economic poise and the order of the
entrepreneur. The importance of accounting consists in its universal value, in its functionality at all stages of
development of human society.
Keywords: accounting, accounting information, decision process, users, accounting informationquality
Jel classification: M41
1. INTRODUCTION
The approach envisages the appreciation of how accounting information meets users
exigencies in the context of globalization. In this sense is very important to clarify the concept of
quality of accounting information and to highlight the features that must meet. Information needs
are influenced by the complexity and diversity of enterprises activity.
The topic of present interest is very important, especially if we consider the priority of
accounting information in global economic informational system. The approach is based on
consulting the literature and formulating personal opinions rigorously substantiated.
The humanity is presently affected by a global financial crisis. Bankruptcies of large
companies, small companies decline or extinction, significantly reducing revenues, increasing
unemployment and degree of indebtedness, outlines an economic situation characterized by
instability and uncertainty. In the short term, there is no magic formula for such complex problems.
Faced with such circumstances, the accounting could not stay immune. We consider that it occupies
an important place in economic and social life. The conduct of any resources consumer activity
requires the collection, processing and reporting of a set of relevant informations for decision
process. The accounting can not exist outside the context in which it operates, being the result of a
social need.
The accounting system fulfill the information function, which involves the supply of
accounting informations, in a specific form of presentation, to all internal and external structures of
the entity. They contribute to ensuring the functionality of economic information system by
flexibility and the possibility of change in accordance with the evolution of users needs.
The International Accounting Standards Board (IASB) evolves the framework for the
preparation and submission of financial statements [12]. IASB considers that any financial
statement, part of the information offer of accounting, must respond to real needs of users. On this
basis, the user can elaborate decisions to decide when to buy, keep or sell a capital investment, to
327
assess the degree of managerial competence, inclusively the responsibilities and performances of
the decision act. He also can assess the companys ability to pay other benefits to its employees, the
guarantees for business loans given to the enterprise. The same set of informations is also used to
determine the taxation policies, to determine profit and dividends that can be distributed and to
regulate enterprises activity.
2. SOME ASPECTS CONCERNING THE EVOLUTION OF ACCOUNTING
From the first notes with accounting significance to the computerized accounting models
today, the science of accounts contributed essentially at the appearance and the recognition of
homo economicus.
Life and business practices marked clues of this anfractuous road. In chronological order,
we mention the essential: the Code of Hammurabi, many notes in the same area of civilization
Asiro-Chaldeans, the accounting used by the Greeks and Romans, Roman law with special
reference to the economic and trade domains, the spread of Arab figures (Leonardo Pisano, 1202),
the appearance of the first Treaty of accounts (Luca Paciolo, 1494), Colbert's Ordinance (1673).
The two merchants of medieval European world, the Italian and Hanseatic, had their own
geographical area for manifestation. Along with the knight, monk, industrialist, banker and
merchant, in the Middle Ages, appears and remains in human history the book keeper. He will
master the art of calcules and business, being preceded since the ending of the fifteenth century by
Summa, a conceptualized theory of the Italian scientist Luca Paciolo. This was the moment when
bookkeeping entered in the great family of sciences. For the first time, a Venetian accounting
practice, already entered in the benefit of merchants, was theoretical generalized and really
published.
The principle of economicity, also known as the principle of the overall efficiency, requires
quantification through rigorous calculations of the effort compared with the effects and the obtained
results. The accounting was an essential shift in the business world. There was the transition from
empiricism at rigor, from arbitrary assessment to the economic truth and accurate image.
At the list of the most important moments that marked the complex process of development
and modernization of accounting, it is necessary to mention the ongoing efforts. We refer to the
extensive process of harmonization and standardization of accounting carried on european and
international level. In a valuable treaty of accounting, the renowned French author Bernard Colasse
recently stressed: the enterprises accounting is essentially marked, in contemporary times, by two
fundamental facts: first, the normalization and the settlement of the general accounting, and second,
the development of accountings research. [2] Through the effects created on economic growth, the
accounting positively influenced the material and spiritual advencement. It is not perchance the fact
that the states that promoted a scientific accounting, have also gained a higher level of economic
development.
We mention that the science of accounting accomplishes the five basic paradigms of
knowledge: [6]
- the inductive approach involving the development of theories by generalizing observations
provided by accounting practices;
- the deductive approach that previously defines the objectives based on witch are deducted the
postulates, the principles and the accounting rules;
- the predictive approach which requires accounting rules and principles ability to predict the
future trend of economic facts;
- the behavioral approach that takes into account the feedback from individual user as a
succession of the access to accounting information;
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- the economic or pragmatic approach starts from the premise that the accounting information
is an economic good, like products and services.
The existence of paradigms in accounting confirms its status of mature scientific discipline.
In this context, the accounting can be considered a science with multiple paradigms.
Through a specific notation system, the accounting observes, records and quantify,
becoming in this way a successful means of management and direction of entire economic activity.
The great German thinker J. Fr. Schr perceives the accounting anchored in the three times of the
companys existence: Accounting is the honest judge of the past, the counselor of the present and
the indispensable guide of the future. This impeccable remark expresses the permanent adhesion
of the science of accounts to economic praxis.
It is true that the presence of this ingenious creation of the spirit, as Gethe calls it in his
book Wilhelm Meisters Lehrjahre manifests discreetly, noiseless, lacking that something
spectacular ... Behind the curtain, the accounting generously offers the oxygen of any business:
the adequate and relevant information, full deserving of its status of founded and established
science.
3. WHO NEEDS ACCOUNTING INFORMATION?
The literature often takes the list from the framework of the IASB, without taking into
account its specificity: those specifications are valid for publicly traded companies, which otherwise
are in a much smaller number toward unlisted companies. They also refer to users of financial
statements and not to those of accounting information. In addition to informations derived from
annual financial statements, accounting offers a wealth of other informations. In this context, we
consider necessary a regard on the accounting information system to identify users, the exigencys
imposed and the purpose for which each beneficiary will use this specialized information system.
The demand for accounting informations comes from different users. Whatever the precise
nature of those decisions, users want informations that allow them the evaluation of two dimensions
of the enterprise: vulnerability and beneficiary capacity.
Investors are the main partners of the enterprises on financial market who provide capital in
risk conditions. Capital bidders and their advisers are concerned about transactions inherent risk and
the profit size from investments made. The prudence principle determine them to pursue a moderate
profit, the exercise continuity and a minimal risk. Based on the accounting informations they will
decide whether it should expand investment, to keep or to sell. Also, the shareholders are interested
about the companys ability to pay dividends, the company's managerial performances, the net
income per share, the share quotations on different capital markets and the evolution of economic
environment. The informations about the outcome of the financial year marked by relativity are
lagging behind in some degree of informations about net cash flows.
In anglo-saxon conception, the accounting informations should give investors a true and fair
view of the firms position, while in continental conception the accent is put on prudence. The
investors occupies a preferential place in the list of users of accounting information in american
environment. In this context, we also consider the fact that more than 80% of the economic activity
financial throughput the stock market.
The employees, as major providers of work, as well as their representative groups, the
unions are interested in informations on the company stability and the degree of profitableness. The
employees have an important role in the production of accounting informations, both in terms of
volume and quality. The employees are also interested in the enterprises ability to offer salaries,
pensions and other professional opportunities. The employees and unions seek informations on the
size and the distribution manner of profit, the sectoral performances materialized in extending or
restricting of the activity, the continuity of enterprises activity in conjunction with job security, the
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investments in profesional education and training of employees, the wage policy, the terms of work.
The lack of informations may lead to mistrust and conflicts in relations between employees and
employer.
The financial creditors are interested in the capacity of the debtor enterprise to repay on
term the falling rates, including interests. To this end they monitor the company trying to avoid
the appearance of bad credits. In this category of users are found stock lenders and bank lenders.
The latters are interested in informations about the profitability and liquidity of the company, how
to finance assets, the financial structure of the entity, the guarantees that can be offer and any other
informations able to contribute to a better apreciation of repayment capacity of loans. The use of
accounting informations by bank creditors have a special character, because of the nature of bank
interest and specific conditions of confidentiality.
The stock lenders seek informations on bond efficaciousness and risk, bonds quotations, the
degree of indebtedness and the liquidity of the entity.
In anglo-saxon countries, mostly enterprises finance is ensured by the stock markets, so that
accounting informations favor the investors. On the other side, in most continental european
countries, funding sources are secured mainly by banks and other financial institutions, which
determine their protection. The amount of published informations is so diminished, as they easily
obtain the necessary informations.
Suppliers and commercial creditors are usually interested on a shorter period than financial
creditors about a full recovery of claims from trading partners (customers, buyers or beneficiaries).
They are interested in a prudent assessment of the debtors wealth, which guard them from negative
consequences of its insolvency. There is also by exception a category of suppliers that do not
interest them solvency of the buyer. We mean the suppliers were paid in advance or for which the
buyer opened letters of credit [6]. Suppliers and other commercial creditors are generally interested
in trading partner entity on a shorter period than lenders, unless they are dependent on continuity of
enterprises activity as the main customer.
Customers are interested in informations about the continuity of business. The importance of
this informations increases even more as customers have a long-term cooperation with the entity or
they are dependent on it. Customers, users or buyers of goods, works and services offered by the
entity, usually pay their equivalent after suppliers delivery or prestation. Release of non-recovery
of amounts due risk, customers will seek for continuity of suppliers activity, especially if it is a
main trading partner. If acquisitions payment took place in advance, these customers become
creditors of the supplier company, being included in Customer lenders structure. In this case their
interests will be similar to those of creditors generally.
Government and its institutions (the state) are interested in patrimonial units activity. The
state needs accounting informations fiscal reasons primarily but also for achieving national
accounting, macroeconomic statistics and economic forecasts. The supervision of enterprises
economic activity serves to determine the manner of resource allocation of state investment policy,
particularly for public patrimonial entities and to develop fiscal policy, including its application in
economic practice. The synthesis organs of state determines certain indicators in the national
economy based on accounting informations. In order to collect revenues, the state and the
authorized institutions reclaim an accounting to monitor if the companies are respecting the tax
rules.
The public is one of indirect users of accounting informations, starting from social and mass
effects of the economic development. The public may include any user who is interested in
accounting informations produced in a patrimonial entity. The activity of an enterprise takes part in
active labor, constituting a temptation also for future employees of the company. The financial
statements may be helpful in this regard by providing informations on recent developments of the
entity.
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The potential investors are usually interested in the same informations as effective investors:
enterprise profitableness, growth prospects, business continuity, legislation stability, labor quality
and likelihood of social convulsions.
Other users interested in accounting informations are local collectivities, environmental
movements, consumer organizations, competition, courts etc.
Managers are the main category of users of financial-accounting informations. In the context
of economic globalization and the competitive environment, the companys management is
remarkably complex, because the decision process requires many informations to be elaborated,
provided, interpreted and strictly controlled. The information needs of managers are influenced by
the complexity and diversity of the companys activity, and also by its nature. Their interest is
related to establishing an optimum costs-benefits report at the organizational level, mantaining a
balance between making a profit, social costs, reinvestment, autofinancing etc. At any level would
find the manager manages in fact its area of responsibility, unleashing actions in order to obtain
maximum effect with minimum effort. While the administration maintaines balance, the leadership
defines the strategy of obtaining the maximum balance with minimum effort, obviously for a
limited period. The leaders art is to perceive the driver, if possible in advance when the balance is
likely to be exceeded. He also must quantify the size of the price paid for achieving the goal.
Finally, all the efforts and actions undertaken on economic plane can be expressed pecuniary, which
implicitly means the direct intervention of accounting.
Accounting, as a key source of information about business performance, can help managers
to develop knowledge of the work environment in several ways: to make visible those activities not
visible through a managers daily activities and to provide an overall quantitative perspective on
their work. Accounting information can make visible those problems that are not visible from day-
to-day activities and can provide an independent check on operations to help managers know what
is going on.
Although not all information needs of users can be met by general purpose financial
statements, there are informations that may interest all users [11].
Grouping users based on their common needs is useful, but limiting categories of users is
not possible, especially if we consider that the demand for informations can come from any
interested person to base their decisions on information about an entitys activities.
Given that the accounting information users are exclusively domestic, the national
accounting rules are able to provide the comparability of informations at enterprises, industry,
economy level. In case of interest widens, encompassing also external users, then the shareholders
and potential investors should be able to do analysis and comparisons between companies from
different countries, which allow the application of optimal rational choices of investment [10].
4. CONSIDERATIONS ON QUALITY OF ACCOUNTING INFORMATION
It is apparent that each user wants to have informations that would diminish uncertainties
and provide him the opportunity to make the best decisions. In fact, these requirements denote the
need to produce first-class informations by accounting.
The accounting informations facilitates to carring out the activities by removal of any
eventual disturbances and contribute to the achievement of stable development. For the most part,
managers use in decision process informations provided by managerial accounting. However, to
base investment and financing decisions or management of clients, suppliers are useful informations
produced by financial accounting. Although the two circuits are organized separate, their
components are intercorrelated. The efficiency of decision process is also conditioned by the quality
of accounting informations generated by the two accounting circuits.
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To be exploited fully in decision process, accounting informations must be compared with
data from previous periods, with the same period, but refers to the same industry and with the
initially estimated. The value of accounting information will be assessed in relation to its usefulness
in decision process to ensure the expected results. The amount of information can be determined as
the difference between the net benefit generated by a decision after obtaining the information and
the net benefit generated by taking the same decision, unaffected by information [1].
The accounting information is crucial for economic decision process. In this context, it
fulfills certain functions, namely planning, monitoring and evaluation. The planning function refers
to the process of an action programming. This function involves the establish of purpose, objectives
and concrete actions to be undertaken. At this stage are useful the accounting informations relating
to estimated budgets. The monitoring function refers to the respect of plans. A useful information
for control can be the comparison of estimated budget with the actual one. The evaluation function
refers to assessment of decision process to improve it. In this respect it monitors whether objectives
have been met, causes of eventual irregularities, the effectiveness of previous stages. In decisions
assesment are useful the informations from financial reports.
An accurate information, held at the appropriate moment is a true power factor. Accounting
informations result from processing and interpretation through accounting logic of value
movements generated by economic activities. They must be real, intelligible, relevant, complete,
useful, homogeneity and verifiable. Qualitative characteristics are attributes that determine the
usefulness of accounting information. To be useful, they must be relevant to decisions making by
users. They have this capacity when they influence economic decisions of users, helping them
evaluate past, present or future events, to confirm or correct their previous evaluations [11].
The usefulness of accounting information is also influenced by its credibility. In this regard,
it should not contain significant errors or be biased. Also it must faithfully represent the transactions
and other events that it is either proposed to represent them or is reasonably expected to describe
them. To be credible, the information must be neutral, without influences and complete. An
omission can cause information to be false or misleading and thus have no credible character and
become deficient in terms of relevance.
An important consequence of quality information to be comparable is that users must be
aware of accounting policies used and any change to these policies, as well as the effects of such
changes. In this respect, users should be able to identify differences between accounting policies for
transactions and other similar events used by the same entity from period to period and by different
entities. The need for comparability should not be confused with simple uniformity and should not
become an impediment to the introduction of improved accounting policies. Not for an entity to
continue to emphasize in accounting, in the same manner, a transaction or other event if the adopted
policy does not maintain the quality characteristics of relevance and credibility. At the same time, it
is not appropriate for an entity to leave the accounting policies unchanged when alternatives are
more relevant and credible.
Accounting information may not meet the highest rates of features, but to be useful in
decision process, it must possess, at least partially, each of the qualities that define it[4].
The thorough knowledge of business processes by each manager, their reporting and
interpreting in the existing socio-economic context, coordinating operatve decisions both short and
long term, requires a high degree of efficiency in the management process. The economic effects
resulting from the optimal use of informations in enterprises management and control system must
materialize in increased efficiency of economic activities [8]. The efficiency of the decisions and
actions undertaken in the management process is influenced by the quality of accounting
informations, the way they are used. This category of informations allows the entitys management
to observe the evolution of activities and especially to compare efforts with results.
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The qualitative assessment of accounting information is an important scientific issue.
Although present in the literature, this problem has not experienced a whole solution, the
suggestions describing a measure of information quality through quantitative assessment. The
quality of information is closely related to management process and the level which is intended.
Thus, evaluating the quality of accounting information should largely reflect its degree of necessity
to a specific decider.
5. CONCLUSIONS
The economic crises that periodically cross the human society are also undisputed
information crisis. An insufficient, incorrect, embellish, irrelevant or uncontrolled information led
to many economic decline phenomena. Often, an unreal information is more dangerous than no
information. Latest situation develops for the thoughtful user the feeling of precaution, of
postponement decision.
Change has become a dimension of the contemporary world. Economic environment, the
enterprise, the market, including the behavior of economic subject, is in constant motion.
Consequently, one of the challenges imposed to accounting is the adjustment of information supply
to market requirements. In the economic field the decision directly affects the result and efficiency
of each taken action. To decide correctly, an adequate informations system proves to be absolutely
necessary.
In conditions of substantial improvements in communications, technology and the economy
field, the interest in the appropriate accounting information tends to become increasingly larger.
Continue reducing trade barriers, increased international economic competition makes
macroeconomic data and general informations may not be sufficient basis for decisions. Attention is
directed to specific informations about enterprises of interest to investors.
Accounting information available to manager, in its key parameters, in the form of
dashboard generated the managerial accounting. It is one of the circuits of patrimonys aproach in
dualist system. Managerial processes in the economy are based on economic information system
and accounting information in their accounts is essential.
In the economic information system, accounting is the main decision-making tool, as it
records in an integrated, analytical and complet manner, the means and resources of economic
management, in terms of size, position, structure and intended use. The objective parameters that
the economic agent tends to make (cost, profit, turnover, solvability) are recorded in their internal
dynamic by the science of accounts. The economic activity aims to optimize value balanced
relationships between effort and effect, revenues and expenses, means and resources, controlling
these relationships involving mandatory use of accounting. Concomitantly, the legitimacy of
leadership and managerial competence is achieved by accounting values, mostly of economic
informations from companys environment, approx. 47% being accounting informations.
We appreciate the importance of accounting information in economic information system
and in decision process derives from a number of peculiarities. By dual representation of wealth
highlights discreet relationships, of interdependence between the material substance of it (means)
and their legal abstraction, their origin (resources). Through complex calculations it allaws to
establish the cost of production, the incomes and results, the companys future economic strategies,
according to the results obtained in the reported period, allowing comparative analysis in time and
space. Through specific means and procedures (account, balance, balance sheet, inventory, cost
calculation etc.) provides both a comprehensive and analytical knowledge of studied perimeters.
The degree of correlation, aggregation and verification of accounting information reality is made
through the principle Active = Passive and formal relationship Debit = Credit. And last but not
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least, accounting information has a higher degree of certainty and relevance toward other
information systems.
Finally, accounting is an essential component of economic information system, oriented
toward knowledge and management of economic values patrimonially separated. Accounting and
its synthesis statements are the most important source of informations both for enterprise
management and external users, the two categories being obliged or interested to know its the work
and the results achieved.
Accounting informations provide the necessary security in decisions processing and
predicting calculation regarding the evolution of economic activity. Their use in information-
decision system is currently amplifying by automating management calculations. Accounting is
operating with a system of interdependent means and processes, involving the state and motion of
economic resources controlled by the enterprise, including the results of these changes. On the
theory accounting has concepts, principles and laws governing the field investigated. Through this
becomes possible the penetration in the essence of economic phenomena and processes, explaining
the connections and interdependencies and what is more important to influence of their future
evolution.
Acknowledgements
This work was supported by the the European Social Fund in Romania, under the
responsibility of the Managing Authority for the Sectoral Operational Programme for Human
Resources Development 2007-2013 [grant POSDRU/88/1.5/S/47646]
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4. Feleag, N., mblnzirea junglei contabilitii, Economic Publishing House, Bucureti, 1996
5. Georgescu, I., Mironiuc, M., Validarea informaiei financiar-contabile n contextul dezvoltrii
durabile, Alexandru Ioan Cuza University Publishing House, Iai, 2009
6. Horomnea, E., Fundamentele tiinifice ale contabilitii. Doctrin. Concepte. Lexicon, 2
edition, Tipo Moldova Publishing House, Iai, 2010
7. Patracu, L., Situaiile financiare suport informaional n decizia managerial, Tehnopress
Publishing House, Iai, 2008
8. Radu, F., Eficiena informaiilor contabile n managementul ntreprinderii, Tehnopress
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10. Tabr, N., Horomnea, E., Mircea, M.C., Contabilitate internaional, Tipo Moldova
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THE STUDY ABOUT USING FINANCIAL AND ECONOMICAL ANALYSIS
Ec. PhD. Student Cristina Antonela SOFRONIA
antosofronia@yahoo.com
Abstract:
The present paper presents the results of a study carried out on 234 trading companies regarding the use of
accounting programmes and economic and financial analysis. The trading companies have been chosen among the
representative clients that the three major producers and suppliers: Win Mentor, Ciel and Pioneer have all over the
country.
The enquiry includes ten questions to which people belonging to the economic and financial department, users
of the above mentioned accounting programmes have already answered. Most of them have used the same programme
ever since they had set up their business and only a small part has changed it several times.
In what concerns the use of the economical and financial analysis in the process of decision taking, the results
have not been encouraging. Most companies do not use it in their activity. For those who do, it is worrying that some of
them prefer counting themselves the indicators instead of using the facilities of the accounting programme. This
phenomenon takes place because of the lack of employees specialized in the field. Moreover, the legislation is too thick
both in the economic and accounting field and the highly qualified staff ask to be remunerated accordingly. The same
study has revealed that the analysis has been used within the companies which were assisted by audit and accounting
expertise companies.
The final conclusion was that in the latest years, the economic and financial analysis has been developed
thanks to its improvement. It refers to the new facilities within the accounting programmes.
Key words: financial and economic analysis, accounting programme, Win Mentor, Ciel, Pioneer, facility,
development.
INTRODUCTION
This papers main concern is that the correct information used at the proper time can lead to
the companys financial benefits. Taking into account that 80% of the information is accountancy
related, the company should have a data processing tool which can easy the work of those who
havent studied accountancy.
Nowadays, this tool is predominantly informational, and in most cases it is embedded in the
transaction and accountability programs used in the activity of trade companies. The economic-
financial activity is essential in a companys development if it wants to obtain an important position
on the market. The modern devices give the users the chance to obtain information and to perfect
their abilities of analysis and synthesis, which can help them understand the companys economic
field of activity.
CONTENT
In this paper I will present the results of the practical research, which has been completed
for more companies that use the three programs of transaction and accountability: Ciel, Pioner, Win
Mentor. In the last few years, the producers of these programs have designed special modules for
the economic-financial analysis.
In order to understand the facilities and the deficiencies of these three programs of
transaction and accountability, I have created the following questionnaire:
Questionnaire
1. In what year have you chosen the computer based accountability over the one done by hand?
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2. What was the name of the first accountability program that you have purchased?
3. How many times have you changed the accountability program since you first started the
activity?
4. What accountability program are you currently using?
5. Are you satisfied with its facilities?
- very much
- yes
- so and so
- not really
- no
6. Do you use the economic-financial analysis within your companys activity?
7. If the answer is yes, do you use the facilities of the accountability program or do you use other
methods?
- the programs facilities
- by hand
- other program
8. In case you use the programs facilities, has this brought advantages to your company?
- time saving ..
- expense savings ...
- personnel savings ...
- decision efficiency ....
- understanding the companys situation in real time ....
9. Do you have objections regarding the functionality of the module that analyzes the economic
financial situation? If the answer is yes, please give further information.
10. Do you have suggestions that can improve this module? If yes, please give further information.
This questionnaire has been answered by 243 companies, representative clients of the three
programmes, from various regions of the country. The statistic on fields of activity has the
following pattern: 118 companies that have a retail and wholesale trade profile, 62 companies that
have an output profile and 63 companies with a profile of providing services in various fields of
activity.
It can be noticed that the number of trade companies is nearly double if compared with the
companies that have an output or services profile. This analysis sustains the fact that trade
companies are on top. In our country there are more warehouses and stores than factories or
consultancy companies.
Out of these, 16 are big companies, 141 are small and medium companies, and 86 are micro
enterprises.
Their area distribution is the following:
Table no. 1 The clients distribution:
Area Number of Companies
Bucharest 40
Moldavia 68
Transilvania 59
Dobrogea 21
Banat 23
Muntenia 32
For this distribution we must specify that in Transilvania there are many clients that use the
Win Mentor application, the Ciel application is not so commonly used and the Pioner application is
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used very rarely. In Moldavia the most common application is Win Mentor, followed by Pioner and
at great length by Ciel. Regarding Bucharest, WinMentor and Ciel have a great number of users,
whereas the Pioner application is not so common.
Those selected have had the kindness to answer the questionnaire and together with these
results I have used the recent statistics provided by the producers.
The results obtained have been the following:
1. For the question In what year have you chosen the computer based accountability over the one
done by hand? the answers (83,4%) indicated that most of the companies have started their activity
after the year 2000 and have never had an accountability done by hand. Only very old companies,
which have started their activity after the year 1998 mentioned that in 1996 or 1997 chose the
computer based accountability over the one done by hand.
2. In this context, the answer to the following question What was the name of the first
accountability program that you have purchased? was that 38,8% bought Mentor sub DOS and
WinMentor; 41,3% bought Ciel; 10,4% Pioner; and the rest of 9,5% had other programs.
3. The question How many times have you changed the accountability program since you first
started the activity? had the following results:
- never 48,5%
- once 40,9%
- several times 10,6%
It must be specified that: 36,9% of those who have never changed their program work with
WinMentor (changing the sub DOS version with the Windows one isnt considered an actual
change); 10,4% work with Ciel from the very beginning, and the rest of 1,2% have Pioner.
Most of those who modified their accountability program at least once have changed from Ciel to
WinMentor or Pioner and only a small fraction of those who used Pioner changed to Win Mentor.
These companies didnt give up another application to buy Ciel, fact which underlines a decline of
this French producer in Romania.
Those who changed several times their accountability software, had unsuccessful attempts to
implement no-name programs, created locally by various persons, but in the end they decided to
purchase better product.
4. The question What accountability program are you currently using? received the following
answers:
- 54,7% WinMentor, that indicates a number of 133 users;
- 23,5% Ciel, that indicates a number of 57 users;
- 21,8% Pioner, that indicates a number of 53 users.
5. Question no. 5 Are you satisfied with its facilities? has the following answers:
- very much 24,2%
- yes 36,3%
- so and so 18,1%
- not really 11,3%
- no 10,1%
It can be noticed that most users are satisfied with the transaction and accountability
program that they are currently using, but there is a small fraction of the companies that start to
have objections or want to replace the program (those that answered with No). Those are big
companies that want to change their current program with an ERP one or small companies, with
activity in trade that work with Ciel and want to purchase a program that includes the cash register.
6. The question Do you use the economic-financial analysis within your companys activity? has
the following answers:
- yes 34,6%- that indicates a number of 84 companies
- no 65,4%- that indicates a number of 159 companies.
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We must specify that most of the companies that use the advantages of the economic
financial analysis are mostly big and medium enterprises. Only a small fraction of the small
companies and the micro enterprises choose to benefit from this analysis, the main reason for not
choosing it being the lack of financial resources and of trained personnel.
7. Those who use the economic financial analysis in their line of work, answered question no. 7
Do you use the facilities of the accountability program or do you use other methods? as it
follows:
- 46 companies use the facilities of the accountability program (here we have the WinMentor and
the Pioner users)
- 22 companies work with other programs (including the Excel application)
- 16 companies calculate by hand certain indicators (this category includes many Ciel users).
Those 46 companies that use the facilities of the transaction and accountability program
have purchased WinMentor with the Expert Module of economic financial analysis and the Pioner
program with Xecutive.Analyst Module. Even though they dont have the same options, these
modules take the accounting data automatically out of the cash flow and the account of settlement
and calculate different indicators or distribute some expenses independently of previous accounting
registrations. The user receives significant help because he doesnt need to introduce or to
consolidate the data, in order to use them in the economic financial analysis.
The 22 companies that work with other programs, either use programs developed only for
the economic financial situation downloaded from the Internet or even purchased, either use Excel
to calculate the indicators. Those that use Excel introduce the data from the account of settlement or
from the account for profit and losses and calculate a simplified analysis.
The companies that calculate by hand specified that they, generally, use sketchy calculations
that evidence capitalization on products. They dont calculate indebting indicators, rates for the
structure of the active or the inactive or intermediary transaction balance, but they constantly keep
track of the products capitalization, as well as of the capitalization for personnel expenses. This
last segment refers to a very interesting calculation system of the added value that an employee can
bring to the company, but at the same time it calculates the contributions paid by the company for
him. There is a trend to externalize certain services through civil contracts. This helps the
companies to avoid many legal payments.
8. At the question In case you use the programs facilities, has this brought advantages to your
company? the 46 companies have given the following answers:
- time saving 75%
- expense savings 65%
- personnel savings 50%
- decision efficiency 70%
- understanding the companys situation in real time 90%
These figures constitute an average of all the answers and have an error margin, if we take into
account the responders subjectivity. However, it can be noticed that the following increased
significantly: the quality of information, the decisions taken, but at the same time the companies
saved resources.
The time saving coordinate is justified through the fact that these companies used the
economic financial analysis before the purchase of these programs or even before the modules
were conceived. At that time they had to introduce the data into other applications, verify them and
then obtain certain situations that needed to be correlated. Now it is much simpler due to the fact
that certain lists are accessed, without additional effort.
Expense savings certain companies used to call experts for an economic financial
analysis, but other companies hired a person especially for this. Because the program generates
automatically certain lists additional expenses are no longer necessary.
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Personnel savings the company doesnt have to hire a person to perform the economic -
financial analysis anymore; the other benefits of implementing this module is the fact that the
employees of the accountability department dont have to perform additional check-ups, repeated
operations and data introduction procedures that require a lot of time.
The decision efficiency benefit has as basis precise and correct information. Without the
necessary information the company can lose certain advantages, clients and, in the end, money.
One can understand the companys situation in real time only if he obtains the information specific
to the economic financial analysis at any moment. The accountability information can be accessed
on the spot, every time the user needs it. The fact that there is no need to end a cash-flow or the
account of settlement in order to have an analysis of the situation is a real progress for the company.
9. The answer to question no.9 Do you have objections regarding the functionality of the module
that analyzes the economic financial situation? underlines a series of problems, real or unreal,
that the users noticed during the process.
10. The last question Do you have suggestions that can improve this module? collects some
interesting opinions about certain necessities.
The users of the Ciel program underlined the fact that there is no possibility to export data for the
economic financial analysis. This cuts out from the starts its chances of being a competitive
program. The developer lost several clients because of the programs failures, which were also
noted by specialists. These failures are still present.
Not all 46 companies that currently use the economic financial analysis have the same
informational needs. The WinMentor and Pioner programs are designed to carry out as many
requests as possible, but most of the companies only need certain facilities. The Expert and
Xecutive. Analyst modules have totally different functions. Thats why there are users of the
WinMentor program that adopt the facilities of the Expert module, but there are others for which
the facilities of the Pioner program are more suitable and the other way around.
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340
CONSIDERATIONS REGARDING THE CONTENTS AND APPLICABILITY OF FISCAL
MECHANISMS INFLUENCING THE ECONOMY IN THE MODERN SOCIETY
PhD. Candidate Marius FRUNZ
Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iai, Romania
frunzammarius@gmail.com
Abstract:
Having the character of exogenous variables under the incidence of the fiscal policies promoted by the groups
that hold the power in the state, the fiscal mechanisms influencing the economy stand out by their complex contents,
given in principle by the high degree of diversity of the use of fiscal instruments within them. By organizing and
adjusting the fiscal flows, in the modern society they are also attributed the capacity of correcting the dysfunctionalities
and derangements generated by the manifestation of phenomena with negative impact, including the ones induced by
the cyclic character of the economic activity. Their action is essentially comprised in the wider sphere of the use of
taxes and public expenses.
From this point of view, in the modern society, the diversity manifested as regards the existence of several
main variants (types) of the same, among which the ones centered on influencing the demand, is admissible.
Particularly, the latter were the ones that - after remaining in the shadow for the last three decades of the past century -
found broad applicability in the contemporaneous society. Their objective support was the context of the strong
decrease in the aggregate demand and in which some monetary mechanisms froze.
In principle, the applicability of the fiscal mechanisms of keynesian type was marked, from one country to
another and even in the same county, as shown by the empiric data, by a set of references, which left their mark to
different degrees on them, influencing the global economic performances.
Keywords: fiscal mechanism, fiscal system, fiscal policy, incorporated stabilizers, taxes
JEL Classification: E 62, H 30
1 INTRODUCTION
The main objective of this study is first to point out and delimitate conceptually the contents
of the fiscal mechanisms influencing the economy and their main variants (types).
As regards the applicability of some of the variants (types) of fiscal mechanisms influencing
the economy in the contemporary society, out research focuses, in the second part, on the fiscal
mechanisms centered on influencing the demand.
The motivation of the chosen topic resides in the fact that, currently, the manifestation of
some deeply deranging, negative phenomena for the entire society brings to the attention of the
public decision-making factors from different countries that face them especially the issues
approached in this study, particularly the one regarding the applicability of the Keynesian fiscal
mechanisms.
And as for the latter, we intend, based on the analysis of statistical data from a series of
countries of the world, to emphasize a multitude of milestones on which it is based, as well as its
results and perspectives in the near future.
2 CONTENTS OF THE FISCAL MECHANISMS INFLUENCING THE ECONOMY
AND THEIR MAIN VARIANTS (TYPES)
2.1 CONCEPTUAL DELIMITATIONS
The objective support of the pointing out and conceptual delimitation of the contents of the
fiscal mechanisms is the approaches in the specialized literature regarding the economic
341
significances - including the financial component - of the mechanism notion (see Vcrel, 2007, p.
106; Filip, 2001, p. 69).
On this background, we consider that the fiscal mechanisms, as integrant part of the
financial mechanisms, focus on the assembly of fiscal flows in the national economy, having in
their structure processes, techniques and instruments necessary to achieve and adjust them, aiming
at responding to the requirements of the normal development of the real flows and processes. As
assemblies of processes and instruments for the management and adjustment of the fiscal flows, the
fiscal mechanisms are influenced by the social-economic system in which they work, and the
actions of creating and applying them are - in principle - under the incidence of the tax policy
promoted by the groups that hold the power in the state. On this line, the fiscal mechanisms are, in
their turn, the result of the decisions of integrated fiscal policy, in the assembly of the monetary-
financial policy decisions, which focuses naturally, both on the issue of the taxes (tax collection)
and on the one of public expenses (Filip, 2002, p. 89).
As regards the latter aspect, we mention that, in a broad sense, the fiscal mechanisms focus
both on the assembly of the tax flows (tax collection) and on the flows of public expenses, thus
justifying the connected approach tendency and the use of the fiscal-budgetary mechanisms to
designate a major component of the financial mechanism. On the other hand, in a narrow sense, the
fiscal mechanisms focus only on the assembly of tax flows (tax collection). Nevertheless, in both
senses, the fiscal mechanisms include in their structure processes, techniques and instruments used
to achieve and adjust the fiscal flows in question, aiming at responding to the requirements of the
normal development of the real flows and processes, involving, in their functionality, structure
elements of the fiscal system (the system of direct and indirect taxes and fees, which function in the
economy; the legislative regulations regarding taxes; the methods, techniques and procedures that
allow the settlement, pursuit and collection of the incomes corresponding to the state; the entire
fiscal system, with its specific structures, organized with the purpose of monitoring, controlling and
analyzing the manner of enforcement of the tax legislation).
Synthesizing, we express our opinion that the fiscal mechanisms - having as an object the
organization and adjustment of the tax flows - may be defined as assemblies of structures and forms
of achievement of the financial-fiscal activity with relations, methods, instruments, decision-making
bodies, models and techniques of sizing and guiding these flows, also including the regulations
concerning the achievement of the money operations.
2.2 MAIN VARIANTS (TYPES) OF FISCAL MECHANISMS INFLUENCING THE
ECONOMY
The capacity of the fiscal mechanisms of correcting the dysfunctionalites and derangements
generated by the manifestation of phenomena with negative impact in the society, including the
ones induced by the cyclic character of the economic activity is attributed to them taking into
account their character of exogenous variables under the incidence of the fiscal policies promoted
by the groups that hold the power in the state. On this line, we should note that the role of fiscal
mechanisms is to act on the quantitative and qualitative dimensions of economy, namely to
contribute, finally, to the increase in the production achieved by the economic agents and implicitly
in the gross domestic product.
On this background and taking into consideration that the action of the fiscal mechanisms is
essentially appropriate for the use of taxes and public expenses with the purpose of influencing and
first of all stabilizing the market economy, the main variants (types) of fiscal mechanisms
influencing the economy are delimited.
The system of incorporated stabilizers created by P. A. Samuelson is representative on this
line, having the taxes and public expenses as main stabilizers incorporated through the fiscal policy
342
in the mechanism of the market economy, together with other components of financial essence,
such as the contributions to the social securities and unemployment benefits. This, in its turn, is
based on the concept regarding the construction and functioning of the mechanisms centered on the
use of the taxes and public expenses with the purpose of influencing economy and, first of all, of
stabilizing it, which are underlain by A. Hansen, namely: the flexibility mechanism, the
compensation programme (mechanism) and the stabilizing system (of stabilizers) (see Filip, 2002,
pp. 238-241).
In the circumstances of the modern society, the high degree of diversity manifested as
regards the use of fiscal instruments translates the existence of several variants (types) of fiscal
mechanisms influencing the economy, as regards their creation and application. For their
delimitation, we consider useful to refer to a series of self-contained criteria.
Hence, according to a first criterion, as regards the nature of their action, there are:
- Fiscal mechanisms with discretionary action;
- Fiscal mechanisms with automatic action.
According to the second criterion, as regards the primacy corresponding to the demand or
the supply (in the activities of creation and application of fiscal mechanisms), there are:
- Fiscal mechanisms centered on influencing the demand (of Keynesian type);
- Fiscal mechanisms centered on influencing the supply (of neo-liberal type).
According to the third criterion, as regards the purpose (objectives) based on which they are
created (built), the fiscal mechanisms influencing the economy are under the shape of several basic
variants (types), namely:
- Fiscal mechanisms oriented towards stimulating investments and re-launching the
economic activities facing the recession and unemployment phenomena;
- Fiscal mechanisms oriented towards the correction of social inequities;
- Fiscal mechanisms oriented towards influencing the evolution of the economic
structures, including the adaptation of the production to the demands of the internal and
external market. These aim mainly at stimulating certain activity fields, economic
branches or sub-branches, as a support in the development of the society.
- Fiscal mechanisms oriented towards the development of the international economic
exchanges. These aim especially at the stimulation of exports and protection of the
development of indigenous production for a better valorification of the national
resources.
A more complex variant of the fiscal mechanisms influencing the economy is, in our
opinion, the fiscal mechanisms oriented towards the counteraction against macroeconomic
unbalances and providing sustainable global development.
The main components of these variants (types) of fiscal mechanisms influencing the
economy seem to be particularly tax exemptions and discounts and generally tax facilities, together
with a special programme for the granting of exemptions and discounts and the technical manners
of applying tax rates on taxable matter.
In the contemporary world, there are several ways of using fiscal mechanisms influencing
the economy, relatively differentiated between the developed countries and the developing
countries. Nevertheless, the recent manifestation of certain deeply deranging, negative phenomena
for the entire society and for both groups of countries, even if to different degrees, created the
premises necessary to bring back to the attention of public decision-making factors of variants
(types) of fiscal mechanisms influencing the economy. Namely, the fiscal mechanisms centered on
influencing the demand (of Keynesian type), situated in the shadow for the last three decades of the
past century.
343
3 COMPARATIVE ANALYSIS OF THE APPLICATION OF FISCAL
MECHANISMS CENTERED ON INFLUENCING THE DEMAND
The applicability of such fiscal mechanisms influencing the economy found its objective
support on the background of the recent world economic-financial crisis leading to a strong obvious
decrease in the aggregate demand, and the signally financial nature of this deeply deranging
phenomenon was able to weaken and even block the monetary mechanisms (see Spilimbergo et al.,
2009, p. 3).
In such a context, as for the amplitude of the application of the fiscal mechanisms centered
on the influencing of the demand, especially of the ones with discretionary action, it is notable that
the world economy has been injected with the biggest Keynesian cocktail yet seen in peacetime
(The Economist, Feb. 11th, 2010).
In relation to these considerations, we need to mention the fact that the applicability, from
one country to another, of such fiscal mechanisms influencing the economy was set out, beyond the
felt amplitude of the effects of the economic-financial crisis, by a series of objective references, of
which: the existent initial conditions, the size of the made effort, its structure and evening out in
time.
The initial conditions existing in each country, namely the levels of public debt and of the
budget balance, set their mark from the very beginning on the applicability of such fiscal
mechanisms of Keynesian type, even though they have not infringed it in all cases.
On this line, it is worthy of noting that in a series of countries (United Kingdom, India,
United States, Japan), the initial conditions hid the worryingly high levels of the budget deficits of
over 3% of the GDP from 2008. On the other hand, in other countries (Saudi Arabia, Russian
Federation, Southern Korea), the registered budget surpluses seemed to ensure the full applicability
of these fiscal mechanisms (see Table no. 1).
Table no. 1. Initial conditions and the fiscal effort in a series of countries
Initial conditions 2009 fiscal effort 2008-2010 fiscal effort
Country
Public
debt
(%)
a)
Budget
balance
(%)
a)
USD
(bb.)
(%)
a)
Decreases
of taxes
(%)
USD
(bb.)
(%)
a)
Decreases
of taxes
(%)
United States 60.8 -3.2 268.0 1.9 44.0 841.2 5.9 34.8
Japan 170.4 -3.1 66.1 1.4 30.0 104.4 2.2 30.0
China 15.7 +0.4 90.1 2.1 0.0 204.3 4.8 0.0
United Kingdom 47.2 -4.8 37.9 1.4 73.0 40.8 1.5 73.0
Canada 62.3 +0.1 23.2 1.5 40.4 43.6 2.8 45.4
France 64.4 -2.9 20.5 0.7 6.5 20.5 0.7 6.5
Germany 62.6 +0.9 55.8 1.5 68.0 130.4 3.4 68.0
Italy 103.7 -2.7 4.7 0.2 0.0 7.0 0.3 0.0
Spain 38.5 -2.4 18.2 1.1 36.7 75.3 4.5 36.7
Russian Federation 6.8 +6.2 30.0 1.7 100.0 30.0 1.7 100.0
Turkey 37.1 -1.5 0.0 0.0 n/a 0.0 0.0 n/a
Australia 15.4 +0.3 8.5 0.8 47.9 19.3 1.8 41.2
India 59.0 -4.2 6.5 0.5 0.0 6.5 0.5 0.0
Indonesia 30.1 -1.3 6.7 1.3 79.0 12.5 2.5 79.0
Southern Korea 27.2 +0.9 13.7 1.4 17.0 26.1 2.7 17.0
Argentina 51.0 +1.7 4.4 1.3 0.0 4.4 1.3 0.0
Brazil 40.7 n/a 5.1 0.3 100.0 8.6 0.5 100.0
Mexico 20.3 0.0 11.4 1.0 0.0 11.4 1.0 0.0
Saudi Arabia 17.7 +11.2 17.6 3.3 0.0 49.6 9.4 0.0
South Africa 29.9 +0.2 4.0 1.3 0.0 7.9 2.6 0.0
a)
of the GDP from 2008. Source: Prasad and Sorkin, 2009, p. 5.
344
At the same time, in a number of countries (Japan, Italy), the initial conditions hid the
excessively high levels of the public debt of over 100% of the GDP from 2008, which could create
the premises for the inapplicability even of these fiscal mechanisms.
It is worth noticing in this context the initial position of Japan, marked by the pressure of the
public debt, by a significant budget deficit and by the pressures exercised as regards the population
ageing phenomenon, as this country has the most aged population of the member countries of
OECD.
As regards the size of the effort made, it is noticeable that in most countries in which fiscal
mechanisms centered on influencing the demand were created and applied, a tendency of
continuous review of this size was registered during 2009, in principle.
As regards the absolute size of the total effort made, the USA is by far at the top, followed
by China, Germany and Japan, all of them having over 100 billion USD. As for the relative size of
this effort, as a percentage from the GDP from 2008, the first place is occupied still by the USA,
followed by Southern Korea, Australia, New Zeeland, Canada, all with levels of over 4%.
The structure of the effort made masks, in principle, different perceptions of the political
decision-making factors in charge with the fiscal policy, from one country to another, on the
relative efficiency in stimulating the aggregate demand for measures centered on decreases of taxes
and on increases in the public expenses, taking into account the multiplying effect on the domestic
product triggered by each measure and by the factors influencing it.
In this context, we must mention that on the background of the continuous review of the
effort, during the year 2009, most countries registered the tendency of focusing more and more on
the increase in the public expenses to the detriment of the decrease of taxes. This can be explained
on the one hand by the fact that the multiplying effect, drawn on the domestic product, of the
increase in the public expenses is stronger, in absolute amounts, than that of tax decrease. On the
other hand, we consider that such a tendency can be explained also by the increase in the propensity
of households and businees to save, which can reduce the multiplying effect of the tax decrease.
Besides these considerations, it remarkable that some countries (Brazil, Russian Federation)
created and applied in their effort the Keynesian fiscal mechanisms centered exclusively on
decreasing taxes, while others (Argentina, China, India, Italy, Mexico, Saudi Arabia, South Africa)
created and applied fiscal mechanisms of the same type but centered exclusively on increases in the
public expenses. Nonetheless, most countries, counting on the cumulated effect of the taxes and the
public expenses, resorted to intermediary variants (types) of fiscal mechanisms centered on
influencing demand, the primacy corresponding, nevertheless, from case to case, either to the
decreases of taxes (United Kingdom, Indonesia, Germany), or to the increase in the public expenses
(Southern Korea, Canada, Japan, United States) (see Table no. 2).
In the same context, we should mention that the decreases of taxes, in most countries,
referred mainly to the taxes on personal incomes and, to a small extent, to the taxes on businesses
incomes, except for United Kingdom, which temporarily decreased the VAT generally. The
increases in the public expenses also referred to in most countries to the public investment
programmes, some countries even assigning approximately 1% or more from the GDP from 2008
(Australia, Poland, Canada and Mexico). Larger amounts of money were also assigned for the
transfer to households, especially to those with lower incomes, or for the sustained subsidies for the
public sector (Czech Republic, Japan, Southern Korea, Portugal, Mexico and Slovak Republic).
Last but not least, the evening out in time of the effort made reflected different attitudes
concerning the duration or extension of the recession, or the difficulties anticipated in the rapid
implementation of public expenses, especially the ones regarding infrastructure and other
investment projects. In this context, it is worth noting that, recognizing on time the signs of the
crisis, some countries created and applied, starting even from 2008, the fiscal mechanisms centered
345
on the stimulation of the demand (Australia, Canada, Japan, Southern Korea, Spain, United
Kingdom, United States). In exchange, a number of countries (Germany, Austria, Belgium, France,
Netherlands, Luxembourg, Sweden, Switzerland) evened out their effort in a balanced way,
generally for the following two years.
Set out by these four references, the applicability of these fiscal mechanisms centered on the
stimulation of demand should be in principles on a short term, and oriented towards the
macroeconomic stabilization and accompanied by the applicability of other variants (types) of fiscal
mechanisms influencing the economy, especially the ones centered on supporting the long-term
economic growth and social objectives.
From this perspective, currently the applicability of these fiscal mechanisms centered on the
influencing of demand, corroborated with the applicability of other mechanisms influencing the
economy, generated, at least in some cases, the anticipated results.
The great emerging economies (India, Brazil, China) are particularly in this situation, their
better situation being generated, in principle, by a strong increase in the domestic demand, as well
as in the existing great production capacities.
346
Table no. 2. The structure and the evening out in time of fiscal effort in a series of countries
Total fiscal effort (2008-2010) (%)
a)
The evening out in
time of fiscal effort
(%)
Taxes Country
Total
Public
expenses Total
on personal
incomes
on
businesses
incomes
on
consumption
social
contributions
2008 2009 2010
United
States
-5.6 -2.4 -3.2 -2.4 -0.8 0.0 0.0 21 37 42
Japan -2.0 -1.5 -0.5 -0.1 -0.1 -0.1 -0.2 4 73 24
United
Kingdom
-1.4 0.0 -1.5 -0.6 -0.1 -0.7 0.0 15 93 -8
Canada -4.1 -1.7 -2.4 -0.8 -0.3 -1.1 -0.1 12 41 47
Austria -1.1 -0.3 -0.8 -0.2 -0.1 0.0 0.0 0 84 16
Belgium -1.6 -0.6 -1.0 -0.3 -0.6 -0.1 0.0 0 60 40
France -0.6 -0.4 -0.2 -0.1 -0.1 0.0 0.0 0 75 25
Germany -3.0 -1.4 -1.6 -0.6 -0.3 0.0 -0.7 0 46 54
Greece n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Italy 0.0 -0.3 0.3 0.0 0.0 0.1 0.0 0 15 85
Netherlands -1.5 -0.1 -1.4 -0.2 -0.4 0.0 -0.8 0 51 49
Spain -3.5 -1.9 -1.6 -1.6 0.0 0.0 0.0 31 46 23
Czech
Republic
-3.0 -0.5 -2.5 0.0 -0.4 -0.1 -2.0 0 66 34
Denmark -2.5 -1.9 -0.7 0.0 0.0 0.0 0.0 0 33 67
Hungary 4.4 4.4 0.0 -0.1 -1.5 1.6 0.0 0 58 42
Norway -0.8 -0.7 -0.1 0.0 -0.1 0.0 0.0 0 100 n/a
Poland -1.0 -0.6 -0.4 0.0 -0.1 -0.2 0.0 0 77 23
Sweden -2.8 -0.9 -1.8 -1.5 -0.2 0.0 -0.2 0 52 48
Switzerland -0.5 -0.3 -0.2 -0.2 0.0 0.0 0.0 0 68 32
Australia -4.6 -3.3 -1.3 -1.1 -0.2 0.0 0.0 15 54 31
Southern
Korea
-4.9 -1.7 -3.2 -1.4 -1.2 -0.2 0.0 23 49 28
Mexico -1.3 -2.1 0.8 0.0 0.0 -0.4 0.0 0 100 n/a
Iceland 9.4 n/a n/a 1.0 n/a n/a n/a 0 33 67
Ireland 4.4 0.9 3.5 2.0 -0.2 0.5 1.2 15 44 41
Portugal -0.8 n/a n/a n/a n/a n/a n/a 0 100 0
a)
of the GDP from 2008.
Source: (2009) OECD Economic Outlook - Interim Report, March, pp. 110-111.
347
By comparison, as regards the economically developed countries, some of them manifest
signs of sustained increase of the domestic demand and the dependence of others in Europe, still, to
a great extent, of the economic growth on governmental stimuli. The developed countries also
experiment an increase in the budget deficits (even their quadruplication, on an average around 9%
of the GDP), accompanied by the explosion of the public debt (see Table no. 3).
Table no. 3. The gross domestic product and the budget balance in a
series of countries
Country
Gross domestic product
(%)
a)
Budget balance
(%)
b)
United States +5.9 -11.1
Japan +3.8 -7.8
China n/a -3.3
United Kingdom +1.1 -13.5
Canada +5.0 -3.6
Austria +1.4 -5.0
Belgium +1.2 -6.6
France +2.4 -8.6
Germany n/a -5.6
Greece -3.1 -9.5
Italy -1.2 -5.0
Netherlands +0.9 -6.2
Spain -0.6 -11.6
Czech Republic +3.0 -5.2
Denmark +0.9 -5.8
Hungary -1.7 -4.0
Norway +0.4 9.3
Poland n/a -2.8
Russian Federation n/a -4.0
Sweden -2.2 -3.0
Switzerland +3.0 -1.3
Turkey n/a -5.2
Australia +3.7 -3.1
India n/a -6.4
Indonesia n/a -2.1
Southern Korea +0.7 -4.1
Argentina +7.9 -1.5
Brazil +8.4 -3.0
Mexico +8.4 -1.6
Saudi Arabia n/a 1.7
South Africa +3.2 -6.6
Iceland n/a -11.0
Ireland n/a -12.5
Portugal n/a -8.5
a)
annual rate, 2009.
b)
of the GDP from 2010, estimates/forecasts.
Source: The Economist, Mar. 25th, 2010.
Related to this last aspect, a series of especially complex issues emerge acutely for some
countries (Greece, Spain, Portugal), being generated by the inappropriate applicability of the
promoted fiscal mechanisms, centered on the influencing of the demand.
On this background and from the perspectives of their applicability, we consider that in the
near future, notable differentiations may still appear in applying some fiscal mechanisms
influencing the economy, including between countries of a close development level.
348
The opinion of the IMF and of the ministries of finance G-7 according to which the above
mentioned emerging countries can and should give up applying fiscal mechanisms centered on
influencing the demand or even create and apply fiscal mechanisms centered on the increase in
taxes and the decrease in public expenses, as applicable.
According to the same opinion, in the economically developed countries, it is too early for
changes such as the above mentioned ones, despite palpable results. It is worth reminding that the
danger of repeating the mistakes made by the USA in 1937 and Japan in 1997 - when premature
increases in the taxes, among other things, pushed the economy back to recession - are greater than
the risk of not taking any measures on this line until 2011.
As opposed, another opinion belonging to ECB that has more and more followers stands out,
according to which the budget deficits promoted by creating and applying fiscal mechanisms
centered on influencing the demand reached their limits, and the efforts made with the purpose of
eliminating them will lead to the increase in confidence, creating the premises, by cutting down
governmental expenses, for impelling private demand.
The invoked argument, based on the theory of the Ricardian equivalence, refers to the fact
that the governmental expenses cannot influence the private demand, as consumers cut down their
own expenses, anticipating a subsequent increase in the taxes. Though this does not mean that
households would act this way generally, the empiric obviousness shows that when the fiscal
mechanisms centered on influencing demand lose their applicability, the investors and consumers
confidence, in its turn, deteriorates suddenly.
Moreover, the studies in the specialized literature suggest that, on a medium and long term,
the high levels of public expenses tend to slow down the economic growth. Thus, it is argued that
for each percentage point of increase in the governmental expenses as part of the GDP, the
economic growth rate will drop 0.12-0.13 percentage points (see Afonso and Furceri, 2007, p. 5).
As for us, we believe that the inappropriate substitution by the developed countries of the
fiscal mechanisms previously promoted with the ones centered on increasing taxes and cutting
down public expenses may trigger the negative, deeply harmful phenomena.
In regard to the above exposed facts, we should also mention the atypical situation
concerning the applicability of the fiscal mechanisms influencing the economy, manifested in a
number of countries (Iceland, Ireland and Hungary) that created and applied inverse fiscal
mechanisms, centered on tax increase and decrease of public expenses.
4 CONCLUSIONS
As fiscal mechanisms essentially represent conjunctures made of processes, techniques and
instruments for the achievement and adjustment of tax flows that aim at responding to the demands
of normal development of real flows and processes, involving in their functioning structure
elements of the fiscal system, they focus, in a broad sense, both on the assembly of the flows of tax
collection and on the one of public expenses.
Beyond the high degree of diversity as regards the use of fiscal instruments in the modern
society, on the background of the recent manifestation of deeply unbalancing and negative
phenomena, such as the economic crisis, the fiscal mechanisms influencing the aggregate demand
(of Keynesian type) stood out preponderantly, particularly the ones with discretionary action.
Their applicability nonetheless, set out by a series of objective references, had differentiated
results, even between countries with similar economic and social development levels, and in the
near future will manifest equally different perspectives in the fiscal-budgetary field from a country
to another, or even in the same country, in comparison to the near past.
As regards the expansion of researches, we consider it useful to relate, in the same
framework of the applicability of some variants (types) of fiscal mechanisms influencing the
349
economy, to fiscal mechanisms with automatic action, especially taking into account the fact that
the applicability of the latter completes considerably the one of the analyzed discretionary action
fiscal mechanisms.
REFERENCES
1. Afonso, Antnio and Furceri, Davide (2008) Government Size, Composition,
Volatility and Economic Growth, article avalaible at the following web address:
http://www.ecb.int/pub/pdf/scpwps/ecbwp849.pdf.
2. Filip, Gheorghe (coord.) (2001) Finane, Sedcom Libris Publishing House, Iai.
3. Filip, Gheorghe (2002) Finane publice, Junimea Publishing House, Iai.
4. Prasad, Eswar and Sorkin, Isaac (2009) Assessing the G-20 Economic Stimulus
Plans: A Deeper Look, article avalaible at the following web address:
http://www.brookings.edu/~/media/Files/rc/articles/2009/03_g20_stimulus_prasad/0
3_g20_stimulus_prasad.pdf.
5. Spilimbergo, Antonio; Symansky, Steven; Blanchard, Olivier J. and Cottarelli, Carlo
(2009) Fiscal Policy for the Crisis, Discussion Paper No. 7130, article avalaible at
the following web address: www.cepr.org/pubs/dps/DP7130.asp.
6. Vcrel, Iulian (coord.) (2007) Finane publice, Didactic and Pedagogic Publishing
House, Bucureti.
7. *** (2009) OECD Economic Outlook - Interim Report, March, report avalaible at the
following web address: http://www.oecd.org.
8. *** (2010) The Economist, Feb. 11th - Withdrawing the drugs, article avalaible at
the following web address:
http://www.economist.com/displaystory.cfm?story_id=15498185.
9. *** (2010) The Economist, Mar. 25th - Output, prices and jobs, statistics available
at the following web address:
http://www.economist.com/markets/indicators/displaystory.cfm?story_id=15772215.
10. *** (2010) The Economist, Mar. 25th - Trade, exchange rates, budget balances and
interest rates, statistics available at the following web address:
http://www.economist.com/markets/indicators/displaystory.cfm?story_id=15772168.
350
THE GLOBAL FINANCIAL CRISIS IMPACT OVER THE REFORMATION OF THE
FINANCIAL SURVEILLANCE ARCHITECTURE IN EU: PROSPECTS AND
IMPLICATIONS
Elena CIOBANU (SIRETEANU)
Alexandru Ioan Cuza University of Iai, Faculty of Economics and Business Administration Doctoral School of
Economics, Iai, Romania,
elenasireteanu@yahoo.com
Abstract:
The current crisis has revealed the existence of certain fundamental weaknesses in the functioning of financial
markets and weaknesses in risk management, which require a deep reform of the financial regulatory and supervisory
framework. The magnitude of the current crisis has brought new attention to issues of transparency and liquidity of
financial systems.
The current crisis is further proof that free markets are not up to the deregulated markets and that excessive
confidence in the self-healing powers / regulation of markets is very dangerous. We must keep in mind that financial
innovation benefits when supporting dynamism and growth, but at the same time can lead to additional risks.
In the context of maintaining international financial crisis and the consequences of measures taken to counteract
its effects, the reconfiguration problem of the supervisory architecture and how it should ensure the smooth functioning
of global and regional financial markets came to the attention of public authorities responsible to issue regulations,
best practices and rules in areas which exert a significant influence in achieving this objective.
This paper focuses on the structural causes of the current global crisis expressed by several authors and their
views on the need to implement new supervisory architecture internationally and regionally, to ensure global financial
stability.
Keywords: financial crisis, financial system, the new architecture of financial supervision, systemic risk.
JEL clasification: G01, G21, G28
INTRODUCTION
The U.S. mortgage securities market with high-risk (sub-prime), in August 2007 was
blocked because speculators have started to adjust their respective positions and sell assets, a
situation favored by inadequate regulatory framework. This laid the groundwork for further
processing into a globally devastating financial crisis which is currently in progress.
Although for a while now, signals were given by some economists about the crisis, they
were not taken into account. The magnitude of the global financial crisis was underestimated by
everyone until the autumn of 2008.
In light of these realities, governments and central banks in the U.S. and some European
countries have responded by taking measures to counter the international financial crisis.
Application of these measures has led to loss of confidence among financial market participants
who remained non-transparent and thus amplified the financial crisis and ultimately favored its
passage in the real sector of economy.
The purpose of this paper is to identify the main causes that triggered the current crisis,
confirmed in the literature and then consider whether implementation of the new architecture of
financial supervision in the EU, proposed by the Larosire Report in order to prevent systemic risk
in the future learning lessons from the global crisis.
351
1. APPROACHES ON THE CAUSES OF THE CURRENT GLOBAL FINANCIAL
CRISIS
In most cases, financial crises have a habit of coming in waves (Nouriel Roubini, Stephen
Mihm, 2010, p.178) and the severity of it has recorded a tidal movement, in the fewest cases it only
hits once and then finally mellows. They look like hurricanes that it is stronger, then weak for a
while, after which they may gain more destructive power than before. The authors show that the
weaknesses that accumulate in preparation for a major crisis penetrate in all directions and are
systemic. They cannot be cured by a single bank failure or rescued by the implosion or even a
portion of the entire financial sector.
According to the teacher (Daniel Daianu, 2009, p.16), the current financial crisis that hit the
center of world finance is "a decisive refutation of the paradigm that glorifies the total deregulation
of economies, be they rich or poor." He argues that at its root is
Also, signatories of a letter including Professor Daianu, published on the 22 May 2008, in
the French daily "Le Monde", and on 29 May 2008 in Dilema Veche, in Romania showed that "the
current financial crisis is no accident. It was impossible to predict, as now claimed not a few
politicians and important people in the financial business. This crisis is in fact a market failure of
too little or not covered financial markets and shows once again that financial markets cannot
govern alone.
It also points out that the current crisis is reducing the ability of the Western World to
improve dialogue with the rest of the world in terms of global challenges and particularly the
management of the effects of globalization, given that Asia's extraordinary economic progress
represents a real unprecedented challenge. They require to the EUs policy makers to come up
with a concrete answer to the current crisis, both at Community and national level.
Crotty, J. and Epstein (2008) identifies the same fundamental structural weakness of the
U.S. financial system that led to the crisis. An architecture dominated by neoliberal policies based
on liberalization, regulatory and a market waiting for a natural adjustment. The authors consider
that the main weakness of the system is inadequate reglementation or lack of rules governing
commercial banks, investment banks and of the shadow banking system (shadow banking system),
which is thinly capitalized. Also, another weakness is to provide incentives for people with
leadership positions in the financial system that have taken excessive risks, aiming only financial
performance.
Financial innovation in the last two decades is one of the main causes that triggered the
financial crisis because it was based on irrational exuberance of individuals. During these
operations, large banks have played a key role as financial wraps and are thus diversifying and
spreading risk. Former head of the Federal Reserve (FED) (Alan Greenspan, 2008), argues that no
risk model / econometrics cannot properly capture all the features that define the complexity of real
systems.
The current financial crisis has its roots in much deeper causes of core, such as
macroeconomic and microeconomic in nature, which were in interconditioned in the production of
the crisis, as NBRs governor shows (Mugur Isarescu, 2009, p.2 ). The cause of deep financial crisis
is considered abundant liquidity created by major central banks of the world (FED, BOJ) and the
willingness of oil and gas exporting countries to limit currency appreciation. Also, at the level of
some countries (China, Southeast Asia) has shown super-saturation with savings as a result of their
increasing integration into the global economy. Supersaturated with abundant liquidity and savings
created the possibility of guiding the available resources to investments, including sophisticated
financial instruments that are not understood by all investors.
In this context, the investors appetite increased for assets with high returns and low market
volatility has led to the underestimation of the risks they are exposed. Also, there were a number of
352
microeconomic cases: frenzy securitization, which led to the credit market hazing, cracks in the
business model of rating agencies, and an intense activity for international deregulation.
In addition to the foregoing, in our opinion, we believe that these operations helped the
underestimation of the risk, maintained the old regulatory structures and the use of poor risk
management practices. Thus, regulators and supervisors have been overcome by innovations in the
markets, fueled by excessive liquidity, which caused them to meet investors earnings.
In conclusion, we find that in most approaches there are treated the non-traditional factors in
particular, that are specific to the global financial crisis.
Unfortunately, the effects of the international financial crisis have spread over the economy
of Romania, on multiple channels (Isarescu, 2009).
Thus, through the commercial channel, which has meant since 2009 - 2010, a drastic
reduction in exports, through the financial channel, limiting access to external financing, reducing
the volume of loans, through the exchange rate channel, reducing external financing has reflected
the currency depreciation (of a course for 3,4 RON/ EURO in the first half of 2007, at a rate of 4.3
RON / EUR, in the first half of 2010), through the reliability channel, where there was a reduction
of Eastern European investors (an event on the monetary market- exchange of moments of panic
and speculative attacks - October 2008) and through the effects of wealth and balance sheet channel
where we are faced with the deterioration of the net assets of people and companies.
It is necessary to specify that there are some similarities and differences when talking about
financial and economic crisis in the developed and emerging countries including Romania (Liviu
Voinea, 2009, p.36) if we consider the structural causes and the mechanisms of transmission and
adjustment. We really have two crises: one that erupted in the U.S. and expanded on account of
toxic assets from non- U.S. banks, in developed countries like Britain, Germany, France, Japan and
another crisis, triggered by too much account deficit, specific to emerging economies, some new
EU member states and Euro zone countries, like Greece, Spain or Ireland, where we can speak of an
economic crisis. In Romania, the economic crisis is internal, it would have occurred even without
the U.S. financial crisis and because the causes and mechanism of transmission are different, also
the measures of response to the adverse effects of the crisis may not be similar in Romania to those
in U.S. or in some European countries.
2. NATIONAL MEASURES DISPOSED FOR THE DIMINUATION OF THE
CRISIS EFFECTS
In order to minimize the effects of the financial crisis, EU authorities have acted in two
stages. Thus, in a first stage, a number of states have adopted a gradual approach, combining
intervention tools for monetary policy actions aimed at improving liquidity and ad-hoc interventions
with specific actions to rescue financial institutions in difficulty. Since these interventions had no
effect on restoring confidence in the financial system it has moved to implement measures under the
second phase, these rescue packages at the financial system level, which had a much more
comprehensive effect.
The solutions proposed to overcome the financial crisis of solvency were the combination of
three essential elements: guarantee obligations, recapitalization of the institutions which were in
difficulty but solvable and the separation of assets with problems.
The measures provided for reducing the national crisis contributed in part to restore the
financial markets stability for liquidation the interbank markets and capital deficit reduction.
However, financial markets have not completely recovered to the normal situation, needing for
further concerted measures at European level, involving the intervention of the governments
members, central banks and the European Commission.
353
3. THE IMPLEMENTATION OF THE NEW EUROPEAN ARCHITECTURE FOR
FINANCIAL SUPERVISION
In response to financial turmoil in the years 2008 and 2009, several actions have been taken,
both short and long term, as follows:
a) in October 2008 it was adopted a plan of concerted action, which included a series of temporary
measures (funding to ailing banks with additional capital in financial institutions, recapitalization of
banks with problems, raising the minimum level of guaranteed deposits from 20,000 Euros to
50,000 Euros);
b) it has called for better coordination of fiscal policies from Member States to counter the recession
by building an economic recovery plan, which is based on two pillars. The first pillar has targeted a
cash injection to boost demand in the economy and boost confidence, and the second is based on the
need to act to revive short-term European competitiveness;
c) the adoption of the European Commission of their Work and Legislative Program in 2009, has
two outstanding strategic initiatives, namely:
- a package of measures for reforming the financial sector;
- a review of Lamfalussy "Architecture" and the consolidation of the arrangements for
financial stability and strengthening at EU level;
In this respect, the European Commission has mandated a group of experts (High Level
Expert Group on Financial Supervision) chaired by former IMF Managing Director Jacques de
Larosiere, which aimed to make recommendations on strengthening the supervisory arrangements
in the European Union in terms of efficiency and integration between all components of the
financial system.
In Lorasire Group Report it was presented a comprehensive analysis on the causes of the
current financial crisis and a set of recommendations both for improving the EU regulatory
framework and restructuring the current architecture of prudential supervision achievement - the
creation of a European System surveillance and crisis management.
The reform which experts suggest is composed by two areas:
- Prudential supervision;
- Micro-prudential supervision.
Thus, for the macro-prudential supervision it has been proposed the establishment of the
European Council for Systemic Risk (systemic Risk The European Council - CESR) under the
guidance and logistical support of the European Central Bank.
The new body will ensure the collection and analysis of information relevant to financial
stability, macroeconomic conditions and corresponding macro-prudential developments in EU
financial area, will regularly exchange information with the supervisors of micro-and will provide
early warnings about the systemic risks can accumulate and if necessary, recommendations on
measures needed to manage those risks.
Given that the risks are alarming, CESR will work with the European Commission to
identify appropriate solutions. Also, globally, CESR will work with the International Monetary
Fund, with the G20 and the Financial Stability Forum. Regarding the micro-prudential supervision
the European Union considers necessary to establish a European System of Financial Supervision
(ESFS) to ensure supervision of financial institutions. The new system will result in the
transformation of the Level 3 committees with an advisory role (CEBS, CESR, and CEIOPS) in
three new European authorities, as follows: the European Authority for Banking, the European
Authority for Securities and the European Authority for Insurance.
The new micro-prudential supervisors will take over all functions from level 3 committees
and in addition will have additional powers, namely:
354
- Developing proposals for technical standards, having regard of the principles of better
regulation;
- Abilities of mediation between national supervisors (resolving cases of disagreement
between the national supervisory authorities, under legislation that requires them to
cooperate or to reach an agreement);
- Helping to ensure consistent application of the Communitys technical rules;
- Licensing and supervision of specific institutions at EU level (for example, the European
Authority for Securities and Markets will have direct supervisory power of credit rating
agencies);
- Mandatory cooperation with the CERS to ensure appropriate macro-prudential supervision;
- A coordination role in emergency situations.
Compared to the draft reform of prudential supervision at EU level have been many
opinions expressed.
As regards the European Council's position, it considers the recommendations from the
Lorasire Report to improve regulation and supervision of financial institutions in the EU.
The European Commission's adoption of the important package of draft laws to create new
European supervisory authorities strengthened the financial sector, the European Commissioner for
Economic and Monetary Affairs Joaquin Almunia argued: the creation of a European Committee
for systemic risks in order to detect and prevent risks related to financial stability in the EU and new
mechanisms to improve surveillance at an institutional level will greatly help to correct imbalances
in our financial systems and the correction of weaknesses in our system of financial supervision are
at least partly responsible for financial crisis.
In our view, reforming the current EU supervisory architecture is a priority, especially
given that the current financial crisis has highlighted weaknesses in the supervisory framework at
Community level.
The proposal to establish a Pan-European authority in the EU, with the political support of
the Member States and based on the Lorasire Report is a way to remedy the shortcomings in the
European financial supervision and will help prevent future financial crises.
We consider very important functions assigned to the three new authorities at micro level, in
particular the role of coordinator in emergency situations.
This new system should ensure the protection of European taxpayers in situations such as
those occurring in the autumn of 2008 and may inspire the creation of one worldwide.
CONCLUSIONS
In the current global crisis, sophisticated risk management methods specific to the banking
sector, promoted by Basel II have shown their limits. Therefore, there must be addressed new
prudential regulatory reforms and measures proposed by the Basel III, with its emphasis on the
early warning component of the risk of escalation.
In this sense, we consider of utmost importance the need for better regulation in all areas,
from the rethinking of market structure, risk management and control activities of rating agencies
and the remuneration of managers, especially those in the banking sector.
Governments, central banks and supervisory authorities of financial markets should ensure
that recent history will not repeat and that economies are entering a phase that would benefit from a
sound financial system, and effective solvent.
355
REFERENCES
1. Almunia, J., The crisis and beyond: what priorities for European Financial Markets?, 2
nd
Financial Centre Meeting, Frankfurt, 5 March 2009
2. Bario, Claudio Ten propositions about liquidity crisis, BIS Working Papers, no. 293,
November 2009
3. Crotty, J and Epstein, G., Proposals for Effectively Regulating the US Financial System to
Avoid Yet Another Meltdown, Political Economy Research Institute (PERI), University of
Massachusetts Amherst, Working paper Series no 181, 2008
4. Dianu Daniel, Capitalismul ncotro? Criza economic, mersul ideilor, instituii, Ed.
Polirom, Iai, 2009
5. Greenspan Alan, We Will Never Have a Perfect Risk Model Financial Times, 17 March,
2008
6. Isrescu Mugur Constantin, International Financial Crisis and Challenges for The Monetary
Policy in Romania presented on 26th of February, 2009 at Babe Bloyai University of
Cluj Napoca, www.bnro.ro
7. Krugman, P., ntoarcerea economiei declinului i criza din 2008, Ed. Publica, Bucureti,
2009
8. Roubini, Nouriel, Mihm, Stephen, Economia crizelor. Curs fulger despre viitorul
finanelor., Ed. Publica, Bucureti, 2010
9. Voinea Liviu, Sfritul economiei iluziei: Criz i anticriz: O abordare heterodox, Ed.
Publica, Bucureti, 2009
10. Bank for International Settlements 2009a (BIS) Global Financial Crisis: Causes, Impact,
Policy Responses and Lessons. Speech by Dr. Rakesh Mohan, Deputy Governor of the
Reserve bank of India, at the 7th Annual India Business Forum Conference, London
Business School, London, Aprilie 23. Available at
http://www.bis.org/review/r090506d.pdf?noframes=1
11. Communication from the Commission to the European Council, A European Recovery
Plan, Brussels, 26 November, 2008, COM (2008), 800, final
12. Communication for the Spring European Council, Driving European Recovery, EC, COM
(2009) 114 final, March 2009
13. IMF (International Monetary Fund.). 2009a.Global Financial Stability Report: Responding
to the Financial Crisis and Measuring Systemic Risks. Available at
http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm
14. The High-Level Group on Financial Supervision in the EU de Larosiere Report, February
25, 2009
15. *** Supervision of pan European financial institutions, European Parliamentary Financial
Services Forum, www.epfsf.org
16. www.bis.org
17. www.ecb.inf
18. www.imf.org
356
5ECTION 4
5TATI5TIC5, DATA PROCE55ING
(INFORMATIC5) AND MATHEMATIC5
357
MACROECONOMIC DEVELOPMENTS BASED ON THE MAIN COMPONENTS
METHOD
PhD. Mariana BLAN
Institute for Economic Forecasting NIER, Romanian Academy, Romania,
mariana_prognoza@yahoo.com
Prof. univ. PhD. Valentina VASILE
Institute for National Economy NIER, Romanian Academy, Romania
valentinavasile2009@gmail.com
Abstract:
The main components method allows for identifying the fundamental structures of some complex data basis,
the highlighting of significant relationships of interdependence and the selection of a low number of factors the features
of which may be used as basis for estimates or decisions.
The paper intends to investigate some variables with direct and significantly propagated impact on the evolution of
macroeconomic indicators oil price, human capital and educational stock. The suggested methodology permits the
identification of measures and instruments of policies adjustment, including some prevention mechanisms.
The outcomes of using the model are presented based on: a) determining the influences of oil price changes (including
shocks) on some macroeconomic indicators for the same period of time in which these occur; b) determining the
employability on industries of the national economy with major impact on economic development, particularly for
transition countries exposed to deep structural changes; c) influence of diminishing rate of non-participation to
education and/or early school-leaving on economic performances.
Key-words: main components method, employment, educational stock, labour market
JEL Classification: C15, C32, I21, J21
INTRODUCTION
The main components method is one of the most used descriptive methods for data analysis.
The underlying principles of the method are old, but the development and diversity of these
techniques are recent. The substantiation of the classic factorial theory was made by Spermann
Thurstone and Burt. The analysis by the main components method in the economic field was
introduced by Karl Pearson in 1901 who studied the issue in the case of non-stochastic variables
under different circumstances. The technique was generalised by Hotelling (1933) for the case of
stochastic variables.
By means of this method an assembly of data may be reduced to a compact form which still can
highlight some fundamental structures of the data. The method allows for underpinning some
significant interdependency relationships which might remain unknown at a simple examination of
the data. The purpose of this analysis is to reduce complexity, by identifying a small number of
factors the characteristics of which can be the basis of some assessments or decisions.
The suggested methodology allows for the study of the influences of quarterly changes of oil
price on some macroeconomic indicators, of possible oil price shocks on each of the considered
variables. The analysis of the labour market dynamics in the Central and Eastern European
countries by this methodology allows highlighting the sectors with the highest share with respect to
358
the number of civil employed, but also a hierarchy of the countries depending on unemployment
rate for various age groups.
The main components method used in the study of the educational level in countries from
Central and Eastern Europe makes possible to underscore the differences between various education
segments for the examined countries, but also the enrolment rate to the educational process of
children and teens between 6 and 18 years, as well as the participation to lifelong learning (persons
aged between 25-64 years).
The principles underlying the method are old, but the development and diversity of these
techniques are quite recent. The basics of the classic factorial theory were laid by S. Ledermann and
their improvement was realised by Spermann Thurstone and Burt. The analysis based on main
components method (Pearson and Hotelling) allows for a descriptive synthesis of an assembly of n
observations for p variables.
Like all other descriptive methods, also the main components method resorts to some general
outcomes from mathematical statistics.
1. FORMULATING THE PROBLEM
An important factor in the proposed analysis is also the data set underlying the study.
By means of this method a set of data can be reduced to a compact form, but which still can
highlight certain fundamental structures of the data. The method permits underscoring significant
interdependency relationships which could not be known by simple data examination. The purpose
of this analysis is to diminish complexity, by identifying a small number of factors the
characteristics of which may be the basis for some assessments or decisions [1]-[2].
The core idea of the main components method resides in determining the share (percentage) in
total variation (sum of variances for those initial p variables) of each new variable.
By means of the main components method the set of correlated variables , ,
p 2, 1
... , x x x is
changed into a set of uncorrelated variables , ,
p 2, 1
...y y , y called main components by making use
of the relationship:
+ + + =
+ + + =
+ + + =
p pp p p p
p p
p p
x a x a x a y
x a x a x a y
x a x a x a y
...
:
...
...
2 2 1 1
2 2 22 1 12 2
1 2 21 1 11 1
(1)
Each component is a weighed sum of the variable x , and
ij
a are weights or coefficients for
which certain restrictions are imposed. The analysis by main components allows also for
geometrical representations of individuals and their characteristics. Therefore is necessary also the
algebraic formulation equivalent to the orthogonal rotation. As result, the coefficients
ij
a must also
satisfy the conditions:
= = = =
= =
_
_
=
=
1,...p k 1,...p; j k; j , 0
1,...p j , 1
1
1
2
p
i
ik ij
p
i
ij
a a
a
(2)
An important consequence of the orthogonal condition is that the total variance of the
components y is equal to the one of the variables x, that is:
359
, , , , _ _ =
= =
p
i
i
p
j
j
x y
1 1
var var (3)
In choosing the number of components due consideration must be given to the fact that, for the
suggested analysis it is recommendable to retain the smallest set of components, but at the same
time to have sufficient values that deliver a good representation of initial data. The variance of the j
component is the own value
j
. The components are selected in decreasing order of their own
values:
p
> > > ...
2 1
. If the variables x are standardised (normalized), then the sum of the x
variances shall be equal to p. Under these conditions, the sum of own values of the total variance y
shall be also p .
The share (percentage) in total variance explained by the j component is:
p
j

+ + + ...
2 1
(4)
And the share (percentage) of the first k components, cumulated, is:
p
k

+ + +
+ + +
...
...
2 1
2 1
(5)
Among the most used criteria in taking a decision about choosing the main component that may
be retained for the analysis are counted:
- retaining the first k components when these represent a higher share of the variance (70-80%);
- if the correlation matrix is analysed, then only those components are retained which have own
values higher than 1;
- examining graphs: if the dependencies between own values and the number of main
components are represented, then those components are selected for which own values decrease
very quickly;
- the graph method, proposed by Kaiser and Cattel [6].
The weight given by the variable i in the j component is
ij
a . The size of
ij
a reflects the
relative contribution given by each variable in the component. Very often, the coefficients are
recalculated as coefficients for the most important components. These new coefficients called also
loaded components are the coefficients used for reconstructing the variables x and y and they are
computed after the relationship:
p 1,..., j p; 1,..., i
*
= = =
ij j ij
a a (6)
When the correlation matrix of the variables x is analysed, the
*
ij
a coefficients must be
interpreted as correlation coefficients between the variable i and the component j .
2. APPLYING THE METHOD OF MAIN COMPONENTS ON STUDYING THE
IMPACT OF THE OIL PRICE CHANGE ON GROSS DOMESTIC PRODUCT
In order to determine the impact of oil price changes on some economic indicators and on the
gross domestic product from Romania, a set of 10 economic indicators were taken into account
(Table no. 1) for which the monthly and quarterly evolution was realised for the period 1994 - 2008.
Using the main components analysis to study the impact of oil price changes on gross domestic
product requires undergoing several stages:
- realising a monthly data bank for the considered indicators ;
360
- building the monthly variation indexes for each indicator (against the same month of the
previous year);
- making the logarithms of the data bank and building logarithmic differences;
- applying the algorithm of the main components method for the built data banks.
Table no. 1 Economic indicators used for studying the impact of oil price changes on GDP
Using the main components method on the set of indicators considered resulted in obtaining
the correlation matrix with the help of which were determined the positive or negative correlations
between the examined variables.
By analysing the correlation matrix of own values is highlighted the fact that the cumulated
percentage in total variance of the first seven components is of 81% (table no.2).
Table no.2. Initial statistics
Own values Dispersion percentage explained
by each factor
Cumulated percentage
Comp. 1 1.6912 0.1691 0.1691
Comp. 2 1.4869 0.1487 0.3178
Comp. 3 1.1293 0.1129 0.4307
Comp. 4 1.1117 0.1112 0.5419
Comp. 5 0.9602 0.0960 0.6379
Comp. 6 0.8878 0.0888 0.7267
Comp. 7 0.8756 0.0876 0.8143
Comp. 8 0.7931 0.0793 0.8936
Comp. 9 0.6086 0.0609 0.9544
Comp. 10 0.4556 0.0456 1.0000
The analysis of the variation graphic of own vectors allows for determining the number of main
factors (components) (Fig. no. 1) [4]. The fact is underpinned that the first 2 factors are dominant
(Fig. no. 1), by having a strong evolution towards the axis ox, thereafter to 4 and 5 and,
respectively, to 7 and 8 where a more significant change of the angle coefficient appears of the
tangent to the evolution curve of own values. This evolution suggests the fact that for this set of
indictors, the first 2 components and the components 4, 5, 7 and 8 are dominant.
Indicator
X1 Electric energy
X2 Total employees in economy
X3 Oil (production)
X4 Export (FOB)
X5 Import (FOB)
X6 Extracted natural gas
X7 Industrial production
X8 Nominal exchange rate (Lei/Dollar)
X9 M2 (at periods end)
X10 Average of the monthly nominal wage/IPC
361
In order to determine the correlations between the main components and the initial
characteristics, the correlation matrix of the loaded components was used.
The correlations obtained within the correlation matrix of the loaded components allow for a
first analysis of the impact of the changes in the oil price on each examined indicator, that is,
depending on the sign of the values from the tables, positive or negative correlations may be
determined between the variables subject to the study and, hence, the way in which these can
influence the evolution of the respective indicator.
1 2 3 4 5 6 7 8 9 10
0
0.5
1
1.5
2
j
j
Figure 1. Evolution of own values for 10 economic indicators
By using the relationships (6) and the loading diagrams for two main components, is possible
to highlight the contribution of each indicator to the development of the gross domestic product
(Fig. no. 2).
Hence, the components in the first quadrant are those with positive correlations, hence they are
not the ones influencing in the strongest way the evolution of GDP according to the changes of the
oil price. In the diagram from Figure 2, each bolded number represents the order number of the
indicator taken into consideration.
362
1
2
3
4
5
6
7
8
9
10
-1 -0.5 0 0.5 1
-1
-0.5
0
0.5
1
a*
i 1
a
*
i 2
Figure no. 2. Contribution of each indicator to the evolution of Gross Domestic Product
under the conditions of changes to the oil price
With the help of the monthly main components were determined the main quarterly
components. These were used for estimating the evolution equation of the Gross Domestic Product
for each of the considered data sets [6].
For the set of 10 data indicators the following equation was obtained:
, , , , , ,
, , , , , , , , , , 6 7 6 5 4
3 2 1
8 7 5 4
2 1
AR F C F C F C F C
F C F C C DLOGGDP
+ + + +
+ + + =
(7)
where , ,
i
F are the coefficients of the examined main components..
Using the coefficients resulting from equation (7) and the matrices of own vectors were
determined the partial derivates. These together with the coefficients from the oil price regression
allowed for determining the impact of changes in the oil price on each examined indicator.
The total impact of oil price change on the examined indicators computed based on the
methodology of the main components method is of -0,075.
The calculation way presented above for the gross domestic product for the economic indicators
and the price of oil ( as differences of the logarithms of quarterly values against the same period of
the previous year), allows for quantifying the GDP change whenever a change by a certain
percentage of the oil price occurs. Thus, an increase of 10% of the oil price in a certain quarter leads
to a diminishment of the GDP by 0.686 %in the same quarter.
Hence, by this method is possible to forecast also the impact of the oil price on the
macroeconomic indicators, hence on the GDP together with the monthly forecasts about the GDP
and the evolution of the oil price.
363
3. THE ANALYSIS OF THE LABOUR MARKET DYNAMICS IN THE CENTRAL
AND EAST EUROPEAN COUNTRIES BY THE METHOD OF THE MAIN
COMPONENTS
The transition to the market economy influenced strongly on the employment rate of the
population from the perspective of volume, and structure triggering the adjustment of the labour
market policies in parallel with the process of institutional reform. Under the conditions of
accelerated restructuring, increasing job uncertainty and of the current economic and financial
crisis, on the labour market were accumulated a large number of social issues. Employment became
one of the most tension-filled areas of the economies.
For studying the dynamics of labour force in various areas of economic activity in Romania,
data were taken into account about civil employed population, on activities of the Romanian
activities at CANE section level by the end of the year for the period 1991-2008.
The correlation matrix of the own vectors determined for the examined variables have
highlighted that agriculture, industry and thermal electric energy, gas and water are three
components which gather 96.3% of the total variation.
The positive or negative correlations of the first three main components for each of the analysed
fields allow for a yearly distinction of the sectors with a high share with respect to the number of
civil employed.
If only the correlations between the first two loaded components are taken into account and
the analysed economic sectors (Table 3).
The position differences between the sectors are due to the fact that the sign of the scores for
these components is changed from one sector to another. The negative values of the scores for
agriculture, hunting and forestry, extracting industry, electric and thermal energy, gas and water,
transports, warehousing and communications corresponding to the first component indicate that
these are sectors with higher employment.
In order to make a comparative analysis of unemployment rate evolution on various categories
of age and gender of employees, data were considered about this indicator for the 17 countries from
Central and South-Eastern Europe.
Table no.3. The score corresponding to each field of activity depending on the first two main
components
Economic activity field
*
1 i
a
*
2 i
a
Agriculture, hunting and forestry
-0.0002 0.0003
Fishing and fishery
0.0180 0.6669
Extracting industry
-0.0092 -0.0024
Processing industry
0.0013 -0.0035
Electric and thermal energy, gas and water
-0.0055 0.0034
Constructions
0.0030 0.0009
Trade
0.0013 -0.0004
Hotels and restaurants
0.0045 -0.0015
Transports, warehousing and communications
-0.0046 0.0535
Financial intermediation
0.0142 0.0325
364
Real estate transactions and others
0.0018 0.0003
Public administration and defence
0.0139 0.0122
Education
0.0021 -0.0153
Health and social assistance 0.0022 0.0053
Other activities of the national economy 0.0030 0.0006
The analysis of the correlation matrix of the own vectors highlights the fact that the first two
components cumulate 96.5% from total variance.
The scores corresponding to each segment of the unemployment rate examined for the 17
countries depending on a certain main component may be calculated based on the relationship:
*
5
*
1
*
46858 , 0 ... 49053 , 0 x x y
j
+ = (8)
where
*
j
x is the standardised variance of
j
x , which represents the percentage of the j component of
the unemployment rate from the examined country, and the obtained results for each country are
presented in the diagram in Figure 3.
Romania
Czech Republic
Belgium
Italy
Greece
France
Hungary
Slovenia
UE-15
UE-27
Lithuania
Estonia
Germany
Latvia
Bulgaria
Slovakia
Poland
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
-1.50 -0.50 0.50 1.50 2.50
Figure 3. Evolution of the unemployment rate in EU and South-East European countries by
using main components
For instance, the strongly negative values of the two components separate Latvia, Lithuania,
Germany and Estonia and the other analysed countries. This indicates the fact that in the economy
of these countries unemployment and the component corresponding to the unemployed aged under
25 years are preponderant.
The current situation of these economies is characterised by high unemployment rates and
output and labour productivity increases.
365
Despite productivity gains from the majority of economies, the gains in diminishing
unemployment were disappointing. The dimensions of labour force and the level of the employment
rate of the population were declining in the period 1993-2008 (with brief revigorating periods
around the years 2005). In the context of the current economic and financial crisis it should be
expected that high values of the unemployment rate occur for individuals up to the age of 25 years
and among those older than 50 years of age.
.
4. THE STUDY OF THE EDUCATIONAL LEVEL IN EU MEMBER COUNTRIES
(EU-15 AND EU-25) AND IN CENTRAL AND EAST-EUROPEAN COUNTRIES BY THE
METHOD OF MAIN COMPONENTS
The method of main components allows also for highlighting some significant interdependency
relationships which could not be known by simple data examination.
For the suggested study were considered data on the pre-school enrolment rate, on education
enrolment of children and teens aged 6 to 18 years, as well as on participation to permanent
education (persons aged between 25 and 64 years of age).
The data set for these indicators comprised the period 1994-2008 and they were examined for
some countries of Central and Eastern Europe.
Based on the correlation matrix for these indicators obtained by applying the main components
method positive or negative correlations were determined between the examined variables. Hence
the only negative correlation underpinned is the one between the pre-school enrolment rate and the
enrolment rate of children and teens aged between 6-18 years.
Because the aggregated percentage of the first two components is of 87.6%, for the suggested
analysis were considered as significant only the first two components.
Using the relationships (6), depending on the first two main components, were calculated the
scores of the indicators analysed for each of the countries subject to the study (Fig. 4).
Poland
Lithuania
Estonia
Croatia
Romania
Slovenia
Slovakia
Hungary
Latvia
Bulgaria
UR-27
Euro Zone UE-15
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
-2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50
Figure 4. Evolution of the educational level using the scores of the two main components for
EU countries, and Central and Eastern-European countries
366
The position differences between the countries are due to the fact that the sign of the scores for
these components is changed from one country to another. The negative values of the scores for
Slovenia, Estonia and Lithuania indicate that these have a higher enrolment of children at the
corresponding level for the ages 6 to 18 years, and lower for the other education forms. Romania,
Croatia, Poland are approximately on the same horizontal, with positive values of the component
*
1
y . The countries with both of these components positive indicate that the differences between
them are due to the different sign of the scores for the enrolment rates of pre-school education and
of the education level corresponding to the ages between 6 and 18 years.
CONCLUSIONS
Using the method of main components and of the regression equations for the Gross
Domestic Product, as well as for the other variables examined have allowed for determining the
impact of the oil price changes on each considered economic indicator. This made possible to
evaluate the GDP changes to the percentage changes of the oil price.
Applying the main components method in analysing the influence of the oil price changes on
Gross Domestic Product allowed also for highlighting the variable most affected by these changes,
as well as for quantifying their changes according to the shocks underwent by the oil price.
. Also, this methodology permits, that based on supplied data, to realise forecasts for
determining the impact of oil price changes on some economic indicators.
In analysing the dynamics of the labour force with the help of this methodology, was
highlighted which of the studied variables have a wider or lesser expansion in each of the countries
subjected to the analysis. At the same time it allowed also for a comparative analysis of the
evolution stage of the considered variables.
Applying the method of main components for the comparative analysis of the various education
segments in different European countries highlighted which is the most developed segment.
This information together with similar analyses on other groups of indicators can become very
useful in analysing the economic evolution of a country at a given moment, as well as in taking
decisions on the economic-social development of a society.
Applying the method of main components on some economic phenomena, and for the issues of
some economic sectors, to analysing the correlation degree of the main macroeconomic indicators
in view of developing macroeconomic forecasts may contribute to economic growth turnaround
which became a priority of the macroeconomic policy starting with its importance.
SELECTED BIBLIOGRAPHY
1. Alvin, C., (1998), Multivariante Statistical Interface and Application, Ed. A. Wiley
Interscience Publication John Wiley&Sons. Inc.;
2. Bartholomew, D., Steele, F. Moustaki, I., (2002), The Analysis and Interpretation of
Multivariante Data for Socila Scientes, Ed. Chapman&Hall/CRC;
4. Jonston, J., (1997), Econometric Methods, Ed. The McGraw-Hill Companies, Inc.;
5. L. Klein, Mariana Nicoale, A. Roudoi, V. Eskin, (2004), Principal components models
of the Romanian economy. Study of the oil price impact upon GDP, Romanian Journal
of Economic Forecasting, Year V, Supplement / 2004;
10. M. Nicolae, (2003), Utilizarea metodei componentelor principale la analiza strii de
sntate a societilor bancare, revista Oeconomica, Nr. 2/2003, pag. 117-133;
367
13. St. Stefnescu, (2000 ), Numerical Analysis, University of Bucharest Publishing House,
Bucharest;
14. Tomasz Michiewicz, (2001), Convergence in Employment Structure: Transition
Countries versus the EU-Reforms, Income Level or Specialisation Patterns, Ten years of
Economic Transormation, Volume III-Societies and Institutions in Transition, Ed. By K.
Liuhto, no 16/2001 ;
*** Anuar Statistic 1990-2008 - Institutul Naional de Statistic
*** Buletin lunar Banca Naional a Romniei, 1994-2008
*** Buletin statistic lunar Institutul Naional de Statistic, 1994-2008
*** Date Eurostat, www. Eurostat.com
*** World Development Indicators (WDI) Washington, DC, www.worldbank.org/
368
CAR ACCESS USING MULTIMODAL BIOMETRICS
Catalin LUPU
catalinlupu@seap.usv.ro
Abstract:
This paper presents the use of multimodal biometrics in order to identify or to verify a person that wants to
start the engine of a car. First of all, a fingerprint sensor is posted on the cars door, one on the steering wheel, a
camera for iris recognition on the car's main mirror, and finally a microphone for voice recognition. There are two
possibilities: if the person is identified as the car owner or a known user, then he/she can take control over the car; if
its an intruder, the car can announce the security service or the police using a complex GPRS system.
Keywords: multimodal, biometrics, iris, fingerprint, car, access, control
JEL Classification: C80
1. INTRODUCTION
The use of multi-modal biometrics aims to increase the accuracy of the verification or
identification of people. There are a lot of biometric technologies, like iris, face, fingerprint, hand
geometry, and voice recognition etc. Each technology has different advantages and disadvantages,
and there are some characteristics that every method has such as universality, uniqueness,
permanence, collectability, performance, acceptability etc. Some characteristics are better for some
technologies at a medium or low level.
The problem in using multi-modal biometrics is the choice the biometric technologies to be
used in the system. Also, the person to be identified must pass all the tests, and every test can have a
different weight in the system.
2. SHORT HISTORY OF AUTOMATIC IDENTIFICATION
The most used identification activity in criminology and in common civil applications is the
one which has as its aim personal identification. The identification of a person that has committed a
crime has been made for a long time by using scientific and mystical elements.
One of the most important innovation in personal recognition and registration belongs to
Alphonse Bertillon, police functionary in France, who claimed and demonstrated in 1879 that if
many body dimensions such as waist, width, height, head circumference, the height of right ear,
the length of some phalanges and of some bones from the left hand are measured, then it would be
almost impossible to find two individuals with the same characteristics.
It is probably the first anthropometrical identification and verification system. This can
also be considered as a multimodal biometric system, as it uses many characteristics of the human
body. These researches were the first in this important field.
3. MODERN BIOMETRIC SYSTEMS
Decades ago, when the first biometric technologies were developed, they were much too
expansive and complex, being used only in military applications that needed a very high level of
security.
369
The situation changed dramatically because of the progress of informatics technologies and
also because of the explosive growth of frauds it is estimated that every year in the USA, because
of the ATM frauds, there are abound 500 million dollars lost, 2 billion dollars in the case of
cheques, and 1.5 billion dollars from credit cards.
The use of PINs and passwords are not useful anymore for the identification of a person. It
is demonstrated, especially in the USA, that if a single document, such as a driving license, is less
secure, then all the documents can be obtained by using this counterfeit act.
The following picture shows the percentage of the main fields where the biometrical technologies
are used.
Figure 1. The use of biometric technologies
There are many physiological characteristics traditionally used for identification. The
biometric indices can be classified in the following main categories:
- general look/appearance (e.g. height, weight, the color of the skin, hair or eyes, visible
characteristic signs, gender, race, facial hair, etc.; all these can be presented in a photo);
- behavior (e.g. general characteristics of the voice, type of character, visible handicaps,
features recorded on video tape, etc)
- bio-dynamic elements (e.g. the pressure and the speed of signature, static characteristics of
the voice, speed of typing, etc.)
- natural physiological elements (e.g. the dimensions of the skeleton anthropometrics,
healed fractures of the bones, fingerprints and palm-prints, vein structure, iris and retina
image, the model of the ear, hand geometry, DNA, etc)
- artificial elements (used especially for the recognition of animals: bracelets, tattooed bar
codes, chips implanted under the skin, etc.)
Some of these elements, like hair color, weight and height, modify naturally throughout
time. The main characteristics of an ideal identification system are presented below:
- universality every person must be identifiable after the proposed criteria;
- uniqueness every person must have a single identifier; there should not exist two persons
with the same identifier;
- permanence the identifier must not change during the time, or to be transformed at
individual wish;
- necessity the identifier must contain one or more natural characteristics, at which one
person cannot renounce;
- acquisition the identifier must be easily obtained;
- conservation the characteristic must be easily stored, in manual or automatic identification
systems;
- precision every identifier must be different enough from another, so that the recognition is
made without error.
370
- cost the collection and storage of the characteristics must be cost-effective;
- acceptability the users must agree that the identifier be collected and stored in a database.
In figure 2 is presented the weight of the most used biometric technologies.
Figure 2. The weight of the biometric technologies
It can be seen from this picture that the main biometric technologies are based on
fingerprinting and hand geometry. But, for better accuracy, iris scan can be used, because its
relatively cheap and the results are very promising. The speed of the verification or identification is
very small, and the accuracy and uniqueness are at a very high level.
4. DESCRIPTION OF THE BIOMETRIC TECHNOLOGIES USED IN THE CAR
ACCESS CONTROL
The main biometrics identifiers used in this system are fingerprint, voice, and iris
recognition. In the following paragraphs there will be presented the main characteristics of each
identifier.
4.1. FINGERPRINT RECOGNITION
This method is probably the most used in personal recognition. It is also one of the first
methods of identification and verification. The police use this method to find people who
committed different crimes. But this method can be used in civil applications in order to identify the
persons. It can be used especially in the access control applications.
The use of fingerprints for identification presents a series of advantages, such as:
- there exists a very significant experience in the use of fingerprints for identification;
- the primary information can hardly be counterfeited, though it is still possible;
- the quantity of information that must be stored is not very high;
- algorithms for processing the fingerprints are very simple, using only 2D mathematical
models;
- the price for acquiring the fingerprints is the smallest of all the biometric equipments;
371
- the precision of personal identification is very well;
- it is a completely non-invasive method;
- identification time is under one second.
The informatics technique used for the recognition of persons is generically called AFIS
(Automatic Fingerprint Identification System). The procedure starts with the acquisition of the
fingerprint image, then the system automatically marks the zones of interest for the description of
the ridges on the image; the points marked on the fingerprint are stored as Cartesian coordinates and
are compared with the coordinates stored in the database.
In the following picture it is presented the fingerprint with the points of interest marked and a
capacitor sensor for image acquisition.
Figure 3. The fingerprint with interest points marked and a sensor for the image
acquisition
4.2. IRIS RECOGNITION
Mr. John Daugman, from the Cambridge University, developed the main algorithms in iris
recognition.
Iris recognition is one of the most accurate methods of personal identification and
verification.
Many companies implemented his method in their software products and created special
camera for the acquisition of the image. For example, the Panasonic BM-ET330 is presented below.
Figure 4. Panasonic BM-ET330
The image of the iris is acquired from an iris camera, and then is filtered and recognized in
order to obtain a code called IrisCode, which has only 512 bytes. The comparison between two
irises is made by calculating the Hamming distance between two codes. This procedure is extremely
rapid.
Iris recognition today combines technologies from several fields including, computer vision
(CV), pattern recognition, statistical interference, and optics. The goal of the technology is near-
372
instant, highly accurate recognition of a person's identity based on a digitally represented image of
the scanned eye. The technology is based upon the fact that no two iris patterns are alike (the
probability is higher than that of fingerprints). The iris is a protected organ which makes the
identification possibilities life long. The iris can therefore serve as a life long password which the
person must never remember. Confidence in recognition and identification facilitates exhustive
searches through nation-sized databases.
Iris recognition technology looks at the unique characteristics of the iris, the colored area
surrounding the pupil. While most biometrics have 13 to 60 distinct characteristics, the iris is said to
have 266 unique spots. Each eye is believed to be unique and remain stable over time and across
environments (e.g., weather, climate, occupational differences).
Iris recognition systems use small, high-quality cameras to capture a black and white high-
resolution photograph of the iris. Once the image is captured, the iris' elastic connective tissue-
called the trabecular meshwork-is analyzed, processed into an optical "fingerprint," and translated
into a digital form. Figure 12 depicts the process of generating an iris biometric. Given the stable
physical traits of the iris, this technology is considered to be one of the safest, fastest, and most
accurate, noninvasive biometric technologies. This type of biometric scanning works with glasses
and contact lenses in place. Therefore, iris scan biometrics may be more useful for higher risk
interactions, such as building access. Improvements in ease of use and system integration are
expected as new products are brought to market.
The iris is differentiated by several characteristics including ligaments, furrows, ridges,
crypts, rings, corona, freckles, and a sigzag collarette.
Iris recognition technologies are now seen in a wide array of identification systems. They
are used in passports, aviation security, access security (both physical and electronic), hospitals, and
national watch lists. Iris recognition alogithms can be seen in more and more identification systems
relating to customs and immigration. Future applications will include, e-commerce, information
security (infosec), authorisation, building entry, automobile ignition, forensic applications,
computer network access, PINs, and personal passwords.
Advantages of the Iris for Identification
Highly protected, internal organ of the eye
Externally visible; patterns imaged from a distance
Iris patterns possess a high degree of randomness
variability: 244 degrees-of-freedom
entropy: 3.2 bits per square-millimeter
uniqueness: set by combinatorial complexity
Changing pupil size confirms natural physiology
Pre-natal morphogenesis (7th month of gestation)
Limited genetic penetrance of iris patterns
Patterns apparently stable throughout life
Encoding and decision-making are tractable
image analysis and encoding time: 1 second
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decidability index (d-prime): d' = 7.3 to 11.4
search speed: 100,000 IrisCodes per second on 300MHz CPU
Disadvantages of the Iris for Identification
Small target (1 cm) to acquire from a distance (1 m)
Moving target ...within another... on yet another
Located behind a curved, wet, reflecting surface
Obscured by eyelashes, lenses, reflections
Partially occluded by eyelids, often drooping
Deforms non-elastically as pupil changes size
Illumination should not be visible or bright
Some negative (Orwellian) connotations
4.3. VOICE RECOGNITION
Voice biometrics works by digitizing a profile of a person's speech to produce a stored
model voice print, or template. Biometric technology reduces each spoken word to segments
composed of several dominant frequencies called formants. Each segment has several tones that can
be captured in a digital format. The tones collectively identify the speaker's unique voice print.
Voice prints are stored in databases in a manner similar to the storing of fingerprints or other
biometric data.
To ensure a good-quality voice sample, a person usually recites some sort of text or pass
phrase, which can be either a verbal phrase or a series of numbers. The phrase may be repeated
several times before the sample is analyzed and accepted as a template in the database. When a
person speaks the assigned pass phrase, certain words are extracted and compared with the stored
template for that individual. When a user attempts to gain access to the system, his or her pass
phrase is compared with the previously stored voice model. Some voice recognition systems do not
rely on a fixed set of enrolled pass phrases to verify a person's identity. Instead, these systems are
trained to recognize similarities between the voice patterns of individuals when the persons speak
unfamiliar phrases and the stored templates.
A person's speech is subject to change depending on health and emotional state. Matching a
voice print requires that the person speak in the normal voice that was used when the template was
created at enrollment. If the person suffers from a physical ailment, such as a cold, or is unusually
excited or depressed, the voice sample submitted may be different from the template and will not
match. Other factors also affect voice recognition results. Background noise and the quality of the
input device (the microphone) can create additional challenges for voice recognition systems. If
authentication is being attempted remotely over the telephone, the use of a cell phone instead of a
landline can affect the accuracy of the results. Voice recognition systems may be vulnerable to
replay attacks: if someone records the authorized user's phrase and replays it, that person may
acquire the user's privileges. More sophisticated systems may use liveness testing to determine that
a recording is not being used.
Consumer voice recognition systems are typically inexpensive and user-friendly. Most
computer systems are equipped to support a microphone used to develop a voice template and later
to collect the authentication request. Voice recognition is more often used in an environment in
which voice is the only available biometric identifier, such as in telephony and call-center
applications. Voice recognition systems have a high user acceptance rate because they are perceived
as less intrusive and are one of the easiest biometric systems to use.
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Voice verification technology uses the different characteristics of a person's voice to
discriminate between speakers. These characteristics are based on both physiological and behavioral
components. The physical shape of the vocal tract is the primary physiological component. The
vocal tract is made up the oral and nasal air passages that work with the movement of the mouth,
jaw, tongue, pharynx and larynx to articulate and control speech production. "The physical
characteristics of these airways impart measurable acoustic patters on the speech that is produced,"
as one expert explained.91 The behavioral component is made up of movement, manner, and
pronunciation.
The combination of the unique physiology and behavioral aspects of speaking enable
verification of the identity of the person who is speaking. Voice verification technology works by
converting a spoken phrase from analog to digital format and extracting the distinctive vocal
characteristics, such as pitch, cadence, and tone, to establish a speaker model or voiceprint. A
template is then generated and stored for future comparisons.
Voice verification systems can be text dependent, text independent, or a combination of the
two. Text dependent systems require a person to speak a predetermined word or phrase. This
information, known as a "pass phrase," can be a piece of information such as a name, birth city,
favorite color or a sequence of numbers. The pass phrase is then compared to a sample captured
during enrollment. Text independent systems recognize a speaker without requiring a predefined
pass phrase. It operates on speech inputs of longer duration so that it has a greater opportunity to
identify the distinctive vocal characteristics (i.e., pitch, cadence, tone).
Voice verification systems can be used to verify a person's claimed identity or to identify a
particular person. It is often used where voice is the only available biometric identifier, such as over
the telephone. Voice verification systems may require minimal hardware investment as most
personal computers already contain a microphone. The downside to the technology is that, although
advances have been made in recognizing the human voice, ambient temperature, stress, disease,
medications, and other physical changes can negatively impact automated recognition.
Voice verification systems are different from voice recognition systems although the two are
often confused. Voice recognition is used to translate the spoken word into a specific response,
while voice verification verifies the vocal characteristics against those associated with the enrolled
user. The goal of voice recognition systems is simply to understand the spoken word, not to
establish the identity of the speaker. A familiar example of voice recognition systems is that of an
automated call center asking a user to "press the number one on his phone keypad or say the word
'one'." In this case, the system is not verifying the identity of the person who says the word "one"; it
is merely checking that the word "one" was said instead of another option.
5. INTRODUCTION TO MULTIMODAL BIOMETRIC SYSTEMS
Biometrics has been adopted in a variety of large-scale identification application -- ranging
from border control to voter ID issuance. While the technology is conceptually adept, in reality
there are numerous challenges associated with enrolling large populations using just single
(unimodal) biometrics. These challenges can be overcome by deploying multimodal biometrics
systems.
5.1. THE PROBLEMS WITH UNIMODALITY
The shortcoming of unimodal biometrics is that no one technology is suitable for all
applications. Therefore, the presence of a multimodal biometric system helps compensate for the
following limitations:
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- The usage of certain biometrics makes it susceptible to noisy or bad data, such as inability of
a scanner to read dirty fingerprints clearly. This can lead to inaccurate matching, as bad data
may lead to a false rejection.
- Unimodal biometrics is also prone to inter-class similarities within large population groups.
In case of identical twins, a facial recognition camera may not be able to distinguish
between the two.
- Some biometric technologies are incompatible with a certain subset of the population.
Elderly people and young children may have difficulty enrolling in a fingerprinting system,
due to their faded prints or underdeveloped fingerprint ridges
- Finally, unimodal biometrics are vulnerable to spoofing, where the data can be imitated or
forged.
5.2. DEFINITION OF MULTIMODALITY
Multimodality is the usage of more than one physiological or behavioral characteristic to
identify an individual. It involves the fusion of two or more technologies such as fingerprint, facial
recognition, iris scanning, hand geometry, signature verification, or speech recognition.
The fusion is done by running the two (or more) biometric inputs against two (or more)
different algorithms, to arrive at a decision. This technique is useful in large-scale civil ID
applications, where the identity of thousands of people need to be authenticated at a time. To have
an additional method of verification as a backup reduces the possibility of inconveniences caused
by the malfunctioning of the primary biometric.
5.3. ADVANTAGES OF MULTIMODALITY
It is estimated that approximately 5 percent of any population has unreadable fingerprints,
either due to scars or aging or illegible prints. In a civil ID scenario, where millions of people have
to be enrolled in the system, the segment of the population who are un-enrolable will face
inconveniences. Having multimodal biometric technology can overcome this restriction and ensure
lower failure to enroll rate (FTE).
Multimodality can also address the problem of aversion to fingerprinting, found in certain
parts of the world. Sometimes people associate fingerprints with criminal activity, and are reluctant
to submit prints. By having an additional biometric available, a greater number of people can be
enrolled into the system
Using multiple biometrics solves the problem of inter-class similarity and the resultant high
false acceptance rate (FAR). If people with similar hand sizes or similar looking facial features can
gain false acceptance, the presence of another biometric such as signature verification can
distinguish between the samples.
Another advantage of using multimodality is that it solves the problem of data distortion. If
the quality of one of the biometric samples is unacceptable, the other can make up for it. If a
fingerprint has been scarred and the scanner rejects the distorted sample, having another modality
like facial recognition can prevent high false rejection rates (FRR).
Unimodal Biometrics can be easily spoofed. Placing a high-resolution picture of a
fingerprint under the scanner can deceive some systems. However, by using multiple biometrics,
even if one modality could be spoofed, the person would still have to be authenticated using the
other biometric. Besides, the effort required for forging two or more biometrics is a deterrent to
those who wish to do so.
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5.4. DISADVANTAGES OF MULTIMODALITY
Some of the disadvantages of multimodality include:
- Interoperability and Standardization: The technology is at its early stages, and there are no
universal standards set for storing templates and having all biometrics technologies
seamlessly work together.
- Cost: The addition of another biometric technology can drive up the price of the solution.
Critics of multimodal systems say it does not offer real value, and that it is just a marketing
gimmick geared toward increasing sales.
- Reduced Matching Level: Calculations provided by John Daugman, the originator of the iris
algorithm, claim that if a stronger biometric is used in conjunction with a weaker biometric,
the result is not necessarily a stronger combined system. The error rate (FAR or FRR) of the
weaker biometric can bring down the overall effectiveness of the system.
Major biometrics companies have released products that combine multiple biometrics,
mainly for large-scale civil ID usage. Motorola's biometrics unit offers a 'multi-biometric'
enrollment and verification solutions with support for fingerprinting, 2D/3D facial recognition, and
signature verification. ImageWare Systems also has a middleware product called 'Biometric Engine'
that can capture finger, face, and iris data to be used for passport and national ID issuance. Viisage
was selected to implement an integrated finger and face biometric system for Iceland's e-passport
program. Rather than relying on paper-based images, the facial recognition technology will be used
to store a photograph in the passport chip. This will offer higher quality and accuracy levels. The
state of Qatar in May 2006, announced the rollout of a national identification project, which will
store fingerprint, face, and iris biometric data on a smart card. Similar integration of multiple
biometrics with smart card-enabled ID documents is being implemented around the world.
5.5. FUTURE TRENDS
So far, the prominent biometrics combinations have been fingerprint, facial, and iris
recognition. It is possible that the patent issue surrounding hand geometry has made it less
accessible for union with multimodal systems. An interesting trend has been the acquisition of
companies focusing on a particular biometric technology by companies that make other biometrics.
Identity solutions company Viisage, in January 2006, entered into an agreement to merge with
Identix, who makes fingerprint scanners. Viisage also acquired the iris recognition company Iridian
Technologies, thus becoming competent in facial, fingerprint, and iris biometrics. Similarly, Cross
Match Technologies bought out the facial recognition technology company C-VIS, in order to
provide multi-modal biometric offerings to their customers. It will be interesting to see if offering a
multimodal product triggers the next wave of development within the market, or if it is just a short-
term marketing gimmick.
6. THE CAR ACCESS CONTROL PROCESS DESCRIPTION
In this application there are used three main characteristics. The user who wants to use a car
must pass all the four tests. First, on the car door there must be a fingerprint reader, then another
one on the steering wheel. A microphone records the voice of the user then an integrated chip
analyzes these signals. A specialized iris camera takes the iris image and processes it in order to
obtain an IrisCode. This code must be compared with the ones stored in a local database. The
camera can be placed at the back of the cars main mirror, or it can stay on the board.
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After the user passes all this tests, he/she can start the engine of the car. If the user doesnt
pass one test, then it can be repeated. After a second attempt, if the test fails, then all collected data
is sent by using an integrate GPRS system to the police or/and to an authorized user of the car.
Then, the police can identify the person if his/her characteristics are stored in a database, or
can store his fingerprints, voice and iris in a database of criminals.
The main user of the car can introduce other persons in the database by acquiring their images of
the fingerprint, voice and iris.
For higher security, both irises can be stored in the database, or more fingers. Of course,
many other methods can be combined in order to increase the accuracy of the identification process.
Another possibility can be figured out: if the person doesnt possess one biometric identifier, then
another one can be used, having in this case a backup biometric identification system. For example,
if the person cant talk, then this disability will be stored in the system and only fingerprint and iris
verification will work for that person.
REFERENCES:
1. A. K. Jain, A. Ross, and S. Prabhakar, An introduction to biometric recognition, IEEE Trans.
on Circuits and Systems for Video Technology, vol. 14, pp. 420, Jan 2004.
2. M. Golfarelli, D. Maio, and D. Maltoni, On the error-reject tradeoff in biometric verification
systems,, IEEE Trans. on Patt. Anal. and Mach. Intell., vol. 19, pp. 786796, July 1997.
3. A. Ross and A. K. Jain, Information fusion in biometrics,, Pattern Recognition Letters, vol.
24, pp. 21152125, Sep 2003.
4. A. Ross and A. K. Jain, Multimodal biometrics: an overview, Proc. of 12th European Signal
Processing Conference (EUSIPCO), (Vienna, Austria), pp. 1221-1224, September 2004
5. Imran Khan, Multimodal Biometrics -- Is Two Better Than One?
6. J.G.Daugman, Combining Multiple Biometrics, http://www.cl.cam.ac.uk/~jgd1000/
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5ECTION 5
LAW AND PUBLIC ADMINI5TRATION
379
COMPETITION AND CONTRACT
Professor PhD. Luca DI NELLA
University of Parma, Italy
Abstract:
The EU principle of an open market economy with free competition are having a significant effect on Italian
contract law. Private autonomy is being affected by the requirement to lower the number of market failures.
Information, transparency, contractual equilibrium, proportionality and fairness have become extremely important. The
field of application of the ban on abusing legislation that protects the weaker party is being widened. New contractual
remedies are being created. A modern competitive model of contracts, which brings higher levels of economic efficiency
and more incisive ethical control of the market through protection of the individual, is thus gaining ground.
Keywords: competition law, contract law - b2c, contracts - b2b contracts
JEL Classification: K 12, K 21
1. THE PRINCIPLE OF AN OPEN MARKET ECONOMY WITH FREE
COMPETITION AS A SYSTEM DECISION (SYSTEMENTSCHEIDUNG) IN THE
ITALO-EUROPEAN MARKET LAW
The changes introduced to contract legislation as a result of the Italo-European principle of
competition are certainly one of the great innovations of recent economic regulation, which has also
introduced the concept of the market as a legal entity in the sense of the German theory of the
Ordoliberalismus [1]. This paper offers an overview of the recent changes in Italy law system.
The point of departure is the fact that the regulations have adopted as a system decision
(in the German sense of Systementscheidung) a social market model (art. 3 3 of the Treaty on
European Union, TUE) [2] based on the democratic government of the economy which is
legislatively in accordance with the principle of an open market economy with free competition, as
described in article 119, 1 e 2, of the Treaty on the Functioning of the European Union (TFUE)
[3].
The market can be understood as a system of rules and principles aiming to govern the
mechanisms and relationships involved in the production and exchange of goods and services which
take place within the European Union [4]. This describes the overall structure of the regulatory
environment in which exchanges ideally take place. There is not one single market therefore, but
rather as many markets as there are rules and regulations which govern them.
Competition on the other hand indicates the duties of the market, the type of structure the
exchange dynamics must adopt within the system. This leads to the decisive importance of the
principle of competition, the definition of which models the progress of the exchanges. The
aforementioned principle has a strong conforming influence on private law relationships both in
terms of the macro-systems of the various markets and the micro-systems of single transactions,
thus directly concerning the rules and regulations of its activity.
The function of competition is to improve the economic efficiency and assure that the
market operates correctly. In this sense, both the overall system of exchanges and every single
transaction, as a segment of the aforementioned system, are both general and private stakeholders,
and this creates a mandatory nature for the majority of the new regulations. Alongside the mixture
of private and public interests lies the need to make the regulations objective, removing almost all
of its subjective profiles due to the need to guarantee a substantial and functional effect in
governing mass economic phenomena.
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2. COMPETITION, MARKET FAILURES AND CONFORMATION OF THE
CONTRACTUAL AUTONOMY
Competition is part of the conflict-choice-selection process, in which many competitors
draw up proposals, the recipients choose, and the losers, unable to survive, abandon the fight. In this
perspective, competition can be defined as the selective struggle regulation based on the ability of
the businesses working in the internal market to perform [5]. With competition defined in this way,
the only compatible entrepreneurial behaviour is that of those whose tools of success exercise a
purely psychological influence over the will of their customers, who themselves comparatively
evaluate the results of their production skills [6].
Any deviation from such standard, any distortion occurring in the conflict-choice-selection
process represents the failure of the market that prevents it from producing any positive effects. In
this case, Italian and European legislation is required to intervene and restore the ideal operating
conditions for competition at all times, correcting any false results that concretely occur through
appropriate interventions at any stage of the transaction.
Among the forms of market failure, two of them have been particularly important for
European contract law: the restrictions of competition and information asymmetries. The
restrictions are the result of both agreements and decisions by trade associations or agreed practices
which hinder the operation of the competition process and of abuses by businesses which exploit
their structural superiority to impose disadvantageous conditions for other contractors. The second
type of failure is found in information asymmetries. If one party is not able to acquire information
on the quality of the supply (goods, services, contractual conditions), the supply is at best deemed to
be of average level. Therefore the customer focuses on the offers with prices which lie in the lower
ranges. Those who offer high quality products and services therefore obtain a price which, in the
best case scenario, is appropriate for an average or low quality product or service. This not only
means that consumers are not able to distinguish between good and bad offers, but that the good
offers are systematically rejected by the market. This causes a downward trend, which leads to the
Market for Lemons [7].
From this we can understand the importance of intervening in order to reduce such failures
by introducing new hypotheses which forbid abuses, a set of regulations aiming to reduce
information asymmetries and introduce new forms of protection. In this way, the group of principles
which traditionally represented the foundations of contract law has changed.
First and foremost, the general principle of order here becomes that of competition which
conforms contractual autonomy, filling it with general interests and specialising its contents
according to the quality of the contracting parties. The consumers freedom of choice (artt. 8
Directive 2005/29/EC and 24 of Italian Consumer Code - cod. cons.), the right to true and correct
information, the duty of transparency and contractual balance represent the new defences which
safeguard correct market operations and weak contracting party, which are no longer available to
the latter. The mandatory non-abuse of these rights sees a new season, and all cases of abuse are
required to be reported, with the support of the general clause of good faith; the same can be said
for the principle of fairness and unfair practices.
3. INFORMATION, FORM AND TRANSPARENCY. THE FAIRNESS OF THE
COMMERCIAL EXCHANGES. THE PROHIBITION OF ABUSE OF THE DOMINANT
POSITION AND OF ECONOMIC DEPENDENCY AND THE NEW LEGAL
OBLIGATIONS OF THE CONCLUSION OF CONTRACTS
In this context the new rules of form and transparency are closely linked to the strategy of
information and protection of weaker contracting party. The transmission of information on
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contractual contents is conveyed by the widest variety of expressive modules, including
advertisements, electronic and paper documents, product labels and more generally everything
which during pre-contractual and contractual phases constitutes a decision-making tool for the
contracting party receiving the information and a form of protection in the event of disputes.
Contract forms therefore once more adopt the written form of agreement, including more widely all
information communication methods which characterise contract negotiation and execution. In
short, it covers both the form of the act in its strictest sense and the form of publicity, publication of
contractual conditions and all other forms of supply stimulus in the market, as well as all
information documents which must be made available to the counterpart during the conclusive and
executive phases of the relationship [8].
The duty of transparency unequivocally marks the overcoming of the distinction between
form and content (art. 2 Law no. 192 of 1998). Formulation also has constant consequence on the
content of contractual clauses. The way in which they are drawn up sets forth and influences their
content. Therefore there is no doubt that in this context the form-content distinction has no
meaning, as the text cannot be separated from the way in which it is written. Moreover, as shown in
German literature, the lack of transparency often hides substantial disadvantages and prevents us
from harvesting the opportunities of competition, deforming the market and consequently causing
an injustice in content due to the impossibility of making choices.
The prohibition of unfair commercial practices also contributes to creating a new dynamic in
consumer relations, aiming to guarantee the free use of the right to choose based on true, correct
and transparent information. The exchange model aimed for by the legislator is therefore based on
the aware and unconditioned choice of the recipient of the supply.
The main consequence of these regulations is the establishment of an information phase in
contractual relation, which takes place prior to negotiation. The procedural profile of the contract is
highlighted, as occurs for example in IT, banking, insurance and financial market contracts. In this
regulatory framework, the form of the act blends with that of the activity, which itself equally
becomes one of the sources of contractual regulation or a cause of contractual invalidity, when
unlawfully done. The overcoming of the distinction between activity and act is definitively marked
by unfair commercial practices in consumer relations, which represent a varied and eclectic figure
including advertising, marketing, declarations, communications and material behaviour of the
professional figure.
New dimensions and a consistent expansion become legal obligations of the conclusion of
contracts, particularly in business-to-business sector. The non-abuse of the dominant position (artt.
102 TFUE and 3 of Italian Antitrust Law no. 287 of 1990) and of economic dependency (Law no.
192 of 1998), which are closely connected, are the fields affected by this new issue. Article 9, para.
2, Law no. 192 of 1998 includes among the prohibited deeds those consisting in the refusal to sell
or purchase, the imposition of unjustifiably harsh or discriminatory conditions, the arbitrary
interruption of existing commercial relations. Also in antitrust law there is a tendency to qualify
the refusal to contract with no objective justification as an abuse of the dominant position. In the
past few years the European Commission, the Court of First Instance of the European Communities
and the Italian Antitrust Authority have considered the right of access for competitors to the
essential facilities of dominant firms [9]. The refusal or access at discriminatory conditions is
considered an abuse [10]. The essential facilities doctrine aims to assure effective competition in the
concerned markets. The cases of essential facilities indicate that a facility can be deemed to be
essential when it is unique in its referred market, or cannot be duplicated for legal reasons (covered,
for example, by an exclusive concession) or for economic reasons.
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4. THE AWARE AND NOT UNDULY CONDITIONED CONSENT. THE CAUSA IN
CONCRETO AND THE OBJECT, FORM AND CONTENT OF THE CONTRACT
BETWEEN TRANSPARENCY, NORMATIVE BALANCE AND PROPORTIONALITY
Also the traditional requirements of the contract structure, regulated in articles 1325-1352 of
Italian Civil Code (cod. civ.), have been greatly influenced by the principle of competition.
It is certain that, to be considered validly formed, an agreement (artt. 1321 and 1325, no. 1,
cod. civ.) must be aware and unconditioned. Particularly in the financial markets sector, the recent
legal repercussions of the famous Cirio, Parmalat and Argentina cases have shown the development
of a consistent legal current which aims to guarantee the development of informed consent by the
purchasers of financial tools and products. The adoption of a general regulation prohibiting unfair
commercial practices in articles 18-27quater cod. cons. definitively marks the introduction of the
requirement of the granting of consent which is not unduly conditioned by the legislation.
The causa of the contract (artt. 1325, no. 2, 1343-1345 cod. civ.) in the new system behaves
increasingly as a requirement to be substantially assessed according to a specific case [11], with the
expansion of the number of effects which traditionally qualify a contract [12]. In antitrust law,
unlawfulness depends on the restrictive effects produced by a given agreement, decision or practice.
If the effect is to prevent, restrict or falsify competition, the case is prohibited whatever the type of
contract. What counts is the substantial, concrete dimension of the functional profile.
The application of some very important laws depends on the position of the contract in the
production chain. As a result, categories of horizontal understandings and vertical understandings
are created. This is particularly interesting in the case of distribution contracts. These have been the
subject of EC regulation which considers mainly the constraints used to link different members of
the distribution chain, limiting their own freedom of competition and that of others. In order to
protect the latter, Regulation (EC) no. 330/2010, regarding to categories of vertical agreements and
concerted practices, introduced in articles 4 and 5 a transversal control of the characterising clauses
of these kinds of contracts which can affect economic competition, such as those which impose
territorial restrictions, obligations of exclusivity and other forms which limit the decision-making
and operational autonomy of the parties. It is not therefore an organic subject which offers solutions
to the various conflicts of interest between the parties, but is rather an evaluation of the lawfulness
or unlawfulness of certain agreements according to their potential influence on market operations.
The problem of network contracts, irrepressible wealth-creating instruments in current economics,
also lies in this context.
Also in the case of consumer contracts, for the purposes of the applicable legislation today a
pre-eminent position is held not by contracts but rather the effects of individual agreements and the
way in which they are drawn up. The significant imbalance of the rights and obligations of the
parties (artt. 3 Directive 93/13/EEC, 33 cod. cons.) or the lack of transparency in their formulation
(artt. 5 Directive 93/13/EEC, 35 cod. cons.) need to be assessed according to the considered clause
within the framework of the contractual regulation or other linked negotiations and within the
overall panorama of the whole economic operation of which the contract is a non-separable
segment.
In short, it appears possible to state that in the new contract law, the difference between
typical and atypical has been progressively effaced, losing a considerable part of its traditional
importance. Increasing importance is on the other hand given to trans-typical regulation which is
applied according to the (essential or otherwise) effects it concretely produces and the quality of the
contracting parties. In this context, undisputable confirmation is found for the doctrine which,
rightly so and for some time, has considered the interpretation as the identification of the regulation
to apply to each concrete case, overcoming the artificial distinction between qualification and
subsumption [13].
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From this point of view, the subject (artt. 1325 no. 3, 1346-1349 cod. civ.) and causa of the
contract seem to become confused, not conceptually but at least in terms of the applicable
legislation. The subject, and with it the content [14], must be not only admissible, possible,
determinate or determinable (art. 1346 cod. civ.). It must also be clear and understandable, balanced
and proportionate (artt. 3 Directive 93/13/ECC and 33 cod. cons.; artt. 2, 9 Law no. 192 of 1998).
The lack of one of these essential connotations opens the way for various sanctions applied to the
contract, but which can also concern the activity, as in the various hypotheses of unfair commercial
practices and misleading advertising.
Also the form (artt. 1325 no. 4, 1350-1352 cod. civ.), as has been seen, takes on new
meanings and functions, in some aspects being merged in the content of the contract at least in
terms of the principle of transparency, where the non-clarity and comprehensibility of a clause hides
a significant imbalance of rights and obligations of the parties.
5. INTERPRETATION, CONTROL AND INTEGRATION. THE FAIR EXECUTION
AND THE PROHIBITION OF THE ABUSE
The functional profile of the relationship, the interpretation (art. 1362-1370 cod. civ.) and
execution phases (artt. 1372, 1375 cod. civ.) see a new era in which the heteronomous integration of
the contractual regulation of interests (art. 1374 cod. civ.) whatever the will of the parties, the
control of content, transparency and fairness predominate.
In all market contracts control of content against unfair clauses [15] and control of
transparency are foreseen. Consumer contract legislation was the first to introduce mechanisms to
remove market failures and protect the weaker contracting party against abuse (artt. 3, 5 Directive
93/13/EEC, 33, 35 cod. cons.). In the business contract sector, the way was paved by article 2 on
transparency of form and content and by article 9 Law no. 192 of 1998, the general rule of non-
abuse of economic dependency, which already governs the significant imbalance of rights and
obligations and the imposition of unjustifiably harsh or discriminatory contractual conditions. In
fact, a list of actual or presumed unfair clauses is missing. This gap could easily be filled by
integrating article 9 of Italian Law no. 192 of 1998 with the provisions listed in articles 101, 102
TFUE and 2, 3 of Law no. 287 of 1990, which provide indication of the forbidden clauses which are
a manifestation of forbidden agreements or abuses of the dominant position. This operation is
permitted by paragraph 3bis of the aforementioned article 9 of Law no. 192 of 1998 which
expressly creates a link between the contentious provision and the antitrust legislation.
The control of content and transparency, together with the principle of conservation (art.
1367 cod. civ.), allow for the redesign of contractual regulation, removing any unfair and non-
transparent clauses and integrating them with legal provisions or self-integration techniques.
The interpretation is connoted by objectivity, under the influence of the market which is the
regulatory framework in which the contract lies. The most important hermeneutical rule given in its
widespread workability is the most favourable interpretation for the consumer, in the event of
doubt over the meaning of a clause (artt. 5 Directive 93/13/EEC, 35 cod. cons.). We can certainly
see here the potential to act as a substantial control tool over the weak position of the contracting
party-subscriber [16], but its relationship with the principle of transparency as its specification is
certainly remarkable [17]. This close link which can be seen not only in the placement of the rule in
question in the same article 35 of the Consumer Code which establishes the principle from which
this derives, but also in the fact that the doubt, the supposition for enforcement of the interpretation
that is most favourable to the consumer, is undoubtedly one of the possible manifestations of the
lack of transparency. From this emerges the significant continuity between the principle of
consumer protection and that of transparency with the above hermeneutical technique, and thus the
moment of interpretation must be rightfully entered in the overall strategy pursued by EC
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legislators, specifically aiming here to effectively eliminate the consequences of the market
imperfections both at macro-system and individual consumer level. The reason of the rule of the
most favourable interpretation for the consumer is therefore two-fold [18]. On one hand, it does not
appear deniable that its foundation lies in the self-accountability of the professional for his
behaviours and declarations made. This aspect fits perfectly in the framework of the characterising
principles of the market understood as a regulatory environment, in particular referring to the
general principle of competition. It is equally found in a number of provisions which are inspired by
the same idea [19]. Moreover, also the considerations on the position of the consumer in the market,
institutionally led to sign pre-set contracts or negotiate with professional experts in order to satisfy
the essential or non-essential personal needs of himself or members of his family or others close to
him, certainly carried some weight in the legislative decision. Indeed, the consumer gives a consent
which is generally nude, and not truly free as it is reduced to the mere subscription to contractual
conditions and forms which are not perfectly understood and evaluated, or of which he is not
sufficiently aware as an appropriate level of information or experience is not always available [20].
The merging of these two aspects is done according to the principle of transparency, in this context
aiming to eliminate the grey areas of the market and at the same time protect the consumer using a
hermeneutical tool which can influence contractual regulation more directly.
A decisive mechanism in this contractual reorganisation is its integration with mandatory
rules (art. 1339 cod. civ.) [21]. Sometimes the legislation requires the automatic substitution of any
clauses which are in contrast to it, sanctioning the breach of binding provisions by integrating the
contract [22]. When provisions of this kind cannot be found, the question is asked as to whether it is
legitimate to hermeneutically draw up the substitution clause according to the mandatory regulation,
precluding the application of the invalidity of the contract. The conservative solution seems to be
extendable even beyond the area of unfair clauses [23]. Placing the aforementioned value of the
most favourable interpretation for the consumer in this category, it is easy to consider that the
recognition of the general value of the integrative technique is coherent with the effective protection
of consumer interests which the legislation aims to pursue. In the absence of such provisions, the
aforementioned hermeneutical regulation, combined with the principles of conservation and
integration of the contract in order to substantially favour the consumer, where required, forces the
interpreter to search the regulatory provisions for criteria for the construction of the substitution
clauses. The integration of consumer contracts with contractual and regulatory conditions must on
the other hand be permitted only where expressly foreseen [24]. The assurance of a minimum
necessary content of certain contractual conditions, the duty of transparency and the widespread
obligations concerning information on contractual conditions, the provision of forms of protection
and the suspected abusive character of agreements which regard or affect the subscription of
consumers to clauses which they have not had the possibility to know prior to the conclusion of the
contract would seem to support the adopted solution. On the contrary, generalised effectiveness
must be recognised for good faith and equity, the expression of contractual balance, as sources of
integration of the regulation of interests, as these are express and contextual provisions in art. 2,
para. 2, lit. e, of the Consumer Code.
Similar conclusions must also be reached for the interpretation of business contracts. The
antitrust law is certainly marked by the objective interpretation of contracts which implement anti-
competitive clauses, aiming to understand the substance profiles of the produced effects. The
provisions protecting the weaker contracting party also in this sector demand an objective
hermeneutical technique, aiming to gather not the subjective intentions of the contracting parties but
rather the objective dimension of the contractual regulation and any inherent unbalances and
distortions. The mandatory regulations covering this context also have an integrative function, due
to the unavailability of other protective defences [25]. Here integration has a particular connotation.
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In the case of anti-competition clauses, the control bodies can also intervene by imposing further
clauses regulating interests, to make them compatible with the protection of competition.
The control of fairness, based on general clause of good faith [26], and the non-abuse of
economic dependency require operational conduct which aims to protect the weaker contracting
party which must aim to assure the execution of the contractual prerogatives in an effective, aware
and unconditioned manner. The protection granted appears far stronger than in the past. We may
think only of the aggressive, unduly conditioning coercive practices or non-contractual obstacles,
which guarantee important protection of a person in positions of inferiority caused by weaknesses,
character and cultural limits, personal feelings and affections, against exploitation by companies.
6. RIGHT OF THE WITHDRAWAL, PROTECTION NULLITY AND NULLITY
FOR THE BREACH OF BEHAVIOURS RULES
The area of contract pathology has seen substantial changes compared to traditional models
[27]. Basically, some key points can be outlined.
First of all, the traditional fault of error (artt. 1427-1433 cod. civ.) has lost great meaning in
consumer law both due to the scarce compatibility with the principle of transparency, which is not
reconcilable with the requirement of knowledge of the fault, and the introduction of the right to
withdrawal or retraction, which is an effective tool for the out-of-court protection of consumer.
Secondly, the system of protection nullity laid down in business or consumer (for example,
artt. 6 1 Directive 93/13/EEC, 36 cod. cons.) contracts has marked the supersedence of the
traditional legal rules of Civil Code (artt. 1418-1424 cod.civ.), acting as a tool to protect the weaker
contracting party. The new necessary relative partial nullity represents an invalidity model which is
perfectly suited to the market regulation and the need to effectively remove market failures.
Finally, financial market law has posed the problem of the applicability of the nullity
regulation or contract termination due to breach of information obligations. It is a complex question.
In short, we may in any case state that there are some decisive considerations which lie in favour of
the nullity solution. Generally speaking, it is agreed that such sanction not only concerns the
contract structure but also the regulation of interests. In any case, consent must today be understood
as aware and not unduly conditioned. Any agreement drawn up on the basis of illicit conditioning or
not in an appropriately informed manner thus presents a structural defect. However, it should be
remembered that the legislator has drawn up an exchange model which must be executed in respect
of a precise procedural technique. Any exchange which in fact is removed from that model must be
considered invalid, in whatever phase the pathology occurs, if it affects the essential moments of the
contact, including information and freedom of choice. Finally, the joint presence of private and
general interests in the new contract law certainly allows us to state also from this point of view the
validity of the recourse to the general remedy of the nullity for the breach of mandatory rules (art.
1418, para. 1, cod. civ.) that makes no expressly provision of this sanction (so-called virtual
nullity).
These considerations are supported by the choice made by legislator in art. 67-septies
decies, para. 4, of the Consumer Code concerning the remote sale of financial services to
consumers, which lays down the sanction of contract nullity in the event of the supplier hindering
the consumers right to retraction, without reimbursing the amounts paid, or beaching the rules on
pre-contractual information thus significantly altering the representation of its features.
7. CONCLUSIONS - the new paradigma of the competitive exchange model and
overcoming of the distinction between activity and act, structure and relationship of the contract.
This rapid and surely incomplete overview offers some ideas for our closing considerations.
386
The new contract legislation is very different from the traditional regulation laid down in the
Civil Code. This leads to some difficulties in reconciling the two models and highlights the
systematic and other inconsistencies marking the current regulatory system. It would therefore seem
appropriate to look further into the modernisation of the law of obligations and contracts, as has
been done in other experiences.
In particular, it should be noted that competition has led to the reformulation of contract,
now including a central phase of information. This reformulation has generated a new competitive
exchange model, with clearly defined dynamic and phases, all strictly interdependent. A key
consequence of the model which constitutes the regulatory base of the contract is the overcoming of
the distinction between activity and act and structure and relationship of the contract, with clear
effects and mutual influences on the pathologies of both.
In this review, finally, close attention must surely be paid to competition as a new principle
of order aiming not only to guarantee economic efficiency, but also to promote contractual justice
and, ultimately, the moralisation of the market with new techniques to protect consumers.
ENDNOTES
[1] On the German theory of the Ordoliberalismus elaborated by F. Bhm (called Freiburg School; the major work is F.
BHM, Wettbewerb und Monopolkampf, Berlin, 1933) see L. DI NELLA, La scuola di Friburgo, o dellordoliberalismo,
in N. IRTI (editor), Diritto ed economia. Problemi e orientamenti teorici, Padova, 1999, p. 171 ff.; in the Italian doctrine
Irti follows the Ordoliberalismus (N. IRTI, Lordine giuridico del mercato, 5 ed., Bari, 2003); on the dispute about the
relation between law and market, aroused by the above mentioned study of Irti, see AA.VV., Il dibattito sullordine
giuridico del mercato, Bari, 1999; on the new conception of contract law based on the Ordoliberalismus see the papers
published in P. SIRENA (editor), Il diritto europeo dei contratti dimpresa. Autonomia negoziale dei privati e
regolazione del mercato, Milano, 2006.
[2] The choice of the social economic model is expressly confirmed by article 3 3 TUE: The Union shall establish an
internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price
stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level
of protection and improvement of the quality of the environment. It shall promote scientific and technological
advance.
[3] This is the text of the article 119, 1 and 2, TFUE: 1. For the purposes set out in Article 3 of the Treaty on
European Union, the activities of the Member States and the Union shall include, as provided in the Treaties, the
adoption of an economic policy which is based on the close coordination of Member States economic policies, on the
internal market and on the definition of common objectives, and conducted in accordance with the principle of an open
market economy with free competition. 2. Concurrently with the foregoing, and as provided in the Treaties and in
accordance with the procedures set out therein, these activities shall include a single currency, the euro, and the
definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which
shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in
the Union, in accordance with the principle of an open market economy with free competition. .
[4] Compare to the general legal definition of the market elaborated by N. IRTI, Teoria generale del diritto e problema
del mercato, in Riv. dir. civ., 1999, p. 19: unit giuridica delle relazioni di scambio di un dato bene o di una categoria
di beni (legal unity of exchange relationships of a good or category of goods); see also L. DI NELLA, Mercato e
autonomia contrattuale nellordinamento comunitario, Napoli, 2003, p. 163 ff.
[5] F. BHM, Wettbewerb und Monopolkampf, cit., p. 212.
[6] In the opinion F. BHM, op cit., p. 212, institutional purpose of the organization of competition by the legal system
is exactly the creation of psychological pressure to develop the capacity whose use has a positive influence for the
whole economical system.
[7] G. AKERLOF, The Market for Lemons: Quality Uncertainty and the Market Mechanism, in 84 Q. J. Econ., 1970, p.
488 ss. In the recent economical literature see W. EMONS, Warranties, Moral Hazard and the Lemons Problem, in J.
Econ. Theory, 1988, p. 16 ff.; R. RICHTER, E. FURUBOTN, Neue Institutionenkonomik. Eine Einfhrung und kritische
Wrdigung, 2 ed., Tbingen, 1999, p. 236 ff.; M. FRITSCH, TH. WEIN, J. EWERS, Marktversagen und Wirtschaftpolitik.
Mikrokonomische Grundlagen staatlichen Handels, 3 ed., Mnchen, 1999, p. 262 ff. In law literature see H.-B.
387
SCHFER, C. OTT, Lehrbuch der konomischen Analyse des Zivilrechts, Berlin, Heidelberg, New York e a., 2000, p. 283
ff.
[8] See on regard L. DI NELLA, Mercato e autonomia contrattuale nellordinamento comunitario, cit., p. 163.
[9] In the European legal system see Commissione, Sea Containers/Stena Sealink, in G.U.C.E., L 15/94, p. 8 ff.;
Commissione, Porto di Rdby, in G.U.C.E., L 55/94, p. 52 ff.; Cause riunite C-241 e 242/91, RTE (Magill), in
Raccolta, 1995, I, p. 743 ff.; Causa C-7/97, Oscar Bronner GmbH, in Raccolta, 1998, I, p. 7791 ff.; Causa T-504/93,
Tierc Ladbroke, in Raccolta, 1997, II, p. 923 ff. In the Italian law system see P. GIUDICI, sub art. 3 l. antitrust, in L.C.
UBERTAZZI (editor), Commentario breve al diritto della concorrenza, 3 ed., Padova, 2004, p. 2329.
[10] On regard see A. VANZETTI, V. DI CATALDO, Manuale di diritto industriale, Milano, 2009, p. 541 ff.; V. MANGINI,
G. OLIVIERI, Diritto antitrust, 2 ed., Torino, 2005, p. 79 f.; L. TOFFOLETTI, La nozione di essential facilities, in Conc.
merc., 1998, p. 329 ff.; V. EMMERICH, Kartellrecht, 10 ed., Mnchen, 2006, p. 135 ff.; R. BECHTOLD, W. BOSCH, I.
BRINKER, S. HIRSBRUNNER, EG-Kartellrecht. Kommentar, Mnchen, 2005, p. 95 ff.
[11] Recently is diffused the conception of causa as interesse concreto perseguito (concrete pursued interest) (see
C.M. BIANCA, Il contratto, 2 ed., Milano, 2002, p. 447 ff.; V. ROPPO, Il contratto, Milano, 2001, p. 364). In the
traditional literature was prevailing the conception of causa as funzione economico-sociale (economical-social
function) (see E. BETTI, Teoria del negozio giuridico, Torino, 1960, p. 172 ff.; F. SANTORO PASSARELLI, Dottrine
generali del diritto civile, Napoli, 1986, p. 127 ff.).
[12] On regard see P. PERLINGIERI, Il diritto civile nella legalit costituzionale secondo il sistema italo-comunitario
delle fonti, Napoli, 2006, p. 612 ff.; V. RIZZO, Interpretazione dei contratti e relativit delle sue regole, Napoli, 1985.
[13] P. PERLINGIERI, Il diritto civile nella legalit costituzionale secondo il sistema italo-comunitario delle fonti, cit., p.
612 ss.; V. RIZZO, Interpretazione dei contratti e relativit delle sue regole, cit.
[14] The concept of the contract subject is very disputed in literature. See, for all, F. GALGANO, Diritto civile e
commerciale, II, 1, Padova, 2004, p. 251; C.M. BIANCA, Il contratto, cit., p. 321; E. BETTI, Teoria del negozio
giuridico, cit., p. 79; L. CARIOTA FERRARA, Il negozio giuridico nel diritto privato italiano, Napoli, 1964, p. 607; A.
FALZEA, La condizione e gli elementi dellatto giuridico, Milano, 1941, p. 300; R. SACCO, F. DE NOVA, Il contratto, II,
3 ed., Torino 2004, p. 6 ff.
[15] The German, French and Italian version of the Directive 93/13/EEC use more correctly the locution abusive
clauses (missbruchliche Klauseln, clauses abusives, clausole abusive).
[16] This can be seen very well in V. RIZZO, Trasparenza e contratti dei consumatori (la novella al codice civile),
Napoli, 1997, p. 91.
[17] See V. RIZZO, op. cit., p. 21 ss.
[18] In this sense V. RIZZO, op. cit., p. 91 s.
[19] See, for example, art. 3 of the Directive 90/314/EEC on package travel, package holidays and package tours: The
particulars contained in the brochure are binding on the organizer or retailer, unless: - changes in such particulars have
been clearly communicated to the consumer before conclusion of the contract, in which case the brochure shall
expressly state so, - changes are made later following an agreement between the parties to the contract.
[20] See for these considerations G. CHIN, Il diritto comunitario dei contratti, in A. TIZZANO (editor), Il diritto privato
dellUnione Europea, Tratt. dir. priv. Bessone, XXVI, 1, 2 ed., Torino, 2000, p. 652.
[21] See S. RODOT, Le fonti di integrazione del contratto, Milano, 1969, p. 101 f.
[22] Compare, for example, art. 6 1 Directive 93/13/EEC on unfair terms in consumer contracts: Member States shall
lay down that unfair terms used in a contract concluded with a consumer by a seller or supplier shall, as provided for
under their national law, not be binding on the consumer and that the contract shall continue to bind the parties upon
those terms if it is capable of continuing in existence without the unfair terms; artt. 5 and 6 Directive 85/577/EEC, to
protect the consumer in respect of contracts negotiated away from business premises, enacts that the consumer may not
waive the right of the withdrawal and the other rights conferred on him by this Directive; art. 12 Directive 85/374/EEC:
The liability of the producer arising from this Directive may not, in relation to the injured person, be limited or
excluded by a provision limiting his liability or exempting him from liability. See also G. CHIN, Il diritto comunitario
dei contratti, cit., p. 660.
[23] In this sense M.A. LIVI, Lintegrazione del contratto, in N. LIPARI (editor), Trattato di diritto privato europeo, III,
Padova, 2003, p. 398 f.; G. CHIN, op. cit., p. 659 f.
[24] See, for example, art. 3 1 Directive 93/13/EEC: A contractual term which has not been individually negotiated
shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties'
rights and obligations arising under the contract, to the detriment of the consumer.
[25] L. DI NELLA, Mercato e autonomia contrattuale nellordinamento comunitario, cit., p. 360 ff.
[26] L. DI NELLA, Il controllo di lealt delle pratiche commerciali, in G. CAVAZZONI, L. DI NELLA, L. MEZZASOMA, V.
RIZZO (editors), Il diritto dei consumi. Realt e prospettive, Napoli, 2008, p. 255.
[27] On regard see S. POLIDORI, Discipline delle nullit e interessi protetti, Napoli, 2001.
388
BIBLIOGRAPHY
1. AKERLOF, G., The Market for Lemons: Quality Uncertainty and the Market Mechanism, in 84
Q. J. Econ., 1970, p. 488 ss.
2. AA.VV., Il dibattito sullordine giuridico del mercato, Bari, 1999
3. BECHTOLD, R., BOSCH, W., BRINKER, I., HIRSBRUNNER, S., EG-Kartellrecht. Kommentar,
Mnchen, 2005
4. BETTI, E., Teoria del negozio giuridico, Torino, 1960
5. BIANCA, C.M., Il contratto, 2 ed., Milano, 2002
6.BHM, F., Wettbewerb und Monopolkampf, Berlin, 1933
7. CARIOTA FERRARA, L., Il negozio giuridico nel diritto privato italiano, Napoli, 1964
8. CHIN, G., Il diritto comunitario dei contratti, in A. TIZZANO (editor), Il diritto privato
dellUnione Europea, Tratt. dir. priv. Bessone, XXVI, 1, 2 ed., Torino, 2000, p. 652 ff.
9. DI NELLA, L., La scuola di Friburgo, o dellordoliberalismo, in N. IRTI (editor), Diritto ed
economia. Problemi e orientamenti teorici, Padova, 1999, p. 171 ff.
ID., Mercato e autonomia contrattuale nellordinamento comunitario, Napoli, 2003
ID., Il controllo di lealt delle pratiche commerciali, in G. CAVAZZONI, L. DI NELLA, L.
MEZZASOMA, V. RIZZO (editors), Il diritto dei consumi. Realt e prospettive, Napoli, 2008,
p. 235 ff.
10. EMMERICH, V., Kartellrecht, 10 ed., Mnchen, 2006
11. EMONS, W., Warranties, Moral Hazard and the Lemons Problem, in J. Econ. Theory, 1988, p.
16 ff.
12. FALZEA, A., La condizione e gli elementi dellatto giuridico, Milano, 1941
13. FRITSCH, M., WEIN, TH., EWERS, J., Marktversagen und Wirtschaftpolitik. Mikrokonomische
Grundlagen staatlichen Handels, 3 ed., Mnchen, 1999
14. GALGANO, F., Diritto civile e commerciale, II, 1, Padova, 2004
15. GIUDICI, P., sub art. 3 l. antitrust, in L.C. UBERTAZZI (editor), Commentario breve al diritto
della concorrenza, 3 ed., Padova, 2004
16. IRTI, N., Lordine giuridico del mercato, 5 ed., Bari, 2003
ID., Teoria generale del diritto e problema del mercato, in Riv. dir. civ., 1999, p. 1 ff.
17. LIVI, M.A., Lintegrazione del contratto, in N. LIPARI (editor), Trattato di diritto privato
europeo, III, Padova, 2003, p. 398 ff.
18. MANGINI, V., OLIVIERI, G., Diritto antitrust, 2 ed., Torino, 2005
PERLINGIERI, P., Il diritto civile nella legalit costituzionale secondo il sistema italo-comunitario
delle fonti, Napoli, 2006
19. POLIDORI, S., Discipline delle nullit e interessi protetti, Napoli, 2001
20. RICHTER, R., FURUBOTN, E., Neue Institutionenkonomik. Eine Einfhrung und kritische
Wrdigung, 2 ed., Tbingen, 1999
21. RIZZO, V., Interpretazione dei contratti e relativit delle sue regole, Napoli, 1985.
ID., Trasparenza e contratti dei consumatori (la novella al codice civile), Napoli, 1997
22. RODOT, S., Le fonti di integrazione del contratto, Milano, 1969
23. ROPPO, V., Il contratto, Milano, 2001
24. SACCO, R., DE NOVA, F., Il contratto, II, 3 ed., Torino 2004
25. SANTORO PASSARELLI, F., Dottrine generali del diritto civile, Napoli, 1986
26. SCHFER, H.-B., OTT, C., Lehrbuch der konomischen Analyse des Zivilrechts, Berlin,
Heidelberg, New York e a., 2000
27. SIRENA, P., (editor), Il diritto europeo dei contratti dimpresa. Autonomia negoziale dei privati e
regolazione del mercato, Milano, 2006
389
28. TOFFOLETTI, L., La nozione di essential facilities, in Conc. merc., 1998, p. 329 ff.
29. VANZETTI, A., DI CATALDO, V., Manuale di diritto industriale, Milano, 2009
390
DOCTRINARY OPINIONS REGARDING THE AUTONOMY OF COMMUNITIES IN
THE LOCAL PUBLIC ADMINISTRATION MANAGEMENT
University Assistant PhD. Candidate Petronela ZAHARIA
petronelaz@seap.usv.ro
Lecturer PhD. Candidate Irina BILOUSEAC
irinab@seap.usv.ro
Abstract:
Addressing the issues of delimitation and enhancement of local autonomy in the management of local
cmmunities is an exciting and challenging endeavor, especially since this subject is very topical. This paper, built up on
the investigation of recent publications in local government management, presents a unified position reflected in the
field literature on the decisive role of the autonomy of communities in the management of local
development. Furthermore, it should be considered that, in many of the studies under investigation, there is some
consistency in the approach of the financial dimension of autonomy, without which there cannot be a successful self-
management of local public affairs. This paper also points out that only under conditions ensuring a genuine local
autonomy it is possible to meet the needs of local communities by providing quality public services.
Keywords: local government management, local autonomy, local communities, administrative-territorial units
JEL Classification: H83
INTRODUCTION
Various managers and great specialists have devoted a good part of their time to study the
complex problems related to local autonomy in the management of local communities in
administrative-territorial units. At local scale, self-governing refers to the powers that are attributed
to the communities and public authorities which represent their interests and act on their behalf.
There are many unclear aspects, arguable in connection with insurance, strengthening and
implementation of local autonomy in the management of existing local communities. Among these
matters which require clarification and that should be subject to extensive discussion, there are
issues such as those related to the organization and functioning of local government autonomy,
independence in exercising the competences conferred to those authorities, providing the necessary
resources to implement the powers and guaranteeing the possibility of involving community
members in addressing and managing existing local public affairs and of particular interest to the
community.
In seeking clarification of these issues, we start our approach by investigating and examining
various existing studies and publications in the field. In this respect, we submit to inquiry ten
articles published in recent years, enabling us to establish a fair position in relation to the subject
under consideration.
CONCEPTUAL FOUNDATIONS REGARDING LOCAL AUTONOMY AND
LOCAL COMMUNITIES
Many of the recent studies in this area address issues which deal with the relation to the
sphere of local autonomy strengthening in the local communities management.
Since in this paper we use the terms local autonomy and local community, a first step in our
research is to clarify the content of these expressions.
391
Thus, to the question What is local autonomy? the answer given by Maja Lamza, Jerko
Glava and Slavko Bonjak in their study entitled Contribution to the development of the urban
management model is clearly significant. The authors consider that local autonomy is a collective
term that covers different ways of organization in which the citizens of a local collectivity, on their
own responsibility and relatively autonomous, organize the pursuit of certain public affairs and
their administration (Lamza and others, 2008).
In the same vein, it must be said that there is a legislative framework that enshrines the
principle of local autonomy. It is the Local Government Law that defines local autonomy as the
right and effective capacity of local authorities to resolve and manage, on behalf of and in the
interest of the local collectivity that it represents, public affairs, under the law (article 3, paragraph
1).
Further on, paragraph 2 of the same article stipulates that this right is exercised by local
councils and mayors, and county councils and their chairmen, local government authorities elected
by universal, equal, direct, secret and freely expressed vote. Therefore, the way to achieve local
autonomy shall be administered by local authorities chosen by community members.
In a similar manner this provision is to be found in the European Charter of Local Self-
Government according to which local autonomy denotes the right and the ability of local
authorities, within the limits of the law, to regulate and manage a substantial share of public affairs
under their own responsibility and in the interests of the local population, and therefore must be
exercised by councils or assemblies composed of members freely elected by secret ballot on the
basis of direct, equal, universal suffrage, and which may possess executive organs responsible to
them. Also, according to the Charter of Strasbourg, the limits of local autonomy depends on a
number of requirements:
- basic skills of the representatives of local authorities are set by the Constitution or by law;
this provision does not prevent the attribution of powers to local authorities for specific purposes in
accordance with law;
- local authorities have the plenitude of power in the exercise of initiative in any matter
which is not excluded from the field of their powers or which are not conferred to any other
authority;
- exercise of public responsibilities should generally lie with, preferably, those authorities
which are closest to citizens; attribution of responsibility to another authority should weigh up the
extent and nature of the task as well as the requirements regarding efficiency and economy;
- the powers conferred to local authorities have to be normally full and exclusive; they may
not be limited by another central or regional authority, except in cases envisaged by law;
- when there is a delegation of power by a central or regional authority, local authorities
must, wherever possible, benefit the freedom to adapt their action on local conditions;
- local authorities must be consulted, possibly in a timely and appropriate manner in the
planning and decision making for all issues that concern them directly.
Maja Lamza, Jerko Glava and Slavko Bonjak, in Contribution to the development of the
urban management model stress that local autonomy is the foundation of the structure of
democratic states that are signatories of the Charter, which pledged its implementation (Lamza and
others, 2008).
As far as the term community is concerned, it should be noted that it receives a concise
explanation in only a few words in the Romanian Explanatory Dictionary, according to which a
communityy is nothing but a group of people who lead a collective life. Less confusing is the
meaning given by the Local Government Law, which stipulates that by local community one
understands all residents of the administrative-territorial unit " (article 3, paragraph 4).
392
Another interpretation can be identified in A proactive perspective on reform in local
public administration, where the authors relate to local communities as providers of public
services for the interests of their citizens (Filip and Bolo, 2007).
In establishing ties of interdependence between communities and local development, Lajos
Kteles and Katalin Rozsnyai stress in their paper entitled Some correlations between local
communities and area development the role of initiator and participant of local community in the
development process. The future progress of any administrative-territorial unit depends on the
extent to which people will be able to discover such development goals which would ensure local
community and thereby they will be accelerators in the local development process. (Kteles and
Rozsnyai, 2008)
Focusing on the financial risks of decentralization in his work entitled Financial
inconveniencies of decentralization, F. Tudor clearly states that a developing community is a
community that is increasingly dependent on its own decisions and resources , with less and less
help from outside. If decisions and resource management are not taken within the community, it
will become dependent on institutions and bodies that the community controls more or less directly.
The institutions that are not directly controlled by the citizen are less transparent and less effective
institutions. (Tudor, 2009)
Therefore, it is indispensable to guarantee autonomy to enable local communities to settle
their affairs and regard them and manage their resources, values and mechanisms.
In the view of the previous explanations, it is not wrong to say that local autonomy is the
freedom available to local authorities, mandatory of the residents of the administrative-territorial
unit, to act in order to satisfy the expectations and needs of those who have appointed them to
represent their interests.
DIMENSIONS OF LOCAL AUTONOMY IN LOCAL COMMUNITY
MANAGEMENT
In determining the typology of local autonomy it should not be overlooked the indication
that Local Government Law makes on local autonomy features, being only administrative and
financial (article 4, paragraph 1). Further on, the law provides that local autonomy regards the
organization, functioning, powers and duties, as well as the management of resources that,
according to the law, belong to the village, town, municipality or county, as appropriate (article 4,
paragraph 1). From the interpretation of these provisions and in line with the views expressed in this
area can be identified the exclusively administrative nature of local autonomy, since it aims only
organizational-functional management of local government authorities and the financial nature
without which genuine local self-management is not possible.
Regarding the organization and functioning of public administration, it must be said that the
determining factor concerning the delimitation of the two levels (central government and local
government) is recognized local autonomy. In the paper A proactive perspective on reform in local
public administration, the authors state that between local, county and central governments there
are relations of cooperation which aim at implementing the public services system, which is very
complex, provided in the interest of citizens (Filip and Bolo, 2007).
As for the financial component, many of the specialist papers in the local government
management field focus on the financial nature of local community autonomy. Among these works
we can mention Financial inconveniencies of decentralization, The municipal bonds the
cause and the effect of local financial decentralisation growth. Romanian case, Financial
autonomy of local communities in Romania - a prerequisite for success of decentralization, Study
of local financial autonomy in Romania and certainly the list does not exhaust here.
393
In his work The municipal bonds the cause and the effect of local financial
decentralisation growth. Romanian case, T. Moneanu and C.M. Lctu stress that local
autonomy is conditioned by financial autonomy, which provides the material support and, at the
same time, provides the possibility of organizing, providing and adapting local public services to
the specific demands and needs in terms of efficiency and effectiveness. In this way, the specific
problems faced by community members, especially the economic and social ones, can be better
identified and thus the most appropriate solutions can be adopted. (Moneanu and Lctu, 2008)
E. Dogariu, in his work entitled Study of local financial autonomy in Romania, points out
that the lack of local financial resources would make it impossible for the local communities to
meet the needs of its members, which would lead to the failure of administrative
decentralization. (Dogariu, 2010)
The importance of the financial side of autonomy is emphasized by P. Filip and M.I. Bolo
in A proactive perspective on reform in local public administration. In their opinion, local
autonomy is the right of local communities to dispose of their own resources and use these
resources in providing public services, this being implemented only through the recognition of
financial autonomy (Filip and Bolo, 2007).
In his Financial autonomy of local communities in Romania - a prerequisite for the success
of decentralization, A. Profiroiu and M. Profiroiu are of the opinion that to achieve financial
autonomy, local authorities must (Profiroiu and Profiroiu, 2007):
- have sufficient own resources to meet their responsibilities;
- be able to freely determine the income and expenditure;
- not be subjected only to a posteriori control of their financial decisions.
According to the study The municipal bonds the cause and the effect of local financial
decentralisation growth. Romanian case, local autonomy gives authorities the right to decide the
appropriate level of local revenue, but also the opportunity and need for public expenditure incurred
from these sources (Moneanu and Lctu, 2008).
Local autonomy has as economic foundation its own heritage area that local authorities
manage as a real owner. Thus, local authorities are entitled to their own resources, which they must
manage according to their duties. In order to ensure local autonomy, they have the right to establish
and collect local taxes, to draw and to approve the revenue and expenditure budgets of communes,
towns or counties. (Profiroiu and Profiroiu, 2007)
Relevant for training and management of local financial resources are the provisions of the
European Charter of Local Self-Management which recommends certain principles:
- local authorities are entitled, within national economic policy, to sufficient own resources
which they may dispose of in freely exercising their powers;
- local financial resources must be commensurate with the responsibilities under the
Constitution or the law;
- at least a part of local financial resources must come from local taxes and duties for which
they have the power to fix them within the law;
- sampling systems based on available local resources must be sufficiently diverse and
evolutionary to enable them to pursue, wherever possible, in practice the actual development costs
of exercising their powers;
- support of financially weaker communities requires commissioning fair financial allocation
procedures or equivalent measures designed to correct the effects of the unequal distribution of
potential sources of funding and tax burdens imposed on them; such procedures or measures should
not reduce the freedom of option of local authorities in their area of responsibility;
- local communities must be consulted, in an appropriate manner, on the way of awarding
reallocated resources that should come to them;
394
- local grants should not, where possible, be intended to finance specific projects; the
allocation of subsidies should not affect the basic freedom of local politics in their own field of
competence;
- to finance capital investment, local communities must have access, in accordance with law,
to the national capital market.
As an amendment to these provisions of the Charter of Strasbourg, the author of Study on
local financial autonomy in Romania warns that, although certain basic principles are fixed, there
are a number of differences between local communities. Thus, in addition to regional and
demographic differences, there are other factors such as the status of local communities, the number
local government levels, separation of powers, public finance system. (Dogariu, 2010)
Local authorities should have a real financial autonomy in exercising their powers, which
becomes the real stake of a successful decentralization. (Profiroiu and Profiroiu, 2007)
Underlining the relationship between existing resources locally and the development of a
territory, M. Burtic, in his The link between the management of the development of a territory
and the capitalization of local resources, argues that local government management requires the
guidance of public authorities in managing community affairs, including on exploitation of local
resources. This is exacerbated by the fact that, the principle of local autonomy being in function,
local authorities are able to have the necessary force to gain genuine autonomy for decision-making
under the conditions in which the skills area is amplified, including those on attracting and using
local resources. (Burtic, 2008)
According to the study Strategic changes in public management at the local level of
administration in Romania, one of the main directions in the process of change in public
management at local level regards the strengthening of the administrative and financial autonomy
(Androniceanu, 2007).
Professor James Katorobo, in his Decentralization and local autonomy for participatory
democracy, believes that there are two ways to strengthen local autonomy.
The first aims to mobilize local community resources and reduce their financial dependence
from central government. This option is realistic and applicable if the local community is wealthy
and there are potential sources of income; in reality, public authorities at local level have a limited
ability to access and collect revenue.
The second option regards the possibility of the local governments to receive substantial
transfers from the central government, which leads to the intervention of central government in the
local public affairs, thus reducing the degree of autonomy that local government authorities might
enjoy. Achieving high levels of management will increase the degree of local autonomy. (Katorobo,
2005)
Therefore, without materializing the financial dimension of local autonomy there cannot be
a real self-government. Ensuring effective implementation of local autonomy in the management of
communities implies the existence of financial, human and material resources, without which self-
management would not be possible and local authorities, representatives of the community, would
be unable to complete their task.
CONCLUSIONS
In the light of the present approach, we can conclude that the issue of local autonomy in the
management of the communities in the administrative-territorial units raises broader
discussion. Only by ensuring real autonomy, local authorities are free to manage and resolve issues
that concern them closely. If ensuring and strengthening local autonomy and thus the process of
decentralization, we could assist to the improvement of the quality of public services available to
communities, to the increase of efficiency in meeting their expectations, and local governments
395
would be better able to respond and meet the demands of the community members and at the same
time of the local development requirements.
REFERENCES
1. Androniceanu A., Schimbri strategice n managementul public de la nivelul local al
administraiei din Romnia, Revista Administraie i Management Public, nr. 9/2007, pp. 33-38
2. Burtic M., Legtura dintre managementul dezvoltrii unui teritoriu i valorificarea
resurselor locale, Studia Universitatis Vasile Goldi Arad, Seria tiine Economice nr.
18/2008, Partea a II-a, pp. 147-154
3. Dogariu E., Studiu privind autonomia financiar local n Romnia, Theoretical and
Applied Economics, Volumul XVII (2010), No. 6(547), pp. 65 73
4. Filip, P. i Bolo, M. I., A proactive perspective on reform in local public administration,
Theoretical and Applied Economics, nr. 10/2007, pp. 41 48
5. Katorobo J., Decentralization and local autonomy for participatory democracy, 6
th
Global Forum on Reinventing Government Towards Participatory and Transparent Governance,
24 27 May 2005, Seoul, Republic of Korea, pp. 1 43
6. Kteles L. i Rozsnyai K., Some correlations between local communities and area
developement, Studia Universitatis Vasile Goldi Arad, Seria tiine Economice nr. 18/2008,
vol. 1, pp. 388 393
7. Lamza M., Glava J., Bonjak S., Contribution to the development of the urban
management model, Journal Interdisciplinary Management Research., Volume 4 (2008), Issue:
(May), pp. 526 541
8. Moneanu T., Lctu C. M., The municipal bonds the cause and the effect of local
financial decentralisation growth. Romanian case, Theoretical and Applied Economics, nr.
9/2008, pp. 51 60
9. Profiroiu A. i Profiroiu M., Autonomia financiar a colectivitilor locale din Romnia
premis a succesului descentralizrii, Transylvanian Review of Administrative Sciences, nr.
19/2007, pp. 77 85
10. Tudor F., Financial inconveniencies of decentralization, Studia Universitatis Vasile
Goldi Arad, Seria tiine Economice nr. 19/2009, Partea a III-a, pp. 340-344
*** Carta European a Autonomiei Locale, adoptat de Consiliul Europei la 15 octombrie
1985 la Strasbourg, ratificat de Romnia prin Legea nr. 199 din 17 noiembrie 1997
*** Legea administraiei publice locale nr. 15/2001, republicat n M. Of. nr. 123 din 20
februarie 2007
396
THE STAMP DUTY REGULATION IN DIFFERENT EUROPEAN COUNTRIES
Assistant Bogdan-Dumitru DMBU
,,tefan cel Mare University of Suceava, Romania
bogdandimbu84@yahoo.com
Abstract:
In any European democratic state, for an individual or juridical person's accession to justice, he/it must pay
for the service provided by the court authority meant to solve the existing litigation. Even though the stamp duties differ
from one state to another, they appear to be a budgetary obligation owed by those individuals who request a certain
prestation from the judicial institutions. These taxes may be definite or may represent a certain percent out of the value
of the request.
Keywords: stamp duty, service, obligation, legal stamp, stamp free,
INTRODUCTION
Although one may say that we're dealing with a topic not so "up-to-date", given the
prolonged economic crisis, we decided to tackle an issue that found resonance even from the birth
of maybe the most important democratic principle: the separation of powers. The fundamental law
of different countries promotes the idea of free access to justice, but for this, the E.U. members
solicit the payment for the provided service through the so called "stamp duties".
By this paper, we try, as simply and efficiently as possible, to bring forth to the reader the
stamp duty's meaning, its features and the way it is collected in different states of the E.U.
Romania signed on the 1
st
of February 1993 the E.U. Association Agreement, enforced on
the 1
st
of February 1995. The Agreement set the judicial and institutional frame of the Romanian-
Community reports, fundamentally aiming at Romania's European integration.
Along with our country's E.U. integration , Romania accepted the Union's fundamental
objectives, including its strategies and instruments. This engagement is necessary in order to ensure
the proper functioning, under the same rules, of all economic and social life components; we're,
therefore, talking about "the legal and institutional frame known as acquis communautaire", through
which the European Union puts into practice its objectives.
In the fiscal area, the European Union is first of all interested in the indirect taxes, the E.U.
acquis refering to the value added tax, duties and customs duties.
The process of indirect tax harmonization comprises those measures necessary for
guaranteeing the creation and functioning of the single internal market so as to prevent the
competitor distorsion and to allow the dissolution of any obstacles that may geopardize the goods
and service free movement.
The E.U. adherence brought about the alignment to the single market reglementations and
the assumtions of the responsabilities to permanently respect the obligations coming with it.
In the fiscal field one could find reflected the results of million of people's activities, the
participation of individuals or juridical persons in the formation of financial resource stocks, the
processes of the latter's redistribution to different beneficiaries, as well as the impact of these
processes on the country's economical and social development. It is in this field that different
interests confront: general versus group, individual and local, immediate versus long term, today
versus next generations.
397
Since the financial relations reflect cash flows, power supply transfer, patrimonial mutations
and changes in the population's life conditions, it is vital that all acts generating such changes
should be thouroughly regulated. We mean here regulations coming from the legislative or
executive state powers, as appropriate, bearing compulsory spirit top to bottom; furtheron, they
should be unitary throughout the entire country and they should set the conditions in which such
acts are being produced as well as the sanctions to be applied when the legal provisions are not
obeyed.
Among the most important financial problems that should get judicial regulation one can put
the system of taxes; the way to assess the taxable field, to place and distinguish the duties; the
individuals and juridical persons' tax obligations; Romania's fiscal sovereignity limits.
If we refer to the fiscal activity, it can be considered to combine four interacting forms:
preparing and initiating the legislative regulations; the execution and methodolocical guidence of
the fiscal activity, the complience control as well as the fulfillment of tax obligations; the tax
perception itself and, respectively, their collection and highlighting in the budgetary accounts
(Topciu and Vintila, 1998).
The reform of the fiscal-budgetary system can be still enhanced since there are some aspects
unsufficiently regulated and some practices require correction.
The stamp duties represent the payment for the services provided or the work performed by
different State bodies or institutions which receive, prepare or issue different acts, provide different
services or solve certain interests of parts (Costas si Mintea,2006).
The stamp duties embody a large and heterogeneous category of budgetary revenues.
Although most of them are direct duties, they have been assimilated in the indirect duty doctrine
because of the features that customize them compared with other budgetary revenue categories. It is
that revenue category that they stand for, which, being currently accomplished with a certain
rythmicity to the budget are being obtained, most of them, from occazional payments made by
different types of legal subjects (individuals or juridical persons), who either introduce claims and
legal actions, or solicit the accomplishment of different acts or services from various public
institutions or State bodies.
The stamp duties are differently established, according to the nature and complexity of the
service, the property value or the nature and importance of the acts or facts subject to taxation. In
accordance with the provisions of the Fiscal Code, the stamp duty level is yearly adjusted by the
Finance Ministry and the Interior Ministry, depending on the inflation.
FEATURES OF THE STAMP DUTIES
We remind, as subject to taxation, the individuals or juridical persons who benefit from the
services included in the category above mentioned. Since they are a tax, stamp duties bear
compulsory nature and are taken over as non-refundable. Nevertheless, there is a major difference
between stamp duties and taxes. Thus, whereas the taxes are assumed by the budget without a
counter-prestation on behalf of the latter, the stamp duties represent, in most cases, payments
directly related to a certain service accomplished by a public institution or by a State body, as well
as by a notary public or other bodies with notary attributions. Even though the stamp duties
represent payment for a service, we must mention the fact that, in many cases, their value is greater
then that of the service provided. The term "stamp duty" appears because of the fact that law-value
taxes are payed by application of revenue stamps. The taxes represent the payment made by
individuals or juridical persons for the service provided to them by the public institutions.
Duties (stamp duties, registration fees, metrology charges, consultation fees etc.) constitute,
along with taxes, the second most important revenue category of the state or local budgets.
398
Therefore, taxes are set as budgetary obligations owed by individuals or juridical persons,
who request a certain prestation from certain state institutions. According to the principle that taxes
are payed as a direct and immediate counter-equivalent, their monetary amount should be equal to
the economic value of the service. In the absence of this equivalence (this is the general rule), if the
monetary amount of a duty exceeds the value of the service provided, this duty will be subject to an
element of taxation, established with fiscal purposes of creating greater revenue for the state budget.
Usually, the duty quantum is not set following the cost or the value of the service, but independent
of economical criteria.
THE DUTY STAMP REGULATION IN EUROPEAN COUNTIES
In England and Wales, the judicial stamp taxes are established in lump sum, according to
the nature of the case (when this one is not ratable) or to the value of the request (when it is ratable).
For the appeal, there are two stamp taxes, regardless of the object of the request; they are payed
depending on the classification as being minor or major.
In Sweden, the judicial proceedings are free of charge, except a fixed tax, the same
regardless of the object of the request, whic is to be payed at its registration.
In Austria, the stamp duties are set according to the value of the request and also cover the
registration costs.
In Belgium, when the request is handed in, one will pay the registration costs (the
registration number, the request's wording, the certification of the copies of the documents).
In Denmark, the judicial stamp taxes are established according to the Law no. 806 from the
24
th
of August 2000, with later modifications. Stamp duties for ratable requests which exceed a
certain sum will be payed by applying a 2% out of the value of the request. When dealing with
unratable requests, the stamp duties are lump sums, dependind on their nature. In appeals, the stamp
duties are set in the same way as those in the first instance, mentioning that a minimum
suplimentary tax will be payed, depending on the Court that will judge the appeal (the so called
Superior Courts). When the appeal is judged at the Supreme Court, the taxes increase with 50 %.
In France, as a rule, there are no taxes employed for entering the cases or appeals (civil,
administrative or criminal), except the commercial Courts where stamp duties are set. Law no. 77-
1468 from 30.12.1997 established the gratouitousness of legal actions in front of civil and
administrative courts.
In Germany, the stamp duties are established depending on the value dispute, in all
materials, according to the 2004 regulation. In appeals, taxes are paid under the same criterion, the
value dispute being limited to the case object value in the first court.
As a scope, taxes are payed for the requests entered at the following court categories:
- ordinary in civil matters, family law, insovency procedure, forced sale procedure, criminal
law, criminal execution, contravention matters, competition;
- finacial disputes;
- administrative disputes;
- social disputes;
- labour law,
as well as for the Prosecution, within the law.
Since 1986, Spain eliminated the judicial stamp duties, Court access being free of charge. The
legislation stipulates however the obligation for the parts to pay some taxes for the copies of the
documents from the case.
In Italy, the Presidencial Decree no.115 from 30.05.2002 comprises the procedure and the
level of the stamp taxes; they consist in a lump sum, according to the nature and the value of the
request, representing the registration costs (registration number, judicial consultance, the
399
certification of the copies). The standard tax is payed at any case phase, except the cases provided
in the law (Beju 1999).
In Malta, the judicial stamp taxes are set by law, in lump sums, according to the object of
the request.
In Lithuania, the stamp taxes are payed depending on the value of the request, representing
a certain percent out of this sum; there is a maximum limit of judicial stamp duties that is not to be
exceeded, regardless of the value of the request.
According to articles no. 53 and 54 from the Bulgarian Civil Law, the judicial stamp taxes
are payed for ratable or unratable requests, their level being set through special laws. The duties
represent a certain percent out of the value of the request, while for the unratable ones the stamp
duties are payed according to the criteria stipulated in the Civil Procedure Code (art.55). Also, in
the procedures placed in front of administrative courts, a lump sum is usually payed , regardless of
the object of the request.
In Poland, the judicial stamp taxes for civil and administrative cases are regulated in the Law from
13.06.1967, with subsequent modifications regarding especially their quantum updating.
STAMP DUTY EXEMPTIONS IN DIFFERENT EUROPEAN STATES
In England, Wales, Northern Ireland, Scotland and Gibraltar, the requests exempted
from stamp duty payment are not provided by law; however, the procedures regarding the legal
assistance are applicable. We mention that the legislations of England, Scotland and Northern
Ireland stipulate that the Judge can establish that some taxes are to be payed by the winning party,
also. Moreover, if the losing party benefitted of legal assistance, it will pay the trial costs reported in
the legal assistance received.
Dispositions regarding the refunding of the judicial stamp duty can be found in the Danish
legislation which provides that the stamp duty for the appeal against a closing interlocutor is
refundable in case the court of appeal corrects the decision of the inferior court. Also, the stamp
duty payed for entering an extraordinary means of redress is returned if the request is accepted.
In Ireland, some categories of requests are exempted from stamp duty payment, regardless
of the Court that they are brought to (the Supreme Court, district Courts).
Thus, requests exempted from stamp duty will be found in matters as follows:
- extradition, the European warrant, bail procedures
- family law, divorce procedure, child protection
- the procedures provided by the Immigration Law no.6/1991
In both criminal and civil legal cases certain state institutions are exempted from stamp duty
payment.
In Italy, the stamp duties are not owed in cases of Family Law, marital status stipulated in
the Book IV of The Civil Procedure Code (for example in divorce cases, minors-related procedures
or patrimonale relationships between spouses), in cases of requests of taking precautionary
measures, in cadastral matters, enforcement, any procedure regardind the child rights.
The duties are not to be payed for requests of civil damages for moral or material causes arising
from criminal cases.
France and Spain are stamp duty free.
In Germany, the federal laws provide stamp duty exemptions for categories of cases that
can be found in Romania also. For example, in cases regarding the rights springing from the labor
contracts, judicial stamp duties are not to be payed. In the same time, in procedures in front of
ordinary courts, as well as in finacial disputes and social security, the Federal State, the Lands and
the public institutions administrated by these are exempted from stamp duty payment (the same as
in the Romanian regulation).
400
In Bulgaria, the special law regarding the stamp duty provides exemptions for requests
related to pension maintenance, establishing paternity, establishing the pension maintenance for
mothers with more children, procedures of social assistence, protection of minors, pension, labor
contract rights, industrial property rights. Furtheron, no judicial tax is payed in criminal cases.
The Slovene legislation provides stamp duty exemption for requests in relation to labor
disputes (the end, the performance or the termination of employment). The exemption is also
applicable to employees or students against the organization or employer, to disputes regarding the
execution of different short-term or timeshare works. In the other regulations, although the handy
ones do not expressly foresee requests that are stamp duty exempted, one could find the possibility
to solicit legal assistance under the form of exemptions, reductions, deffered or sliding scale
payment. The procedures for granting this form of legal assistance are different from one regulation
to another.
In Lithuania, the law sets stamp duty exemptions in certain cases, as requests for the
establishment and the grant of compensations for damages caused to a person's life or health in
labor accidents, occupational deseases, wrongful convictions, illegal arrest or detention,
misapplication of an administrative sanction, as well as prejudice caused by the judges act in civil
cases.
We may add on the list of stamp duty exempted the requests introduced by those injured in their
rights by an administrative act or by an administrative authority's unjustified refusal to solve the
request regarding the recognition of a right.
In Poland, the following categories of requests are stamp duty free:
- the matter of Family Law in issues regarding child care, recognition of child, name awarding
- testamentary matters
- compensations requested for material damages resulted from human rights and liberties
limitation
- Health Insurance
- redressing against court ruling
Certain public institutions are exempted from stamp duty payment: the State Treasury and
state institutions which do not develop economic activities, the local public administration bodies,
except from the cases regarding the building cadastral registration, The Agricultural Market
Agency, The Agency for Restructuring and Modernisation of Agriculture etc.; furtheron, the
organizations which manage public goods, voluntary organizations, except the economic activity-
related issues, as well as the N.G.O.s which don't conduct economic activities.
The Polish legislation stipulates that, in justified cases, the stamp duty payed in advance is
to be totally or partially returned, according to the decision of the first court. In case the appeal is
introduced, the stamp tax is not charged; however, it will be payed if the request is rejected. The
stamp duty already charged is also returned in case the court rejects the request without having
discussed the merits. In these situations, the right of stamp duty refund can be claimed within three
years from the date it was payed.
The Czech regulation on stamp duty foresees that, in case the request is refused without
havinf discussed the merits, the party will be given back half of the charged stamp duty.
In case the aplication of summons is withdrawn before the first term or before pronouncing
a decision or in case of transaction, half of the charged duty will be refunded.
We mention that the studied regulations foresee that stamp duties are to be payed when the
request is introduced, except for the Finnish legislation where the process costs, including judicial
taxes, are payed after pronouncing a final decision, being subsequently communicated by the court
to the losing party. Other regulations, like the Swedish one, foresee that, when introducing the
request, one must pay an advance from the sum owed as stamp duty, the rest being charged at the
end of the trial, along with any other costs occured during the procedures.
401
CONCLUSIONS
The stamp duties represent the payment for the services provided or the work performed by
different State bodies or institutions which receive, prepare or issue different acts, provide different
services or solve certain interests of parts.
The stamp duties embody a large and heterogeneous category of budgetary revenues.
Although most of them are direct duties, they have been assimilated in the indirect duty doctrine
because of the features that customize them compared with other budgetary revenue categories. It is
that revenue category that they stand for, which, being currently accomplished with a certain
rythmicity to the budget are being obtained, most of them, from occazional payments made by
different types of legal subjects (individuals or juridical persons), who either introduce claims and
legal actions, or solicit the accomplishment of different acts or services from various public
institutions or State bodies. The stamp duties are differently established, according to the nature and
complexity of the service, the property value or the nature and importance of the acts or facts
subject to taxation. In accordance with the provisions of the Fiscal Code, the stamp duty level is
yearly adjusted by the Finace Ministry and the Interior Ministry, depending on the inflation.
According to the regulations in force, the stamp duties can be classified in four categories.
The most important according to the revenues brought to the budget are: judicial stamp duties,
stamp duties for notary work, judicial stamps and extrajudicial stamp duties.
As for the Romanian legislation, the common law in relation to judicial stamp taxes
establishes that these request will be differently charged, foollowing the objects monetary ratability.
In the case of ratable requests, the duties concist in a lump sum to which a percenr is added,
depending on the value of the request; as for the unratable requests, the judicial duty represents a
lump sum, according to the type of request or action. The law foresees categories of requests or
actions which, for legal assistance - related motives, are exempted from stamp duty payment. The
setting of the duties' quantum is made by the court or, as appropriate, by the Ministry of Justice;
against this manner a special reexamination procedure is stipulated, at the request of the person
involved.
The stamp duties for notary work can be charged by the notary public , too, the latter
bearing the obligation to empty them into the state budget in the circumstances set through the
methodological standards regarding the application of the Ordinance no.12/1998 in respect to the
stamp duties for notary work.
The stamp duties for notary acts and services are due in advance, except for the taxes for the
inheritance procedure, which are due until the issuing of the certificate of inheritance.
The stamp duties for notary acts and services are state budget revenue and are comprised
distinctly in the income and expenditure budget of the Interior Ministry, in the conditions and with
the destination provided by the law for judicial stamp taxes.
The judicial stamps can appear under the form of lump taxes for different services as well as
percentage shares.
"The requests and court actions as well as the requests adressed to the Ministry of Justice
and to the Prosecutor of the Supreme Court of Justice are subject to the stamp duties, foreseen in the
present law, and are charged in a differentiated manner, following the object's ratability, with the
exceptions stipulated in yhe law." It applies to the court actions, requests, acts and services within
the competence of all the courts, the Ministry of Justice, the Prosecutor of the Supreme Court of
Justice, as well as of the notary publics.
The extrajudicial stamp duties are due for issuing all kinds of certificates (except for those
issued by the courts, the Prosecutor of the Court of Cassation and Justice, the Ministry of Justice or
402
the notary publics), I.D. issuing or exchange, fishing and hunting permits, drivers examination for
drivers licence, registration of vehicles.
SELECTIVE BIBLIOGRAPHY
1. Allix, Edgar - Traite elementaire de science des financis et de legislation financiere
francaise, Editura Rousseau, Paris.
2. Amariei, tefan - Finane generale, Editura Junimea, Iai,2002.
3. Blan, Emil - Drept financiar, Ediia 3, Editura All - Beck, Bucureti, 2004.
4. Bistriceanu, Gheorghe. Gheorghe, Ana - Finane, Editura Didactic i Pedagogic,
Bucureti, 1995.
5. Bostan, Ionel - Drept financiar i fiscalitate (elemente de teorie i practic autohton),
Editura Media-Tech, Iai, 1999.
6. Bostan, Ionel. Drept financiar Relaii financiare publice & fiscalitate, Editura Universitii
Al. I. Cuza, Iai, 2001.
7. Carton, Leon - Droit financier et fiscal europeen, Prcis Dalloz, Paris, 1972.
8. Dariescu, Nadia, Cerasela. - Drept financiar, Casa Editura Venus, Iai, 2006.
9. Duverger, Maurice - Finances publiques, Editura Presses, Universitaries de France, PUF,
Paris, 1978.
10. Duverger, Maurice - Insitutionis financieres, Coll Themis, Paris, 1980.
11. Minea, tefan, Mircea. Costa, Flavius, Cosmin - Dreptul finanelor publice, vol I-II,
Editura Sfera Juridica, Cluj Napoca, 2006.
12. Muzellec, Raymond - Finances publiques, Ediia a 8-a, Editura Sirey, Dalloz, Paris, 2003.
13. Popa, D., Constantin, Moca i Fanu, Adrian. Drept financiar, Editura Lumina Lex,
Bucureti, 2003.
14. Olcescu, Paul. Toma, Toader - Drept financiar i fiscal, Editura Cantes, Iai, 2000.
15. aguna, Drosu, Dan - Drept financiar i fiscal, Editura All Beck, Bucureti, 2001.
16. Vcrel, Iulian. Bistriceanu, D., Gheorghe. Anghelache, Gbriela. Bodnar, Maria. Bercea,
Florian. Stolojan, Teodor. Moteanu, Tatiana - Finane publice, Editura Didactic i Pedagogic,
Bucureti, 2006.
403
SOME ASPECTS OF THE CONSTITUTIONALITY OF LAWS CONF CONTROL
PhD Luminita DRAGNE
Christian University Dimitrie Cantemir of Bucharest, Romania
Faculty of Legal and Administrative Science
luminita_ucdc @ yahoo. com
Abstract:
The Constitution is the fundamental law of a State, its supremacy is ensured by a special and complex
mechanism called the control of the constitutionality of laws. For this purpose it was created an effective mechanism
resulted in a legal institution called review the constitutionality of laws and that includes all procedures that ensure the
supremacy of the Constitution. The notion of control of constitutionality of laws means all methods through which the
verification of compliance with constitutional law. It is a competent body to determine non-compliance of the law or
provisions of law with the Constitution different from a constitutional system to another, how to regulate fundamental
relations and constitutional tradition, determining each state agency to achieve constitutional justice. Constitutional
practice were imposed two forms of constitutional law control: control by a court, known as the American model and
control system or a particular unique and specialized body system called the European model. Romanian constituent
legislature opted for the European model of control of constitutionality of laws, assigning it a special and specialized
control, called the Constitutional Court. Political-judicial body, the Constitutional Court of Romania consists of nine
judges, three appointed by the Chamber of Deputies, three by the Senate and three by the President of Romania, for a
term of nine years. Under the European model of constitutional justice, the law provides exclusive Constitutional Court
the constitutionality of laws in matters.
Keywords: Law, judicial review of laws, the supremacy of the constitution, European model of control, the
Constitutional Court.
1. GENERAL ASPECTS
State law requires the rule of law. Exercise of political power should be within the limits set
by law respecting human rights and fundamental freedoms. Law must be the expression will,
otherwise it can not generally impose respect. The Constitution is above the law, fundamental law
of the state, whose supremacy must be ensured by a special mechanism, otherwise it remains the
value of a simple law. For this purpose it was created an effective mechanism resulted in a legal
institution called review the constitutionality of laws and that includes all procedures that ensure the
supremacy of the Constitution. The notion of control of constitutionality of laws means all methods
through which the verification of compliance with constitutional law. Competent body to determine
non-compliance of the law or provisions of law with the Constitution are different from a
constitutional system to another, how to regulate fundamental relations and tradition determining
each state agency to achieve constitutional justice. It is noted that in countries with flexible
constitutions fail to issue the constitutionality of laws, i.e. their conformity with the constitution.
This is because under such a system, which introduces an otherwise constitutional law does not
constitute a breach of it, but a change in her (1).
By contrast, in countries with rigid constitution written constitution is endowed with a
superior legal force because ordinary laws that she can always change them, but they can not be
changed(2)
404
2. FORMS OF CONTROL THE CONSTITUTIONALITY OF LAWS
Control of the constitutionality of laws is a complex legal institution aimed at checking
compliance with laws and other normative constitutional. Control is achieved by a public authority
expressly vested by the Constitution with such control. Constitutional practice were imposed two
forms of control of the constitutinality of laws: control by a court, known as the American model
and control system or a particular unique and specialized body system called the European model.
American system has in turn two forms:
a) when control is focused on constitutional and is exercised only by the Supreme Court.
Called centralized control, this control feature is like that, regardless of the controlling
body of constitutionality, this body has monopoly control (3)
b) diffuse control, that control is performed by any judge court in the country. Decentralized
control, as it is known that control, is also judicial review of constitutionality and is characterized in
that the law can be declared unconstitutional by all the judges acknowledged (4)
The first control (concentrated) gives greater authority and take decisions usually effects
erga omnes. The second control (speaker) is limited to one issue, and now current and in its
decisions have a relative authority in that it take effect only between the parties and may be
extended, at most, by way of judicial precedent (5).
European control system involves the constitutionality of laws, creating a special agency
that specializes in conducting the review to rule on the constitutionality of the law or they violate
constitutional principles, but without opportunity to amend or add to them, i.e. without legislative
competence.
In the literature, classification forms of constitutionality control laws has other criteria also.
Thus, giving of the controlling bodies, we have:
a) the control exercised by a political body, in this case is a special body appointed, but on political
considerations to penalize non-compliance with the Constitution Act,
b) the control exercised by a body judicial control is achieved by courts,
c) the control exercised by a political-judicial body, usually the Constitutional Court.
Political character of the body resulting from the designation of members of the Court, that
are appointed on political and judicial nature is given the powers which the Court has the control of
constitutionality of laws, the procedure to be followed before it and the nature of the solutions
given.
Another classification criterion is when control is exercised as follows:
a) before control is exercised before the law is promulgated,
b) back control is the control exercised after the entry into force of the law.
One opinion (6) states that constitutional practice of democratic states have developed
degrees of intensity of the constitutional control of different laws, namely:
- lack of control (eg, Netherlands, United Kingdom)
- a weak constitutional scrutiny (eg Sweden, Norway)
- a constitutional control environment (eg, Spain)
- a powerful constitutional scrutiny (eg, Germany, Hungary).
The same author states further that the impact of constitutional review depends on the
strength and frequency of its use by courts, especially the Supreme Court and Constitutional.
Constitutional Court was established for the first time in 1920 in Austria and Czechoslovakia, but
control of the constitutionality of laws rooted in U.S.A. being established by a decision of the
Supreme Court in 1803 regarding case Marbury vs. Madison. The Court decision states that
without doubt, those who prepared the written Constitution they designed as the fundamental and
supreme law of the nation, and therefore, any principle of governance must be such that a law of
Parliament contrary to the Constitution is void (7).
405
The doctrine states that in this way was born the American model of control of
constitutionality of laws (8).
Control of the constitutionality of laws, regardless of its type, is an important tool in
ensuring supremacy of the Constitution. However, extending the control of constitutionality of laws
in most countries of the world is proof of its effectiveness in the order of a state constitutional.
3. CONSTITUTIONALITY OF LAWS CONTROL IN ROMANIA
In Romania, the legislature opted for setting up the European model of control of
constitutionality of laws, assigning it a special and specialized control, called the Constitutional
Court. This institution was established by the Constitution of Romania in 1991 and according to
constitutional text - Article 142. 1 - is the guarantor of constitutional rule. Also, the Constitutional
Court is the sole authority of constitutional jurisdiction in Romania, being independent from any
public authority and obeys only the Constitution and law on its organization and operation (9).
Constitutional Court provides constitutional control of laws, international treaties, regulations and
orders of Parliament Government finds out acts unconstitutional provisions when they violate
constitutional provisions or principles, but also decides on the constitutionality of provisions of that
before, without to amend or supplement provisions controlled.
Romania's Constitutional Court is a political-judicial body. Its political nature resulting from
the designation of members of the Court: three judges are appointed by the Chamber of Deputies,
three by the Senate and three by the President of Romania (Article 142. 3 of the Constitution) and is
given the judicial nature of the powers which the Court has the control of constitutionality of laws,
the procedure to be followed before it and the nature of the solutions given.
Constitutional reform in 2003 strengthened the role of the Constitutional Court as a defender
of the rule of law while outlining more clearly his position in the system of state bodies (10).
Amendments and constitutional provisions governing the Constitutional Court are the result
of turning a decade of activity of the Constitutional Court and seek to increase its effectiveness as
a guarantor of the supremacy of the Constitution, the constitutional control (11). According to
Article 146. 1 point. d) of the Constitution, the Constitutional Court decide on objections of
unconstitutionality of laws and ordinances, brought before the courts or commercial arbitration;
exception of unconstitutionality can be raised directly by the Ombudsman.
Article, in its new wording, makes two significant changes: a) the objection of
unconstitutionality of a law or ordinance can be waived and courts of arbitration not only of the
court, as provided in the old wording, b) the objection of unconstitutionality can be brought up
directly by the Ombudsman.
Exception of unconstitutionality before the court or commercial arbitration can be invoked
by either party and the court process in motion and the prosecutor in cases involving. As regards the
Ombudsman, the objection of unconstitutionality by invoking it is done directly before the
Constitutional Court.
Under Article 25.1 of Law 47/1992, republished and amended, the Court decide on
exceptions directly by the Ombudsman, and in paragraph 2 of that article states that the procedure
for resolving the objection of unconstitutionality raised in the courts properly apply in this case.
Unconstitutionality of a law or an order may be raised before the courts and commercial arbitration,
unless it depends on resolving the case. May not be the objection of unconstitutionality of
provisions of law or constitutional order which was established by the Court or the provisions of
state law or ordinance, a previous decision as unconstitutional.
Law Review has made a significant change and the decisions of the Constitutional Court
handed down at the settlement of unconstitutionality and the provisions of existing law or ordinance
was declared unconstitutional. Thus Article 147. 1 of the Constitution requires the Parliament or
406
Government, as appropriate, to agree with the unconstitutional provisions of the Constitution. If that
requirement is not met, the provisions found unconstitutional ceases legal effect 45 days after
publication of the Constitutional Court decision. During this time provisions are suspended as
shown. Shown by the new constitutional provision were removed questionable and confusing
situations, possible under the earlier empire drafting the Constitution, the public authorities could
overlook or even reject the Court's decisions (12).
Some aspects of control of constitutionality of laws presented are meant to contribute to the
understanding and knowledge of this mechanism, but also emphasize the importance of ensuring
that the Constitution and its rule. Whichever approach is adopted constitutional control of the
legislature constituted for this type of control is to guarantee rights and freedoms and to prevent
exceeding the constitutional limits of public authorities.
ENDNOTES
(1) T. Drganu, Drept constituional i instituii politice Tratat elementar, vol. I, Ed. Lumina Lex,
Bucureti, 1998, p.291.
(2) Ibidem
(3) Deleanu, Drept constituional i instituii politice Tratat vol.I, Ed. Europa Nova, Bucureti, 1996,
p.300.
(4) Ibidem
(5) I. Deleanu, Justiia Constituional, Ed. Lumina Lex, Bucureti, 1995, p.24.
(6) A. Lijphart, Modele ale democraiei. Forme de guvernare i funcionare n treizeci i ase de ri, Ed.
Polirom, Iai, 2000, p.211.
(7) O. Tinca, Constituii i alte texte de drept public, Ed. Imprimeriei de Vest, Oradea, 1997, p.702.
(8) M.J.C. Vile, Constitutionalism and the separation of powers, Liberty Fund, Indianapolis, 1998, p.85.
(9) Legea nr.47/1992 privind organizarea i funcionarea Curii Constituionale, republicat, aa cum a
fost modificat prin Legea nr.232/2004 pentru modificarea i completarea Legii nr.47/1992.
(10) C. Clinoiu, V. Duculescu, Drept constituional i instituii politice, Ediie revzut i completat,
Ed. Lumina Lex, Bucureti, 2005, p.237. Curtea Constituional este un organ de stat, regulile
juridice privind constituirea, organizarea, funcionarea i competena sa confirmnd fr tgad
aceast concluzie G. Vrabie, Organizarea politico-etatic a Romniei, Drept constituional i
instituii politice, vol.II, Ediia a treia revzut i rentregit, Ed. Cugetarea, Iai, 1999, p.334.
(11) M.Constantinescu, I.Muraru, A.Iorgovan, Revizuirea Constituiei Romniei Explicaii i
comentarii, Editura Rosetti, Bucureti, 2003, p.126.
(12) I.Muraru, E.Simina Tnsescu, Drept constituional i instituii politice, vol.II, Ediia a XI-a,
Editura All Beck, Bucureti, 2004, p.280
REFERENCES
1. C. Clinoiu, V. Duculescu, Drept constituional i instituii politice, Ediie revzut i
completat, Ed. Lumina Lex, Bucureti, 2005.
2. M.Constantinescu, I.Muraru, A.Iorgovan, Revizuirea Constituiei Romniei Explicaii i
comentarii, Editura Rosetti, Bucureti, 2003.
3. I. Deleanu, Drept constituional i instituii politice Tratat vol.I, Ed. Europa Nova,
Bucureti, 1996.
4. I. Deleanu, Justiia Constituional, Ed. Lumina Lex, Bucureti, 1995.
5. L. Dragne, Drept constituional i instituii politice, vol.I, Ed. Universul Juridic,
Bucureti, 2009.
6. T. Drganu, Drept constituional i instituii politice Tratat elementar, vol. I, Ed. Lumina
Lex, Bucureti, 1998.
7. C. Leclerq, Droit constitutionnel et institutions politiques, Litec, 1990.
407
8. A. Lijphart, Modele ale democraiei. Forme de guvernare i funcionare n treizeci i ase de
ri, Ed. Polirom, Iai, 2000.
9. I.Muraru, E.Simina Tnsescu, Drept constituional i instituii politice, vol.II, Ediia a
XI-a, Editura All Beck, Bucureti, 2004.
10. O. Tinca, Constituii i alte texte de drept public, Ed. Imprimeriei de Vest, Oradea, 1997.
11. M.J.C. Vile, Constitutionalism and the separation of powers, Liberty Fund, Indianapolis,
1998.
12. G. Vrabie, Organizarea politico-etatic a Romniei, Drept constituional i instituii
politice, vol.II, Ediia a treia revzut i rentregit, Ed. Cugetarea, Iai, 1999.
408
THE DISTINCTION OF THE ADMINISTRATIVE CONTRACT
FROM OTHER TYPES OF CONTRACTS
Assistant professor Ph.D. Liana-Teodora PASCARIU
University Stefan cel Mare Suceava, Romania, liap@seap.usv.ro
Abstract
There was a clear tendency in the past few years, and especially on a European level, to harmonize and
conceptualize the regulations referring to the drafting, alteration, execution or cessation of contracts that would
eventually lead to the emergence of a new branch of community law, i.e. contract law.
The issue debated here focuses on whether these European interests have any influence on the matter of
administrative contracts, on the possibility of a European administrative contract law and whether specialists in the
field have particularly addressed the sphere of civil contracts.
Key-words: administrative contract, limitation criteria, specific features, juridical competence.
JEL Classification: K12, K39
INTRODUCTION
At present, the law has no specific provisions for the organization of a public or civil law
regime for contracts dealing with private property assets of the public authorities, but it is equally
true that certain features bestow independent prerogatives on the private property of the state or of
the administrative-territorial units: the derogatory procedure of forced sale, established by the G.D.
no. 22/2002 published in the Official Monitor no. 81of 01/02/2002; the prohibition of the voluntary
alienation; a derogatory procedure for accepting donations; the prohibition of forming conventional
privileges; mandatory annual inventory; sale by public auction.
The present paper analyses the distinctive features of the procedure applied to contracts
signed by the administration, in its broadest sense, and by means of the wide range of bilateral
agreements where one of the cosigners is the state, an administrative-territorial unit or another
public authority - in order to reveal what type of contracts must observe the public law regulations.
CONTENTS
The French doctrine, which is based on solid statute law consolidated by the resolutions of
the State Council, stipulates that, in order to qualify an agreement as administrative contract, it must
meet two requirements: the existence of exorbitant terms in the tender book and the inclusion of one
of the parties in the category of administrative authorities (Pequignot, 1945). Even though the
present edition of the Constitution distinctly warranties and protects the public property that belongs
to the state or to administrative-territorial units, the fundamental law provides that private property
is also intangible, under the organic law regulations.
The French juridical literature argues that, unlike public law contracts, private law contracts
of the administration have two distinctive features: on the one hand, they are not related to a public
service and thus dont tackle public interest, and, on the other hand, they do not include exorbitant
terms, and the administration acts like an owner. If a contract is signed by two public parties, it
mainly acquires administrative status, at work being the so-called administrative law
assumption, which can be explained by the fact that the contract is normally situated between two
public management structures that engage exorbitant administrative law regulations.
When identifying a contract as being of an administrative nature, one must ensure it meets a
set of criteria. The doctrine (Le Mestre, 2006) has identified a series of administrative contracts
409
characteristics that would define their juridical nature, as opposed to other contracts that are
governed by private law:
o The juridical inequality of the parties, determined by the need to defend the general interest,
manifested by the public authority and thus outranks the other contracting party;
o The public administration authority or proxy quality, at least for one of the parties;
o Limitation of the freedom of will, for the public authority, by legal provisions;
o Serving the public interest by the public authority, thus conveying a special purpose to it;
o Extensive interpretation of the contract, as concerns the prevalence of the public interest of
administration, manifested when the contract is cancelled by the administration and the
private party is paid damages;
o The proper execution of the contract obligations by the private party who can be charged
with delay penalties;
o The intuitu personae character of the contract, as cessation is only allowed with the
permission of the public authority; speaking of novatie;
o Observing the principle of financial balance and material impossibility to execute the
obligation, based on the two statute law theories, fait du prince (according to which the
prince = the public power, can aggravate the contract terms by his deeds and thus be
compelled to pay compensations for the prejudices caused) and the theory of
unpredictability (when the terms that change the initial balance of the contract are enforced
by an exceptional economic event, unlike the theory of unforeseen constraints that hinder
the execution of the contract but could have been foreseen by reasonable thought);
o The single-sided denunciation of the administrative contract when the public interest
requires it;
o The single-sided alteration of the regulatory part of the contract, i.e. the exorbitant terms, by
the administration;
o The involvement of both parties in the provision of the same public service, in any of its
forms;
o According to the manner of drafting the contract, the administrative contract qualifies as a
solemn contract, with a certain standard form, ranging from simple written forms to very
complex ones, as in the case of public purchases.
A contract can be classified as administrative according to various criteria as the main
differences consist in identifying the proper juridical procedures to be applied. The easiest way to
identify it is by deciding upon the law and where the law defines a certain contract as clearly
administrative, without leaving room for any interpretation of the juridical procedures pertaining to
it. This identification criterion is only used indirectly in Romanian legal proceedings, by referring
contract litigations to administrative contentious courts of law. Such an implicit rule is stipulated in
the E.D. no. 34/2006 on the assignment of public purchase, public works lease and service lease
contracts, and E. D. no. 54/2006 on the usage of public property lease contracts.
De lege ferenda, it should be mandatory that, in the case of certain standard contracts and in
the administrative law practice, as well as with public assets lease, public works or purchases, for
the law to include the specific reference to the administrative nature of the contract, as in the case of
the French legislation that clearly specifies the administrative nature of certain contracts for
example contracts referring to public property possession or public works execution or purchase
contracts signed by the local authorities or their proxies according to the new Code of public
purchases.
The second manner of classifying a contract according to its juridical nature is the statute
law determination, in which case juridical literature (Dacian, 2008) has identified two situations: the
first, where the contract is thus defined by each trial court, in the event of a litigation, and the
410
second case when the contract is defined after an appeal has been resolved for the convenience of
the law by the High Court of Cassation and Justice.
So far, the High Court hasnt been notified of such an appeal but, hypothetically, should it
be promoted, it would lead to its statutory eligibility, since the doctrine unanimously considers that
an appeal in the interest of law is either a primary or a secondary law source. Now is not the time to
further research the matter but the statement could be debated since there is no constitutional decree
that would empower the High Court to proceed to the general compulsory interpretation of the law.
In France as well, apart from deciding upon the law, a contract is also defined from a statute
law viewpoint, thus establishing two criteria used to identify the administrative nature of a contract:
an organic criterion which entails the presence of a public representative as a contractor, and an
alternative criterion which refers either to the presence of exorbitant terms of common law or to the
fulfillment of a public service as the purpose of the contract. Thus, the doctrine has identified
another definition of the administrative contract: administrative contract is any agreement entered
by a public individual or on behalf of a public individual and which either includes common law
derogatory terms or has as purpose the fulfillment of a public service (Foillard , 2008).
First of all, one must establish whether all contracts entered by public law individuals are
administrative contracts; in other words, could the administration enter contracts which, according
to their juridical nature, are not administrative? If we start from the definition of administrative
contracts as stated in Law no. 554/2004, these include contracts entered by public authorities and
focusing on the capitalization of public property, the execution of public interest works, provision
of public services, public purchases and other categories of administrative contracts specified by
special laws and subject to the competence of administrative contentious courts.
Therefore, this very definition states, per a contrario, that any contract entered by a public
authority, unless defined by Law no. 554/2004 or another special law as administrative, is either
another type of public or private law contract. The public contract is defined by the common law
as a legally enforceable commitment to undertake the work or improvement desired by a public
authority. Both the English and American doctrine and jurisprudence rather use the term
government contracts, as the term government largely incorporates the meaning of central and
local administration (Davies, 2009).
The Romanian doctrine only incidentally mentions public contracts or public law
contracts, justified, of course, by the lack of the proper notion in legislation and statute law. Our
opinion is that, at this normative stage, no reason, at least no didactical reason, prevents us from
speaking of public contracts of public law contracts, as the relation between these and
administrative contracts is similar to that existing between gender and species. Both the French and
Romanian (Sraru, 2009) juridical studies mention the gender-species relationship between
contracts entered by the administration and administrative contracts. The first notion includes
private, civil or commercial contracts entered by the administration under common law regulations,
and the latter covers the administrative contracts entered by the administration under public law
regulations.
The practice and regulations in the field, applied in the past few years, provide numerous
examples of contracts entered by the administration and governed by common law. At this moment,
mention must be made of the dichotomy between private and public in the legal entity of the public
administration, based on the original definition from the 4
th
paragraph of Law no. 69/1991 of public
administration, also mentioned above, concerning the ability of administrative-territorial units as
civil legal persons to own private property and as public legal persons to own public property of
local interest, according to the law. This easily confused dual legal statute has been regulated by
Law no. 215/2001, which stipulates in Article 21 that administrative-territorial units are public law
legal persons.
411
Without further discussing the public-private dichotomy, that exceeds the purpose of this
paper, we must acknowledge the decreasing bipolarity of the juridical specifics for the two
categories, justly invoked in the doctrine. The intromission of the market economy principles in the
field of public finance also influences the matter of administrative contracts, not only through the
emergence of new legal persons, but also by the occurrence of unprecedented juridical
circumstances. Neither should one favour the other tendency, that of ranking as principle the
supremacy of common law regulations over contracts concerning assets that belong to the private
property of administration. Some argued (Sraru, 2009), as a de lege ferenda proposal, on the
exclusion of the concession contracts concerning the above mentioned assets, from the realm of
administrative law contracts, justified by the omission of such contracts from the E. D.(Emergency
Decree) no.34/2006 and E. D. no. 54/2006.
It is true that, unlike the former concession law, no. 219/1998 which, as stated by Article 1,
was concerned with the regulation and organization of the concession standards for the private or
public property of the state, county, city or village, the present edition of the two Decrees (more
specifically, the E. D. no. 34/2006, since the very title E. D. no. 54/2006 suggests the field of
interest the regimen of concession contracts for public property assets) do not clearly state
whether their provisions still apply to the concession contract for private assets pf the state or of the
administrative-territorial units.
As stated before, a contract entered in France, between a public authority and a private
person is qualified as administrative under one of the following circumstances: it includes
derogatory terms from common law or is entered with the purpose of providing a public service. On
the other hand, if a contract is entered between two natural persons, that contract is assumed to
comply with private law regulations, with two exceptions: the first refers to state infrastructure
works, when a contract is administrative if it is demonstrated that one of the parties e.g. the
concessionaire of a connecting motorway has acted on behalf of the national authority, while the
second exception occurs when indices prove that one of the parties has actually contracted, on
behalf of the public authority or a territorial community, as is the case of a concession organization
dealing with the landscaping and design of a tourist resort.
On the other hand, in our country, the law specifically defines a contract as being of a civil
nature, even though it meets the above mentioned criteria that qualify it as belonging to the
administrative law. More specifically, we are referring to the provision inserted in article 69
1
of
Law no. 95/2006 on the healthcare reform that stipulates that the authorities of the local public
administration can enter a civil contract with the legal representative of the family doctor and
decide upon the provision of facilities and incentives associated with the setting up and organization
of the family doctors office, in compliance with the current legal regulations and thus set forth the
rights and obligations of the parties. The administrative contract has a very wide application in Law
no. 95/2006, an issue that will be further discussed.
The altered E.D no. 34/2006 specifically provides for the possibility of entering an administrative
contract of public purchase between two private entities, under the provisions set out by Art. 8,
letter e) that defines the contracting authority as any law subject, other that those mentioned at
letters a) to d) and developing one or more of the activities described in Chapter 8, section 1, based
on a special or an exclusive right, as defined in Article 3, letter k), granted by a competent authority,
when the latter assigns public purchase contracts or enters agreements referring to the development
of those activities. The article refers to the contracts entered in the public utility sector water
supply, mail, transport by a private law individual empowered by a public authority through the
provision of a special right.
Further discussions also tackled with the possibility of applying the two different juridical
frameworks within the same contract which thus becomes administrative for one party and
commercial for the other party. The theory has been demonstrated by corroborating article 8 (the
412
village, county and commune cannot act as business entities) with article 56 which provides that if
an agreement is commercial for one party only, all contractors are subject to commercial law, apart
from the provisions aimed at the business owners and the cases when the law provides otherwise.
Since the administrative regulations protect the public interest, which prevails above private
interest, the solution arises, identified ever since the inter-war period and upon which we agree, to
reject the commercial law in the administrative contract.
The doctrine has identified certain interferences between the administrative contract and other types
of contracts, such as the adhesion contract, transient contracts and international treaties and thus
concluded that the type of contract whose analysis is hereby presented is a contract with distinctive
features, of an administrative juridical nature and framework and subject to the public law
regulations.
CONCLUSIONS
The implementation of a strict juridical private law framework in the case of certain
contracts that, according to the delimitation criteria, belong to administrative law, such as
concession contracts, we think that it would be against the general public interest, which should be a
priority; and, when the concession is directed at a private property of the state or of the
administrative-territorial unit, certain derogatory terms from common law are required to ensure the
efficient use of the resources of the authorities as well as the yield resulted from the use of these
assets.
This opinion is supported by the fact that, for example, the mayor, as main credit
coordinator on the administrative-territorial level, in compliance with Law no. 273/2006 on public
finance, analyses the manner in which the budget credits are handled through the local budgets and
the budgets of public institutions whose managers are tertiary credit coordinators and approve
expenditures from their own budgets, in agreement with the legal provisions. But, since the
exploitation of private and public property assets also weighs in the drafting of the budget,
increased legal protection in asset management would be of great use for the proper management of
the administrative-territorial unit.
Even though Article 551 of the new Civil Code includes in the category of real estate rights
both the concession and the administration and use rights, mentioned in the chapter general real
estate rights, and even if we accept the possibility of applying the private law framework in the
concession of the assets that are not part of the public property of the administrative-territorial units,
the introduction of the derogatory rules for the contracts entered under the above mentioned
circumstances, is justified in the same Civil Code: on the one hand, the provisions of article 554
which stipulates that if the law doesnt state otherwise, the rules applied to private property rights
also apply to public property rights but only to the extent of their compatibility and, on the other
hand, the provisions of article 602 that states that the law can restrict the property right either for a
public or a private interest reason.
As a de lege ferenda proposal, we think that, in the future, one could also opt for a
concession, administration or use contract for the assets belonging to the private property of
administrative-territorial units, provided that certain terms are also included and thus allow the
public authority to observe the above mentioned principles and responsibilities.
BIBLIOGRAPHY:
1. G. Pequignot, (1945), Thorie gnrale du contrat administratif, Universit de Montpellier:
169-175.
413
2. Renan Le Mestre, (2006), Termes du droit administratif, Gualino diteur, Paris: 58-62.
3. Drago Dacian, (2008), Administrative law, http://apubb.ro: 2-12.
4. Foillard, Phillippe, (2008), Droit administratif, Editure Paradigme, 13
e
ed., Paris: 241-242.
5. Anne C. L. Davies, (2008), The public law of government contracts, Oxford University Press,
New York: 200-220.
6. Sraru, Silviu Catalin, (2009), Administrative Contracts. Regulators. Doctrine. Law, C.H. Beck
Publishing, Bucharest: 245-250.
414
THE EU CHARTER OF FUNDAMENTAL RIGHTS
ACCORDING TO TREATY OF LISBON
Lecturer Ph.D. Rzvan VIORESCU
razvanv@usv.ro
Judge Iulius-Cezar DUMITRESCU
Suceava Appeal Law Court, Romania
cezar_idumitrescu@yahoo.com
Abstract:
Lisbon Treaty is one which intended to replace the European constitutional treaty. Its adoption will make an
improvement of the Community institutional law system, by coming in force of the EU Charter of Fundamental Rights.
The Charter was proclaimed by the European institutions (European Commission, European Parliament and EU
Council) at the Nice European Council dated 07/12/2000 and its contents are set for the first time in a single piece of
the overall social rights, economic, civil and political rights that can benefit all citizens.
Key-words: fundamental rights, protection, treaty, Constitutional European Law
JEL Classification: K39, K10, K40
1. INTRODUCTION
The Treaty of Lisbon continues the tradition of EU treaty revisions bringing changes
to the institutional balance - and the range of institutional reforms introduced is much more
extensive than in the case of the previous reforms under the Treaty of Nice. This contribution
is intended to provide an assessment of the shifts in relative power occasioned by the new
treaty changes between the EU institutions which exercise legislative and/or executive power,
i.e. the European Parliament, the European Commission, the Council and (as newly formally
codified 'institution' of the EU) the European Council. This will allow us, at the end, to draw
arrive at some conclusions regarding the overall implications of these shifts for the further
evolution of the EU system.
2. THE DIFFERENT DIMENSIONS OF THE EUS INSTITUTIONAL BALANCE
OF POWER ACCORDING TO LISBON TREATY
The main objective of this paper is to identify some challenges for the future of the EU
Charter of Fundamental Rights (the Charter), which text was also incorporated in the later Treaty
of Lisbon. The Charter will have the force of law effective from December 1st 2009. The fifty-five
articles of the Charter of Fundamental Rights list political, social and economic rights for EU
citizens. It is intended to make sure that European Union regulations and directives do not
contradict the European Convention on Human Rights which is ratified by all EU Member States
(and to which the EU as a whole would accede under the Treaty of Lisbon).
The Treaty of Lisbon not only continues the strengthening of the Parliament`s
position especially through a new massive extension of the fields to which legislative co-
decision applies (see below) -, but it also transforms the tri-polar into a four-polar system as it
gives to the European Council for the first time the official status of an institution (Article
13(1) TEU) which is also vested with powers it had not been provided with explicitly before,
such as, for example, the power to define the strategic guidelines for legislative and
operational planning within the area of freedom, security and justice (Article 68 TFEU).
415
The institutionalisation of the European Council adds already a degree of increased
institutional complexity to the institutional balance as the European Council adds a second
formal institutional representation of the interests of national governments to that already
provided by the Council, although at a more senior level and with tasks which are clearly
separated in the Treaties. Yet even more complexity is added by the introduction of the new
combined position of the High Representative of the Union for Foreign Affairs and Security
Policy and Vice-President of the European Commission (HR/VP) whose task it is to
conduct and put into effect the Unions common foreign and security policy (CFSP) as
well as to represent the Union in this field (Articles 18(2), 24(1) and 27(2) TEU). Appointed
by the European Council (Article 18(1) TEU) in whose work the HR/VP takes part (Article
15(2) TFEU) and who also defines the strategic interests and objectives of the EU in the
CFSP domain (Article 22(1) TEU), the HR/VP is mandated by the Council (Article 18(2)
TEU) whose foreign affairs formation the HR/VP presides (18(3) TEU). Yet the incumbent is
at the same time responsible within the Commission as one of its Vice-Presidents for external
relations and for coordinating other aspects of the Union's external action and in this respect
fully bound by Commission procedures (Article 18(4) TEU). The Treaty of Lisbon has thus
assigned to the HR/VP a position somewhere in the middle between the institutional sub-
triangle of Council, European and Commission, creating an extraordinarily hybrid position
whose direct relationship to the EP as the fourth pole in the institutional balance is limited
to consultation and information duties with no binding effects on action (Article 36 TEU).(2)
In order to pragmatically limit and focus the scope of this analysis we
will in the following investigate six dimensions of the post-Lisbon relative power positions of
the EU institutions of which the first four are based on the respective formal powers of the
institutions as defined in the Treaties in line with the principle of conferral (Article 13(2)
TEU). These are:
I. Power relating to the constitutional position of each institution. This
dimension covers all powers with systemic relevance to the EU as whole, i.e. powers
regarding treaty changes, the budgetary framework, key appointments and the
relative degree of autonomy any of the institutions is given with regard to the others.
II. Power relating to policy initiation. This dimension covers all powers given to
the institutions in respect of the initiation of both policies and legislation, it being
widely recognised that agenda-setting powers and not just voting power in the
decision-making process - can have a major impact on eventual policy-outcomes.
6
III. Power relating to decision-making. This dimension covers all formal
decision-making powers provided for by the Treaties, including both binding
decisions (legislation, annual budget) and non-binding decisions (e.g.
recommendations and certain CFSP decisions).
IV. Power relating to implementation. This dimension covers all powers of
implementation in the legislative and budgetary fields as well as powers of control
regarding the implementation of EU measures by the Member States.
V. Power linked to institutional strength. This dimension covers any changes in
political impact possibilities an institution might derive from treaty changes to its
internal organisation which enhance or decrease its abilities to fulfil its tasks and
wherever possible provide political leadership.
VI. Power linked to public visibility. This dimension covers the changes in
political impact possibilities of an institution resulting from treaty changes likely to
increase or decrease its public visibility as such visibility if effectively mediated
can play a major role in creating and sustaining a basis for support (3)
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3. THE NEW CONSTITUTIONAL DIMENSION OF THE INSTITUTIONAL
POWER BALANCE
The Treaty of Lisbon strengthens the European Parliament's significantly - and this in
six ways:
First, by extending its powers under the ordinary treaty revision procedure. The Parliament
now has a right to submit formal proposals for the amendment of the Treaties to the Council
(Article 48(2) TEU), must be represented in the revision Convention and must give its
consent to any decision by the European Council not to convene a Convention (Article 48(3)
TEU).(4)
Second, by extending the Parliament's powers under the simplified revision procedures.
Under the latter the Parliament has gained a right of initiative as well regarding any revisions
of Part Three TFEU relating to the internal policies and action of the Union (Article 48(6)
TEU) and the right to give its consent to the use of 'passerelle' provisions which allows the
European Council to authorise the Council to pass from unanimity to qualified majority
voting in the domain of Title V TEU (CFSP)
9
and to move from a special legislative
procedure to an ordinary legislative procedure in the context of the TFEU (Article 48(7)
TEU).
Third, by extending the Parliaments powers regarding the launching of enhanced
cooperation frameworks between Member States to which the Parliament has now to give
its consent (Article 329(1) TFEU).
Fourth, by giving the Parliament powers of constitutional importance regarding EU
competences and structures in the field of criminal justice cooperation: The Parliament has to
give its consent to any Council decision extending the number of aspects of criminal
procedural law which can be the object of common rules (Article 82(2)(d) TFEU) or
identifying other areas of serious cross-border crime that may be subject to legislative
approximation measures (Article 83(1) TFEU) as well as to the establishment of a European Public
Prosecutors Office (Article 86(1) TFEU).
Fifth, by enhancing the Parliaments powers in the appointment process of the Commission:
The European Council now has to take into account the elections to the European Parliament and
hold appropriate consultations in this regard before proposing a candidate to the Parliament as
President for the European Commission - who now has to be formally elected by the Parliament.
The HR/VP is also subject to a vote of approval by the
Parliament together with all other Members of the European Commission (Article 17(7)
TEU).
Sixth, by extending the budgetary powers of the Parliament: The removal of the distinction
between compulsory and non-compulsory expenditure in revised Article 314 TFEU now puts the
Parliament on a perfectly equal footing with the Council regarding the adoption of the EUs annual
budget, a major constitutional function.
As a result of the above changes the Parliament has a significantly increased role regarding
constitutional change, the extension of EU powers not requiring treaty revision, the
appointment of the Commission and the EUs budgetary framework which together clearly
accounts for a major plus in the institutional balance.
417
4. WHAT ARE FUNDAMENTAL RIGHTS FOR EU CITIZENS AFTER LISBON
TREATY
It is difficult to over-estimate the importance, and in the fullness of time, the impact
which the Lisbon Treaty has and will have regarding fundamental rights and citizens
of the Union. There are three main reasons for this:
Citizenship of the European Union has finally acquired its Bill of Rights in the
form of a legally binding EU Charter of Fundamental Rights; the skeleton
which citizenship of the Union has been is now acquiring the flesh and blood
it needs to merit the title; (5)
The EU Charter of Fundamental Rights transforms citizenship in the EU as it
redefines who is entitled to bundles of rights which inform the meaning of
citizenship and belonging; (6)
The EU Charter of Fundamental Rights is neither part of a constitution in the
traditional nation state sense, nor is it an international human rights treaty even
in the regional sense of the European Convention on Human Rights. As a new
mechanism for the delivery of rights it transforms the relationship between the
individual and the state through a different type of rights entitlement arisen
from and embedded in the EU.(7)
The EU Charter of Fundamental Rights was adopted by the three central EU
institutions (Parliament, Council and Commission) in Nice 7 December 2000. It was
the result of 12 months of discussion and negotiation which took place in the form of
a Convention established by the Cologne European Council 3-4 June 1999. The
Convention included not only members of the institutions which would ultimately
adopt it but also members of national parliaments assisted by experts and taking into account the
views of civil society. (8) It was a magnificent accomplishment, and like all
such events, surrounded by controversy and debate. The intention for the Charter was
that it would codify the rights to which EU nationals were already entitled. There was
no objective to extend those rights by virtue of the Charter.(9) However, as with any
such action to consolidate rights which individuals already hold, by bringing them
together in one place set out clearly in one document, there is a centrifugal effect:
rights engender rights. The interaction among rights and the necessity of enjoying
some rights in order to be able to access others becomes apparent from any such
effort.
Due to the rather strong opposition in 2000 of at least one Member State, the Charter was
not inserted into the treaty amendments which the Nice Council proposed to the Member States.
Instead it remained a self standing document without a direct legal status in the EUs legal order or
indeed that of its Member States. (10) As an aspirational
document setting out a Bill of Rights, however, it gained authority and importance. As
the years of its long languish as a more political rather than legal document stretched
out, it acquired supporters in many different areas. While the Charter was referred to
in political debates at the EU and national levels, and by judges in the Member States,
it also gradually gained stature at the European Court of Justice, initially as Advocates
General began to have regard to it. Nonetheless it remained outside the realm of
binding legal documents within the EU order. Remedying this unsatisfactory situation
was central to many Member States and the EU institutions for a number of reasons.
Among them were:
Member States need confidence that their national constitutional settlements
with their people are not undermined by EU measures because of the lack of
418
comprehensive and legally binding fundamental rights provisions at the EU
level;
The EU needs to have a single document setting out what rights exist under
EU law so that this is clear for Member States authorities and people in the
EU;
As EU law engages in areas where people are directly affected, a parallel
reinforcement of rights is needed to ensure that state and supra state powers do
not grow at the expense rights of people;
The addition of the Area of Freedom, Security and Justice into the EUs field
of law making demands that peoples rights are set out as well to guide how
the legislation in the AFSJ is crafted;
National courts required confidence that EU law is not only adopted in
conformity with fundamental rights, a matter normally included in the
preambles of EU secondary legislation, but that in its application and
transposition people affected by those measures have a chance to challenge
them on the basis of a clear and legally binding set of rights which they are
entitled to enjoy;
The coherence of EU law depends on full human rights compliance as the
Member States obligations under the European Convention on Human Rights
and other international human rights treaties must not be undermined by EU
law.
So what does the Charter mean for citizens of the Union? (12) It sets out a Bill of Rights to
which they are entitled. It does so in seven chapters respectively entitled 1.Dignity;
2.Freedoms, 3.Equality; 4. Solidarity; 5.Citizens Rights; 6.Justice and 7. General Provisions.
Among jurists there has been much discussion whether the
different chapters have different legal effects. This debate tends to resemble
discussions about the numbers of angels which can fit on the head of a pin. It seems to
me that from a natural reading of the Charter and an examination of the General
Provisions, which the TEU invites us to do, there is no substantial foundation to
accept that for instance the provisions contained in the Dignity chapter are somehow
juridically different from those in any other chapter. For example, Article 2 which is
found in this chapter contains the right to life. It mirrors a similar provision in the
European Convention on Human Rights. The European Court of Human Rights has
never questioned the legal applicability of the right to life and has interpreted it
frequently in complex and politically sensitive cases. . The EU Charter sets out rights
irrespective of the title of the chapter in which they have been placed.
The rights which are contained in the Charter come mainly from two sources: first
rights which already existed in EU law such as for citizens of the Union the right of
free movement (Article 45); secondly, the European Convention on Human Rights
(and its protocols). Here the Charter specifically states that in so far as it contains
rights which correspond to those in the ECHR, the meaning and scope of the Charter
rights shall be the same as that of the ECHR rights. However, this provision expressly
does not prevent Union law providing more extensive protection (Article 52(3)).
The Charter takes on legal force with the entry into force of the Lisbon Treaty at a
critical moment for the EU. The Charter is neither a national constitution nor an international human
rights treaty. Instead it belongs to the EU legal order and depends for its interpretation and
enforcement on the mechanisms of EU law. In this regard it imposes obligations on
state authorities which are not amenable to modification by those authorities. Its
definitive interpretation is the preserve of the European Court of Justice to which any
419
national court can turn for assistance in interpretation. But that interpretation when
provided is binding on both national administrations across the Member States and
national courts.
5. CONCLUSIONS
The key change which the Lisbon Treaty is bringing about for citizens of the Union. Among
the most important is access to EU fundamental rights through the legal effect which has been given
through the Lisbon Treaty to the EU Charter of Fundamental Rights. There are four main
consequences:
Citizens of the EU now have a Charter of Rights which is legally binding and
which their state authorities must deliver in accordance with their duty of good
faith to the EU;
Third country nationals resemble ever more citizens of the Union through their
inclusion as beneficiaries of Charter rights under the same conditions as
citizens of the Union (with only limited exceptions);
The Charter provides a new and potentially very important source of rights for
people in Europe which cannot be modified by any one Member States authorities on the basis of
the inconvenience which those rights might constitute to them. There has been a disaggregation of
authority and rights which will assist Member State authorities to have greater confidence in one
another and people to have greater confidence in all EU authorities.
Accession of the EU to the European Convention of Human
Rights (ECHR) is of high political and legal significance. It will guarantee that any alleged victim of
an action undertaken in theframework of Union's competences is able to bring a complaint against
the Union before the Strasbourg Court under the same conditions as those applying to complaints
brought against Member States. In political terms, accession means that the European Union
reaffirms the pivotal role played by the ECHR system for the protection of human rights in Europe.
The accession to ECHR is not an isolated initiative but as one among several leverages
underpinning the development of an ambitious EU policy aimed at strengthening the effectiveness of
the fundamental rights that people enjoy in Europe. The European Court of Human Rights is likely
to have fewer occasions to intervene on matters linked to EU law if the EU is beyond reproach
when it makes legislation and when Member States implement it.
NOTES
(1) Draft Reform Treaty Projet de trait modificatif". Council of the European Union. 24 July 2007.
http://www.consilium.europa.eu/cms3_fo/showPage.asp?id=1317.
(2) Jrg Monar, The European Unions institutional balance of power
after the Treaty of Lisbon
(3) On the power dynamics of mediated visibility see John B. Thompson: The new visibility, in: Theory,
Culture
& Society, vol. 22, number 6, 2005, pp. 31-51.
(4) The Parliament was represented in the 2002/2003 Constitutional Treaty Convention, but its right to be
represented in any future Convention had not been codified in the Treaties before.
(5) Peers, S & A Ward, The EU Charter of Fundamental Rights: Politics, Law and Policy Hart, Oxford, 2004.
(6) Guild, E The Variable Subject of the EU Constitution, Civil Liberties and Human Rights (2004) EJML pp.
381-394(14); Framework 7 Project: ENACT which examines the changing meaning of citizenship in the EU today
http://www.enacting-citizenship.eu/; the research which this project is generating has been fundamental to my own
understanding of European citizenship and its relationship to rights.
(7) Menendez, A J The Chartering of Europe: The European Charter of Fundamental Rights and its Constitutional
Implications ARENA Working Paper 01/13.
420
(8) http://www.europarl.europa.eu/charter/default_en.htm
(9) De Burca C & J B Aschenbrenner European Constitutionalism and the Charter in Peers, S & A Ward, The
EU Charter of Fundamental Rights: Politics, Law and Policy Hart, Oxford, 2004 pp 3 35.
(10) S Peers, Taking Rights Away? Limitations and Derogations in Peers, S & A Ward, The EU Charter of
Fundamental Rights: Politics, Law and Policy Hart, Oxford, 2004 pp 141 182.
(11) J P Jaqu, Les droits fondamentaux dans le trait de Lisbonne, version 5 fevrier 2010
(12) Elspeth Guild, What Fundamental Rights for whose EU Citizens?, Jean Monnet Professor ad personam,
Radboud University Nijmegen
BIBLIOGRAPHY
1. Treaty of Lisbon
2. Charter of Fundamental Rights of the European Union
3. European Convention for the Protection of Human Rights and Fundamental Freedoms
4. Protocol No 30 annexed to the TFEU on the application of the Charter of Fundamental
Rights of the European Union
421
COMBATING ECONOMIC AND FINANCIAL CRIMINALITY AT THE EUROPEAN
LEVEL
Research Assistant Ana PIRLAC
Faculty of Economic Sciences and Public Administration
anap@seap.usv.ro
Abstract:
The procedures concerning the protection of European financial interests are contestably of first interest for
the European Union. The central issue is a matter of residency of the compatibility of criminal law with European law,
which infers two levels of analysis: the etatic approach and the communitarian approach respectively.
To this extent, the European Community Treatises, on one side, introduce steadily the working instruments
particular both in the matters of judicial cooperation and of criminal law in what concerns the protection of the EU
financial interests. On the other side, the adjustment of communitarian politics and the insurance of their effective
implementation has lead to a new separation of competences between the Union and the Member States, by such means
consolidating the juridical instruments of action of the Union in the plan of combating criminality of all kind, including
economical and financial.
The attempt of constitution of a criminal protection of EU financial interests lasts since the '70, and the idea
has been once more brought into attention, by the assembly of treatises successively adopted in Maastricht, Amsterdam,
Nice and Lisbon which represent the legal framework of the European Union of our present days.
The Lisbon Treaty brings a new dimensioning to communitarian law, such issue regarding the compatibility of
criminal law to the juridical communitarian order persisting in being on top among debates and developments at a
European level in what concerns the effective protection of EU financial interests.
Key words: economic and financial criminality, communitarian fraud, tax evasion, European criminal law,
European economy.
INTRODUCTION
One major issue which the EU deals with is that of frauds committed in the detriment of the
Union's budget, defined firstly as the concrete expression of a veritable patrimony that the EU
citizens share and secondly as the instrument by excellence of the European policy (Delmas-Marty,
1998).
The idea of constituting a criminal protection of the EU financial interests has appeared
since the '70, becoming the scope of several normatives. According to this perspective, Report
Theato (1991) is of a particular importance since it proposes the attribution of the Community's
competence to adopt regulations and directives related to the criminal protection of its financial
interest in the purpose of harmonising criminal measures of the Member States and applying certain
penalties aiming to protect the European Community's financial interests. Such idea has been
reconsidered, with certain alterations, by the assembly of treatises successively adopted in
Maastricht, Amsterdam, Nice and Lisbon, which represent the legal framework of our present days
European Union.
Besides the necessity of insuring the protection of the European economy, combating
economic and financial criminality at a European level presents a different importance due to the
difficulties risen in distributing the competence of incriminating the fraud between the
communitarian law and the internal law of the Member States.
422
THE PREMISES OF COMBATING COMMUNITARIAN FRAUD
The Treaty of Maastricht on European Union (TEU) in February 1992 established the
premises of combating communitarian fraud, as long as it comprised the fundamental provisions
concerning the cooperation between the police and the juridical authorities in criminal matters.
The treaty comprises criminal provisions, among which the most important is being enlisted
in art. 28 in which it is presented that, both the community and its Member States combat the fraud
and any other illicit activity in the detriment of the Community's financial interests, by applying
decisive sanctions for the effective protection of the Member States. As a consequence, the Member
States adopt the same measures in order to combat fraud in the detriment of the Community's
financial interests on the same grounds on which they adopt them in order to combat acts in the
detriment of their own financial interests (Antoniu, 2007).
Due to TEU, cooperation in criminal matters is an area including the fight against fraud,
either communitarian or international. The premise of work, in what concerns the distribution of
competences in criminal matters is given by the game between the first and the third pylons [1]. The
distinction between them is of relevance when related to the distribution of competences of
legislation and action. Thus, the first pylon refers to domains of action in the exclusive competence
of the Community, while the third pylon refers to domains of action in the exclusive competence of
Member States. By tradition, issues related to justice and internal affairs are part of the third pylon
(Costea, 2008).
Consequently, in the perspective of the Treaty of Maastricht, the financial and criminal law's
sphere derives from the tough nucleus of national competences. In a subsidiary point of view, the
diversity of legal systems of the Member States renders much more difficult a uniform or common
approach, as in the light of the present Treaty, there exists no relationship between criminal law and
European Union.
In such conditions, the main obstacle that hinders a repressive and efficient action against
economical and financial criminality is the lack of continuity of such actions, the competence of
repressive authorities being limited, mainly, at national frontiers, together with the existing
differences between criminal regulations in different Member States.
On this purpose, according certain competences to communitarian law in criminal matters
means breaking the fundamental Treatises of the European Union, which leaves in exclusive
competence of the Member States the attributions of criminal regulations; such fact would lead to
creating a supranational criminal law which would not be capable of guarantying the observance of
the fundamental principles of criminal law and would bring into discussion the national sovereignty
of the criminal law.
Starting from the premise of national sovereignty in criminal matters, in order to put aside
such obstacles, there have been made great efforts in three directions, sorting out several solutions:
the assimilation technique, in other words adopting a criminal treatment of the actions in the
detriment of the Union's budget, similar to the one used in internal law for the sanction of facts in
the detriment of the national financial interests. Another way would be the cooperation technique of
the states on the purpose of developing certain effective actions of combating the phenomenon
mentioned, and, in the last, the technique of harmonization of national legislations, which means
their proximity by means of abolishing their most important differences and creating a juridical
background, if not identical, at least with smaller differences destined to insure a corresponding
repression to the aggressions to the European Union's budget.
The continual increasing of the criminal phenomenon and the breadth taken by the fraud in
detriment of the European Union have outlined that the methods undertaken didn't bring any result.
The harmonization and the assimilation have continuously bumped against the striking differences
between the legal systems of the Member States and against the impossibility of their correlation
423
because of which the cooperation has turned out to be hardly achievable in criminal matters, as
proven by several projects of international conventions in such matters which haven't yet been
ratified by the Member States (Antoniu, 2002).
THE CONVENTION REGARDING THE PROTECTION OF THE EUROPEAN
COMMUNITIES' FINANCIAL INTERESTS (PFI 1995)
The PFI Convention, together with its three protocols, has been adopted by the Act of the
Council on the 26
th
of July, 1995, in order to combat in a more efficient way the frauds and all the
other illicit activities in the situation in which the efforts made at a communitarian level in such
issue assimilation, cooperation and harmonization of the Member States legislations haven't
offered the desired results.
Communitarian fraud, as shown in the Regulation attached to the Convention, represents an
act in the detriment of the European Communities' financial interests, including crimes of financial
fraud, crimes of common law false, fraud, economical crimes and elements of criminal
structures money laundering, black market work, corruption, counterfeits, narcotics trading, traffic
of persons (Faletti, 2003).
Communitarian fraud may be committed in relation to provisions of the primary
communitarian law [2] or of the communitarian law derived [3].
The P.I.F. Regulations force the states to foresee criminal sanctions against communitarian
frauds: "each Member State should take all necessary and appropriate measures in order to
transpose in the internal criminal law the previsions stipulated in paragraph 1, in such manner that
the endorsed behaviors constitute crimes". If in criminal law there is no possibility of criminal
penalty of facts stipulated in the Convention, the Member States are obliged to lay down such
incriminations in their own criminal law.
The Member States are obliged to criminally sanction facts of instigation, complicity, fraud
attempt, if such acts are not stipulated as autonomous penalties. They are as well obliged to
establish their competence on communitarian fraud also in the circumstance under which it is
committed by a person outside his/her national territory, on another Member State's territory or on a
third country's territory. For the hypothesis in which several Member States become competent of
following the same communitarian fraud, the Convention consecrates the principle of ne bis in idem
[4].
The first Protocol of the Convention [5] makes a distinction between active and passive
corruption. It is stipulated that we refer to active corruption whenever the official, intentionally,
directly or by means of a third party, solicits or receives benefits of any kind, for his own purpose or
for a third party's purpose or accepts such promises in order to accomplish, not accomplish or
accomplish an act which is contrary to his/her official duties, in the detriment or susceptible to be in
the detriment of the European Communities' financial interests. Active corruption consists of the
intentional act of whomever to promise or offer an official, directly of by means of a third party, a
benefit of any kind, for his/her own purpose or for a third party's purpose in order to accomplish or
abstain from accomplishing an act contrary to his/her official duties, in the detriment or susceptible
to be in the detriment of the European Communities' financial interests.
The scope of the second Protocol of the Convention [6] is money laundering and the liability
of the juridical person. The protocol makes references to the definition given to capital laundering
where there are enlisted the activities susceptible of constituting acts of capital laundering, as
follows: the conversion or the transfer of goods about which the person who delivers them is aware
of their provenience from a criminal activity or from a participation to such activity, on the purpose
of hiding or disguise the illicit origin of such goods or helping any person part in such activity
escape from the criminal consequences of his/her acts; hiding and covering the nature, the origin,
424
the location, the disposal, the movement or the real property of the goods or the respective rights of
which the author is aware they come out from a criminal activity or from a participation to such
activity; purchasing, obtaining, using the goods while being aware that in the moment of the receipt
the goods come from an illicit commercial activity or from the participation to such activity.
In what concerns the juridical persons' liability, the Protocol stipulates liability for acts of
fraud, active corruption and capital laundering. The text itself does not express in terminis that the
focus is on a criminal liability, but it stipulates the obligations of the Member States to take all
necessary measures in order to ensure that the persons declared liable for the mentioned facts are
passable of sanction, effective and proportionate, including criminal and non-criminal penalties and,
eventually, of other sanctions (Antoniu, 2001).
COMBATING ECONOMICAL AND FINANCIAL CRIMINALITY IN ROMANIA
In primary communitarian law, the notion used in order to design the damages brought to
the communitarian budget is that of fraud. The Romanian lawmaker employs the notion of financial
fraud in terms of national regulation. Thus, terminologically speaking, it is permitted the
overlapping of the concept of fraud communitarian approach with that of financial fraud, in the
sense of incriminated crime by criminal national law of the Member States.
Yet, in a communitarian sense, the notion of fraud has a larger area of coverage than the
national concept of financial fraud including crimes of financial fraud, crimes of common law
false, fraud, economical crimes and elements of criminal structures - money laundering, black
market work, corruption, narcotics trading, traffic of persons (Faletti, 2003).
Between the EU accession and adoption processes of the communitarian acquis in Romania,
in our internal law, the incrimination of facts affecting the European Communities' financial
interests has been realized by adopting Law no. 161/2003 regarding certain measures for the
insurance of transparency in executing public dignities, public and business functions, the
prevention and the sanction of corruption [7]. By Book II, Title I, art. I, pt. 18 of this specific law, it
has been introduced section IV
1
in Law no. 78/2000 for the prevention, the uncovering and the
sanctioning of acts of corruption [8], entitled "Crimes against European Communities' financial
interests".
Consequently, the Romanian lawmaker opts for the creation of a particular criminal
protection of the European Communities' financial interests, distinct of the one applicable to similar
national values. In such sense, it is observed that countries like Belgium, France, Portugal and the
Czech Republic have chosen to assimilate the European Communities' financial interests with the
national ones and they didn't create special regulations of incrimination regarding the fraud
affecting the communitarian budget (Antoniu, 2008).
In the section "Crimes against European Communities' financial interests" there are
incriminated facts such as: use or presentation of documents or false statements, inaccurate or
incomplete, which have as result unrighteous obtaining of funds from the general budget of the
European Communities or from the budgets administrated by them or on their behalf. Also, it is
incriminated the omission of providing, rationally, the information demanded in conformity with
the law for acquiring funds from the general budget of the European Communities or from the
budgets administrated by them or on their behalf, if the fact has as consequence the unrighteous
acquisition of such funds, or the illegal decrease of the resources from the mentioned budgets, as
well as the exchange, without respecting the legal provisions of the destination of funds obtained
from the general budget of the European Communities or from the budgets administrated by them
or on their behalf.
In the same time, by the provisions newly considered it is incriminated the negligence at
work of the economic agents' superiors which have as result the commission of one of the crimes
425
against the European Union's financial interests or the commission of a crime of corruption or of
money laundering by the persons in their subordination and who act on the behalf of the economic
agents.
The juridical scope of these crimes is represented by the social relationships concerning the
European Communities' financial interests in Romania, which shall be protected according to the
relevant communitarian regulations. This way are protected those particular social relationships
regarding the correct access and administration of the funds from the general budget of the
European Communities or from the budgets administrated by them or on their behalf.
The material object of the crimes mentioned consists of the materialization of the social
value protected by the incrimination norm, on which refrains directly the action or the inaction of
the criminal, more specifically the amounts of money assigned from the European Communities'
budget which the criminal misappropriates.
Incident communitarian regulations in such matter stipulate, for the Member States, the
obligation of co-financed projects by national financial contribution, public or private.
De lege lata, public co-financed funds do not benefit from the same criminal protection as
the communitarian funds, their fiddle being sanctioned by the criminal common law regulations
Criminal Code. In such conditions it may be brought into discussion the problem of the contest of
crimes between the crimes in matter in the Criminal Law and in the special law mentioned. But in
practice there have been sketched two orientations: one in the sense of only retaining the
commission of crimes stipulated in the Criminal Law, the other of retaining only the provisions in
Law no. 78/2000. The incriminating norm from the special law protects, for the time being, only the
communitarian budget, but not the national co-financing (Dobleag et alii, 2008).
De lege ferenda, the lawmaker should intervene and extend expressly the special criminal
protection from Law no. 78/2000, Section IV
1
on national co-financing public funds.
LISBON TREATY - A NEW DIMENSIONING OF THE COMMUNITARIAN LAW
In the context of combating economical and financial criminality, the Lisbon Treaty
intervenes in order to conciliate radical distinctions of competence and legislative technique
existing in the sphere of fiscal law and in the sphere on criminal law at the European Union level.
Thus, the traditional mechanism of the three pylons is replaced by a two-part classification
of the national and communitarian competences in exclusive and shared competences. In matters of
exclusive competences, they reside in the domains where the European Union may act, the Member
States having the possibility to intervene only with the permission of the Union or in order to put
into practice the European policy. In matters of shared competences, the Member States may
intervene as long as the Union hasn't reacted yet, thus on the grounds of reverse subsidiarity
(Costea, 2010).
In the context of this new classification of competences between the Union and the Member
States, the freedom, security and justice policy, the hard kernel of the third pylon is assimilated in
the sphere of shared competences. Such fact allows the direct involvement of the Union in the
criminal national sphere, or better, the creation of a communitarian criminal policy. Thus, the
Union's legal action instruments are being reinforced in the context of combating criminality of any
kind, implicitly the economical and financial kind.
In the actual context of the European construction, the necessity of protecting the
communitarian financial interests justifies a specific intercession of the legislating process through
the unification technique which is more energizing [9], insured by the provisions of articles 69A-
69E from the Lisbon Treaty.
The normative technique of the unification seems to gain ground in the context of the
communitarian policy, attenuating the sovereignty of the Member States in criminal matters. The
426
treaty insures a political form for the transfer of competences in criminal matters form the exclusive
domain of the Member States, yet with certain particularities. The civil matters, together with the
legal matters, inserted in the European field beginning with the Maastricht Treaty are officially
recognized as European competences, yet without depriving the States from their margin of
maneuver (Chaltiel, 2008).
There can be identified two formulas of work depending on the domain of action: a general
mechanism applicable to criminal domains of certain gravity and a special mechanism applicable to
the domain of the European Union's financial interests' protection.
As far as the specific domain of the protection of financial interests is concerned, it must be
said that a wide project, disputed at an initiative legislative level and retaken by the provisions of
the Lisbon Treaty at a primary law level, concerns the constitution of an European Public Minister.
In the actual form, the normative intercession is circumscribed to the preoccupation of safeguarding
the European Union's financial interests, the competence of the European prosecutor being limited
to surveying the crimes affecting the communitarian financial resources.
CONCLUSIONS
Combating economical and financial criminality at a European level trough the prism of the
communitarian law presupposes the analysis of the assembly of treatises which have created the
legal-institutional background of today's European Union. The idea of the protection of the EU
economical and financial interests has constituted a continuous preoccupation desired to evolve
until achieving a balance between the sovereignty of the national criminal law of the Member States
and the communitarian law on the purpose of the effective protection of the EU economical and
financial interests.
Thus, the new dimension of the communitarian law given by the Lisbon Treaty should be
concretized in legal-institutional context in order to establish with exactitude the jurisdictions able
to statute over certain crimes at European level, which material scope is the amounts of money from
the European Communities' budget. Yet, unification at the procedural level is demanded either
limited exclusively to the protection of the financial interests, or comprising other domains.
NOTES
[1] The structure of the European Union implies three pylons, regarding from the Treaty of Maastricht
perspective: the first pylon competences of the European Community, the second pylon competences in matters of
security and external affairs and the third pylon cooperation in matters of justice and internal affairs.
[2] Primary communitarian law represents the assembly of treatises, as well as the protocols attached to the
treatises, the Conventions and the agreements which complete them.
[3] Derived communitarian law represents the assembly of documents issued by the communitarian
authorities: regulations, directives, decisions, recommendations and approvals.
[4] In order to commit a crime, a wrongdoer can be found liable for one single reason.
[5] The Protocol of the P.F.I. Convention from the 27th of September 1996 regarding the corruption acts
committed by or against national officials or communitarians liable for the accessing and administrating
communitarian funds.
[6] The Protocol of the P.F.I. Convention from 19th of June 1997 regarding money laundering and the
liability of juridical persons.
[7] Published in Romania's Official Monitor no. 279 from 21st of April 2003.
[8] Published in Romania's Official Monitor no. 219 from 18th of May 2003.
[9] The technique of the unification, introduced once with the Lisbon Treaty, has proved to be more energizing
than the technique of assimilation, cooperation and harmonization, introduced once with the Maastricht Treaty.
427
BIBLIOGRAPHY
1. Antoniu G., Activitatea normativ penal a Uniunii Europene (I), RDP, nr. 1/2007, p. 14.
2. Antoniu G., Dreptul penal i integrarea european, n RDP, nr. 3/2001, p. 18-21.
3. Antoniu G., Protecia penal a intereselor financiare ale Comunitilor Europene, RDP, nr.
2/2002, p. 9-10.
4. Antoniu G., Reflecii asupra conceptului de incriminare, RDP, nr. 3/2008, p.9-31.
5. Chaltiel F., Le Trat de Lisbonne: lespace de libert, de scurit et de justice, Les petites
Affiches, nr. 68/2000, p.11.
6. Costea I. M., Combaterea evaziunii fiscale i frauda comunitar, Publishing House C. H. Beck,
Bucureti 2010, p. 220.
7. Costea I. M., Europenizarea dreptului penal sau protecia intereselor financiare al Uniunii
Europene, Revista romn de drept comunitar, nr. 5/2008, p. 124.
8. Delmas-Marty M., Corpus Juris, Publishing House Carl Haymanns, Kln, Berlin, Bonn,
Mnchen, 1988, p. 103.
9. Dobleag O., Baciu M., Karoly B., Infraciuni mpotriva intereselor financiare ale Comunitilor
Europene, RPD, nr. 4/2008, p. 152-153.
10. Faletti F., La copration internationale dans le lutte contre la fraude fiscale, Revue de Droit
Fiscale, nr. 3/2007.
428
A STUDY ON THE ROLE OF LOCAL BUDGET PROCESS IN THE SOCIAL-CULTURAL
DEVELOPMENT OF THE NORTH-EASTERN REGION
Lecturer PhD. Student Cristinel ICHIM
cristineli@seap.usv.ro
Abstract:
This paper suggests to analize the stage of socio-cultural development of the North-East region, analysis
based on the information included in romanian yearly Statistical Reports, development which represent the expression
of local budgetary process.
The budgetary process is in a close connection with the socio-cultural level of the places because public services,
supplied by the local authorities ,such as water deliver, sanitation, public lighting, satitary assistance, etc. are based on
the budgetary revenue collection. Also, the execution of the expenses ensure the admitance of the population to schools,
hospitals and shops and stimulate the establishment and extention of economic agents which can provide a revenue
increase and more work places for citizens
Keywords: local budget, public expenditure, government revenue, social-cultural development, welfare,
infrastructure
JEL Classification: H 72, H 83
INTRODUCTION
Local development is achieved through effective management of local government in which
a definite role and place is played by the development and implementation of local budgets. The
progress of the community is assured by the ability of local leaders to adopt the most successful
decisions depending on the new economic and social conditions. As a leader, local government
must have a thorough knowledge of human, intellectual and financial resources of their community
in order to achieve its objectives. From this perspective we think it is interesting to analyze the state
of socio-cultural development of the North-Eastern Region on its main components: population and
employment, health infrastructure, education and social services infrastructure.
1. THE INVOLVEMENT OF BUDGET PROCESS IN THE SOCIAL AND
CULTURAL DEVELOPMENT OF LOCALITIES
Local development is a broad concept and can be defines as the process of diversification
and economic and social development activities in a territory starting from the mobilization and
coordination of existing resources and energies. Local development is an expression of local
solidarity, creating new social relations and expresses the will of the residents of a region to exploit
local resources. Local development is also a continuous process of strategic planning and
implementation of programs and policies for sustainable development for the purpose of getting
measurable improvements in the quality of life of the whole local community through the creative
use of local resources.
Local development can be interpreted as a phenomenon not only quantitative (economic) but
also as a qualitative one (socio-cultural). The socio-cultural component of local development takes
into account the creation of a climate of fairness, through the fight against poverty and promotion of
individual identity in a wide variety. Also, development takes into account the removal of
discrimination between generations, particularly by the care directed towards disadvantaged groups.
(Dinca, 2008) In general, one can speak of individual human development and the fortification of
the individual abilities through education, adherence to ethical values and social development that
429
takes into account social and cultural relations, citizen participation in decision-making within
public authorities. Economic growth will be associated with development, only in the case of the
involvement of structural changes in the socio-economic system, meaning that it will improve the
quality of life and environment, will preserve the cultural heritage, and will involve the community
in solving common problems and in the joint exploitation of the benefits.
The local budget process is in close connection with socio-cultural development of the
territorial-administrative units because it primarily involves collecting revenues on which local
authorities provide public services to citizens or ensure the provision of such services by third
parties such as: water supply, public transport, sanitation, public lighting, fire prevention, protection
and security of citizens, healthcare. Also, through the execution of expenditure, the local
government creates and maintains a favorable local climate for local citizens and businesses so they
can thrive and stimulate the creation and expansion of economic agents with a direct impact on
citizens thus increasing their incomes and creating new jobs.
Public access to schools, hospitals and shops is also provided, and the availability of quality
local public services increases the attractiveness of the area both for citizens and businesses eager to
settle in that territory. In the context of the local budget process to achieve the common objective of
local development, local authorities focus human, intellectual and financial resources of the private
sector and the local community, establishing plans and strategies on short, medium and long term.
2. POPULATION, HUMAN RESOURCES AND LABOR MARKET IN NORTH-
EASTERN REGION
2.1. POPULATION AND HUMAN RESOURCES DEVELOPMENT
On 1 January 1998, the total population of North-Eastern Region was 3,785,530 inhabitants,
representing 16.7% of the total population of the country, reaching 3,719,102 inhabitants in 2008
according to Statistical Yearbook of Romania from 2009, which means 17.29 % of the total
population. In terms of number of inhabitants, the region ranks first in the country.
The region's population is concentrated in 46 urban centers, 506 communes and 2414
villages. The share of urban population (2008), in total the local population is 43.24%, decreasing
since 2001. The rural population holds 56.76%. Along with the South and South-West Region, the
North-Eastern Region has a population concentrated in the rural area in a share of 56.76%.
At national level in 1998-2008 has been a decrease in the total population in parallel with
urban population decrease (except for 2004 for urban population, a phenomenon that could be
explained by the fact that some communes became towns). The main causes are both natural growth
decrease and the migration from urban to rural areas.
At regional level there is instead a total population growth between 1998 and 2001, followed
by a sinusoidal variation between 2002 and 2006 and a decrease in recent years. Surprising is the
evolution at urban rural level. Thus, while between 1998 and 2000 there is a slight decrease in the
urban population to the detriment of rural areas, and in 2001 a standstill 2002 is marked by a
weakening of the urban population of 8.32%.
Having a look at the development trend of the female population, its trend is in the same
direction with the urban population trend. Urban population is more concentrated in more
developed urban centers. This migration phenomenon of people from town to village emerged as a
necessity of a part of the population to ensure themselves conditions of subsistence, under massive
layoffs in the industrial sector (mainly located in urban areas), and correlated to the application of
the law of restitution of the agricultural land.
In 2008, the region had an average density of 100.9 inhabitants per square kilometer, thus
placing itself at a higher level to the national average (90.2 inhabitants per square km). The county
430
with the highest density was Iasi, with 150.9 inhabitants per square km, and the one with the lowest
density was Suceava, with 82.6 inhabitants per square kilometer.
According to the 2009 Statistical Yearbook of Romania, in 2008, the population growth in
the North-Eastern Region was 0.5 per thousand inhabitants, being the the only region in Romania
that still registered a positive value.
On the other hand, the infant mortality rate in 2006 was the highest in our region, reaching
15.3 deaths (under one year of age) per 1,000 inhabitants, compared to the national average of 13.9.
This could be explained by the high level of poverty, especially in rural areas, and insufficient
education regarding health and the minimum conditions of hygiene. Sex structure of the global
population, by region, shows a balanced distribution of population in North-East, 49.42% of the
total population of the region being men and 50.58% women.
2.2. STRUCTURAL ANALYSIS OF LABOUR MARKET AND EMPLOYMENT
OPPORTUNITIES
In late 2006, the active employed population of the North-Eastern Region was of 1,248,900
persons, representing 33.58% of the total population of the region and 14.27% of the total active
population of the country.
In the last decade, the region has shown a continuing downward trend in the share of active
employed population. Following the phenomenon of economic decline which has increased, many
state-owned enterprises, which mobilized the largest number of employees, have restructured,
which meant that, once giving up a number of activities they also gave up to a large number of staff.
At the regional level of the total population 44.9% is employed, 2.1% are unemployed ILO
(International Labour Office), and 53% inactive population. In the 15-24 age-group the number of
recorded unemployed people is the highest of all the groups - 4.3%. It is followed by age group 35-
44 years and 45-54 years by 3.4%. The situation is similar both in urban and rural areas. 47.72% of
the total population works in agriculture, 34.40% in services, and 15.17% in industry. Its share in
the agricultural field is at least ten times higher than in regions of the European Union countries. In
agriculture, of the total population, 18% are aged between 55-64 and 18.2% aged over 65 years - the
aging of the population employed in agriculture.
In services, most are active in trade (9.79% of total), public services (public administration
and education with 4.18% and 4.30%, health with 3.94%), construction (6.27% of total) and
transport, storage and communications with 3.04%. In the hotels and restaurants field operate only
1.01% of the employed population. Predominant is the population aged 25-34 and 35-44.
Of the total employed population, 47.3% are women, the North-Eastern Region being above
the national average - in 2008. Also, there is the phenomenon of inter-sectorial mobility by
redistributing the employed population in secondary sector and its reorientation towards primary
and tertiary sectors. The same phenomenon is also observed at national level, but with less intensity.
In 2008 the average number of employees is approximately 592,399, representing 35.38% of
the total employed population. Most are in Iasi with about 164,886 employees, followed by Bacu
with 121,996 and Suceava with 101, 602, at the opposite end being the counties of Botoani with
60,815 employees and Vaslui with 56,570 employees.
North-Eastern Region is facing challenging problems in terms of unemployment. The
evolution of the last decade of the twentieth century showed a continuous increase in the number of
unemployed, while emphasizing the inability to adapt of state-owned companies to the requirements
of the economy based on supply and demand. Given the acute lack of funds necessary for
technology and investment, many managers have opted to increase productivity through staff layoff.
This has led to the current situation in the region, which has serious problems especially in
areas with low industrial diversification (Botoani and Vaslui counties, mining areas of Bacu and
431
Suceava). Thus, on 31/12/2008, if the national average unemployment rate was 4.4, in the North-
Eastern Region the unemployment rate registered 5.3% with a minimum of 3.6% in the county of
Botoani and a maximum of 10.2% in the county of Vaslui. Moreover, this phenomenon is
accompanied by an increase in the number of unemployed unpaid, due to the entry into force of
Law 416 on the minimum guaranteed income, a problem in counties where massive layoffs were
conducted in 1993-1995, confirming the extension of the economic decrease trend.
Analyzing the evolution of unemployment rate in the region during 1999 - 2008, we can
observe its decrease with an inflection point in 2001. It is noted the emergence of a growing trend
starting with 2002, followed by a decrease in the next period and in 2008 we have a slight increase.
Encouraging is the fact that the unemployment rate for women is lower than the overall rate of
unemployment.
Table no. 1. Unemployment rate by regions in 1999-2008 compared
%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Romania, out of
which
11.8 10.5 8.8 8.4 7.4 6.3 5.9 5.2 4.0 4.4
women 11.6 10.1 8.4 7.8 6.8 5.6 5.2 4.6 3.9 4.4
NE Region, out of
which
14.9 13.2 10.6 10.8 9.0 7.8 6.8 6.2 5.1 5.3
women 14.2 12.3 9.6 9.7 7.5 6.0 5.2 4.9 4.4 4.8
Source: Romania's Statistical Yearbook 2000-2009
In 2008, the unemployment rate by sex showed that 58.16% of the unemployed are men and
41.84% women, more affected by the phenomenon of unemployment being the age group 15-34
years.
When considered the staff and level of education, 65.37% of the total number of
unemployment beneficiaries are have secondary and vocational education studies, 26.98% people
have post high school education and 4.76% persons have higher education.
Among the unemployed who do not get unemployment help, 91.22% are secondary and
vocational education graduates, 6.47% are secondary education graduates and 7.64% are university
graduates.
Statistical data ranked the North-Eastern Region on the last place in the country in terms of
income level, which is illustrated in the table below.
Table no. 2. Comparative evolution of average net monthly wage in 2000-2008
%
Territorial
Unit
2008 2000/
1999
2001/
2000
2002/
2001
2003/
2002
2004/
2003
2005/
2004
2006/
2005
2007/
2006
2008/
2007
Romania 1309 40.46 41.16 25.49 27.72 23.70 24.7 16.08 20.32 25.62
North-
Eastern
Region
1155 39.96 42.38 29.46 26.68 25.48 22.3 15.38 22.61 23.13
The level of the average wage in the North-Eastern Region remains at the lowest level. It is
to be noted, however, that during 2001-2008 the percentage increases were similar or even
exceeded the national average.
432
3. EDUCATION AND HEALTH INFRASTRUCTURE DEVELOPMENT
3.1. EDUCATIONAL INFRASTRUCTURE DEVELOPMENT
Key factor in the development of a national, respectively a regional economy is represented
in a large measure by human capital. Although it is difficult to quantify it and it is in itself a
controversial concept, human capital could include human resources with a certain level of
education.
Table no. 3. Comparative evolution of the number of schools by level of instruction
Number of
educational units
2008/2009 school
year
Growth rate in
2002/2003 school
year
Growth rate in
2003/2004 school
year
Growth rate in
2004/2005 school
year
Units of
education
Romania NE
Region
Romania NE
Region
Romania NE
Reg
ion
Romania NE
Region
Kindergartens 1718 193 -4,34 -
3,15
-20,23 -
0,94
-25,33 -
28,
16
Elementary
schools
(primary and
lower-
secondary)
4727 832 -1,35 -
0,94
-30,05 -
5,01
-19,41 -
20,
69
High Schools 1444 206 0,65 4,23 0,65 1,53 1,29 2,5
Schools of
Trades
147 80 -7,06 0 -7,06 -
10,7
2
-2,54 -12
Post-
secondary
Schools
79 14 7,7 -
23,5
3
7,7 -
15,3
9
-5,96 0
Foreman
Schools
- - - - - - - -
Total 8115 1325
Growth rate in
2005/2006 school year
Growth rate in
2006/2007 school
year
Growth rate in
2007/2008 school year
Growth rate in
2008/2009 school
year
Units of education
Romania NE
Region
Romania NE
Region
Romania NE
Region
Romania NE
Region
Kindergartens -33.7 -74 -54.3 - 25.39 0.63 0.52 -0.75 0.52
Elementary schools
(primary and lower-
secondary)
-8.7 -13.57 -21.3 - 24.47 -6.10 -3.01 -0.21 -0.35
High Schools -0.21 0 0.78 0.48 0.35 -0.48 1.26 0.48
Schools of Trades 16.8 68.18 27.7 102.7 27.82 0 0 6.66
Post-secondary Schools -7.1 9 1.28 16.66 5.06 0 -4.81 0
Foreman Schools - - - - - - - -
The number of education units in the region has 16.32% of the total number of schools
nationwide. This is consistent with the fact that the region has the largest area and population of the
433
eight development regions. At the level of kindergartens, elementary schools and high schools in
the region there is the same trend with the national one at about the same rate. Opposed trends to the
national one were recorded in 2002-2003 and 2005-2006 school years for schools of traders.
Also, the North-Eastern Region has 20.03% of total students at national level, a situation
explained by the fact that the region is the largest in the country in size, number of inhabitants,
school population and at the same time it has the highest fertility rate i.e. 46 versus 43 held by the
next ranked region (central region) and versus 40.6 the country average. The evolution of the
number of students in the region by type of education unit has the same trend as the national trend.
A comparative situation of the number of units of education (kindergartens, elementary
schools, high schools, vocational schools and apprenticeship, post-secondary schools, foreman
schools) can be seen from the following table.
Table no. 4. Comparison of the number of units of education
Number of educational units for the 2008-2009 school year Territorian
Unit Kindergartens Elementary
Schools
High
Schools
Schools of
Trades
Post-secondary
Schools
Foreman
Schools
North-East 193 832 206 80 14 -
Romania 1718 4727 1444 147 79 -
Source: Romania's Statistical Yearbook, 2009, p. 478-483
In the 2008-2009 school year, the North-Eastern Region has the highest number of schools
of trades, while for other types of educational establishments the region is at a medium level. The
North-Eastern Region has, except foreman schools, the highest number of students enrolled in units
of education in the 2008-2009 school year.
Table no. 5. Situation of education facilities in the North-Eastern Region in the 2008-
2009 school year
County/Region Kindergartens Elementary Schools
Primary and lower-
secondary schools
High
Schools
Scools of
Trades
Post-secondary
Schools
Bacu 41 175 33 29 2
Botoani 26 104 28 11 1
Iai 67 231 52 2 4
Neam 9 116 33 4 2
Suceava 29 129 41 32 4
Vaslui 21 77 19 2 1
Nord-Est 193 832 206 80 14
Romnia 1718 4727 1444 147 79
At county level, the first three counties that hold about 66% of the total number of schools
throughout the region, are also the three university centers, namely: Bacu, Iai and Suceava, with
21.13%, 26.86% and 17.73% respectively, primarily due to the concentration of students in these
university centers, and on the other hand, these counties have the highest school population
compared with the other three counties in the region.
The North-Eastern Region includes all forms of education, the number of students enrolled
in pre-university system in the 2008-2009 school year being of 651,949 students, approximately
17.52% of the total population of the region, and in terms of higher education in the three university
centers there are 79,034 students. If we are talking about ownership of the educational infrastructure
in the region, we can say that private education is little developed, especially at pre-university level.
434
The above data demonstrates the existence of a pedagogical tradition in the region and a
continue concern to train the next generations, even if the educational infrastructure is currently
facing a number of problems of which the most important are: lack of appropriate space for the
educational process, lack of facilities to keep pace with the changing needs of the labor market, lack
of cooperation with industry and, an aspect which is very important, lack of correlation of the
educational process with the requirements of the labor market, i.e. lack of a training strategy of the
human resources in the region.
Thus, after 1989 there has been an increased demand for the profiles: economic, medical,
pharmaceutical and legal, while technical and vocational education has been decreasing as the
whole Romanian industry, the latter being not able to properly reorganize and keep pace with the
labor market demands, although there were introduced new jobs or forms of specialisation in areas
like information technology, biochemical engineering, environmental engineering,
agromontanology, tourism, marketing and management, civil engineering, etc. with the possibility
that some profiles to be studied in an international language widely spoken: English or French.
Although the region has a staff with good experience in training and human resource
training and, on the other hand, it has a good potential in terms of number of persons enrolled in
various forms of education, another issue facing the region is migration of young graduates to more
developed regions or even to other countries because the job offers in the region is extremely low in
some fields compared with other regions where there is a better offer for the same fields and better
paid.
Table no. 6. Comparison of the number of libraries
Territorial
Unit
2001 Variation
compared to
the previous
year
%
2002 Variation
compared to
the previous
year
%
2003 Variation
compared to
the previous
year
%
2004 Variation
compared to
the previous
year
%
North-East 2589 -2.70 2579 -0.38 2553 -1.01 2408 -5.68
Romania 13442 0.14 13377 -0.48 13169 -1.56 12574 -4.52
Territorial
Unit
2005 Variation
compared to
the previous
year
%
2006 Variation
compared to
the previous
year
%
2007 Variation
compared to
the previous
year
%
2008 Variation
compared to
the previous
year
%
North-East 2321 -3.6 2149 -7.41 2227 -4.04 2250 1.03
Romania 12455 -0.9 12081 -3.00 12366 -0.71 12359 -0.05
Source: Statistical Yearbooks of Romania 2000-2009
In 2008, the number of libraries in the North-Eastern Region was of 2250, slightly up from
the previous year by 1.03. The can be noted that the 2001/2007 trend was downward at national and
for every region, the decay rate being in the North-Eastern Region being higher to the other regions.
The table shows that in 2008 the number of libraries in the North-Eastern Region increased by
1.03% while at national level the downward trend is maintained.
Most libraries in the region are located throughout the three university centers, but this is
quite normal if we take into account the population of these counties, but mainly the concentration
of students from the region or of certain students outside the region in these university centers well-
known for training and education.
435
It can be said that regarding the number of libraries in the North-Eastern Region there is a
satisfactory number of such units, but the real problems in this sector are, as in education, the poor
state of certain buildings and poor computerized facilities that would facilitate the work in this area.
3.2. HEALTH INFRASTRUCTURE DEVELOPMENT
The healthcare system in the region is characterized by the difficult transition from
centralism, egalitarianism and limitation of freedom of opinion to local autonomy, privatization and
competition. Thus, the reforms of recent years has sought to fundamentally change the healthcare
system in order to unitary reconstruct the legal and organizational environment, to introduce Social
Health Insurance and diversify financial resource generation mechanisms, while shifting the center
of gravity of the healthcare services towards ambulatory care.
It was intended to stimulate various forms of privatization, introduction of competition
among suppliers and decentralization of the health system by increasing the role of local authorities,
of professional associations, of lending institutions, communities, etc.
The funding of hospitals is done more than 90% through agreements between the
managements of hospitals and the District Health Insurance Houses. In the OG 124/1999,
privatization has been achieved so far almost 100% of primary care in both urban and rural areas
and in a percentage of more than 70% of ambulatory specialty care.
The North-Eastern Region ranks first in number of health units (hospitals, clinics,
dispensaries, tuberculosis sanatoriums, dental offices, pharmacies, etc.) with 7698 units. At present,
both in the North-Eastern Region and throughout the country, there are private medical facilities,
but their number is relatively small (except pharmacies and medical offices).
If from this point of view things seem good for the region, on the other hand, all the
infrastructure, like that of education, is in poor condition, with a risk that some hospitals may not
receive authorization to function. In addition, just as in education, their technical facilities are both
physically and morally worn and no longer meet current requirements. These observations are valid
for public health services infrastructure, especially for all hospitals in the region, which hardly
survive without a support to be rehabilitated, upgraded and equipped at European standards.
Table no. 7. Number of health units in state majority ownership in 2008
County/
Region
Hospitals Clinics Dispensaries Health
Centers
Tuberculosis
sanatoriums
SPA
Sanator
iums
Preven
toria
Nursery
Bacu 12 2 5 - - 1 - 8
Botoani 10 - 2 - 1 1 - 1
Iai 20 1 4 - - - 1 14
Neam 7 1 3 - - 1 - 5
Suceava 11 - 6 1 - - - 2
Vaslui 7 6 4 - - - - 4
Nord-Est 67 10 24 1 1 3 1 34
Total 458 269 213 47 5 8 4 280
% 14.62 3.71 11.26 2.12 20 37.5 25 12.14
It is to be noted that at regional level the best situation is in Iai county with a relatively
large number of hospitals, diversified specialties (neuro-surgery, infectious diseases, emergency,
psychiatry, etc.), being due primarily to the great number of people in this county, but also to the
fact that it is a university center, having a university hospital and various research centers in this
area.
436
As a share, the North-Eastern Region has 14.62% of the total number of hospitals, 11.26%
of the dispensaries and from 12.14% of all existing nurseries at the national level. At county level,
most hospitals are located in Iai, Bacu and Suceava.
In the region there is sharp decrease in the number of clinics in the period 2000-2008, by a
rate almost identical to the national one. An alarming situation is the decrease by an increasing rate
from year to year of medical dispensaries. For the other types of units there was significant
variation. Regarding the number of beds in hospitals and doctors in late 2008, the North-Eastern
Region was among the first regions in the country with 15.43% of the national total. At regional
level it was recorded in 1998-2008 a fluctuated evolution of the number of beds in hospitals, the
number of doctors, pharmacists and ancillary medical personnel.
Table no. 8 Number of beds in hospitals and doctors in 2008 in the North-Eastern Region
County/Region Beds in hospitals Doctors Dentists
Bacu 3398 1017 294
Botoani 2609 558 117
Iai 6743 3088 657
Neam 2700 719 222
Suceava 3320 935 251
Vaslui 2552 496 115
Nord-Est 21322 6813 1656
Romnia 138184 50267 11901
% 15.43 13.55 13.91
Source: Statistical Yearbook of Romania, 2009, p. 441
At county level, Iasi county far exceeds the regional average, the values of these two
indicators being double, sometimes triple compared to other counties in the region (Vaslui,
Botoani).
-
3.3. SOCIAL SERVICES IN THE NORTH-EASTERN REGION
Social services in the region are strongly affected by the dominant characteristics of the
transition period through which the whole country is passing and by the fact that the region has the
largest population compared with other regions, but also the lowest GDP per capita.
On the one hand, the demand for these services has grown increasingly in recent years due
to massive layoffs in the economy, but also because of the economic agents inability to absorb
young workforce. In addition, the strong demand is determined by the overall level of poverty of
the population, especially in the case of disadvantaged social groups such as the elderly, those with
chronic diseases or various handicaps. A consequence of this level of poverty is the increasing
number of cases where parents entrust their children voluntarily to placement centers in the region.
These children, in turn, require complex and expensive social welfare.
On the other hand, the social service offer was extremely poor in the region, due to general
poverty of the local budgets, which has contributed for several years to finance part of these social
services. In addition to the allocation of budgetary resources to finance social services, there are
also numerous non-governmental organizations involved in social activities, especially in the area
of protection of childrens and the old peoples rights. In this respect, there is also, orphanages and
homes for the elderly that are funded by religious establishments.
The counties with the worst situation are Botoani and Vaslui, occupying the first places in
terms of unemployment and poverty of the population.
Another aspect of social services is the social canteens operating in all counties of the
region. Here, the poor and those who have no means of existence, including the homeless, receive
free daily meals.
Table no. 9. Number of social canteens in 2005-2008
Number of canteens Capacity (places) Number of beneficiaries Territorial
Unit
2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008
Bacu 2 2 2 2 120 250 300 330 226 200 200 218
Botoani 2 2 2 2 1200 450 450 550 341 359 271 285
Iai 1 1 1 1 300 300 300 300 282 249 228 194
Neam 3 3 3 3 510 560 560 590 443 361 374 535
Suceava 7 7 7 7 1746 2260 2425 2425 1501 1302 1328 1268
Vaslui 4 4 4 4 1850 1370 1320 1410 550 557 585 495
North-East 19 19 19 19 5726 5190 5355 5605 3343 3028 2986 2995
Romania 114 124 121 125 28203 32486 30722 29805 19600 23590 21268 20469
% 16.66 15.32 15.70 15.2 20.30 15.97 17.43 18.80 17.05 12.83 14.03 14.63
Source: Statistical Yearbook of Romania, 2006-2009
In 2008 the number of social assistance canteens in the region is of 19 units, representing
15.2% of the total number of units existing at national level.
The capacity provided by these units is 5605 placess, representing 18.80% of the total
existing capacity at national level, of which have benefited 2995 people in the year 2008. It is noted
that at regional level during the reported period the active capacity exceeds the number of
beneficiaries.
CONCLUSIONS
In conclusion, we note a number of issues facing the North-Eastern Region compared to
other regions in terms of socio-cultural realities. Thus the North-Eastern Region has the highest
level of poverty, the annual trend going up and the share of population concentrated in rural areas is
high, the region being characterized by the absence of a redistribution of employed population from
agriculture to services and industry. Also, statistical data put the North-Eastern Region last in the
The Annals of The "tefan cel Mare" Universityof Suceava. Fascicle of The Faculty of Economics and Public Administration Vol. 10, Special Number, 2010
country in terms of income levels. If from the point of view of health infrastructure development
things seem good, that entire infrastructure, like that of education, is in poor condition, with a risk
that some hospitals may not receive the functioning license. In addition, just as in education, their
technical facilities are both physically and morally worn and no longer meet current requirements.
BIBLIOGRAPHY
1. Dinc Drago, Public services and local development, Lumina Lex Publishing house,
Bucharest, 2008
2. Iuhas Valeriu, The regional economic development economic and social implications, Emia
Publishing house, Deva, 2004
3. Roca Elisabeta (coordinating), The regional development in the context of the integration in the
European Union, Economic Publishing house, Bucharest, 2006
4. Voinea Gheorghe, Local Finance, Junimea Publishing house, Iai, 2002
5. *** Statistical Yearbook of Romania, 2006-2009
6. ***www.adrnordest.ro
INSTRUCIUNI UTILE PENTRU AUTORI / AUTHOR GUIDELINES
RO
Revista The Annals of the Stefan cel Mare University of Suceava. Fascicle of The Faculty of
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EN
The Annals of the Stefan cel Mare University of Suceava. Fascicle of The Faculty of Economics
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