HOW TO UNDERSTAND THE NEW ECONOMY

ISSN 2066-575X www.seap.usv.ro/annals

THE ANNALS OF THE"ŞTEFAN CEL MARE"

UNIVERSITY OF SUCEAVA.FASCICLE OF THE FACULTY OF

ECONOMICS ANDPUBLIC ADMINISTRATION

VOLUME 9, NO. 2(10), 2009

Editura Universităţii Suceava

Revistăcotată

CNCSIS,categoria B+

www.seap.usv.ro/annals

The Annals of The "Ştefan cel Mare" University of Suceava. Fascicle of The Faculty of Economics and Public Administration Vol. 9, No. 2(10), 2009

EDITORIAL BOARD:

Editor-in-chief: Carmen NĂSTASEGeneral editorial secretary: Adrian Liviu SCUTARIUEditors: Elena HLACIUC, Carmen CHAŞOVSCHI, Mariana LUPAN, Ovidiu Florin HURJUI

SCIENTIFIC COMMITTEE:

Angela ALBU, „Ştefan cel Mare” University of Suceava, RomaniaGeorge P. BABU, University of Southern Mississippi, USAChristian BAUMGARTNER, International Friends of Nature, AustriaGrigore BELOSTECINIC, ASEM, Chişinău, Republic of MoldovaIonel BOSTAN, „Alexandru Ioan Cuza” University of Iaşi, RomaniaAurel BURCIU, „Ştefan cel Mare” University of Suceava, RomaniaGheorghe CÂRSTEA, Academ y of Economic Studies, Bucharest, RomaniaSlobodan CEROVIC, Singidunum University, Belgrade, SerbiaSimion CERTAN, State University of Chişinău, Republic of MoldovaCarmen CHAŞOVSCHI, „Ştefan cel Mare” University of Suceava, RomaniaLiliana ELMAZI, Tirana University, AlbaniaCristian Valentin HAPENCIUC, „Ştefan cel Mare” University of Suceava, RomaniaElena HLACIUC, „Ştefan cel Mare” University of Suceava, RomaniaElena IFTIME, „Ştefan cel Mare” University of Suceava, RomaniaMarian JALENCU, State University of Chişinău, Republic of MoldovaMiika KAJANUS, Savonia University of Applied Sciences, Iisalmi, FinlandStefanos KARAGIANNIS, Institute of Tourism Research, Athens, GreeceMaria MUREŞAN, Academy of Economic Studies, Bucuresti, RomaniaCarmen NĂSTASE, „Ştefan cel Mare” University of Suceava, RomaniaAlexandru NEDELEA, „Ştefan cel Mare” University of Suceava, RomaniaIon PÂRŢACHI, ASEM, Chişinău, Republic of MoldovaRusalim PETRIŞ, „Ştefan cel Mare” University of Suceava, RomaniaAbraham PIZAM, University of Central Florida, Orlando, FloridaIon POHOAŢĂ, „Alexandru Ioan Cuza” University of Iaşi, RomaniaGabriela PRELIPCEAN, „Ştefan cel Mare” University of Suceava, RomaniaGheorghe SANDU, „Ştefan cel Mare” University of Suceava, RomaniaPetru SANDU, Elizabethtown College, Pennsylvania, USAPavlo SHYLEPNYTSYI, Bucovina State Academy of Finance, Chernivtsi, UkraineDoru TILIUŢE, „Ştefan cel Mare” University of Suceava, RomaniaIon TORONCIUC, National University Yuri Fedcovici, Chernivtsi, UkraineViorel ŢURCANU, ASEM, Chişinău, Republic of MoldovaDiego VARELA PEDREIRA, University of A Coruna, SpainRăzvan VIORESCU, „Ştefan cel Mare” University of Suceava, RomaniaValeriy YEVDOKYMENKO, National University Yuri Fedcovici, Chernivtsi, Ukraine

Text review: Alina HODOROABĂ, Adrian Liviu SCUTARIU. Cover design: Adrian Liviu SCUTARIU

Contact:

Faculty of Economics and Public Administration„Ştefan cel Mare” University of SuceavaStr. Universităţii nr. 13, Corp H, Camera H108720229 SUCEAVA, ROMANIAPhone: (+40) 230 216147 int. 294E-mail: [email protected] web site: www.seap.usv.ro/annalsFaculty web site: www.seap.usv.roUniversity web site: www.usv.ro

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CONTENT

SECTION 1ECONOMY, TRADE, SERVICES ................................ ................................ ................................ ................................ 7

DETERMINANTS OF KEY PERFORMANCE IND ICATORS (KPIS) OF PRIVATE SECTOR BANKS INSRILANKA: AN APPLICATION OF EXPLORATORY FACTOR ANALYSIS ................................ .................... 9

Balasundaram NIMALATHASANDepartment of Commerce, Univers ity of Jaffna, Jaffna, SriLanka

CO-OPERATION STRATEGIES ENHANCING THE INNOVATION I N NATURE-BASED TOURISMSERVICES ................................ ................................ ................................ ................................ ................................ ...... 18

Anne MATILAINENUniversity of Helsinki Ruralia Institute, Seinäjoki, Finla ndGerhard WEISSUniversity of Natural Resources and Applied Life Sciences, Vienna, AustriaZuzana SARVASOVANational Forest Centre, Zvolen, SlovakiaDiana FELICIANOMacaulay Institute, Aberdeen, ScotlandCarmen NASTASEUniversity “Ştefan cel Mare”, Suceav a, Romania

THE EUROPEAN EXPERIENCE CONCERNING REGIONAL DECENTRALIZATION ................................ . 30Associate Professor PhD. Irina-Maria DRĂGANLecturer PhD. Rodica-Manuela GOGONEAAcademy of Economic Studies, Bucharest, Romania

ECONOMIC GROWTH IN RUSSIA REGIONS: KEY FACTORS ................................ ................................ ........ 35Ph.D. Vitaly ALESCHENKOInstitute of Economy and Organization of an Industrial Production of the Siberian Branch of the Russian Academyof Sciences, RussiaAssociate Professor Ph.D. Alexandru NEDELEAUniversity Stefan cel Mare of SuceavaLecturer Ph.D. Student Oana NEDELEAUniversity Stefan cel Mare of Suceava

APPRECIATIONS ON CRITICS OF THE GLOBALIZATION PROCESS ................................ .......................... 41Lecturer PhD. Student Carmen BOGHEANLecturer PhD. Student Florin BOGHEANLecturer PhD. Mihai POPESCU“Ştefan cel Mare”University of Suceava, Romania

THE SOCIAL LCA: THE STATE OF ART OF AN EVOLVING METHODOLOGY ................................ .......... 47Luigia PETTIPatrizia CAMPANELLADASTA, G. d’Annunzio University, Pescara, Italy

THE CONNECTION IDENTIFICATION BETWEEN THE NET INVESTMENTS IN HOTELS ANDRESTORANTS AND TOURISTIC ACCOMODATION CAPACITY BY USING THE ANOVA METHOD ..... 57

Assistant Roxana Elena STANLecturer Emilia GABROVEANUAssistant Nicoleta RADNEANTURomanian-American University, Bucharest, Romania

CONSIDERATIONS ON THE NEW COMMUNITY LEG ISLATION REGARDING THE EUROPEANPRIVATE SOCIETY ................................ ................................ ................................ ................................ ..................... 62

Lecturer PhD. Elise Nicoleta VÂLCUUniversity of Piteşti, Romania

A THEORETICAL OVERVIEW ON INSTITUTIONS ................................ ................................ ............................ 70PhD. Student Ana Iolanda VODĂ“AL. I. Cuza” Univers ity, Iasi, Romania

THE ABILITY TO ASSUME THE DECISIONAL RISK IN THE CONSUMPTION PROCESS ........................ 75Assistant PhD. Student Laura DIACONU“Al. I. Cuza” University Iaşi, RomaniaProfessor PhD. Corneliu C. DIACONU„Gr. T. Popa” University Iaşi, Roma nia

www.usv.ro


CONCEPTS, MODELS, TECHNIQUES AND PRACTICES OF ECONOMIC AND FINANCIAL ANALYSIS83Ec. PhD. Student Alina BALANASE Bucharest, Romania

SECTION 2MANAGEMENT AND BUSINESS ADMINISTRATION ................................ ................................ ................... 91

HUMAN RESOURCES MANAGEMENT CONTROL ................................ ................................ ............................. 92Professor PhD. Mihaela DUMITRANALecturer PhD. Mădălina DUMITRULecturer PhD.Iulia JIANULecturer PhD.Gabriel JINGALecturer PhD.Gabriel RADUAcademy of Economic Studies, Bucharest, Romania

THE IMPLICATIONS OF THE FDI FLOWS ON THE ECONOMICAL GROWTH IN THE CENTRAL ANDEASTERN EUROPE COUNTRIES ................................ ................................ ................................ ........................... 100

Lecturer PhD. Mariana LUPAN“Stefan cel Mare University” of Suceava, Romania

THE MANAGEMENT OF INNOVATION, A CHANCE TO STRENGTHEN THE ORGANIZATION .......... 107PhD. Student Virgil Dan AMZAAcademy of Economic Studies, Bucharest, Romania.Professor PhD. Constantin BRĂTIANUAcademy of Economic Studies, Bucharest, RomaniaMSc Student Miruna Vladia AMZASNSPA, Bucharest, Romania

THE INFLUENCES FINANCIAL MANAGEMENT IN DEVELOPING THE FUTURE FIRM`S BUSINESS 112Lecturer PhD. Student Valeria Arina BĂLĂCEANUEcological Univeristy of Bucharest, Romania

BALANCED SCORECARD AND THE MANAGEMENT INTRUMENTS COMPLEMENTARITY ............... 119Lecturer dr. ing. ec. Sunhilde CUCUniversity of Oradea, Romania

THE WAY IN WHICH METAPROGRAMS AND METAMODELS INFLUENCE LEADERS OFORGANIZATIONS ................................ ................................ ................................ ................................ ...................... 125

Ec. PhD. Student Cornel IOSIFUniversity ”Al. I. Cuza” Iasi, Romania

CURRENT TRENDS IN HRM ................................ ................................ ................................ ................................ ... 134Assistant Otilia ALBUAssistant PhD. Student Lucia MORO ŞAN-DĂNILĂUniversity „Ştefan cel Mare”, Suceava, Romania

THE OUTSET AND DEVELOPMENT OF PUBLIC RELATIONS (PR) IN ROMANIAN ECONOMY AFTER1990 ................................ ................................ ................................ ................................ ................................ ................ 140

Assistant Raluca ZOLTANProfessor PhD. Ghiorghi PRISĂCARUAssociate Professor PhD. Romulus VANCEA”Ştefan cel Mare” University of Suceava, Romania

HOW TO UNDERSTAND THE NEW ECONOMY ................................ ................................ ................................ . 148Assistant Ph.D. Student Angela-Nicoleta COZORICIAssistant Ph.D. Student Simona BUTAProfessor PhD. Ghiorghi PRISĂCARU”Ştefan cel Mare” University of Suceava, Romania

SECTION 3ACCOUNTING - FINANCES ................................ ................................ ................................ ................................ .. 156

EVALUATION AND RECOGNITION OF INTANGIBLE FIXED ASSETS IN ACCORDANCE WITHNATIONAL AND INTERNATIONAL FINANCIAL REPORTING STANDARDS IAS / IFRS ......................... 157

Professor PhD. Dorel MATESWest University of Timisoara, RomaniaProfessor PhD.Elena HLACIUC“Stefan cel Mare” University of Suceava, RomaniaUniversity Assistant PhD. Student Marian SOCOLIUC“Stefan cel Mare” University, Suceava, Romania


MODELS FOR THE ASSESSMENT OF THE ENTREPRISE BANKRUPTY RISK IN CRISIS SITUATIONS................................ ................................ ................................ ................................ ................................ ........................ 163

Professor PhD. Silvia Melania PETRESCU„Al. I. Cuza” University of Iaşi, RomaniaLecturer PhD. Camelia Cătălina MIHALCIUC„Ştefan cel Mare” University of Suceava, Romania

ACCOUNTING ALTERNATIVE TREATMENTS REGARDING FIXED ASSETS - A NATIONAL ANDINTERNATIONAL APPROACH ................................ ................................ ................................ ............................... 173

Professor PhD. Ion PERESWest University of Timisoara, RomaniaProfessor PhD. Dumitru COTLETWest University of Timisoara, RomaniaUniversity Assistant PhD. Student Veronica GROSUUniversity “Stefan cel Mare” of Suceava, Romania

ASSESSMENT OF INFLUENCE INFLATION STOCKS ................................ ................................ ...................... 181Associate Professor Ph.D. Mihaela TULVINSCHILecturer Ph.D. Student Mariana V LAD“Ştefan cel Mare” University of Suceava, Romania

PARTICULAR ASPECTS OF THE PROCESS OF FINANCIAL COMMUNICATION FROM THEPERSPECTIVE OF EXIGENCIES REGARDING THE QUALITY ASSURANCE OF ACCOUNTINGPRODUCTS ................................ ................................ ................................ ................................ ................................ .. 189

Associate Professor PhD. Valeriu BRABETEAssociate Professor PhD. Cristian DRĂGANUniversity of Craiova, Romania

QUO VADIS INTERNAL AUDIT EDUCATION? ................................ ................................ ................................ ... 197PhD Candidate Cristina BOŢA-AVRAMPhD Professor Atanasiu POPBabeş-Bolyai University, Cluj-Napoca, Romania

THE DISCRETIONARY FISCAL POLICY IN THE EUROPEAN ECONOMIC AND MONETARY UNION................................ ................................ ................................ ................................ ................................ ........................ 206

Lecturer PhD Candidate Cristian PANAEcological University Bucharest, Romania

CONCEPTUAL APPROACHES CONCERNING THE NEW PARADIGM OF THE MONETARY ECONOMY................................ ................................ ................................ ................................ ................................ ........................ 213

Professor, Ph.D Spiridon PRALEAUniversity of Iaşi „ Al. I. Cuza”, FEAA, RomaniaLecturer Ph.D. Irina – Ştefana CIBOTARIUUniversity Stefan cel Mare, Suceava, RomaniaLecturer Ph. D. Candidate Anişoara -Niculina APETRIUniversity Stefan cel Mare, Suceava, Romania

COSIDERATIONS REGARDING THE ORGANISATION OF FINANCIAL MANAGEME NT OF THEECONOMIC ENTITIES................................ ................................ ................................ ................................ .............. 223

Lecturer PhD. Lucia RISTI“Aurel Vlaicu” University Arad, Romania

RELEVANCE AND CREDIBILITY OF THE INFORMATION FROMTHE FINANCIAL-ACCOUNTING STATEMENTS ................................ ................................ ............................... 231

University Lecturer Ph.D. Marilena ZUCARomanian-American University, Bucharest, Romania

THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT AND THE INFORMATION SUPPLIEDBY ACCOUNTANCY IN THE PROCESS OF SUBSTANTIATING THE FINANCIAL DECISIONS AT THELEVEL OF AN ECONOMICAL ENTITY ................................ ................................ ................................ ................ 238

Assistant Irina CHIRITAAssistant Claudia GRIGORAŞ -ICHIMUniversity “Ştefan cel Mare”, Suceava , Romania

CONCEPTUAL DELIMITATION OF FIXED ASSETS PROCUREMENT IN PROJECTS WITH GRANTFUNDING ................................ ................................ ................................ ................................ ................................ ..... 244

Assistant PhD. Student Mihaela Nătăliţa LESCONI -FRUMUŞANUPhD. Student Ec. Ioan Anton PAULESCUUniversity Eftimie Murgu, Resita, Romani a

THEORIES REGARDING FINANCIAL INTERMEDIA TION AND FINANCIAL INTERMEDIARIES – ASURVEY................................ ................................ ................................ ................................ ................................ ........ 254

Research Assistant PhD Student Alin Marius ANDRIEŞ„Alexandru Ioan Cuza” University of Iaşi, Romania


ACCOUNTING POLICIES APPLIED IN DETERMINING CASH FLOW ................................ ......................... 262PhD Student Florin HOSTIUCAlexandru Ioan Cuza University of Iasi, RomaniaLecturer student PhD Ciprian Dan COSTEAVasile Goldis West University of Arad, Satu Mare branch, Romania

SECTION 4STATISTICS, DATA PROCESSING (INFORMATICS) AND MATHEMATICS ................................ ......... 272

A STATISTICAL ANALYSIS OF THE NORTH -EAST REGION OF ROMANIA COMPARED TO THEOTHERS IN TERMS OF TOURIST ACTIVITY ................................ ................................ ................................ ..... 273

Assistant PhD. Student Ioana CIOTIR„Al. I. Cuza” University of Iaşi, RomaniaAssistant PhD. Student Adrian Liviu SCUTARIU“Ştefan cel Mare” University of Suceava, Romania

DATABASE ACCESS THROUGH JAVA TECHNOLOGIES ................................ ................................ ............... 281Professor PhD. Ion LUNGUInf. PhD. Student Nicolae MERCIOIUInf. PhD. Student Victor VLĂDUCUAcademy of Economic Studies , Bucharest, Romania

MATHEMATICAL MODELING OF THE DISSEMINATION PHENOMENON CONCERNING THECURRENCY CRISIS OF SUOTH -EASY ASIA ................................ ................................ ................................ ....... 292

Lecturer PhD. Student Tudor COLOMEISCHILecturer PhD. Student Anamaria G. MACOVEI„Ştefan cel Mare” University of Suceava, Romania

SECTION 5LAW AND PUBLIC ADMINISTRATION ................................ ................................ ................................ ............ 299

ROMANIA AND BULGARIA IN THE EUROPEAN UNION: A SPATIAL ANALYSIS OF COUNCILVOTING ................................ ................................ ................................ ................................ ................................ ........ 300

Adjunct Professor PhD. Diego VARELAUniversity of A Coruña, Spain

CONSIDERATIONS ON PRE-EMPLOYMENT STAGE SPECIFIC PERSONNEL ADMINISTRATION ..... 310Lecturer Ph.D. Alunica MORARIU“Stefan cel Mare” University of Suceava, RomaniaProfessor Ph.D. Grigore BELOSTECINICAcademy of Economic Studies of Moldova , ChisinauProfessor Ph.D. Ionel BOSTAN“Stefan cel Mare” University of Suceava, Romania

THE DISTINCTION BETWEEN DECENTRALIZATION AND DECONCENTRATION OF PUBLICSERVICES ................................ ................................ ................................ ................................ ................................ .... 315

Lecturer Ph.D. Student Irina BILOUSEACUniversity Assistant Petronela ZAHARIA,,Ştefan cel Mare” University of Suceava, Romania

BOOK REVIEW ................................ ................................ ................................ ................................ .......................... 321

BOOK REVIEW FOR MACROECONOMICS: FUNDAMENTAL CONCEPTS , Carmen NĂSTASE, MihaiPOPESCU, Carmen BOGHEAN, Adrian Liviu SCUTARIU ................................ ................................ .................. 322

Professor PhD. Gheorghe CÂRSTEADean of the Faculty of Management, ASE Buchares t, Romania

INSTRUCTIUNI UTILE PENTRU AUTORI / AUTHOR GUI DELINES................................ ............................. 325


SECTION 1

ECONOMY, TRADE, SERVICES


DETERMINANTS OF KEY PERFORMANCE INDICATORS (KPIS) OF PRIVATESECTOR BANKS IN SRILANKA: AN APPLICATION OF EXPLORATORY FACTOR

ANALYSIS

Balasundaram NIMALATHASANDepartment of Commerce, University of Jaffna, Jaffna, SriLanka

[email protected]

Abstract:An efficient banking system facilitates linkage between mobilization and use of resources, which accel erates

the process of economic growth. It is a widely accepted belief that a banking system which relies on a wide array ofbanking products, is able to carry out this function because it increases the efficiency of a banking systems to a largeextent by offering a broader and flexible arrange of services to the benefits of both borrowers and investors.Meanwhile, there are no comprehensive and empirical researches in that field especially in banking sector.

In an attempt to fill in this gap, the present s tudy is conducted determinants of key performance indicators(KPIs) of private sector banks in SriLanka with samples of hundred respondents in twelve branches in North andEastern Provinces. Data were collected through a five points Likert type summated ra ting scales of questionnaire fromstrongly disagree (1) to strongly agree (5) were adopted to identify indicators. Sophisticated statistical model as“Exploratory Factor Analysis” (EFA) has been used. The results show that eight factors extracted from the analysisthat together accounted 73.781% of the total variance. These factors were categorized as 1) Accident Ratio (AR); (2)Opportunity Succession Rate (OSR); (3) Cash Flow (CF); (4) Return on Capital Employed (ROCE); (5) CustomerSatisfaction Rate (CSR); (6) Overall Equipment Effectiveness (OEE); (7) Return on Investment (ROI); (8) InternalPromotion (IP).

Keywords: Key Performance Indicators; Banking; Measurement; Efficiency

JEL Classifications: M1, M4

INTRODUCTION

Every organisation measures them to some degree. Often these measurements are based onhistorical information. While there is certainly value in historical analysis, it is a fundamentalprinciple of Key Performance Indicators (KPIs) to be current or forward -looking metrics. It is alsocritical that KPIs be closely aligned to strategic company goals and implemented in such a way asto support positive change. KPIs are financial and non-financial metrics used to help anorganization define and measure progress toward organizational goal s. KPIs can be deliveredthrough business intelligence techniques to assess the present state of the business and to assist inprescribing a course of action.

KPIs are quantifiable measurements, agreed to beforehand, that reflect the critical successfactors of an organization. Whatever KPIs indicators are selected, they must reflect theorganization's goals, they must be key to its success, and they must be quantifiable (measurable).KPIs usually are long-term considerations. The definition of what they a re and how they aremeasured do not change often. The goals for particular KPIs may change as the organization's goalschange, or as it gets closer to achieving a goal. The act of monitoring KPIs in real -time is known asBusiness Activity Monitoring (BAM). KPIs are frequently used to "value" difficult to measureactivities such as the benefits of leadership development, engagement, service, and satisfaction.KPIs are typically tied to an organization's strategy (as exemplified through techniques such as theBalanced Score Card).

LITERATURE REVIEW

Performance Indicators (PIs) have been implemented in many countries, from the UnitedKingdom (UK) to Australia labelled as essential management information (Sizer, 1990) and amanagement tool (CVCP/UGC, 1986), as well as claimed to bring about numerous benefits (e.g.,improved accountability and planning), PIs are expected to be increasingly used by the

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governments of the future (Carter, Klein & Day, 1992; Hughes, 1994). However, the literature onperformance indicators suggests that their application may bring about dysfunctional effects. Inparticular, authors from countries such as the UK (Barnett, 1992), Australia (Marginson, 1995),United State of America (USA) (Porter, 1988), and the Netherlands (Vroeijenst ijin & Acherman,1990) had voiced their concerns that performance indicators could set the criteria for performance.

Performance measurement and reporting is now widespread across the private sector as wellas public sector of many industrialised and indus trialising countries. The common tool that is usedfor this process, key performance indicators (KPIs), have been argued to provide ‘intelligence’ inthe form of useful information about a public and private agency’s performance (Williams,2003).

So great is this faith in KPIs that many public and private agencies are now mandated bylaw or executive order to use them as one of the primary tools to account for their performance tomain public accountability or reporting authorities, such as the Parliament a nd the Governmentauditor. It is apparent that, the way in which KPIs work to improve accountability is through theinformation they provide to the principal. Performance measurement systems assume that humanscan use the information to make better decisi ons (Cavalluzo & Ittner, 1999). This assumption isconsistent with the rational -comprehensive and bounded rationality perspectives on decision -making (Simon, 1955, 1992). The former perspective describes information as directly related toorganisational goals and the organisational methods by which to achieve these goals. It also viewsinformation as available, unambiguous and directly influential on decisions.

Many scholars have maintained that the implementation of performance measurementsystems possesses important symbolic value (Modell, 2004; Moynihan, 2005; Vakkuri & Meklin,2006). KPIs are viewed as a ‘good’ management device and a socially constructed tool that makessense (DeKool, 2004 & Weick, 1995). The fact that KPIs tend to be quantitative has helped topromote their image of objectiveness and rationality. The image of KPIs is further enhanced bytheir widespread application across the public sector of many industrialised countries. Theimportance of performance measurement is noted by Ingraham (2005) it is important to expect thatcitizens see and understand the results of government programs. It is necessary that publicemployees and their leaders not play their thumbs when public dollars are wasted on poorly plannedor unrealistic public programs.

Based on the above literatures, there are no comprehensive and empirical researches in thatfield especially in private sector banks viz., EFA. In an attempt to fill in this gap, the present studyis conducted the determinants of key performance indi cators (KPIs) of private sector banks inSriLanka with samples of hundred respondents in twelve branches in North and Eastern Provinces.

OBJECTIVES

The present study has the following objectives1. To examine necessary indicators for the performance of the private sector banks.2. To determine the key indicators for the performance of the private sector banks.

MATERIAL AND METHODS

Sampling procedureThe sample for this study was private sector banks in North and Eastern Provinces of

SriLanka. A stratified random sampling technique was used to select the organizations. Initially weidentified total number of banks which consists of four private sector banks (Seylan bank; HattonNational Bank; Commercial Bank& Sampath bank). Out of 16 branches of above four b anks, 75%of the banks were selected for the study.Utlimately the present study is made with the samples of 12private sector banks. Researchers, then, decided to distribute 10 questionnaires among each branch.In a way 120 questionnaires were distributed, of which only 110 were returned and 100 were usedfor the study as an ultimate samples.


Data sourceThe study was complied with the help of primary data. Primary data were collected through

the questionnaire. Moreover, the desk study covered various pub lished and unpublished materialson the subject.

Questionnaire Development The questionnaire was administrated to banking executives in North and Eastern Province

of SriLanka.The questionnaire was designed by the researchers with some modification fromKaplan & Norton, (1996). A five item scale from strongly disagree (1) to strongly agree (5) wasadopted to identify the indicators.

Statistical Tools UsedIn the present study, we analyse our data by employing EFA. For the study, entire analysis

is done by personal computer. A well known statistical package SPSS (Statistical Package forSocial Sciences) 13.0 Version was used in order to analyze the data.

Results and DiscussionTo identify potential underlying dimensions of the KPIs of private sector ba nks

development used in the current study, responses of the participants were subjected to factoranalysis method. Before applying factor analysis, testing of the reliability of the scale is very muchimportant as its shows the extent to which a scale pro duces consistent result if measurements aremade repeatedly. This is done by determining the association in between scores obtained fromdifferent administrations of the scale. If the association is high, the scale yields consistent result,thus is reliable. Cronbach’s alpha is most widely used method. It may be mentioned that its valuevaries from 0 to 1 but, satisfactory value is required to be more than 0.6 for the scale to be reliable(Malhotra, 2002; Cronbach, 1951). In the present study, we, therefor e, used Cronbach’s alpha scaleas a measure if reliability. Its value is estimated to be 0.653 , If we compare our reliability valuewith the standard value alpha of 0.6 advocated by Cronbach (1951), a more accuraterecommendation Nunnally and Bernstein (1 994) or with the standard value of 0.6 asrecommendated by Bagozzi and Yi’s (1988) we find that the scales used by us are highly reliablefor data analysis.

Regarding validity, a research instrument with small modifications from the modeldeveloped by Kaplan & Norton (1996) was used. The statements included in the questionnaire aremost suitable for the variable, because many researchers used these variables to measure theperformance indicators (Kaplan & Norton, 1996; Deming, 1986; Inner & Larcker, 1997) . Hence theresearchers satisfied with the content validity then it was decided to continue the analysis.

After checking the reliability of scale, we tested whether the data so collected is appropriatefor factor analysis or not. The appropriateness of fa ctor analysis is dependent upon the sample size.In this connection, Kaiser – Meyer- Olkin (KMO) measure of sampling adequacy is still anotheruseful method to show the appropriateness of data for factor analysis. The KMO statistics variesbetween o and 1. Kasier (1974) recommends that values greater than 0.5 are acceptable. Between0.5 and 0.7 are mediocre, between 0.7 and 0.8 are good, between 0.8 and 0.9 are superb (Field,2000). In this study, the value of KMO for overall matrix is 0.461 (For details pl ease see table no1), it is near to 0.5. Hence the sample taken to process the factor analysis is statistically significant.

Table no 1. KMO and Bartlett's Test

Source: Survey data

Kaiser-Meyer-Olkin Measure of Sampling Adequacy..461

Bartlett's Test of Sphericity Approx. Chi-Square 574.740df 210Sig. .000


Bartlett’s test of sphericity (Barlett, 1950) is the third statistical test applied in the study forverifying its appropriateness. This test should be significant i.e., having a significance value lessthan 0.5. In the present study, test value of Chi – Square 574.740 is significant (as also given intable no.1) indicating that the data is appropriate for the factor analysis.

After examining the reliability and validity of the scale and tes ting appropriateness of dataas above, we next carried out factor analysis to indentify the KPIs of private sector banks. For this,we employed Principal Component Analysis (PCA) followed by the varimax rotation, (Generally,researchers’ recommend as varim ax). When the original twenty-one variables were analysed by thePCA. Eight variables extracted from the analysis with an Eigen value of greater than 1, whichexplained 73.781 percent of the total variance (For details please see table no 2).

Table no 2. Total Variance ExplainedInitial Eigen values Extraction Sums of Squared Loadings

Component Total % of Variance Cumulative % Total % of Variance Cumulative %1 3.398 16.182 16.182 3.398 16.182 16.1822 2.505 11.927 28.109 2.505 11.927 28.1093 2.073 9.871 37.980 2.073 9.871 37.9804 1.824 8.685 46.666 1.824 8.685 46.6665 1.730 8.237 54.903 1.730 8.237 54.9036 1.428 6.800 61.702 1.428 6.800 61.7027 1.345 6.404 68.106 1.345 6.404 68.1068 1.192 5.675 73.781 1.192 5.675 73.7819 .983 4.681 78.46210 .878 4.182 82.64411 .703 3.349 85.99312 .591 2.816 88.80913 .556 2.647 91.45614 .439 2.090 93.54715 .373 1.777 95.32416 .313 1.490 96.81417 .290 1.382 98.19618 .194 .922 99.11819 .110 .524 99.64220 .057 .271 99.91321 .018 .087 100.000

Source: Survey dataExtraction Method: Principal Component Analysis.

One method to reduce the number of factors to something below that found by using the‘eigen value greater than unity’ rule is to apply the scree test (Cattell, 1966). In this test, eigenvalues are plotted against the factors arranged in descending order along the X -axis. The number offactors that correspond to the point at which the function, so produ ced, appears to change slope, isdeemed to be the number of useful factors extracted. This is a somewhat arbitrary procedure (Fordetails please see figure no 1). Its application to this data set led to the conclusion that the first eightfactors should be accepted. Within this solution, Factor 1 had fourteen items with their primaryloadings on that factor, one item, two items had their primary loadings on Factor 2 and Factor 3respectively, but Factor 4 did not contain any primary loadings.


Figure no 1. Scree Plot

It is worth mentioning out here that factor loading greater than 0.30 are consideredsignificant. 0.40 are considered more important and 0.50 or greater are considered very significant.The rotated (Varimax) component loadings for the eight components (factors) are presented inTable no 3. For parsimony, only those factors with loadings above 0.50 were considered significant(Pal, 1986; Pal and Bagi, 1987; Hair , Anderson, Tatham, and Black, 2003).

Table no 3. Principal Component Analysis – Varimax Rotation Indicators of PerformanceIndicatorsVariables

Indicator 1IP

Indicator 2AR

Indicator 3ROI

Indicator 4OSR

Indicator 5CSR

Indicator 6OEE

Indicator 7CF

Indicator 8ROCE

IP .968

GR .948

FR .947

AR .951

NOA .926

ROI .759

ILR .675

CL .619

OSR .798

CR .774

IWE -.535

CSR .822

ROE .766

OEE .731

IE .667

DPCE -.564

CF .930

ET .610

ROCE .749


DPCQ .711

Eigen Value 3.398 2.505 2.073 1.824 1.730 1.428 1.345 1.192

Proportion ofVariance

16.182% 11.927% 9.871% 8.685% 8.237% 6.800% 6.404% 5.675%

CumulativeVarianceExplained

16.182% 28.109% 37.980% 46.666% 54.093% 61.072% 68.106% 73.781%

Source: Survey data

Indicator 1: IP – This indicator was represented by three variables with factor loadings rangingfrom .968 to .947. They were internal promotions, gender ratio, and financial result. This indicatoraccounted for 16.182% of the rated variance.Indicator 2: AR – Two variables with loadings ranging from .951 to .926 belonged to this factorand they included accident ratio and number of activities. This indicator explained 11.927% of therated variance.Indicator 3: ROI – This indicator comprises three variables representing return on investment,illness rate, and customer loyalty. Factor loadings of these variables ranged from .759 to .619. Avariance of 9.871% was explained by this factor.Indicator 4: OSR – Three variables were included in this indicator. They were opportunitysuccess rate, customer retention, and internal working environment. Their factor loadings rangedfrom .798 to -.535. The factor explained 8.685%.Indicator 5: CSR – This indicator comprised two variables, nam ely customer satisfaction rate,return on equity. They carried factor loadings of .822 and .766. The factor explained 8.237% of thevariance.Indicator 6: OEE – Three variables with loadings ranging from .731 to -.564 to this indicator andthem included overall equipment effectiveness, internal efficiency, and deliver performance tocustomer – by date. This indicator explained 6.800% of the rated variance.Indicator 7: CF - This indicator consisted two variables representing to cash flow and employeeturnover. Factor loadings of these variables ranged from .930 to .610. A variance of 6.404 % wasexplained by this indicator.Indicator 8: ROCE - This last indicator comprised of two variables relating to the return oninvestment and deliver performance to c ustomer – by quality. Their loadings ranged from .749 to.711. The variance explained by this indicator amounted to 5.675%.Ranking of the above eight indicators in order to their importance, along with mean and standarddeviation, is shown in Table no 4. The importance of these indicators, as perceived by therespondents, has been ranked on the basis of their mean values.

Table no.4 Ranking of Indicators according to their importanceIndicators No. of. Variables Mean S.D RankIndicator 1: IP 03 4.1552 .8214 8Indicator 2: AR 02 4.2586 .73294 1Indicator 3: ROI 03 4.1609 .59968 7Indicator 4: OSR 03 4.2529 .51227 2Indicator 5: CSR 02 4.1983 .72511 5Indicator 6: OEE 03 4.1782 .47229 6Indicator 7 : CF 02 4.2500 .69617 3Indicator 8 : ROCE 02 4.2155 .66959 4Source: Survey data

As depicted in table no. 4, the indicators “AR”; “OSR”; “CF”; “ROCE”; “CSR”; “OEE”;“ROI”; and “IP” got the ranks of first, to eight respectively and constitute the KPIs of Privatesector banks in North and Eastern Provinces of SriLanka.


CONCLUSIONS

Through an empirical investigation, this study has identified eight indicators that are majorcontributors to the performance of the private sector banks in North and Eastern provinces ofSriLanka. These factors in order to importance are (1) AR; (2) OSR; (3) CF; (4) ROCE; (5) CSR;(6) OEE; (7) ROI and (8) IP.

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Appendix- A:Table no 5: Code Sheet

Code Descriptions of the Indicators

DPCD Deliver Performance to Customer – by Date

DPCQ Deliver Performance to Customer – by Quality

CSR Customer Satisfaction Rate

CL Customer Loyalty

CR Customer Retention

NOA Number of Activities

OSR Opportunity Success Rate

AR Accident Ratio

OEE Overall Equipment Effectiveness

IWE Internal Working Environment

IE Internal Efficiency


IR Investment Rate

IlR Illeness Rate

IP Internal Promotions

ET Employee Turnover

GR Gender Ratios

CF Cash Flow

ROI Return on investment

FR Financial Result

ROCE Return On Capital Employed

ROE Return on Equity


CO-OPERATION STRATEGIES ENHANCING THE INNOVATION I N NATURE-BASEDTOURISM SERVICES

Anne MATILAINEN1), Gerhard WEISS2), Zuzana SARVASOVA3), Diana FELICIANO4), Carmen NASTASE5)

1) University of Helsinki, Ruralia Institute, Seinäjoki, Finland2) University of Natural Resources and Applied Life Sciences, Vienna, Austria

3) National Forest Centre, Zvolen, Slovakia4) Macaulay Institute, Aberdeen, Scotland

5) University “Ştefan cel Mare”, Suceava, Romani a

AbstractNature-based tourism is rapidly growing industry sector providing new kinds of sources of livelihood to the

rural areas to diversify the traditional economics. However, the level of innovations in nature tourism and recreationservices has not been reported as very high. The innovations in nature-based tourism typically occur not as a result ofspecific innovation systems but rather “between” existing ones, and as a result of a more spontaneous, project -orientedcooperation of various actors. Therefore, in creating new ideas and opportunities, the role of key actors and co -operation partners is essential. The successful co-operation with the different stakeholder groups has found to haveclear connections on the company’s business performance a nd in the long run the company must operate in such a waythat the stakeholder groups are satisfied. To be able to combine all these different types of actors to cross -sectoralnetworks and co-operation is essential and it provides a big challenge especial ly in small and micro company level.

This paper aims to illustrate by using 10 case studies around Europe (AUT, FIN, RO, SLO and Scotland), whatkind of strategies small and micro size nature -based tourism companies have created in order to establish and maintainthe critical co-operation with the main stakeholder groups effecting their business activities and social sustainability ofcompanies. As a result two different strategies, business approach - and community approach -strategy were found. Theresults clearly highlight the important role of informal co -operation and co-operation networks in nature based tourisminnovation process.

Key words: nature-based entrepreneurship, stakeholders, co -operation, multiple use of forests, case study

JEL Classification: L83, O32

1. INTRODUCTION

Nature-based tourism can broadly be defined as tourism, with main activities related tonature (Saarinen 2001). It is a growing industry sector providing new sources of livelihood todiversify the traditional rural econom ics, namely agriculture and forestry. The income generatingform nature tourism typically remains in the rural regions, it usually requires strong localknowledge base and the sector is labor intensive (e.g. Saarinen 2003, Honkala 2001), whichcharacteristics make it especially interesting in respect of rural development.

In general tourism is one of the most rapidly growing industry sectors at the moment.Within it, especially nature -based tourism has had high growth rates and the growth has beenestimated to continue in near future with increasing respect for the pure authentic nature by theconsumers (Ryymin 2006). For example in Finland the growth rate of the turnover of nature safaricompanies exceeded up to 8,5 % during 2003 -2004 and even the growth ra te of smaller naturetourism companies exceeded up to 6 % (Ryymin 2006). At the same time the growth of traditionalsaw mill industry was practically non -existent (Hänninen and Toppinen 2004).

However, even though the nature -based tourism sector is growing rapidly in many respectsin Europe, the level of innovations (both product and process innovations) in nature tourism andrecreation services has not been reported as very high (see e.g. Nybakk et al. 2005, Rametsteiner etal. 2005). This brings out the question, if the possibilities and opportunities have been recognisedand utilised in all their potential. The competition in the nature tourism is increasing concerningespecially foreign niche customer groups. The innovativeness is an important element in thecompetitiveness of companies and has been seen as one of the indicators of the future developmentof the sector (e.g. Rametsteiner et al. 2005).

In creating new ideas and opportunities, the role of key actors and co -operation partners isessential. Those actors, who have the knowledge and access on nature resources, play very


important role. In European context nature-based tourism utilizes typically forests in some form andin many cases the forest areas are not owned by the entrepreneurs. This brin gs out not only thequestions of property rights but also the one of combining the interests of user groups of the forestareas (Matilainen and Lähdesmäki 2009). Equally important role have those actors, who have the“access to customers” in the marketing channels. For a nature-based company to be able to combinethese different types of information and actors to cross -sectoral networks and co-operation isessential, and it provides a big challenge to the sector especially in small and micro company level(see e.g. Rametsteiner et al. 2005, Luostarinen 2005, Lunnan et al. 2005). The important questionsin order to support innovation activity in nature -based tourism sector are, how simultaneouslyguarantee the access to the needed natural resource (in this s tudy forest areas) and to the customers,organize the business activities effectively and to combine the interests of different stakeholdergroups, both local and wider, for the use of forest areas in order to successfully generate anddevelop the nature-based tourism sector as part of rural economics.

In order to overcome these problems, the small and micro size companies have to findsuccessful networking and co-operation strategies (Virkkala 2006). Typically rurally located nature -based tourism companies form complex co-operation relationships to ensure their activities, and arecontinuously developing this co -operation, without which their companies would extinct. Inaddition especially in rural regions the social sustainability of business activities p lays an importantrole in success of the company (Lähdesmäki 2005)

This paper aims by using cases throughout Europe, to illustrated, what kind of co -operationstrategies nature-based tourism companies have developed for managing the most criticalstakeholder groups in order to reach the local acceptance for their business activities and maintainand develop their innovations further.

2. THEORETICAL BACKGROUND

2.1 INNOVATION RESEARCH AND REGIONAL GOVERNANCE - PROVIDINGBASES TO THE INNOVATION OF RURAL NATURE -BASED TOURISM COMPANIES

Innovation research has often studied innovation processes in large firms that pursue explicitinnovation strategies and run R&D -departments. Scholars, however, have learnt that innovation is aprocess that does not only take pla ce within companies, but also between companies and betweencompanies and many other actors. Besides of various types of private and public actors alsoinstitutional framework conditions are important to form and success of innovation processes. Thesystems of innovation approach (Lundvall 1992, Nelson 1993, Edquist 1997) defines innovation asa result of systems that consist of actors and institutio nal settings whereby actors include – besidesof the company and as important as them – authorities, interest organisations, consultancy agenciesand research and education institutes. Institutional settings on the other hand are understood asformal and informal rules and norms, e.g. public policies or the innovation and interaction culture incertain regions or sectors. Innovation systems are often understood in a narrower sense asestablished, enduring systems that are explicitly and strategically orient ed at creating innovations ina national economy – national innovation system (Nelson 1993), a sector – sectoral innovationsystem (Breschi, 1997), or a region – regional innovation system (Asheim, 2002). Innovations innature-based tourism are of significantly different in nature: they typically occur not as a result ofspecific innovation systems but rather “between” existing ones, and as a result of a morespontaneous, project-oriented cooperation of various actors (Kubeczko et al, 2006).

Such kind of innovation processes are particular important in regions with weak economicand institutional structures and crucial for the economic development of such regions. This is oftencase with many rural regions. These proce sses are studied under the headings of regionaldevelopment, regional governance and learning regions.

The early concepts of industrial districts (Harrison 1992) and enterprise clusters (Porter1998) pointed out the importance of interrelationship of regional enterprises. Consequently,


“company networks concepts” where enlarged to also comprise socio -cultural and politicalnetworks, leading to the concept of the “creative” or “innovative milieu” (Cooke and Morgan 1994;Capello 1996; Maillat 1996) . These strands of theorizing assume that innovative regions have to besupported by three network systems: business, social and political networks (Weber 2002; Fornahland Brenner 2003). The regional actors’ adaptability and their ability to learn is the central questionof the study of “learning regions” (Florida 1995; Asheim 1996; Morgan 1997) .

Some representatives of the learning regions approach look at innovation processes inregions with weaker capacities. In their analyses they focus on the role of social capital and trust,formal and informal inter-firm networks and the process of interactive learning (Asheim 1996,Morgan 1997). Important resources for innovation and economic development are the capacity ofpeople, organisation, networks and reg ions to learn. Authors often look at “network organisedinnovation projects” (Asheim, forthcoming). In these studies, the basic features of innovationsystems are used but more broadly interpreted and applied to any co -operations or networks ofactors in innovation projects (innovation systems in a broader sense).

The critical networks and co-operation partnerships for innovation systems in broader sensecan be seen to be formed from different types of stakeholders relating to the innovation initiatives.The crucial issue is, how all the key stakeholders are taken into consideration so that successfulnetworks and partnerships can be formed and social sustainability of the business activities can beguaranteed.

2.2. THE ROLE OF STAKEHOLDERS IN FORMING SUCCESSF UL CO-OPERATION AND CREATING SOCIAL SUSTAINABILITY FOR RURAL BUSINESS

It has been stated that transferring corporate social sustainability of to the business objectivesis best undertaken by using the stakeholder approach (Clarkson 1995). In their operati onalenvironment the rural SMEs have different kind of stakeholder groups influencing their scope ofaction. As a stakeholder can be defined any group or individual who can affect or is affected by theachievement of a corporation’s purpose. (Freeman 1984 ) for example when company’s activities setlimitations to land use of local people. The impact and influence mechanism of to businessenvironment vary depending on the type of stakeholder group. The stakeholders can be dividedinto “primary stakeholders” , who have formal, official or contractual relationship with the companyand to the secondary stakeholders, who represent the rest of interest groups in the businessenvironment, like local people, forest owners etc. (Carroll 1989 and 1993, Clarkson 1995, Näsi1995).

The influence these stakeholders have to companies’ activities can be direct or indirect.Frooman (1999) has divided the stakeholder influence between a company and stakeholder groupbased on the resource dependence. If the company’s dependen ce on the stakeholders’ resource e.g.in case of nature tourism forest land, is high, more likely direct influence mechanisms are used inthe co-operation between the company and stakeholders. In cases when the dependence is low andstakeholders do not control the critical resources for company’s operations, the indirect influencemethods via other stakeholders are used (Frooman 1999, Sharma and Henriques 2005).

The successful co-operation with the different stakeholder groups has found to have clearconnections on the company’s business performance (e.g. Besser 1999). According to Näsi (1995)in the long run the company must operate in such a way that the stakeholder groups are satisfied orthe company’s activities will likely cease. Bryson (2004) also h ighlights that it is important tosatisfy the key stakeholders at least minimally according to their own criteria for satisfaction. Thisbrings out the need for entrepreneurs to be able to understand the stakeholder’s agenda, which issometimes difficult to identify. The failure to understand the unforeseen hidden power andinfluence of stakeholders has led to countless project and business failures (Bourne and Walker2005, Nutt 2002) Typical example of the significant role of stakeholder’s hidden power ar eplanning and decision making processes of the utilization of nature resources (see e.g. Sharma andHenriques 2005, Bisi 2008).


In rural areas there seem to be more expectations from the stakeholder groups towards thecompanies than in urban areas (Lähd esmäki 2005). This highlights the critical role of fluent co -operation between the company and stakeholders. The stakeholder groups are unique for eachcompany and its actions based on e.g. location, line of business, networks, customer base of thecompany. They are also very multiplicity and form a complex network (Neville and Menguc 2006).In many cases it is impossible to satisfy fully all the stakeholder groups. Therefore it is important toidentify the key stakeholders (Bryson 2004). There have been de veloped different kind ofstakeholder analyses and practices to locate the most critical stakeholders for different processesand activities (e.g. Bryson 2004, Bourne and Walker 2005, Cleland 1999, Neville and Menguc2006). According to Mitchell et al 1997 the critical attributes in defining key stakeholders arepower of the stakeholder , legitimacy of the stakeholder concerning the stake and urgency, thestakeholder claims attention to his claims from the entrepreneur.

In this paper the approaches mentione d above are combined in certain extent and a companyapproach was chosen. The stakeholders, without whose acceptance or co -operation the company’sinnovation process would not have been possible, or the business activities could not continuesuccessfully on the long run are considered as critical or key stakeholders, regardless whether thestakeholders can be seen primarily or secondary, or whether the influence of the stakeholders isdirect or indirect.

The companies have developed different various co -operation strategies, either strategicallyconsidered or unconscious, in order to sustainable co -operate with and manage different stakeholdergroups. The chosen strategies influence also directly on the business decisions of the operators(Besser and Miller 2001).

3. MATERIAL AND METHODS

In this study interpretative and descriptive perspective was adapted for studying therelationship between the entrepreneurs and their key stakeholder groups in innovation process ofnature-based tourism. This kind of qualitative approach is well justified choice in order tounderstand any phenomena about which little is yet known (Strauss & Corbin 1990). The aim is arather inductive analysis (see Glaser & Strauss 1967; Strauss & Corbin 1990). For studying theinnovation process a case study –approach has been chosen, in which the cases are designed asinnovation cases on enterprise level. A case study is considered to be an appropriate researchstrategy to investigate contemporary phenomena within their real -life context, especially when theboundaries between the phenomena and the context are not clearly evident (Yin 2003; Perry 1998),like typical when investigating an innovation process. Furthermore, case studies can be descriptive,explanatory or exploratory in their nat ure (Yin 2003).

The empirical data consist of 10 case studies representing five different European countries(AUT, FIN, RO, SK and Scotland (UK)) providing a collection of cases each representingdifferent institutional settings with regard to access to forest land, innovation support system andforest ownership. The sampling of the interviewees was made by a purposive sampling in order toensure manageable and informative data (see Patton 2002). The case studies have been collected bythe co-authors of the article by using joint semi-structured thematic interview guideline, whichallowed flexible conversations to take place still ensuring that all the main issues were discussed(see e.g Patton 2002). The themes were chosen to cover the critical aspects relating co-operationnetworks of forest based nature tourism companies, especially focusing on mapping out the criticalstakeholder groups and their management.

The interviews were conducted during 2004 - 2009. In most of the cases innovation carrierhas been visited by the case author. The data collection methods comprised personal face -to-face,telephone and e-mail interviews with core actors of the innovation project. In addition writtensources such as internal or official project documentations, pre ss releases, newspaper articles,information on websites, brochures etc were used. The critical key stakeholder groups for each casewere identified by the case authors based on the data (Table 1).


The data was analysed by using analyst-constructing typologies, in which patterns,categories and themes are looked for from the data and based on these, typologies were formed(Patton 2002). For this purpose a common analyzing framework was created. Typologies are builton ideal types rather than complete and d iscrete set of categories and they provide one simple formfor presenting the qualitative comparisons (Patton 2002). Unlike classification systems, typologiesdo not provide rules for classifying. Instead, typologies usually identify multiple ideal types, eachof which represents a unique combination of the attributes that are believed to determine therelevant outcome (Doty and Glick 1994). In other words the typologies and their characteristicsemerge from the data during the analysing instead of being de cided in beforehand. Since thetypologies present complex ideal types, the cases can have elements from several differenttypologies. In analysing, the case descriptions were cross -checked by co-authors in order to ensurethe quality of the results and to avoid the risk of creating analyst -constructed typologies that are toomuch influenced by the analyser (Patton 2002). The summary of cases is presented in the table 1.

3.1. CASE STUDIES AND THEIR INNOVATIVENESS

All the cases, even though representing dif ferent nature tourism activities, represent newinnovative form to utilize forest areas for benefiting economics of the region in a form of privatecompany or wider network of actors. Common to all cases are several critical stakeholder groupswithout whose support the activities could not have been established or maintained.

“Almliesl” – Marketing of forest cottages for tourists, AustriaThe marketing initiative carrier is a regional unit of the Austrian Federal Forests, whose

innovation was to renovate and lease 12 traditional forest houses and hunting cottages to tourists.After severe troubles, the project was reorganised by handing over the marketing to a tourismagency offering quality cottages in Austrian mountain provinces under the brand “Almliesl” . In thecase traditional heritage cottages has been managed to transform business activities withoutendangering the traditional or social value of the cottages. However, the successful stakeholdermanagement has played significant role in success.

Canopy walkway Sauwald, AustriaThe innovation initiated by a private farmer aiming to diversify his business activities by

offering in his forest a canopy walkway and a forest restaurant. The innovation was carried out asEU Leader+ -project and the canopy walkway is managed by the society “Baumkronenweg”. Incontrast to other canopy walkways in Europe, the Sauwald was consciously built from wood. In thefirst season the project attracted more than 100.000 visitors and employs 12 people. In the case anew innovative use of forest was created.

Hunting in Eastern FinlandThe private company Finnhunt Oy, organises moose and small game hunting in private and

State’s forests. The company has managed to transform innovatively a traditional leisure activityholding passionate interests from different stakeholder groups (e.g local recreational hunters andgeneral public) as commercial activity and has been successful in finding suitable customer groupsfor their products. One of the most important success factors has been close co-operation with localhunting clubs and landowners from very beginning in order to maintain the social sustainability ofthe activities and with Central European sales organizations in order to have access to the markets.

Horse back riding tours in FinlandThe private company, Kainuun vaellustalli, organises horseback riding tours utilizing

mainly the privately owned forests. The company organises tours around year on daily basis andhas managed to find successful additional source of livelihood fo r remote rural region as well asmanaged to utilise the customer base of bigger tourism companies of the region. Also they havemanaged to negotiate successfully with several private non industrial forest owners (up to 100) tobe able to establish riding routes long enough for their activities being the only horseback ridingcompany in the region.


Dorna Adventure, RomaniaDorna Adventure is a private company initiated by two partners providing e.g. boats rides

on Bistrita River, mountain climbing, biking , paint ball and horseback riding tours and courses. Theinnovativeness of Dorna Adventure, is to offer something unique in the forest area and developedprerequisites for that. For the enterprise it is essential to collaborate with the private and publicactors actively in order to maintain their activities in the long run in the struggle against the existingrivers pollution destroying the beauty of the area as well as sustaining the economic sustainabilityof the micro company.

The Calimani National Park, RomaniaThe Calimani National Park is a public park with main purpose of protection and

conservation of unique natural elements, giving also the possibility for visits in scientific,educational, recreational and touristic purposes. Its establishment i n 2004 provided also a lot ofopportunities to develop new innovative forest tourism and recreation activities in the area, likehiking, mountain biking, horseback riding, photo safaris, bird watching tours etc. To maintain anddevelop the innovation it is very important sustain fluent co -operation between the National Park,the private companies and the interest groups.

Huntly peregrine wild watch, ScotlandWildlife interpretation centre providing wild watch opportunities is managed and

implemented by the national Forestry Commission in its own woodland. Several animal species canbe seen in the area, but the main attraction is the peregrine’s nest existing in the site and visited by acouple of peregrines every year. There are cameras filming the peregrine s feeding the chicks andalso their other activities around the nest. The project is considered to be innovative because it usescameras to show on wildlife activities as live recording and it is free of charge for the visitors.

Mountain biking, ScotlandA private enterprise in the Tweed Valley, Scotland provides mountain biking opportunities

and organize biking courses in the forest areas mainly owned by national Forestry Commission.The forested environment plays major role in attractiveness of the servic es by providing uniqueopportunities for the tracks. The company has found an innovative way to works within a networkof businesses in the area and have created a Mountain Biking Hospitality Scheme providing a packof services like bike courses and accomm odation packages, to improve the forest based mountainbike tourism activities in the region.

Forest tourism in Velky Klíž forests, SlovakiaUrbarium (shared ownership type) of the village Velký Klíž associates about 600 owners of

agricultural and forest land. The most important drivers for innovative new services in area wereaim to diversify production activities, ensure additional income for the members of Urbarium andenhance the development of the municipality by using the existing natural and cultura l potential.The facilities were jointly built to serve for the accommodation of guests and provide base for otherservices offered by Urbarium V. Klíž. Nowadays for visitors in urbarial forests various recreationalservices (e.g. accommodation in the forester’s house, 9 round trails, forest guides) are provided.

Vydrovská valley, SlovakiaVydrovská valley is a touristic destination located in one of the largest villages of Slovakia,

Čierny Balog. The valley includes several tourist attractions related to f orestry like the narrow-gauge Čiernohronská railway (ČHŽ), open-air forest museum, primaeval forest . The activities arebased on the work of Vydra-(Rural Development Activity) aiming to contribute to the sustainabledevelopment of the rural region. In co -operation with other similarly oriented NGOs they activelyseek for new initiatives to develop the region further. The trademark Vydrovská valley was formedbased on the region’s attraction and possibilities for tourism.

Table 1. the summary of the case s tudies and the key stakeholder groups of the casesCountry The case The identified key stakeholder groups for the innovationAustria “Almliesl” –

Marketing of forestcottages for tourists

MTS Almliesl tourism agency and other local tourism partners,local people (neighbours), Public authorities


Austria Canopy walkwaySauwald

Firms involved in construction of the canopy walkway,Members of the society Baumkronenweg, Public administration

Finland: Private huntingenterprise

Hunting clubs, Landowners, Selling agencies, Other SMEs, Local people,General public

Finland Horse riding tours Private land owners, Metsähallitus, Other SMEs, hunting club, regionaldevelopers

Romania Dorna Adventures,private nature-tourismcompany

Public administration (municipality tourism officials),Other private SMEs, Volunteers, trainers, guides

Romania The Calimani NationalPark

National Administration of Forests (Suceva and TG Mures branch offices),Forest research and management institute,The Association of Forest Owners, Forest Group Josenii Bârgâului, localSMEs

Scotland Huntly peregrine wildwatch /Wildlifeinterpretation centre

Scottish Agricultural College (SAC), Primary Gartly School,North East Raptors Study Group

Scotland Mountain biking Local tourism consortium, Forestry Commission, Local farmers,Local community council

Slovakia Forest tourism inVelky Klíž forests

Local forest owners (Urbarium), Local associations (like hunting clubs),local people, ALEA (association focusing on marketing in web, organizin gexhibitions of tourism etc), Local joiners, Local municipality

Slovakia Vydrovská valley jointnature tourism

Vydra (Rural Development Activity), Lesy SR state forest enterpriseCierny Balog, ČHŽ (local company operated narrow-gauge railway), Thelocal municipality, other enterprises

4. ANALYSIS AND RESULTS

When studying the co-operation between the innovation carrier and key stakeholder groups,two clear strategies for stakeholder management were found in all cases, even though the casesrepresented different nature tourism activities in different institutional settings. The strategies werefurther analysed based on 3 characteristics, which were emerged from the data to represent thetypical characteristics and differences of the strategies:

Formality of the relationship (formal-informal): in the formal relationship typicallywritten contracts were issued, when the informal relationships were based on verbal informalagreements or interpretations of discussions.

The communication: the style of the communication between innovation carrier andstakeholder group was analysed based on its regularity and forums it was conducted in. Based onthese it was divided into official and unofficial communication. In official communication, thecommunication between parties is regular and happens based on formal meeting related to businessactions and/or agreements. In some cases even minutes of the meetings are made and distributed tothe participants. The unofficial communication, even though it can be very vivid happens typicallyfrom non regular basis as random chats or discussions. Also the role of personal relationships withthe stakeholder group representatives is big.

Type of co-operation: The co-operation was analysed further in details by using threedifferent concept pairs: horizontal or vertical co -operation; unisectoral or cross sectoral co -operation; and based on the local networks or based on wider networks outside the region or withhigher levels e.g. in a form of political levels or national actors . The horizontal co-operation wasdefined as a co-operation within one level of production, when the vertical co -operation refers tothe co-operation along the production chain. The u nisectoral co-operation was defined as co-operation occurring within one sector, in this study primarily referring to forest sector. By the crosssectoral co-operation on the other hand is meant the co -operation within more than one industrysector.

The first found co-operation strategy can be called business approach –strategy. In thisstrategy the co-operation critical for success of the innovation case was established and maintainedstrongly based on business to business activities providing typically monetary benefits to bothparties. Monetary benefits were also used as just ification and favoring arguments for establishing


the co-operation and “selling the innovation” to the stakeholder group in question. The relationshipcan be described as normal business relationship with written agreements and contractual rights andthey were very formal in nature. In almost all vertical co -operation relationships the businessapproach –strategy was applied, since as part of production chain the stakeholder groups in questionwere usually sub-contractors or selling and marketing organizati ons. However, also in horizontalco-operation business approach was used, especially when other local SMEs were in question. Dueto its formality, business approach was used both in managing the local stakeholders as well as thestakeholders outside the region.

The communication in the business approach -strategy was typically official based on thebusiness actions between the innovation carrier and stakeholder group. The personal relationshipswere important in enhancing the co -operation, but they were not highlighted or seen perquisite forit.

In addition to business –approach, in the case studies became clearly visible so calledcommunity approach - strategy. In this strategy, the innovation was justified and argumentedwith “benefits to whole area” a nd “improvement of regional economics” – discourse by theinnovation carrier. Also more general level values like “nature conservation”, “nature education”and “increased knowledge on forests” were used as arguments for innovation implementation.Regardless, whether the innovation process was carried out by private company aiming formaximizing their benefits, this strategy was used especially in managing local and regionalstakeholder groups in securing the social sustainability of the activities. Even tho ugh this is not assuch very surprising, the cases clearly illustrate the extremely significant role of local stakeholdersas well as community approach –strategy in maintaining successful co -operation in forest-basednature tourism innovations.

In co-operation relationships applying community approach -strategy, the compensation forthe stakeholder group for their work, land etc. was not necessary paid. The innovation carrierexpected the stakeholder groups also to contribute for general good and “benefit to the wholeregion”, even though the direct benefits would be allocated primarily to the innovation carrier. Insome cases the innovation carrier did not seek for profit from their activities, like in Huntlyperegrine watching activities in Scotland. In these cases the role of community approach –strategywas even more highlighted. However, the community approach -strategy was not really utilized inmanaging stakeholder groups outside the region.

The communication in community approach –strategy could be very vivid or relativelyrandom, but it was typically very informal in nature. Usually the co -operation occurred also inlocal or at most in the regional level and the role of personal relationship between the innovationcarrier and the stakeholder group s was highlighted. In some cases, where the personal relationshipwas non-existing, local mediators were used. The co -operation was both uni-sectoral as well ascross sectoral and typically horizontal co -operation relationships occurred. Also interestingly incases, in which the private forest land was not owned or administrated by the innovation carrier, inorder to gain the access to required forest area, typically the community approach –strategy wasused.

In addition to two above mentioned strategies a lso so called ignoring or non existing –strategy was found. Concerning some stakeholder groups the innovation carriers did not have anykind of co-operation strategy, even though the stakeholder group was identified as critical to theinnovation success. In some cases the importance of these stakeholder groups was not recognizedproperly by the innovation carrier, but also in some cases these stakeholder groups were seen toomassive, outside of region or difficult to manage by the innovation carrier in orde r to even try tomaintain proper co-operation relationship with them. This was the situation e.g. related to thegeneral public concerning hunting tourism in Finland. The entrepreneur realized the importance ofgeneral public as stakeholders in influencing the business environment, but had not come up withany actual active strategy to apply for this group. In cases same types of stakeholder groups wereco-operated in the local level (usually local people), the community approach -strategy was used.


5. CONCLUSIONS

In all cases there were found both business approach and community approach -strategiesused for managing the co-operation with different stakeholder groups. In general the businessapproach was applied into co-operation with so called business par tners and community approachwas used in managing the local level stakeholder co -operation. This as such is not very surprising,and to be able to define the strategies further there is a need to study both main strategies moreclosely in order to find more detailed, innovative co-operation aspects and tools.

However, the results clearly highlight the important role of informal co -operation and co-operation networks in nature based tourism innovation process (Table 2). Even the cases representdifferent institutional settings and entrepreneurial environment, in all cases the role of informal,local level co-operation was vital for the sustainable innovation activities in the forest based nature -tourism sector. These kinds of relations are important in regard to very different types ofstakeholders, including authorities, neighbors or interest groups. Even if these groups are notformally involved in the business activity, they might put the project at risk, if good relations arenot maintained. The informal c o-operation networks were vital both in cases, in which theinnovation carrier was business focused and in cases in which the innovation carrier did not seekdirect profit from the activities.

In addition to improve the business activities and skills of t he companies and actors, thefocus of public development activities should also be in increasing innovation carriers perquisites toestablish and maintain critical informal co -operation. This brings also out an interesting questionrelated to various innovation support schemes implemented in EU, national and regional levels. Dothey support adequately also this informal co -operation? The co-operation based on businessapproach clearly brings concrete benefits, increased business, for both parties in co -operationrelationship. In the co-operation based on community approach on the other hand, the benefits tothe stakeholder groups are typically not so concrete, at least on short term.

In some cases the stakeholder groups, which typically have been managed b y usingcommunity approach -strategy were in fact managed at least partly by using business approach –strategy. By selecting this strategy in the studied cases the social sustainability of innovationcarrier’s activities was increased significantly. This w as the situation. e.g. in the cases of huntingenterprise in Finland concerning the local hunting club co -operation and forest tourism in VelkyKlíz Forests in Slovakia concerning the local forest owners. By recognizing the local stakeholdergroup holding important resource at least partly as a business partner and allocating benefits, evenas a token, to them, the local acceptance for the activities and the status of community approach –strategy arguments were improved. The activities were seen in practice to “benefit the whole area”.

In general, however, even though the forest owners had the vital resource to the innovationactivities, have direct influence mechanism to use in co -operation relationship and the innovation isvery much dependent on the succe ssful co-operation with this stakeholder group, in cases where theforest area was not owned or managed by the innovation carrier the community approach –strategy,with no actual compensation was prevailing. The forest owners were not typically seen as bu sinesspartners in the innovation processes, even in some cases there were indications towards thisdirection. In areas where the pressure to use forests for nature tourism and recreation activitiesowned by others than innovation carrier is high, this app roach brings out interesting questionsconcerning the forest owners’ role as resource provider in the future.


Table 2. The role of business and community approach strategies in co -operation with keystakeholder groups

Case Business approach –strategy (formal) Community approach -strategy(informal)

Austria:Almliesl – Marketing forestcottages for tourists

MTS Almliesl tourism agencyother local tourism partnerPublic authorities

NeighborsLocal people

Austria: Canopy walkwaySauwald

Firms involved in construction of thecanopy walkway

Members of the society BaumkronenwegPublic administration

Finland: hunting tourism Hunting clubsSelling agenciesOther local SMEs

Hunting clubsLandownersLocal people

Finland: Horse riding tours MetsähallitusOther SMEsRegional developers

Private land ownersLocal hunting club

Romania Dorna Adventures, Public administrationOther private SMEs

Volunteers, trainers, guides

Romania: The CalimaniNational Park

National administration of ForestsForest Research and Management InstituteThe Association of Forest OwnersForest Group Josenii Bargaului

Local SMEs

Scotland: Huntly peregrinewild watch /Wildlifeinterpretation centre

Scottish Agricultural College Primary Gartly SchoolNorth East Raptors Study Group

Scotland: Mountain biking Tourism consortium/mountain biking subgroupLocal farmers

Forestry CommissionLocal farmersLocal community council

Slovakia: Forest tourism inVelky Klíž forests

Local forest ownersALEA (marketing association)Local joiners

Local forest ownersLocal recreational associationsLocal peopleLocal joinersMunicipality

Slovakia: Vydrovská valleyjoint nature tourism

State forest enterprise Cierny BalogCHZ (local company operated narrow -gauge railway)Other enterprises

State forest enterprise Cierny BalogLocal municipality

AcknowledgementsThis seminar paper was prepared as part of the European COST Action E51 on the

“Integrating Innovation and Development Policies for the Forest Sector”. In addition t his work wassupported by the Slovak Research and Development Agency under the contract No. APVV-0692-07“.

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http://www.proact2006.fi/index.phtml


THE EUROPEAN EXPERIENCE CONCERNING REGIONALDECENTRALIZATION

Associate Professor PhD. Irina-Maria DRĂGANAcademy of Economic Studies, Bucharest, Romania

[email protected] PhD. Rodica-Manuela GOGONEA

Academy of Economic Studies, Bucharest, [email protected]

Abstract:The current decentralization process is justified by the necessity of defining the role of the central

administration as against the local administration, the political and administrative competences that shall be delegatedto the local administration, the necessary sources, as well as the setting out of a reference framework on theperformances of the decentralization process in the next period.

Key words: regional development, decentralization, sectorial strategies, regional authorities

JEL Classification: O18, R58

1. INTRODUCTION

Regional policy may be appreciated from the point of view of the utilization by the centraland local public authorities of the resources they dispose of; combinations of instruments ofeconomic and financial policy with the aim at stimulating the investments, of creating new jobs andof improving the life conditions in a certain region/territory. Such instruments of economic policycover a large area, from those with general character, such as the legal framework meant to supportthe development, the economic regulations of certain specific measures, such as the aid granted bythe state to the companies, with the aim to stimulating the investment s or to supporting restructuringprojects.

There are different patterns of regional administration in the European theory and practice,distinguished from the point of view of the competencies of the regional authorities, of the impliedregional institutions, as well as of the financial decentralization . According to these patterns, theregions function on the principle of regional self -organization, respectively the right to organizetheir own structures and their functioning within the limits set forth by the Constitution.

2. PATTERNS OF REGIONALIZATION

Thus, a first model is used in the regions that have the power to adopt primary legislation intheir field of competence, legislation that is guaranteed by the constitution or by a federalagreement. These regions may have the right to adopt secondary legislation within the action of theprimary legislation promulgated by the national parliament and they may have delegated powers toissue laws or to regulate, taking into account the conditions of peculiarity of each of them. Theregions function on the principle of the financial autonomy, their own resources originating fromtaxes and other sources. The regions receive also transfers of funds on the part of the state (grants)under the form of directed funds (for projects or specific needs) and non -directed funds (forcovering of the cost of fulfillment of the delegated functions). This type of pattern is used byBelgium, Germany and partially by Italy.

According to another model , the regions have the right to issue laws, in the fields where theState has no exclusive competence. They may exercise powers delegated by the State. Theseregions receive funds from the state or they have their own resources. The own resources originatefrom non-directed funds from the state, incomes of the state from taxes (exclusively those directedto the regions) and incomes from the taxes fixed by every region. The funds from the state are underthe form of grants, directed or non -directed. When setting forth the funds destined to the regions,

[email protected]

[email protected]


the number of the population and the level of economic development are taken into account. Thiscategory of patterns of regional administration is met in Spain and partially in Great Britain.

In the case of a third pattern , the regions have the right to promulgate laws according to theframework set forth by the national legislation; the existence of those laws is guaranteed by theConstitution. The regions have both own competences set forth by the Constitution or the nationallaw as well as competences delegated by the state, both being exercised throu gh legislation andregulations. The regions have financial autonomy according to the regulations of the EuropeanChart of Local Self-Government. Their resources are made up of: own resources that originate froma percentage an amount added (fixed by the regions) to certain taxes or incomes collected by thestate and of the regional taxes and of general grants or grants directed for specific objectives(generally necessary for covering the cos t for the implementation of the delegated tasks). This typeof pattern is used by the Check Republic and partially by Italy.

In the fourth pattern, the regions have the power to adopt laws and/or other legislativeregional acts, according to the national legislation, but the existence of which is not guaranteed bythe Constitution. In this case too, the regions have their own competencies set forth by the law andcompetencies delegated by the state, but the exercise of the legislative competencies may beregulated by the state legislation. These regions are first of all financed by the State, they have noright to collect taxes for their benefit. The resources originate from non -directed funds from thecentral government, funds directed for specific project s or programs, a certain percentage of certainnational taxes, incomes from the operation of the regional enterprises, incomes from directed ornon-directed grants. Countries as Hungary and Great Britain (partially) use this type of pattern.

According to other pattern, the regions have the power to decide and regulate, but they haveno legislative power for the implementation of the competences incumbent upon them. The regionsmay also have powers delegated to them by the central authorities and they may s hare certaincompetences with the central authorities (on the basis of an agreement). The incomes of theseregions originate from own resources (charges, taxes, or other fiscal incomes) and from transfers.The received funds may be partially directed. The pattern is to be found in the practice of certaincountries such as: Denmark, France and partially Great Britain.

In a last pattern, the regions have the power to make decisions and they have councilselected by the local authorities. They have no legisla tive power, their decisions being based on thenational legislation and on government decrees. However, the regions have the possibility to adaptthe exercise of their competences to their specific conditions . The regions are financed by the localauthorities from own resources (but they may not collect taxes) and through financial allowances,generally with a general character. This type of pattern is used by Finland.

3. REGIONALIZATION AND DECENTRALIZATION

Accepting the idea that every community is also s patially shaped, so that it may keep itsdefining characteristics through a spatial -temporal structure, we have the explanation of the factwhy, starting with the ‘60s of the last century, the regionalism/regionalization became a themedisputed and approached by a series of disciplines (regionalism as priority theme of the politicaldebates may be considered a type of political barometer). The post -totalitarian space, as it happensin very many circumstances and case related to the transition it goes over, acute symptomsregarding the approach of the theme, first of all due to the historic load that the regionalist concepthas to integrate into the most diverse interpretations (currently the globalize world).

The political approach may have in subsidiary th e ideological side and, following this one,the cultural-traditional side, namely the identity side. The administrative approach leads us to thejuridical-legislative one with aspects that concern a local history too of the public institutions. Theeconomic approach may not elude and cannot be separated from the analysis of certain socialaspects, from the demographic ones to those of the communication networks.

These approaches which aim at observing certain disciplinary limits may and must becompleted with those due to certain general process of the present: European unification and


integration, phenomena related to poverty and the economic migration. Under these circumstances,the state has to intervene with important financial resources for fighting ag ainst poverty anddecrease of the imbalances, with concrete measures against the injustice and the polarizing betweenthe rich and the poor that increased in Romania too. Decrease of discrepancies, harmoniousdevelopment implies, in principal, new programs , additional financial sources and new people forthe implementation of the regional development programs.

The state aids represent a traditional instrument in Europe with a decisive role for thedecrease of the discrepancies, an equipment of intervention of the policy makers wherever they arefrom, including within the member states of the European Union.

In the view of the Romanian legislator, the objectives of the regional development policy,which are materialized in state aids, are placed in the foll owing fundamental directions:

Decrease of the existing regional discrepancies, by stimulating the balanceddevelopment, by accelerated recovery of the delays in the development of the areasdisfavored as a result of certain historic, geographic, economic, social, political conditions,as well as the prevention of the occurrence of new imbalances; Correlation of the policies and of the governmental sectorial activities at the level of

the regions, by stimulating the initiatives and turning to account of the local and regionalresources, with the view to the durable economic -social development and their culturaldevelopment; Stimulation of the internal and international inter -regional cooperation, of the cross -

border cooperation, including within the Euro -regions, as well as the participation of thedevelopment regions in the European structures and organizations, which promote theireconomic and institutional development, with a view to carrying out of certain projects ofcommon interest, according to the agr eements Romania is part of.We can also mention the fact that the Agencies for Regional Development operate in the

field of regional development, which are non -governmental, non-profit, public utility bodies, butthey are legal persons.

The programs and the expenses for the regional development of the Agency are financedfrom the Fund for Regional Development, which has the following sources: allowances from theNational Fund for Regional Development; contributions from the own budgets of t he counties or ofthe Bucharest, as the case may be, within the limit of the amounts approved for this destination,through the respective budgets; financial sources attracted from the private sector, from banks,foreign investors, the European Union, and from other inte rnational organizations.

Besides the positive aspects, a series of negative aspects were registered in the carrying onof the decentralization process:

Failure to grant certain important rights to the Local Public Authorities what limitstheir capacity to efficiently organize the offer of services (for example the right to fix pricesfor these services.

The occurrence in certain fields of the mechanisms of direct control and of thediscretionary decisions. There are only a few fields with clear and trans parent regulations.This limits both the financial planning and anticipation, and the possibility to test andintroduce creative local solutions in order to offer more efficient services. This aspect limitsindirectly the capacity of absorption of the fund s of the European Union.

Limiting of the autonomy of the local financial management by the regulations onthe allocation of own incomes, through restricting the use of transfers.

Preponderance of grants with precise destination, what represents an obstac le for anefficient spending of money, as it limits the coordination and integration of the localservices.

The existing balancing mechanisms do not provide the equitableness of the system. The incomplete transfer of property is an obstacle in the effectiv e management of the

local goods.


Insufficient specification regarding the legal and constitutional guarantees related tothe local autonomy.

Public policies insufficiently reasoned and partially implemented failed to offerrational solutions for the existing issues.

Recording of a discrepancy between the transferred decisional competences towardsthe local authorities and the resources allocated with a view to supporting them (theallocation of local resources does not reflect the changes of responsibility ).

4. CONCLUSIONS

As an adequate answer to the issues identified at the level of the public administrationsystem of Romania in the field of decentralization and dispersion of the public services, thefollowing priorities were identified:

Improvement of the system of providing decentralized/ dispersion public services(the increase of their consistency).

Clarification of competencies at different levels and structures of the publicadministration, through: creation of the specific working groups for the el aboration of thesectorial strategies; setting out of implementation structures at the central and local levelwith well defined responsibilities and relations; coordination and harmonization of thesectorial strategies; setting out of a standard system of measurement of the performances ofthe decentralized services.

Strengthening of the financial autonomy through: increase of the own incomes at thelevel of the local administrations; i ntroduction of the computing system based on allocationof operational subsidies; strict procedures and rules for the carrying on of the financings forinvestments; improvement of the predictability system of the grants at the central level;improvement of the system of equalization of the horizontal distribution of the resou rces;improvement of the system of management of the budget and of reporting at local level.

Redefining of the competences of the prefects, especially for the coordination of thedispersion services.

Creation of the capacity, instruments and procedures nec essary for theimplementation of the strategy through: drawing up of a standard system of procedures andnorms which should support the implementation of the Strategy; strengthening of thecapacity of the local authorities for the management and provision of the new decentralizedservices; preparing of the human resources necessary for supporting the decentralization/dispersion process.The reform of the public administration in the field of decentralization and dispersion

includes three major elements: Continuation of the decentralization through transfer of administrative and financial

competences and responsibilities, from the level of the central public administrationauthorities to the level of the local authorities;

Continuation of the dispersion process through delegation of responsibilities in theterritory depending on the necessities on local plan, within the same administrative structure(the dispersion services operate subordinated to the ministry that delegated theresponsibility).

Transformation of the dispersion services in the territory, depending on thenecessities of the citizens and for their becoming efficient, in decentralized services in theresponsibility of the local authorities.The updated strategy represents the general framework that creates the premises of the

continuation of the decentralization/ dispersion process, securing its coherence. The responsibilityof defining and implementing the sectorial strategies regarding decentralization/ dispersion restupon each institution of the central public administration and upon the local authorities, which takeover the competencies transferred from the financial an d administrative point of view. A group of


laws on important sectors of development such as the organization of the adminis tration, theplanning of the territory and of urbanism, the finances, the taxes, the services for health, welfare,education, etc. was enforced, regulating currently both the form of political decentralization ofcertain public services and the form of ter ritorial and administrative decentralization through theinstitution of the prefect. Decentralization also represented the staring of a process of creation andstrengthening of new forms of dialogue between the central and local administration represented bythe Federation of the Local Authorities of Romania (FLAR), the professional administrative corpsor other associative structures of the local authorities.

BIBLIOGRAPHY

1. Alesina A. and E. La Ferrara (2002) “Who trusts others?” Journal of Public Economics,August

2. Bodnăraş Emil (2007) “Finanţarea locală: practici comparate România - U.E.”, SeriaProbleme Economice, vol. 245-246, Centrul de Informare şi Documentare Economică,Bucureşti

3. Kahler, Miles, and David A. Lake (2003) “Globalization and Governance: Definition,Variation, and Explanation.” Governance in a Global Economy: Political Authority inTransition, ed. Miles Kahler, David Lake. Princeton: Princeton University Press.

4. Nicolaidis, Kalypso (2001) “Conclusion: The Federal Vision Beyond the State.” In TheFederal Vision: Legitimacy and Levels of Governance in the United States and the EuropeanUnion, ed. Kalypso Nicolaidis and Robert Howse. Oxford: Oxford University Press

5. Weingast, Barry (1995) “The Economic Role of Political Institutions: Market -PreservingFederalism and Economic Development.” Journal of Law and Economic Organization 11

6. *** Programul Operaţional Regional 2007-2013, Ministerul Dezvoltării Regionale şiLocuinţei

7. *** Cadrul Naţional Strategic de Referin ţă, Guvernul României8. http://www.mie.ro/9. http://www.inforegio.ro/10. http://www.falr.ro/

http://www.mie.ro/

http://www.inforegio.ro/


ECONOMIC GROWTH IN RUSSIA REGIONS: KEY FACTORS

Ph.D. Vitaly ALESCHENKOInstitute of Economy and Organization of an Industrial Production of the

Siberian Branch of the Russian Academy of Sciences, [email protected]

Associate Professor Ph.D. Alexandru NEDELEAUniversity Stefan cel Mare of Suceava

[email protected] Ph.D. Student Oana NEDELEAUniversity Stefan cel Mare of Suceava

[email protected]

Abstract:Research objective is revealing and the analysis of key factors of Siberia economy development in a context of

their historical formation. It allows to estimate prospects and possibilities of the Siberian regions from the point of viewof the balanced and long-term economic growth. As empirical base data of Omsk area were used. Researchconstruction was based on use of methods of theoretical research, and also historical and economic -statistical methods.There are conclusions that regulated factors were key sources of economic growth of Siberia always (system measuresof the state in sphere of the migratory policy, supported with real financial possibilities), showing the high productivityagainst a number of casual factors (favorable resursno-climatic conditions, a successful geopolitical site, a safe worldconjuncture). In research practical recommendations are offered for giving region economic system of additionalpossibilities of economic growth .

Key words: economic growth, regional economy, state policy

JEL Classification: R11

INTRODUCTION

Economic growth is observed in Russia throughout some years that is naturally reflected inthe basic indicators of regional development. Siberian regions are not an exception in th is respectwhere it is possible to observe positive tendencies in the most various sectors of economy.Meanwhile, in scientific, business and political circles today all speak about fastening of a resourcecomponent in regional economic growth. Thereupon p ossibilities of diversification in Siberiaeconomy are called in question in conditions of displacement of responsibility spheres on regionalmanagement level. This question gets a special urgency in the conditions of global economicinstability.

With a position of importance of the declared subjects, basic, in our opinion, there is aquestion about sources of economy growth of the Siberian regions. What stands up for rather safeindicators of economic development of Siberia regions? At the cost of what fac tors there is agrowth of regional economy? What is the nature of their origin and how much steady is a similarsort of growth? What puts region in the given process? This research is devoted to answers to thesepressing questions.

The research purpose is the revealing and the analysis of key factors of Siberia economydevelopment in a context of their historical formation, allowing to estimate prospects andpossibilities of the Siberian regions from the point of view of the balanced and long -term economicgrowth. For object in view realisation all factors of region economic growth were considered,depending on the nature of their origin, as:

a) regulated - defined by productive possibilities of national level of management;b) local - defined by influence of a regional component (the local enterprises, the power, etc.);c) casual - not dependent on will and desire, both region, and the state as a whole.

Statistical and historical data of one subject of the Siberian federal district (Omsk area) wereused as empirical base. Research construction was based on use of theoretical methods (the analysis

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and synthesis, an estimation of the facts within the limits of the system approach, reconstructionand a prediction), and also historical and economic -statistical methods.

FACTORS OF REGIONAL ECONOMY GROWTH: HISTORY OF QUESTION.

First of all we will notice, that the state policy had strongly pronounced characterconcerning the Siberian regions during the pre -revolutionary period and in the solving imageinfluenced formation and the further development in them economic activities. Since 1590 fromgiving of Moscow there was a mass resettlement to Western Siberia at first Cossacks and militaryofficials, and then, peasantry. Making a basis of the future Siberian cities military strengtheningsand fortresses together with a resettlement policy of the Russian state gave powerful spur toeconomic development of region.

At that time, the region economy could show any essential rates of development exclusivelyat the expense of external factors as “internal sources of development” did not function at all.Considerable territorial remoteness from Moscow, weak development of a transport infrastructure,dispassionateness from national trading streams, even more overdue, in compar ison with theEuropean Russia, formation of market relations in agriculture, - all these factors promotedformation of backward, closed (practically natural) system of the managing which development wasmainly extensive. In statistical collections “Reviews of the Tobolsk province” the same figure onOmsk cities repeated from year to year.

The matter is that the Siberian cities which, logically, should be sources of generation ofinternal impulses of regional development, in practice did not carry out this f unction. And for twohundred years the situation practically did not vary. So, according to one -day population census onApril, 1st, 1877 the lowest military ranks, members of their families, Cossacks and noblemen madean overwhelming part of townsmen of O msk. Thus natives of Omsk in a population lump madeonly 37,3 %. Thus, the structure of the population of Omsk quite definitely reflected the basicfunctional purpose of a city - to be the centre of military and civil authorities in Western Siberia.Clearly, that at such model of mutual relations “the centre - the region” unique is a way of extensivedevelopment of the regional economy which growth could go exclusively at the expense of thecentralised resources.

In particular, building of the Great Siberia n railway became the outstanding fact in historyof Omsk which has made huge impact on economy as the major infrastructural component ofeffective regional development. In total for 20 years after movement opening by rail the populationof Omsk has increased more than three times and by 1917 Omsk became the largest city of Siberia.At this time the area worries powerful inflow of new capitals, branches of the largest foreign banksactively open in Omsk, in 1904 the commodity exchange has been opened. Manufa cture and sale ofthe Siberian butter were so profitable branches, that minister Stolypin wrote to the tsar: “TheSiberian manufacture of butter gives gold twice more than all Siberian gold industry”.

Right after clearings of White Guards Siberia began to develop under laws which werecharacteristic for any territory which was a part of Soviet Union: the regional economy wasconsidered as an integral part of a national economy taking into account uniform spatial strategy.And though for development of natu ral riches of Siberia and creation of large economic potential inthe east of the country the big initial investments were required, from positions of long -termprospect it looked quite justified. As a whole at the expense of the state support in 1940manufacture of a total industrial output in region has increased in comparison with 1913 in 30times. With the Great Patriotic War beginning the policy of the state was transformed aside increasein military-industrial potential of Siberia, basically, at the e xpense of carrying over of manufacturesfrom the western and central part of the Russia. The general release of an industrial output ofSiberia in 1942 in comparison with 1940 has increased in 2,4 times, including mechanicalengineering and metal working m anufacture - in 7,9 times.

After the end of war the state policy is again directed on prompt replenishment of region byimmigrants: labour power employed from 1946 to 1950 has increased almost by 30 %. Next decade


is noted by government programs of develo pment of virgin lands: as a result of migratory motionsthe general number of the working population in Omsk area has grown in 1,6 times. For thefollowing of 10 years number of working population in region has increased again in 1,5 times. Aswell as in days of imperial Russia, prompt development of economy of Siberia again goes thanks toa state policy of active financial investments and assistance mass resettlement.

Thus, effectiveness of a state policy concerning Siberia is available. Rates of productio ngrowth of Omsk industry practically throughout all its history were considerably above similarRussian indicators. In 1980 production of the Russian industry surpassed level of 1940 in 18,5times, while in Omsk area - in 65,1 times. However, playing the role in an all-union division oflabour, the region was at all in a status to solve questions on rates and proportions of economydevelopment, being a part of the big organic system. From this there was variety of problems(ecological, social, an industria l infrastructure) to solve which the region independently not could.Despite rough rates of regional economy growth and higher “return” (in 1980th output counting onarea unit in Omsk region was above all -union on 60 %; employment degree in a national econ omy -50,2 % - also exceeded average on the country - 46,5 %), the area population had rather lower, thanon the country as a whole, both a standard of living, and social protection level. So, in 1986budgetary expenses on public health services in Omsk ar ea (counting on one inhabitant) were in2,17 times less, than in the country as a whole.

From all above-stated the logic conclusion follows that to prompt growth of absoluteindicators throughout the previous period of the history the economy of Siberia r egions has beenobliged to regulated factors (the powerful centralised injections in the tideway of a purposeful statepolicy) and to casual factors (a geopolitical site, nature and climatic resources). The local group offactors did not exist as a kind: b eing an integral part of planned economic system, the region wasunable influence independently rates and directions of the economic development.

MODERN SOURCES OF REGIONAL ECONOMIC GROWTH.

How has changed the basic system factor of regional development - a state policyconcerning Siberia - after disorder of command model of managing? At the first stage in relation toSiberia, no less than to all other regions, there was a popular belief, that the regional policy is notnecessary to market Russia, as the special institutes which are responsible for working out andrealisation of this policy are not necessary at the state level. As a whole, development (is moreexact, stagnation) of regional economy in 1990th went in the conditions of sharp decrease ininfluence of regulated factors.

With coming to power of the new president and relative stabilisation of macroeconomicposition in the country the present stage of a state policy concerning Siberia begins which appearsagain in the list of priority macroregions . Whether the state policy can today as the factor ofregional economy growth to lead to the irreversible system changes promoting effectivedevelopment of the Siberian regions?

For the answer to this question it is reversible to such tool of a state polic y as themacroregional program “Siberia” which has been urged to define strategy of development ofSiberia and to play a co-ordinating role under the relation to all programs already realised in thismacroregion. However in 2002 the program has been exclud ed from the perspective list of thefederal target programs financed from the federal budget. Logically to it there is an explanation:Siberia lags behind on rates of development Russia as a whole and the attention of the federal centreto Siberia, naturally weakens. Nevertheless, the resource potential of Siberia is important forRussia: the taken reconnoitered stocks of oil make 77 % of the Russian stocks, natural gas - 85 %,coal - 80 %. Interest, first of all, in fuel and energy resources of Siberia is traced in Strategy ofeconomic development of Siberia, the basic emphasis in which is made on increase of efficiency ofextracting branches, geological prospecting, improvement of a transport infrastructure, etc.

Perhaps, ability of regional economy to new quality of economic development in theconditions of decrease in the state investment and migratory possibilities has essentially changed?


To answer this question, on an example of Omsk area we will analyse the basic components ofeconomic growth of regional economy in modern conditions.

First of all we will notice, that possibilities of intensive development of region economyoperating before at the expense of new "manpower resources" are exhausted to the full. For timewhich has passed between population censuses in 1989 and 2002, number of inhabitants of Omskarea was reduced to 62,7 thousand persons (about 3 % from an aggregate number of the regionpopulation). Besides, urbanization process has practically stopped also: from 1989 to 2007 theurban population share has increased only on 1,1 %. On the other hand, processes of geographicallocalisation of regional development sources proceed. In the city of Omsk which is the regionalcentre, today lives 79 % of urban population of area (Omsk surpasses in a population the city ofIsilkul following it in 43,8 times). As a result of a total regional product of Omsk area almost on 80% is formed in economy of Omsk; in the regional centre it is issued more than 90 % of industrialproduction of region. As a matter of fact, economic growth of economy of the whole region isconnected today with the enterprises of only one city. Further we will carry out the analysis of threekey sectors of the regional industry, wich defining the industrial face of region throughou t all periodof reforms and most indicative concerning sources of the development.

The petrochemistry and oil refining enterprises make today basis of industrial growth ofOmsk area (Open Society ”Gaspromneft - Omsk NPS”, Open Society “Omsk rubber”, OpenSociety “Omskshina”, Open Society “Tehuglerod”). To an economic crisis beginning thepetrochemical complex not only left on the Soviet facility, but it also has surpassed maximum thoseyears manufacture volumes: in 2005 the total volume of the goods and ser vices by the enterprises ofOmsk petrochemistry has made 126 billion roubles (practically half of total regional product). Soessential value of the enterprises of an oil refining and petrochemical complex in growing economyof region is caused by high pri ce competitiveness of export raw manufactures in the conditions of afavorable external economic conjuncture, and also investment possibilities of the large holdingcapital (all enterprises are connected with the largest Russian corporations).

The food-processing industry of Omsk area is the most indicative example of vigorousdevelopment of the branch focused not on a world conjuncture, and, first of all, on home market.However and in this case it is available similar processes of concentration and integr ation. Todayonly 32 organisations of the food -processing industry are the cores for region, the most part fromwhich is built in the closed production cycles within the limits of the vertically -integrated Russianand foreign holdings. Today branch in Omsk the international holding company “Sun -inbev”(former brewery “Rosar”) and dairy factory belonging to the international holding Wimm Bill Dann“Manros – M” had an opportunity to concentrate additional resources with a view of the vigorousdevelopment by means of this tool. The Group of the enterprises belonging to oil company“Sibneft” “Omsk bacon” stably increases volumes of manufacture of meat production, providingwith them not only Omsk area, but also other regions. Perhaps, a unique exception of all l argestenterprises of the food-processing industry of region is the vodka distillery “Omskvinprom” whichhas independently outgrown the regional market and by means of the competent marketing policyhas managed to enter into ten leaders of Russia alcoholic production and to become the mostdynamically developing Russian company in the alcoholic market.

The opposite situation has developed in a machine -building complex of Omsk area. In thebeginning of economic reforms the branch was pride of regional econom y (in the early nineties inOmsk mechanical engineering it has been concentrated more than half of industrial personnel of theindustry of area and about third of its fixed capital), it possessed high scientific and technicalpossibilities (here the most qualified structure of workers and experts has been concentrated, 80 %of the equipment with numerical programmed control). Today the branch has stably negativedynamics of growth owing to the accessory to a military -industrial complex of the country. Nothaving managed to reconstruct the manufacture on release of the civil production, the enterprises ofOmsk mechanical engineering being in federal submission have today real chance to leave the longperiod of stagnation only by occurrence in actively created integrated state holdings applying forstate financing.


Thus, because of insignificant relative density of small and average business of Omsk areain release of the goods and services (about 8 % of a regional total product) the regional economydevelops, basically, at the expense of large business which is closely integrated into system of theRussian and international holding capital that reduces controllability degree of these processes atregional level. Value of regulated factors of economic developme nt for the investigated period,practically, was levelled. Still, the role of casual factors (a world conjuncture) is essential. Theimportance of local factors has increased, but nevertheless is insufficient for the purposes of steadyeconomic development of region in intermediate term prospect.

THE CONCLUSION.

Regulated factors (system measures of the state in sphere of the migratory policy, supportedwith real financial possibilities), showing the high productivity against a number of casual factors(favorable resource and climatic conditions, a successful geopolitical site, a good worldconjuncture) were key sources of economic growth of Siberia always. Actually, the macroregionstatus of the national value, which was capable to give real efficiency in scales of all country,allowed the Siberian regions to be in avant -guard of economic development. Unfortunately,possibilities of regional economy independently to generate the positive internal impulsespromoting formation of the new centres of economic growth (local factors), in force of “geneticmemory” systems still possess low productivity. Therefore in the conditions of open marketeconomy loss of the prepotent territory status conducts to the unique variant - to the inertialscenario of structure of regional development at which rates of economic growth, mainly, directlyare co-ordinated to variety of casual factors (the good weather, a favorable conjuncture, etc.). Fromhere it is possible to draw the basic conclusion: on this basis it is impossible to provide long-termgrowth of regional economy.

Thus, results of the carried out research allow us to offer following practicalrecommendations for giving to region economic system additional possibilities of steady economicgrowth in intermediate term prospect:

1) It will not be possible to achieve desirable structural shifts in economy of the Siberianregions without the minimum state investments. But at the heart of the state concept of regionaldevelopment should lay not migratory projects and “scheme s of placing of manufacture”, butassistance to the business really working in the important regions, mainly, through improvement ofinstitutes and development of an infrastructure.

2) The state role should be more important in support of useful structural shifts of regionaleconomy. Today there is a set of the centres, perspective from the point of view of thecompetitiveness. Therefore federal and regional levels of the power should organise in commonmonitoring of ”competitive activity” in region and to search for support forms of the arising andgrowing companies, especially small and innovative. They are engaged in what kind of activity thusabsolutely not very well.

3) The state is obliged to assist really to competition strengthening in the regional market tomake active the existing companies on competitiveness and upgrade increase. At the same time it isnecessary to assist in every possible way to cooperation of the regional enterprises with the bestRussian and world corporations for the purpose o f embedding in chains of addition of cost,cooperation with bearers of high technologies, to penetration through it on the markets of more andmore complex finished articles, to a finding of own niches for creation and distribution ofinnovative production.


REFERENCES

1. Evseenko S.V. A machine-building complex of Omsk area: laws, ways and developmentprospects. - Omsk, 2003.

2. Karpov V.V. Formation of regional model of market economy. - Omsk: publishing houseOmGtU, 1996.

3. Katanaev G.Е. A short istoriko-statistical sketch of a gain and settling of Siberia. - Omsk, 1911.4. Malyhin V.V., Sosnin V.B. Economy of Omsk area: problems and prospects. - Omsk: Omsk

book publishing house, 1988.5. Industrial development of Omsk area. 1917 - 1975 - Omsk: Omsk book publishing house, 1987.6. The regional policy of Russia: adaptation to a variety: the analytical report / under

G.A.Satarov's edition. - М: Fund INDEM, 2004.7. Suspizin S.A. Potentialities and restrictions of spatial transformations in economy of

Russia.//Region: economy and sociology. - 2004. - № 4. - P. 3-28.8. Economy of Siberia and economic development of new territories. The collection of

proceedings. - Novosibirsk, 1987.9. Yurasova M.K. Omsk. Sketches of history of the city. - Omsk: Omsk book publishing house,

1983.


APPRECIATIONS ON CRITICS OF THE GLOBALIZATION PROCESS

Lecturer PhD. Student Carmen BOGHEANLecturer PhD. Student Florin BOGHEAN

Lecturer PhD. Mihai POPESCU “Ştefan cel Mare”University of Suceava, Romania

[email protected], [email protected], [email protected]

Abstract:Globalization has become not only one of the most fashionable wor ds used by politicians, business people,

union leaders and economists alike, it has also assumed the role of scapegoat for everything that is wrong in the world.Globalization is the phenomenon that has raised the fiercest debates and has made the topic of several conferences andcongresses, as well as of important meetings attended by government representatives from all the world states.

Opponents of globalization believe it is the very source of all financial crises, as the capital invested inpromising economies is suddenly being withdrawn at the first sign of political or economic weakness. Globalization iswhat increases the inequality of income on a national level, thus leading to a widening of the gap between rich andpoor nations.

The debate over globalization is much broader than what the members of the two competing teams mayimagine. The novelty brought about by the dispute over globalization is that both individuals and institutions fighttogether against the negative repercussions of globalizati on.

Key words: opponents of globalization, multinational corporations, nation -state, international liberalization

JEL classification: F15, G20, F36

I. INTRODUCTION

Critics of globalization accuse western leaders of hypocrisy, and they have a point. Thelatter have forced poor countries to lift any commercial barriers, but they have kept theirs in place,thus preventing developing countries from exporting their farm products and depriving them of theincome they could have gained from this activity, incom e they desperately need. The west hasestablished the priorities of globalization and has assumed a high percentage of the benefits, to thedisadvantage of developing countries. [8] Not only have industrialized countries refused to open thegates for commodities from developing countries, but they insisted that the latter open theirs forcommodities from developed countries. Not only have highly industrialized countries continued tosubsidize agriculture, they have also made it harder for developing countri es to face competition.

Another “evil deed” assigned to globalization is that the phenomenon causes the diminishingof the sovereignty of the nation -state, as it gradually loses its authority when faced with theunstoppable power of financial markets and multinational corporations. Many politicians criticizeglobalization while, in fact, they benefit from it. It is to be mentioned that the governments ofdeveloping countries are not always allied with the opponents of globalization.

It seems only logical that partially solved or unsolved problems will find a solution in theglobal order. That is precisely why globalization is expected to bring about another world orderprinciple that would offer a new way of managing powers and of allocating resources, to generate anew action plan and another sphere for a new economic and political order that will succeed insolving the trials of economic and financial history. Globalization is essentially a problem that canbe solved only with and by the global society. [5]

Despite the criticism against it, most economists are currently defending globalization ingeneral, although some of them still wonder about the opportunity of financial globalization orabout the need for a real international governing of its process. However, only a very small group ofeconomists disagree with globalization, while very many of them are dissatisfied with the wayglobalization is being carried out, without any world institutions to control and monitor it.

Globalization is a dynamic process of international liberalization, opening and integration ona large number of markets, from labour to goods, from services to capital and technology. The

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period we are experiencing is not the first wave of globalization, but we sure hope this era ofglobalization won’t end as tragically as the previous one, as it would, again, trigger a withdrawalfrom the economic competition subordinate to the rules of the market and an enrolment in thepolitical and military competition, and armed conflict. This is u nlikely to happen, as the presentperiod of globalization has lasted for more than 50 years and, even though it has witnessednumerous market booms and busts, its fundamentals are stronger than those of the first era ofglobalization. [2]

Globalization requires that, on a global scale, countries should integrate and thus consolidatemarket interdependence and develop the cross -border mobility of production factors and capital.The constant integration of the world economy brings about several common interes ts amongeconomic agents. It gives rise to potential conflict but also creates a framework for a globalizationthat gradually intensified in the past few years.

Given the lack of a specific movement and the heterogeneous degree of the liberal economicpolicies of governments, the “consensus”, often mentioned by globalization opponents, is yet to bereached. The debate over globalization is much broader than what the members of the twocompeting teams may imagine. The novelty brought about by the dispute ov er globalization is thatboth individuals and institutions fight together against the negative repercussions of globalization.

Many of the argumentative models of fundamentalist opponents and target orientedopponents do not match the dominating doctrine of economic sciences – they are often so oppositethat it is absolutely impossible to have an economic discussion, as they only claim regulations thathave no economic background. On the one hand, economists take a high interest in the benefits onefficiency and growth and development chances, but, on the other hand, opponents of globalizationseriously doubt the highly increasing global integration, thus hinting at the restriction of marketeconomy processes. Given the theoretical and empirical results the y are referring to, economists canonly refuse the criticism and resolutions offered by certain non -governmental organisations.Moreover, they underline the ability to solve the problems related to the market mechanism and tocompetition and thus urge poli ticians to use these abilities. [1]

It should be noted that opponents often tend to directly blame financial globalization forempirically demonstrated, but undeniable, world dysfunctions. In the historical debate on the role ofindustrialisation in Europe and the United States, it is admitted that all the justly blamed conditionshave been equally precarious, or even worse, after the structural change. Moreover, both economicand financial globalizations are unjustly assigned certain general factors.

It must be noted that economists admit to the existence of a certain number of market bustcases. Based on the analysis of public assets and external negative effects, we can reiterate severalarguments issued by the opponents of globalization and we can ju stify their haste, as was the casewhen cash was granted in order to avoid contagion in a possible financial crisis. The arguments ofseveral opponents often mention the wish for a more strict international cooperation regulation inorder to face problems. English economists underline the notion of “global governance” createdfrom the merger between the liberal demand pointing at the fundamental principles of the worldeconomic order and the regulation wanted by globalization opponents.

Nevertheless, the measures suggested by the opponents are often organised, so that themarket intervention method would trigger exactly the opposite of what is really expected. The mostsignificant example is the Tobin tax, which, not only should decrease volatility, it sho uld also grantthe financing of the development aid. The two objectives cannot be carried out, since the decreasein the volume of financial market will highly increase volatility.

Opponents of globalization often criticise the phenomena that are not rela ted to marketintegration but to anything that prevents it. We can find such examples in the literature aboutindustrialised countries protectionism, migration barriers or the IMF operations that can favourmoral hazard. By criticising the market economy s ystems, fundamentalist opponents often use thesearguments without realising that they are actually criticising the interventions that do not favour thismarket system. Contradictory claims thus ensue. For instance, when opponents claim a higher


social level for developing countries, they are ready to accept, either willingly or not, theprotectionist effects on these countries.

II. VARIOUS REPROACHES EXPRESSED BY OPPONENTS AND PROPOSED

In the light of these arguments, we’ll draw a brief comparison between the differentopinions expressed by opponents and the suggested solutions.

As mentioned before, the criticism against the slow and uneven growth caused byinternational trade, is partly unjustified. Poverty is a problem that persists and doesn’t seem to havedeepened in the present phase of globalization, although globalization can alleviate it. That is, atleast, the result shown by studies that find a positive balance between the opening of the market andthe alleviation of poverty. Consequently, fundam entalist suggestions on the different marketinterventions (price control, protectionism), must be rejected.

Moreover, the possible repercussions or inequalities may arise from other reasons as well,not necessarily triggered by globalization. In develop ing countries there may be wars, uneveneconomic structures, demographic development and the failed domestic economic policies. On theone hand, the numerous regulations and the demographic process may create problems inindustrialized countries, not neces sarily created by globalization. On the other hand, the sustainedgrowth triggered by globalization can be of help in overcoming problems of such nature. [3]

Nevertheless, an increase of the aid for world development and redistribution is absolutelynormal. The minimum wage guarantee is a prerequisite for economic growth in less developedcountries. However, public means are not enough and only certain transfers could alleviate theserious problems of attraction and allocation and those related to economic policies. The positiverole of foreign direct investments and of private cash flows for the development of the newlyindustrialized countries of south -east Asia have proved that private initiative has a critical role. Thatis the reason why poor countries should create the necessary circumstances for certain means tofunction: liberalization, protection of property rights, as well as attractive and stable conditions forinvestments.

As for the repercussions of globalization on the labour market, one must admit that, inindustrialized countries, certain pressure can be applied on salaries or on the jobs of unskilledemployees, either through foreign trade, or through migration. Nevertheless, globalization is toooverrated. In the past decades, the pressure on unskilled labour force was most likely caused by theunstoppable technological development, often triggered by the conventional wage policies and theregulation of the labour market that extremely increases simple labour and thus favours thereplacement by capital. On the other hand, because of increased development, globalizationindemnifies those affected through social redistribution systems.

The opening of markets from developing countries is a step in the right direction, as theybring about a positive change in salaries and working conditions. On a theoretical level, workingconditions are not to deteriorate because of globalization, as empirical studies have not reached thatconclusion either. Nor can we fear a race to the bottom. In this case, harmonisation on all sociallevels is needed. It doesn’t entail the protection of unskilled employees from industrializedcountries and nor is it an attempt to gain any benefits from developing countries. It would beredundant to say that social security s ystems from different industrialized countries need a reformand that this reform would cause certain services to disappear and would rise responsibilityawareness. But these conditions required by reform have nothing to do with globalization. Leavingthis phenomenon aside, they represent the priority of economic policies.

The fluctuations of international trade are unsettling, as they can slow down the growth ofdeveloping countries. That includes the present protection of industrialized countries and al so thebarriers on exchange practices in developing countries. The conclusion according to which a one -sided openness of the market can lead to economic growth is not very popular among opponents ofglobalization. Much of the criticism is focused on the su pposed fluctuations caused byindustrialized countries, by multinationals or by the World Trade Organization . [7]


Opponents of globalization and economists alike have reached agreement on the claim ofrenouncing protection; but their opinions greatly diff er when it’s about valuing the performance ofmultinationals. It is generally difficult to prove that multinationals may have a certain behaviourthat would have a negative effect on the macroeconomic welfare. Instead, it was observed thatmultinational employees from developing countries benefit from better working conditions than thepeople employed in national industries. Multinationals wish to have a dominant position on themarket, too, but it is less likely to imply world competition. When multination als succeed in signingdisloyal competition agreements with developing countries, the latter are either rewarded bypositive external effects, or the respective governments are not considering the welfare of thepopulation. Attacking these agreements throu gh prohibitive measures such as embargoes, boycottsor other severe restrictions against multinationals is not very recommended. A more rigorouscontrol imposed by authorities and better public relations practices are perhaps the best competitionpolicies to be applied in industrialized countries. The institutions that deal with competition policiesshould be promoted and supported. If they take into account the unimaginable weaknesses ofnational justice courts, they must also consider the international ag reements on the rules ofcompetition policies, but not necessarily a new world order.

III. CONTROL VERSUS LIBERALIZATION

Certain aspects of WTO (World Trade Organisation) are also criticised, especiallyexceptions, sanctions on allowing counter -protection and anti-dumping procedures, including themore ample notion of dumping as well. Nevertheless, the WTO is especially criticised for theliberalization of the tertiary sector (GATS – General Agreement on Trade and Services) and for theprotection of copyright (the Agreement on ADPIC - Legal Aspects of Intellectual Property Relatingto Trade).

There is a high number of market busts on international financial markets. Situations can beremedied and measures have been taken on a national and international leve l. Firstly, we mustadmit that liberalization also entails certain considerable gains, and that keeping a functionalcompetition would prevent the government from focusing on one thing. The opening of the capitalmarket is generally regarded as positive, a nd it would be counterproductive to stop financialmarkets from operating freely by means of capital movement control or transaction taxes, such asthe Tobin tax. A different situation can be observed in Chile or Malaysia, as to the extent to whichthe capital movement control limits the capital flow before the emergence of institutions thatwarrant the integration of the financial system on the world market. One must always carefullycompare this advantage of financial allocation with the risk premiums, po ssibly higher, for capitalinterests. [4]

It is difficult to blame financial markets for the debts of developing countries. Rather moreimportance should be given to the means obtained by governments. The debt of developingcountries highly depends on the public powers from industrialized countries. Asking to settle a debtsomehow equals some kind of developing aid that may have negative consequences. On the otherhand, efforts are made to apply an international debt redeeming procedure, both for sovereign statesand for their creditors, in order to at least contain the unsolved problem of state collapse. However,it should be clear that only the regaining of trust can grant new access on international financialmarkets. Thus, the debt redeeming procedure sh ouldn’t spare the debtor from any responsibility, asthere is the risk of excessive indebtedness that would cause some developing countries to alwaysfoster poverty.

The moral hazard from the bank system, the possible irrational behaviour of marketparticipants and, due to the complex nature of the increase in financial services, the inconsistentinformation exchanged between financial institutions and their clients, all these could create realproblems on the international financial markets.

Even before interacting within globalization, these problems are triggered by financial andmonetary crises on a national level and they can affect entire regions all over the world. Moreover,


except for crises, financial markets usually react in a rational manner whe n confronted with anunstable economic policy. Certain irrational behavioural features can certainly be identified in thetendencies of financial markets (herding, speculative bubbles). Nevertheless, ever since the 90’s,certain considerable disagreements between fundamental data and the fixed exchange rate system(prices for all currencies), have caused pressure in the financial systems of developing countriesduring the majority of the financial crises. In this respect, “speculators” cannot be held accoun tableif they assume the entire economic risk of a possible mistake.

The criticism against the IMF is an exception. To a certain extent, one must agree with theaccusation that its financial transfusions have favoured the excessive risk certain marketparticipants have taken on. But it is not true that its stability practices data sheet has conditioned thegranting of funds and thus triggered the crisis. The policies of the IMF are, undoubtedly, arguable,as they establish trust only after a crisis and, at the same time, try to stop an expansionist economicpolicy. [5] A high devaluation of the exchange tax, in the event of a monetary and financial crisis,indicates a monetary adjustment and a stimulus for the economy. If this course of events is to becontradicted by extending the interests and by enforcing austerity policies, the IMF can be accusedof serving the interests of private foreign investors and of compelling countries to adapt to theserequests by paying a very high price (including unemployment ). But, if a crisis cannot be blamed onthis policy, what is the point of asking the IMF for help?

The ex ante conditionings, defined through the PSAL programmes, are highly welcome asthey decrease the possibility of a crisis. That is the purpose claimed by the “Washington consensus”on the competitive exchange rate. If the fixed exchange rate can only be maintained with very highcosts, because of economic crises (such as the Argentina crisis), it would be necessary to grantcertain flexibility in the choice of a new exchange rate system.

IV. CONCLUSION

A possible market collapse can be prevented through better information (for instance,matching the funding and accounting regulations), and not necessarily by creating an internationalauthority to supervise the financial market. Unlike an international institution, the national controlauthorities and the central banks can show greater flexibility if they coordinate their activities.Moreover, fixed exchange rate systems or world monetary systems should be refused, as theexchange rate can be more flexible in diminishing the macroeconomic drifts than the prices of morerigid factors. The World Bank is especially criticised for observing the rules set up by the economicpolicies of the IMF. Just as with a ny development aid, the economic literature expresses doubtsabout the efficiency of supplying public means instead of aid from investors or private capitalproviders. Nevertheless, one must note the fact that, for certain reasons, the access to internatio nalfinancial markets is not a realistic option for very poor countries. An institution such as the WorldBank is irreplaceable in these countries until they meet the necessary requirements for the economicpolicy before being granted the development aid. Moreover, the Bretton Woods institutionsspecialised in world financing and cash loans can support the access to information.

Also, the role of the IMF and of the World Bank must be reconsidered in order to includethe new global reality: widening the ga p between developed and underdeveloped nations, thevolatility of global funds and the instant capital transfers. Ever since the beginning, theseinstitutions have been governed by responsible managers from the countries they represented. Theinterests of the managers did not always coincide with the interests of the members. These interestsare now unclear because of the new role of the nation -state in world business. The globalizationforces have diminished the power of the state. Now global actors interv ene – multinational and non-governmental organizations – and play an active role in the development of the world system. Evenif the world is no longer the divided ruin from the end of the Second World War and no longershifted by the ideologies of communi sm and capitalism, the IMF and World Bank networks do nothave sufficient ranges to accommodate the dynamics of global economy or the complexity ofdomestic problems. Consequently, the new role of the IMF and of the World Bank in the global


economy should aim at a harmonious development, accomplished through the control of failures,normal on a market system, and to draft economic prescriptions that would balance investments,development and political effects. As these institutions have evolved when it come s to reflectingchanges in the perception of development in a human context, and also in dealing with theemergence of problems of global interest, they have also adjusted their policies so that theiroperations can be interchangeable. But this is not an e fficient means to manage and benefit frominternational finances. It is time for the IMF and the World Bank to have a taste of their medicine:operate efficiently, perhaps as one institution.

REFERENCES

1. Chamsy, O., & Hayden, P., (2006), Critical Theories of Globalization, PalgraveMacmillan, New York, p.8

2. De la Dehesa, Guillermo, (2008), Învingători şi învinşi în globalizare , Editura Historia,p.12

3. Gilpin. R., (2004), The World Economy in the XXI centu ry. The Challenge of the GlobalCapitalism, Editura Polirom, p.24

4. Hirst, P., & Thomson, G., (2000) Globalization in Question. International Economy andthe Possibilities of Governance , Polity Press& Blackwell Publishers Ltd., p.68

5. Madura, J. (2006), Financial Institutions and Markets , Thomson, South - Western, USA,p.79

6. Marin, Dinu, (2004), Globalizarea şi aproximările ei , Editura Economică, p.247. Maynagh, M., & Worsley, R., (2008) Going Global, Key Question for the 21st Century ,

A&C Black Publishers Ltd, London, p.558. Stiglitz, Joseph E, (2003) Globalizarea. Speranţe şi de ziluzii, Editura Economică, p.34


THE SOCIAL LCA: THE STATE OF ART OF AN EVOLVING METHODOLOGY

Luigia PETTIDASTA, G. d’Annunzio University, Pescara, Italy

[email protected] CAMPANELLA

DASTA, G. d’Annunzio University, Pescara , [email protected]

Abstract:The paper deals with the introduction and the discussion of the concept of Social Life Cycle Assessment

(SLCA) – a new methodology which assesses social aspects of all life -cycle steps, from cradle to grave for the productsand services. The peoples become more and more interested for the environmental problems and the scientific researchhave to provide appropriate and useful new tools .

Key words: sustainable development, impact, Social Life Cycle Assessment, quantitatively indicators

JEL Classification: Q01

1.1 INTRODUCTION

In 1992 in Rio de Janeiro the United Nations have declared “sustainability” as the guidingprinciple for the 21st century, and the term has then become popular thanks to the Bruntland reportof the World Commission on Environment and Development. (Klöpffer, 2002 - Klöpffer, 2008) Inthis report has been introduced, for the first time, the definition of sustainable development (“ thedevelopment that meets the needs of present without compromising the ability of future generationto meet their own needs”) and it has been emphasized the responsibility of human kind towards thefuture generation. (Klöpffer, 2002)

From a careful interpretation of the definitio n it has emerged that sustainability comprisesthree components, known as “ pillars of sustainability”, which have to be properly assessed andbalanced if a new product has to be designed or an existing one has to be improved: environment,economy and social aspects. (Klöpffer, 2002 - Klöpffer, 2008)

There seems to be consensus about the three pillars, but not about the weights of theseaspects. (Klöpffer, 2002)

As a result of globalization and of the increasing complexity of modern economies, a newconcept has become a focus of interest, passing from a narrow and often marginalized notion, to acomplex and multifaced concept: corporate social responsibility (CSR). (Fet, 2006 – Cochran,2008)

Corporate social responsibility has become an important component in the management ofrelationship between companies and community, public, employees and shareholders, sincecompanies who successfully pursue a strategy of seeking profits while solving social needs mayearn better reputation and gain a competitive advan tage over companies esteemed sociallyirresponsible. (Fet, 2006 – Cochran, 2007)

1.2 SOCIAL ASPECTS

A commonly accepted definition for the social dimension of sustainability doesn’t exist,since it is a dimension characterized by particular features: it is bipolar (it refers both to individualand collective levels), it is reflexive (our perceptions and interpretations of the objective socialconditions change the behaviour of individuals and social collectives) and it is immaterial (thesocial phenomena are difficult to grasp and analyse quantitatively). (Lehtonen, 2004)

Compared to environmental and economic aspects, social aspects present different problemsbecause they can be highly diverse, they are weighted very differently by different interest groups

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and in different countries and regions, and their evaluation is subject to swifter changes over time(it’s sufficient to think, for example, to cultural changes). (Grieβhammer et al., 2006)

The aspects to consider in a social impact assessment study have t o do with the scope of thestudy itself, and the social impacts, understood as “ the consequences on human population of anypublic or private actions that alter the ways in which people live, work, play, relate to one another,organize to meet their needs and generally cope as members of society ” (InterorganizationalCommittee on Guidelines and Principles for Social Impact Assessment, 1995 , pag. 11), will bedifferent for each stage of a project or a policy, that is the initial planning, theimplementation/construction, the operation/maintenance and the decommissioning/abandonment.(Interorganizational Committee on Guidelines and Principles for Social Impact Assessment, 1995)

An important distinction has to be made between social change processes (that can bring tosocial impacts, considering the features of the community and the mitigation measures) and socialimpacts. (Vanclay, 2002)

Among social change processes there are, for example, the demographic processes (changesin the number and composition of th e family); the economic processes (relating to the way in whichpeople make a living and economic activity in the society); the geographical processes (changes inland use patterns); the institutional and legal processes (relating to the efficiency and eff ectivenessof institutional structures, including governement and non government organisations); theemancipatory and empowerment processes (increasing influence in decision making processes); thesociocultural processes (affecting the culture of a society ); and all the other processes are notincluded in the previous. As regards social impacts, on the contrary, according to Vanclay (2002)they can be subdivided into seven categories: the indicative health and social well -being impacts asfor example the death in the community (where the death is considered as a loss of human andsocial capital), the nutrition (quality and adequacy of individual and household food supply), themental health and subjective well -being (feelings of anxiety, stress, depression e tc.), the uncertaintyabout the effects of planned interventions and so on; the indicative quality of the living environmentimpacts (exposure to dust, noise, risk, recreation opportunities etc.); the indicative economicimpacts and material weel-being impacts (workload, access to public goods and services, incomelevel of unemployment in the community etc.) ; the indicative cultural impacts (changes in culturalvalues such as moral rules, beliefs, language, cultural integrity etc.); the indicative family andcommunity impacts (alterations in the family structure, family violence, social differentiation andinequity, social tension and violence etc.); the indicative institutional, legal, political and equityimpacts (integrity of government and government age ncies, loss of tenure or legal rights, violationof human rights, participation in decision making etc.) and the indicative gender relations impacts(personal autonomy of women, gendered division of production oriented labour, equity ofeducational achievement between girls and boys, political emancipation of women etc.). (Vanclay,2002) The lists of social impacts are the product of the conceptualization of the authors who decidewhich impacts to include. Considering this, many publications have provided some generalclassifications concerning the types of social impacts that should be considered in a social impactassessment process (SIA). Audrey Amour, for example, has identified, as main social aspects, thepeople’s way of life (how they live, work, play and interact with one another on a day -to-day basis),their culture (beliefs, customs and values) and their community (cohesion, stability, character,services and facilities); Vanclay has added to these aspects the political systems of people (theextent to which people are able to partecipate in decision that affect their lives, the level ofdemocratisation and the resources provided for this purpose), their environment (the quality of theair and water they use, the availability and quality of the food that they eat, the level of hazard, dustand noise in which they are axposed to, the adequacy of sanitation, their physical safety and theiraccess to and control over resources), their health and well-being, their personal and property rights(particularly whether people are economically affected, or experience personal dasadvantage whichmay include a violation of their civil liberties) and their fears and aspirations; Juslén, on thecontrary, has identified seven main categories of impacts: the “standard” social impacts,concerning noise level, pollution and so on, the psychosocial impacts (community cohesion,


disruption of social networks), the anticipatory fears, the impacts of carrying out the assessment ,the impacts on state and private services and the impacts on mobility (transportation, safety etc.)(Vanclay, 2002) The US Interorganizational Committee on Guidelines and Principles for SocialImpact Assessment, at last, has included a list of social impact variables, that points to measurechanges in human population, communities, and social relationships , resulting from a developmentproject or policy change. These hypothetical variables regard: the population characteristics(present population and expected changes, racial and ethnic diversity, infl uxes and outflows oftemporary residents as well as the arrival of seasonal or leisure residents); the community and theinstitutional structures (size, structure, and levels of organization of local government , includinglinkages to the larger political systems, historical and present patterns of employment and industrialdiversification, the level of activity of voluntary associations, religious organizations and interestsgroups, relations among institutions ); the political and social resources (distribution of powerauthority, the leadership capability and capacity within the community or region); the individualand family changes (factors that influence the daily life of the individuals and families, includingattitudes, perceptions, family characteris tics and friendship networks); the community resources(include patterns of natural resource and land use, availability of housing and community servicessuch as health, sanitation facilities, historical and cultural resources etc.). (InterorganizationalCommittee on Guidelines and Principles for Social Impact Assessment, 1995)

The concept of social impact assessment has been already mentioned in this work, but it hasbeen no way of giving a definition yet. To better understand the topic of the next paragra ph,concerning the Social LCA (regarding the application of a SIA to a product or service life cycle),it’s necessary to outline its main aspects. The social impact assessment (SIA) has been defined indifferent ways from the authors and the lack of a com monly accepted definition has often led to theinadequacy of many studies. (Vanclay, 2002)

Social impact assessment can be defined as “ the process of identifying the futureconsequences of a current or proposed action which are related to individuals, or ganizations andsocial macrosystems”. (Becker, 2001, pag.312) The methodology consist of different phases thatcan be subdivided into two groups: the group concerning the initial phases that precede theassessment project and the group regarding the main p hases of the same project. (Becker, 2001) Tothe first group belong the phases concerning the problem analysis and the communication strategy(it’s necessary to understand the nature of the problem and why it has been judged serious enoughto merit action), the system analysis (the boundaries of the system, its sub -systems and relatedphenomena), the critical or base-line analysis (regarding the existing conditions and past trendsassociated with the human environment in which the proposed activity has to t ake place, forexample relationships with the biophysical environment, the historical background, the political andsocial resources, the culture, attitudes and social -psychological conditions, including attitudestoward the proposed actions, and the popul ation characteristics), the trend analysis and theconsequent monitoring design (able to provide informations about the development of action and itsintended and unintended consequences) and the project design. (Interorganizational Committee onGuidelines and Principles for Social Impact Assessment, 1995 - Becker, 2001)

To the second group, on the contrary, belong phases such as the scenario design (necessaryphase to provide simulations of what might happen to the system of interest), the design ofstrategies that might eliminate or mitigate the problem, the assessment of impacts and theconsequent ranking of strategies (that are redesigned in order to mitigate negative impacts), thereporting and, finally, the stimulation of project implementation and the auditing of the socialimpact assessment project. (Interorganizational Committee on Guidelines and Principles for SocialImpact Assessment, 1995 - Becker, 2001)

A particularly important aspect in the social impact assessment process, moreover, is thepublic involvement starting at the very beginning of planning for the proposed action, that is theinvolvement of all people who live nearby, who will hear, smell or see the project development,those who will be forced to relocate because of a project, thos e who normally use the land on which


the project will be located and so on. ( Interorganizational Committee on Guidelines and Principlesfor Social Impact Assessment, 1995)

Social impact assessment has changed substantially. In many western countries, forexample, it is nowadays obligatory in the preparation of governement actions, and many businesscorporations and no-profit organizations have adopted social impact assessment as a standardrequirement in policies formation. The number of practitioners of s ocial impact assessment isgrowing steadily all over the world; significant documents concerning social impact assessmenthave been published (it’s sufficient to think, for example, to “ The international principles for socialimpact assessment” and to “The principles and guidelines for social impact assessment in theUSA”, both of 2003 and, although they have been developed independently, they are both directdescendents of the “Guidelines and principles for social impact assessment ” of 1993/1994); andmore and more often, how we will see, the consideration of social impacts is incorporated in greaterprojects of environmental impacts assessment. (Becker, 2001 – Vanclay, 2006)

1.3 THE SOCIAL LCA

There has been way of outlining, in the previous paragraph, that social aspects haveobtained, nowadays, an undoubted importance. More in particular recent years have seen anincreasing interest, among policy makers and stakeholders, in the inclusion of social impacts inproducts or services environmental life cycle ass essment, ant this interest has been made concretewhit the development of the so called Social Life Cycle Assessment (SLCA), a new methodologythat has obtained more attention only over the last years. (Norris, 2006 – Hauschild et al., 2008) Thesocial LCA assesses social aspects of all life -cycle steps, from cradle to grave, and it has beendeveloped for including a great number of impacts, that vary from those concerning workers(accidents, remuneration, working conditions) and local communities (toxic po llutants, humanrights abuses), to the greater conseq uences on the society (corruption, payment of taxes).(Grieβhammer et al., 2006 – Hauschild et al., 2008)

The importance of the methodology, however, is that Social LCA supplements thetraditional environment-oriented LCA and the life cycle costing tools in support of sustainabilitymanagement, addressing all three pillars of sustainability. (Hauschild et al.,2008)

The Life Cycle Assessment is a methodology that analyses quantitatively the behaviour of aproduct towards the environment, evaluating the soca lled “environmental shadow” cast by thesame product. (Heiskanen, 1999 - Bovea, 2004)

The Life Cycle Costing, on the contrary, can be defined as the assessment of all costs,internal and external, associated with the life cycle of a product, that is from t hose that are directlycovered by any one or more of the actors in the product life cycle (suppliers, producers, users, endof life actors etc.), to those that, in the long term, fall back on society, since there is nogovernmental regulation or market tha t assigns them to the company, that, consequently, is notresponsible for them (environmental degradation costs, adverse impacts on human beings, theirproperty and their welfare). (Bovea, 2004 – Hunkeler and Rebitzer, 2005 – de Beer and Friend,2006)

It has already been said that the LCA, the LCC and the SLCA are important methodologiesfor the environmental, economic and social assessment, and their integration allow to give a morecomplete assessment of product sustainability. (Hunkeler and Rebitzer, 200 5)

As regards this integration two options have been proposed. According to the first one theLife Cycle Sustainability Assessment (LCSA) can be written as LCSA = LCA + LCC + SLCA . Thisoption is based on three separate life cycle assessments with consiste nt system boundaries (thisbrings to build an independent dimension of sustainability, respecting an important principle ofsustainable development which aims at balancing environmental, economic, and socialconsiderations). (Hunkeler and Rebitzer, 2005 – Klöpffer, 2008)

According to the second option, on the contrary, the LCSA can be written as LCSA = “LCAnew”.


In this case the Life Cycle Costing and the Social LCA are included as additional impact categoriesin Life Cycle Assessment and exists, consequen tly, an only one LCI model which has to be definedin the “Goal and Scoping” phase. (Klöpffer, 2008)

Before studying in detail the SLCA is important to make a specification in order to do notcause confusion afterwards. The acronym SLCA has been interprete d, depending on the authors,differently; some authors, as we have seen, have spoken of Social LCA, someone else, like forexample Hunkeler, of Societal LCA. The same Hunkeler, in one of his works, has outlined thedifference between the two terminologies, highlighting the micro-economic character of SocietalLCA compared with that macro-economic of Social LCA. According to what affirms the author, thesocietal life cycle assessment differs from social LCA because it examines the effect of productsubstitution on the state of average workers in countries where the product life cycle has an effect.The Social LCA, therefore, covers explicitly the effect of government programs, while the SocietalLCA covers them implicitly via overhead and taxes. (Hunkeler, 20 06)

Even though not all the authors have dwelt upon the slim difference between the twoterminologies, to consider this distinction is important in order to avoiding unnecessary doubtsgoing forward in the work. Starting from the next paragraph, it will b e described the framework ofSocial LCA and it will be introduced the considerations of different authors concerning this topic,in order to see how the Social LCA has been interpreted.

1.4 THE FRAMEWORK OF SLCA

As it has already been mentioned, the Social Life Cycle Assessment considers social aspectsthroughout the product life cycle and, as it happens in Life Cycle Assessment, it can be identified,for this methodology, two main classes of goals which should be seen as complementary: the firstone regards product, process or company comparison, and the other one the identi fication ofproduct or process potentials improvements. (Grieβhammer et al., 2006 – Jørgensen et al., 2008)

The Social LCA, corresponding to the LCA consists of the same phases of it, that is:- Goal and scope definition;- Inventory analysis;- Impact assessment;- Interpretation. (Grieβhammer et al., 2006)

The objective of the first phase is to identify the object of the study and to delimit the scope.It’s necessary to define, in this phase:

- Goal of the study (for example the development, or the refinement of a product);- Inventory scope and system boundaries (for example the determination of which countries

or regions are covered, the evaluation of the existing situation, or of a prospective ofdevelopment);

- Temporal scope;- Functional unit;- Alternatives/scenarios (including benchmarks and improvement options);- Data quality requirements;- Allocation procedures;- Critical review (in the case of comparative evaluations and in the case of any pubblication).

(Grieβhammer et al., 2006 - Jørgensen et al., 2008)The second phase, regarding the inventory analysis, has the goal to collect objective data

identified during the scope definition , and in this phase there is one of the more demanding aspectsof Social LCA. (Jørgensen et al., 2008) As regards the collection and the availability of data , in fact,arise different problems, since it can happens that only a small part of data is available in processedform from statistical or other sources; that no input -output data are yet available for severalprocesses and activities; or even, that several upstream chains can be involved, particularly in thecase of complex industrial products. (Grieβhammer et al., 2006)


The impact assessment is the phase where the inventory information s are translated intoimpacts and, as in the LCA, it consists of four phases: classification, characterisation,normalisation and evaluation of impacts. (Grieβhammer et al., 2006 - Jørgensen et al., 2008)

The classification assigns individual aspects to groups of indicators and, with regard to it, adiscussion has arisen concerning whether to follow the approach known from LCA (that is toclassify on the basis of the dif ferent impact categories), or to classify according to the impactedstakeholders (in this case the UNEP/SETAC task force has agreed on a minimal list of stakeholders:workforce, local community, consumers (related only to the use stage) and society (nation al orglobal)). (Grieβhammer et al., 2006 - Jørgensen et al., 2008)

The purpose of characterisation is to aggregate the inventory results (types of jobs, jobsatisfaction etc.) within the same impact category, and this implies the conversion of inventory datato a common metric. Many times, in fact, results can not be simply added or aggregated and for thisreason it’s necessary an approach that allows it. (Grieβ hammer et al., 2006 - Jørgensen et al., 2008)

Weidema, for example, (as it will see later) calc ulates all impacts as a reduction in theaverage well-being, denoted Quality Adjusted Life Years (QALY), while Hunkeler relates oneindicator, the number of working hours along the product chain, to several impact categories(housing, health care, education and necessities). (Jørgensen et al., 2008)

As regards the normalisation and the evaluation in Social LCA, at last, very little workshave been carried out and the general trend is that these phases have to be performed like in LCA.(Jørgensen et al., 2008) The normalisation, in particular, seems an optional step which has senseonly with quantitative results; in this phase the outcomes for the individual indicators are placed inrelation with a suitable reference value which has to correspond to that of LCA (for example thegross national product) and the goal is to establish the proportional importance of every problem.(Grieβhammer et al., 2006)

The final phase of the methodology, concerning the interpretation of results, at last, shoulinclude checks of completeness (or full coverage of areas of impact), consistency, sensitivity,materiality (relevance of provided informations) and of responsiveness (engagement ofstakeholders). Key requirements for this phase, moreover, are the participation of stakeholders, thedocumentation of the evaluation process, the steps to ensure transparency and verifiability ofresults, as well the analysis concerning the conformity with the goal of the study and with the scopeof inventory analysis. (Grieβhammer et al., 2006)

In spite of the same methodological structure of LCA, however, in Social LCA there aresome differences regarding, for example, the d efinition of product and boundaries system. If theproduct system in the Environmental LCA comprises all processes involved in the different stagesof the product’s life cycle, from the extraction of raw materials to final disposal, in the Social LCAit is represented by the companies engaged in the life cycle and in which industrial processes takeplace.

In Social LCA, therefore, the analysis is no more conducted at a process level, but ofcompanies engaged in the life cycle and, more precisely, it focuses on the conduct of each companytowards stakeholders. (Dreyer et al., 2006 - Jørgensen et al., 2008 – Hauschild et al., 2008)

As Dreyer, Spillemaeckers and other authors argue, most social impacts have no relationwith processes that form the product or se rvice system, but rather with the conduct of companiesperforming the same process; this means that the causal link is not, like in the LCA, betweenprocess and impact, but between conduct of the company and impact. ( Jørgensen et al., 2008)

Analysing impacts at a company level instead of process level, however, makes difficult todefine the relation between impacts and product; the link between the conduct of a company in theproduct life cycle and the product is not directly quantifiable as the physical l ink between processand product. (Dreyer et al., 2006)

A share factor, which represents the weight that is given to a company in the product orservice chain, is used to solve the problem and to allocate social impacts, created by companies, tothe product or service assessed. (Dreyer et al., 2006 - Hauschild et al., 2008 - Jørgensen et al., 2008)


The share factor can be calculated in different ways; it could be based, for example, on thephysical weight (the contribution to the physical weight of the pro duct), on the cost (thecontribution to the cost of the product), on the value creation (the contribution to the product’svalue) or on the number of working hours spent per functional unit of the product, and the choicedepends on two criteria: it is nece ssary that the bias, naturally introduced by the share factor, isknown and accepted, and the data or information, needed for the calculation of the share factor,have to be available for all companies of the product chain. (Dreyer et al., 2006 - Hauschild et al.,2008 - Jørgensen et al., 2008)

As regards the boundaries of the product system, on the contrary, they are determined withrespect to the influence that the product manufacturer exerts over the activities in the product chainand they have to be determined on a case-to-case basis, because Social LCA is highly site-specific.To conduct a Social LCA, in fact, simple general informations would not be useful, since aspectsconcerning the conduct of companies in the life cycle, or the impacts over stake holders are alwaysspecific. (Dreyer et al., 2006) Generally it can be affirmed that in a Social LCA are included allsocial impacts which occur in the material, manufacturing and distribution stage; should beconsidered social impacts of product use; and finally, in the disposal stage, their considerationdepends on the local or regional community’s choices on the matter of waste management (theinfluence of the product manufacturer in this stage, in fact, is restricted to the few case where he hasinfluence on the choice of waste management companies, or where he is also the end -user of theproduct). (Dreyer et al., 2006)

Other important aspects to consider in a Social LCA are the definition of assessmentparameters, the identification of areas of protect ion and the concept of social indicator. As regardsthe first aspect it can be said that the address changes depending on the approach type. In a bottom-up approach the definition of assessment parameters start s with the identification of social issues inthe business context of the product manufacturer ; in a top-down approach, on the contrary, thedefinition of assessment parameters starts with the identification of what is valuable to society (thisensures the inclusion of those impacts which are relevant from a societal point of view). In order togive importance to both company and society, a two-layer Social LCA has been suggested. Thismethod consists of two layers of impact categories, an obligatory and normative one, concerning apredetermined set of categories expressing minimum expectations to conducting responsiblebusiness, and an optional one, regarding a self-determined set of categories expressing specificinterests of the product manufacturer. (Dreyer et al., 2006) The obligatory categorie s are based onthe Universal Declaration of Human Rights and they refer, for example, to the discrimination, thechild labour, the forced labour and the freedom of association. (Hauschild et al., 2008) The optionalcategories, on the contrary, are more dep endent on the context of the company in terms ofgeographical and cultural settings, but also from trade to trade and some examples are the physicalworking conditions, the working hours, the minimum wage, the training and education ofemployees, and so on. (Hauschild et al., 2008) As regards the areas of protection in the Social LCAto the four areas normally present in a process of environmental assessment (human health, naturalenvironment, natural resources and man -made environment) it’s necessary to ad d a new one (tosupplement the human health of LCA): Human dignity and well-being (representing the value of agood and decent life and the fulfilment of the basic needs such as access to food, water, clothes,medical care etc.). (Dreyer et al., 2006 - Hauschild et al., 2008 – Jørgensen et al., 2008)

As regards social indicators, finally, they can be different. A first classification subdividesthem in midpoint indicators and endpoint indicators , difference that refers to the location of theindicators in the impact pathway. (Jørgensen et al., 2008) Job creation, for example, is normally notconsidered a goal in itself but, through contributing to the family income and subsequent povertyreduction, it may improve the family's health conditions , which may be considered as an end goal.The job creation could, thus, be considered a midpoint indicator, and the health condition as anendpoint indicator. (Jørgensen et al., 2008)

Another important classification considers the different methodologies used in theformulation of indicators. The first relates whether the indicators are formulated in quantitative,


semi-quantitative or qualitative terms , and the second concerns whether the indicator measures theimpact directly or via indirect indication or proxy measurem ents. (Jørgensen et al., 2008)

When formulating quantitative indicators it is assumed that the phenomenon to be measuredcan be directly quantified; a scoring system, based on semi -quantitative scales (for example ratingsfrom good to bad, often expressed in corresponding numbers), on the other hand, is often applied ifthe phenomena to be measured are too complex to measure and express in simple physical units(such as the indicators used to measure the performance on occupational health and safety ); the useof qualitative indicators, at last, does not set any restrictions on the types of information to includein the assessment, and thus they can be used in a more exploratory manner than both thequantitative and semi-quantitative indicators. (Jørgensen et al., 2008)

As regards the use of indicators that measure the phenomena directly, indirectly, or viaproxy measurements, on the contrary, it can be given two examples. According to Dreyer it is wellknown, among companies which have experience with regist ration of working accidents, that theregistered number of accidents cannot always be correlated with the quality of work environment inthe company. The problem of using the number of accidents as an indicator is that this number isstrongly influenced by how well reporting of working accidents is managed (a low number ofreported incidents, in fact, may reflect both a very efficient management practice and a very poormanagement where incidents are simply not reported ). Dreyer, therefore, introduces the i dea ofassessing the management effort s rather than the reported impacts. The indicator measurement,thereby, becomes an assessment of the will and ability of the company to avoid negative impacts ,and not an assessment of the reported impacts themselves. (Jørgensen et al., 2008)

Weidema, on the contrary, gives an example of measurement via proxi and suggests amethod of reverse compilation from available data sources. Reverse compilation, for example,could be used in relation to child labour: regional or national statistics on child labour are veryscarce and, assuming that children are either in school or working during day hours, a proxyindicator measurement of the total extent of child labour in the region can be made on the basis ofstatistics on education and demography. (Jørgensen et al., 2008)

1.5 CONCLUSIONS

The social life cycle assessment of a product presents, as well as it happens in everymethodology, some strenghts and weaknesses. The main problems regard, for example, how torelate quantitatively the existing indicators to the functional unit of the system, how to obtainspecific data for the regional SLCA (it’s to remind, in fact, the possibility of a scarce availability ofdata, or a total lack of them for different processes or activities), how to decide among qualitative orquantitative indicators, how to quantify all impacts properly, or more how to evaluate the results.(Klöpffer, 2008)

The strenght point of the methodology is that it makes the assessment of the product morecomplete, adding its social aspects to the environmental and economic ones. The Social LCA wouldallow companies to fully consider sustainability and, providing informations about the potentialsocial impacts on people, caused by the activities in the life cycle of th eir product, it would facilitatethem to conduct business in a socially responsible manner. (Dreyer et al., 2006 – Hauschild et al.,2008)

In spite of the admission of this importance the Social LCA is still in the phase ofdevelopment, the one where different approaches emerge and hypotheses are tested and discussed ,waiting to reach an agreement and achieve harmonization . Promoting the development of themethodology and its practical use it’s more than ever necessary and to obtain this it should certainl yadopt some actions; actions concerning, for example, the execution of case studies, the definition ofthe single indicators and of their measurement units, the improvement of existing databases(restricting the problem of the lack of data, previously con sidered), or more the creation of a code ofpractice for integrating social aspects into LCA or extending the existing code of practice of theLCA. (Grieβhammer et al., 2006) A role of primary importance for the development of Social LCA


is occupied by values (defined by Vanclay as “ the statements about fundamental beliefs deeply heldthat determine principles from which guidelines can be written ” (Vanclay, 2006, pag. 9) ), byculture and by every individual and communities beliefs.

As it has already been said in this work, talking about the Kuhnian model, in fact, theactions of individuals are guided by their values and their beliefs and this means that only anunderstanding of the importance of concepts, like for example, in our case, the intergenerationalequity or better working conditions , can help to change the norms which “condition” humanactivities, allowing to insert ethical aspects in the company.

As Lorna Beretta properly asserts, the starting point for obtaining a change is the personallearning experiences of those struggling for the change itself and this learning, given by theexperience in relationship with others, has the potential to enhance individual and community lifes.(Beretta, 2007)

The importance of the consideration of social aspect s in a life cycle context has to beunderstood first of all at a theoretical level by individual, and companies that make, for example,social reporting, or apply a management system such as SA8000, have to do it because they reallyhave recognized its importance and not exclusively to obtain a competitive advantage overcompetitors. Only a manager that has really understood the importance of social aspects and ofprobable impacts that company activities may cause on various stakeholders who will have to dowith it, can really work hard to try to avoid or to mitigate these impacts and only in this way thecompany will be able to fully enjoy all the benefits that it will register, for example, in therelationship with customers or employees (which certainly w ill work with more enthusiasm in abetter context).

It’s just, therefore, what Becker says, that is that “ the social impact assessment has to bediscussed first of all as a moral obligation ” (Becker, 2001, pag. 318); a moral obligation to the baseof which there must necessarily be the understanding and the convinction of why it must be so.

REFERENCES

1. Becker H. A. : 2001, Social impact assessment , European Journal of Operational Research128, 311-321.

2. Beretta L.M.: 2007, Learning experience: the root of sustainable change , Int. J. Learningand Change, Vol. 2, No. 4, 405-419.

3. Bovea M.D., Vidal R.: 2004, Increasing product value by integrating environmental impact,costs and customer valuation , Resources, Conservation and Recycling, 41, 133 -145

4. Cochran P. L. : 2007, The evolution of corporate social responsibility , Business Horizons,50, 449-454.

5. De Beer P., Friend F. : 2006, Environmental accounting: A management tool for enhancingcorporate environmental and economic performance , Ecological Economics, 58, 548-551

6. Dreyer L.C., Hauschild M.Z., Schierbeck J. : 2006, A Framework for Social Life CycleImpact Assessment, Int J LCA 11 (2), 88-97.

7. Dreyer L.C., Hauschild M.Z. : 2006, Scoping Must be Done in Accordance with the GoalDefinition, also in Social LCA, Int J LCA 11 (2), 87.

8. Fet A. M.: 2006, Environmental management and corporate social responsibility , CleanTechn Environ Policy 8, 217-218.

9. Frischknecht R., Braunschweig A., Hofstetter P., Suter P.: 2000, Human health damagesdue to ionising radiation in life cycle impact assessment , Environmental impact assessmentReview, 20, 159-189

10. Gauthier Caroline: 2005, Measuring corporate social and environmental performance: theextended Life-Cycle Assessment, Journal of business ethics, 59, 199 -206.

11. Grießhammer R., Benoît C., Dreyer LC., Flysjö A., Manhart A., Mazijn B., MéthotA.,Weidema BP. :2006, Feasibility Study: Integration of Social Aspects into LCA,Discussion Paper from UNEP-SETAC Task Force Integration of Social Aspects in LCA


meetings in Bologna (January 2005), Lille (May 2005), Brussels (November 2005) andFreiburg (May 2006).

12. Hauschild M.Z., Dreyer L.C., Jørgensen A.: 2008, Assessing social impacts in a life cycleperspective—Lessons learned, CIRP Annals - Manufacturing Technology 57, 21 –24.

13. Heiskanen E.: 1999, Every product cast a shadow: but can we see it, and can we act on it? ,Environmental Science & Policy, 2, 61 -74.

14. Hunkeler D., Rebitzer G. : 2005, The Future of Life Cycle Assessment , Int J LCA 10 (5)305-308.

15. Hunkeler D. : 2006, Societal Assessment – A New Subject Area and Call for Papers, Int JLCA 11 (2), 86.

16. Hunkeler D.: 2006, Societal LCA Methodology and Case Study, Int J LCA 11 (6), 371-382.17. Interorganizational Committee on Guidelines and Principles for Social Impact Assessment:

1995, Guidelines and principles for social impact assessment , Environmental ImpactAssessment Review, 15, 11-43.

18. Jørgensen A., Le Bocq A., Nazarkina L., Hauschild M. : 2008, Methodologies for SocialLife Cycle Assessment, Int J LCA 13 (2), 96-103.

19. Klöpffer W.: 2002, Life-cycle based methods for sustainable product development, Life-cycle Approaches to Sustainable Consumption Workshop Proceedings, 22 November 2002,133-138.

20. [Kloepffer W. : 2008, Life Cycle Sustainability Assessment of Products , Int J LCA 13 (2),89-95.

21. Korhonen J.: 2003, On the Ethics of Corporate Social Responsibility – Considering theParadigm of Industrial Metabolism , Journal of Business Ethics, 48, 301 -315.

22. Labuschagne C., Brent A.C.: 2006, Social Indicators for Sustainable Project andTechnology Life Cycle Management in the Process Industry , Int J LCA 11 (1), 3-15.

23. Lehtonen Markku: 2004, The environmental – social interface of sustainable development:capabilities, social capital, institutions, Ecological Economics 49, 199-214

24. Norris G.A. : 2006, Social Impacts in Product Life Cycles , Int J LCA 11, Special Issue 1,97-104.

25. O’Brien M., Doig A, Clift R.: 1996, Social and Environmental Life Cycle Assessment(SELCA) Approach and Methodological Development , Int J LCA 1 (4), 231-237.

26. Udo de Haes H.A. : 2008, The Scientific Basis for SLCA , Int J LCA 13 (2), 95.27. Vanclay F.: 2002, Conceptualising social impacts , Environmental Impact Assessment

Review, 22, 183-211.28. Vanclay F.:2006, Principles for social impact assessment:A critical comparison between the

international and US documents , Environmental Impact Assessment Review, 26, 3 – 14.29. Weidema B.:2005, ISO 14044 also Applies to Social LCA , Int J LCA 10, 381.30. Weidema Bo P. : 2006, The Integration of Economic and Social Aspects in Life Cycle

Impact Assessment, Int J LCA 11, Special Issue 1, 89 -96.


THE CONNECTION IDENTIFICATION BETWEEN THE NET INVESTMENTS INHOTELS AND RESTORANTS AND TOURISTIC ACCOMODATION CAPACITY BY

USING THE ANOVA METHOD

Assistant Roxana Elena [email protected]

Lecturer Emilia [email protected]

Assistant Nicoleta [email protected]

Romanian-American University, Bucharest, Romania

Abstract:In the purpose of giving the answers to customers’ harsh exigencies, in the Romanian tourism development has

to be taking into account especially the “accommodation” component. The dimension of technical and material base ofaccommodation can be express through: units’ number, rooms’ number, places number. The most used is “placesnumber” indicator. Nowadays as regarding the tourism Romanian investments there are special concerns caused bypeculiar determinations. The study aim is represented by identifying of a connection existence between net investmentsin hotels and restaurants and tourism accommodation capacity, registered among 2002 -2007period in Romania, byusing the dispersion analysis ANOVA method .

Key words: Net Investments, Tourist’s accommodation capacity, Variant analysis

JEL Classifications: B23, C13, C51, C52

INTRODUCTION

In the widening conditions and methods improvement of phenomenon commensurable, it ispossible the most correct evaluation for hy postasis displayed at micro and macro economy level.Thus is necessary the each analyzed situation depiction, the comparison between two or manycollectivities, as well as the analysis influence of the implied factors.

A dispersion analysis method is ANOV A method – Analysis of Variance, contoured by A.Fisher, which suppose grouping and study of interdependencies that appear during routephenomenon display and economical processes. The study of these connections suppose to build aregression model, which implies getting the regression equation, testing the regression modelvalidity, the settlement and testing of correlation report and testing the purport and parametersevaluation for the regression model on the trusting intervals.

In the case of ANOVA method, the analyzed parameters values can be calculated or couldbe used for determining them the EXCEL software.

1. REALIZING THE REGRESSION MODEL

The evolution of net investments in hotels and restaurants and touristic accommodationcapacity in Romania, during 2002-2007, is presented in the following table:

Table no: 1. The evolution of net investments in hotels and restaurants and touristicaccommodation capacity, registered in Romania, between 2002 -2007

Years

Net investments inhotels and restaurants

(lei million currentprices)

Touristicaccommodation

capacity

(existing places)

2002 331,5 272596

2003 481,5 273614

[email protected]

[email protected]

[email protected]


2004 750,4 275941

2005 936,6 282661

2006 1249,2 287158

2007 1600,9 283701

Source: Romanian Statistical Yearbook, INS, 2008, p. 517 .

For determining and analysis the connection between net investments in hotels andrestaurants and touristic accommodation capacity, it will be us ed the information from table no: 1,and applied the dispersion analysis method (ANOVA – Analysis of Variance).

ANOVA method supposes the following main aspects: determining the regression equation,testing the validity of the regression model, establishing and testing the multiple reports, and testingthe significance and estimate the parameters of the regressi on model.

1.1. DETERMINING THE REGRESSION EQUATION

The identification of the regression equation which adapts the connection between netinvestments in hotels and restaurants and touristic accommodation capacity suppose to follow thesesteps:

Identifying the two variables: xi and yi

xi – factorial variable – Net investments in hotels and restaurantsyi – resultant variable – Touristic accommodation capacity

Estimating the parameters for the linear regression model: a and bLinear regression model imply the linear regression equation. Regression equation which

shapes the connection between net investments in hotels and restaurants and touristicaccommodation capacity is: y = a + bxi.

Parameters a and b are determined using the least squares method, and n represents theobservations.

In the following table are presented the intermediary values necessary for applying leastsquares method:

Table no: 2. The algorithm necessary for applying least squares method

Years

Net investments inhotels and restaurants

(lei million currentprices)

Touristicaccommodatio

n capacity

(existingplaces)

xi2 xiyi

2002 331,5 272596 109892,25 90.365.574,00

2003 481,5 273614 231842,25 131.745.141,00

2004 750,4 275941 563100,16 207.066.126,40

2005 936,6 282661 877219,56 264.740.292,60

2006 1249,2 287158 1560500,64 358.717.773,60

2007 1600,9 283701 2562880,81 454.176.930,90

∑ 5.350,10 1.675.671,00 5.905.435,67 1.506.811.838,50

Knowing that n = 6, result:

6a + 5350,10b = 16756715350,10a + 5905435,67b = 1506811838,50


so: a = 269343,7 and b = 11,1416.

The regression line is: y = 269343,7 + 11,1416x

The a free term indicates the value of resulting variable when all unessential factors have aconstant action. In other words, a = 269343,7 indicates the medium lev el of tourismaccommodation capacity variable determined through the other factors influences less netinvestments in hotels and restaurants.

The positive value of the regression ( b) indicates the fact that there is a direct connectionbetween the net investments in hotels and restaurants and tourism accommodation capacity, theboth variables modifying in the same direction. The value of regression quotie nt b = 11,1416reveals the fact that the accommodation capacity increases with approximately 11 place s when theinvestments increase with 1 million.

The following stages in the linear regression model analysis model represent the methodchecking validity, through which is demanded the model establishment and utilization. In order tofind the solution of problems and to facilitate the calculus it has been applied the EXCEL program.

1.2. TESTING THE VALIDITY OF THE REGRESSION MODEL

Testing the validity of the regression model supposes making the following steps: Null hypothesis – H0: the model is not valid Alternate hypothesis– H1: the model is valid In report with data is to be applied F test (Fisher Snedecor) Is to be settled the purport limit α (in this status α = 0,05, due to appearance probability calculus

of the results is 95%) and is get the rejection region limit:Fα;k;n-k-1 = F0,05;1;4 = 7,71

Is to be settled the test F statisticsTo settle the statistics of test F it has been used EXCEL software. Thus has been getting the

following necessary values for validity analysis of the regression model:

Table no: 3 Table ANOVA with necessary valuesfor validity analysis of the regression model

ANOVA

Df SS MS F Significance F

Regression 1 1,41E+08 1,41E+08 14,05434 0,019966

Residual 4 40093989 10023497

Total 5 1,81E+08

The assessment of final decision for testing the model validity depending on the F c value: If Fc > Fα;k;n-k-1, then H0 is rejected, the regression model being statistic valid; If Fc < Fα;k;n-k-1, then H0 is supposed true, the regression model not being statistic valid

From the 2.3 table results that, in the case of these two analyzed indicators – The netinvestments in hotels and restaurants and Tourist accommodation capacity, F c = 14,05434 > Fα;k;n-k-1

= 7,71, then H0 is to be rejected, the model of regression being statistic valid.In table appears also an element that reflects the validity of the mod el: Significance F. If the

achieved value of this element is smaller than 0,05 then is rejected H 0. In the case of this


application, Significance F = 0,019966 < 0,05, from where results that the regression model isstatistically valid.

1.3. ESTABLISHING AND TESTING MULTIPLE R

Multiple R, in statistics, is used to measure the intensity rate for a connection between aresultative variable and a factorial variable, while in econometrics is introduced also in thevalidation stage of linear regression model.

Multiple R 0,1, his values having the following significance 3:- if R = 0, the two variables are independent, so do not there is a connection between them (all the

averages are equal);- if R (0;0,2, there is o very feebly connection between the studied va riables;- if R (0,2;0,5, there is feebly connection between the two variables;- if R (0,5;0,75, there is a medium intensity connection between the variables;- if R (0,75;0,95, there is a strong connection between the two variables;- if R (0,75;1), there is a very strong connection between the variables;- if R = 1, there is a perfect connection, determinist or functional between the two variables.

In table no: 4 are presented: Multiple R (R), R Square (R 2), Adjusted R Square (R2) andStandard Error (se):

Tabel no: 4 Values for R, R 2, R2 and se parametersSUMMARY OUTPUT

Regression Statistics

Multiple R 0,882296

R Square 0,778447

Adjusted R Square 0,723058

Standard Error 3165,991

Observations 6

The value of Multiple R is 0,882296. This shows that , between net investments in hotels andrestaurants and touristic accommodation capacity there are a strong connection.

R Square is 0,778447 and indicates that the percent influence of the volume of netinvestments on touristic accommodation capacity is ap proximate 77,84%. Standard Error is3165,991.

By detailing this component of verifying the model validity, have been determined theelements necessary for complete analysis of the studied phenomenon.

1.4. TESTING THE SIGNIFICATION AND ESTIMATING THE LINEARREGRESSION MODEL PARAMETERS ON TRUST INTERVALS

Parameters a = 269343,7 and b = 11,1416, raters in linear regression equation:yi = a + bxi yi = a + bxi

have been determined by applying least square method.Testing the signification of parameters a şi b has in view the size of selected sample.Because n < 30 it must applied Student test.The necessary elements for testing parameters and establishing the trust intervals were

determined using EXCEL and are presented in an ANOVA table (table no: 5).


Table no: 5 The necessary elements for testing parameters (, )and establishing the trust intervals

Coefficients

Standard Error

t Stat P-value Lower95%

Upper95%

Intercept 269343,7 2948,442

91,35121

8,61E-08

261157,5

277529,9

X Variable 1 11,1416 2,971955

3,748912

0,019966

2,890109

19,39308

The free term (Intercept) appears under form of a quotient. The value of quotient of269343,7 indicates the fact that, in the condition of remaining constant the accommodation capacitythan the investments have been established at a value of 11, 14.

Due to tca = 91, 35121, and the signification threshold P -value is 8,61E-08 < 0,05, thatmeans the respective quotient a is statistic significant. The lower limit of the trusting interval forthis parameter is positive, established at the value of 261157, 5, and the upper limit reaches till thevalue of de 277529,9.

The value of b quotient is approximately of 11, 14 and shows that at the increasing of hotelsand restaurants investments by 1 mil lion lei, the tourist’s accommo dation capacity will increasewith approximately 11 places.

Due to tcb = 3,748912, and the signification threshold P-value is 0,019966 < 0,05, means thatrespective quotient b is statistic significant. The lower limit of the trusting interval for thisparameter is positive, established by the value of 19,39308, and the upper limit reaches till value of19,39308.

2. CONCLUSIONS

Following the test of regression model validity, it has been established the fact that thismodel is statistically valid. Thus, it h as been noticed that between net hotels and restaurantsinvestments and tourist’ accommodation capacity there is o direct and strong connection, thecorrelative report having the value of 0,88.

The influence percent of the making investments in hotels and restaurants over tourist’accommodation capacity is of approximately 77,84%.

The values of determined estimators parameters of the regression equation show that at theincreasing with 1 million lei of the investments in hotels and restaurants, the tourist’accommodation capacity will increase with approximately 11 places.

REFERENCES:

1. Andrei T., Statistics and econometry , Editura Economică, Bucharest , 20032. Gogonea R., Zaharia M., Econometry with appliances in Commerce -Tourism-Services, Editura

Universitară, Bucureşti, 20083. Pecican E. Ş., Econometry for... economists , Editura Economică, Bucureşti, 20074. *** Romanian Statistic Yearbook, INS, Bucharest, 2008


CONSIDERATIONS ON THE NEW COMMUNITY LEGISLATION REGARDING THEEUROPEAN PRIVATE SOCIETY

Lecturer PhD. Elise Nicoleta VÂLCUUniversity of Piteşti, Romania

Juridical and Administrative Sciences Faculty [email protected]

Abstract:The European Commission has proposed a new legal form for European companies and for the private

European society, or “Societas Privata Europaea” (SPE). The advantages of this new legal form are a greaterflexibility and lower costs for small and medium enterprises who wish to pursue activities in other states of theEuropean Union than they are registered. According to the Regulation submitted to discussion, the specificity of theEuropean Private Society in terms of its legal form is that, on the one hand, it undertakes a number of features of jointstock companies, such as the method of formation of governing bodies (the two, dual and unitary systems beingaccepted), but are retained also specific elements to the limited liability companies, meaning the fact that shares maynot be offered for public trading. In terms of how social responsibility and contribution in proportion to the capital, thisfeature included in the Regulation is found in both legal forms. By this time the Community legislature has followed thenew legal form of company are not subject to mandatory capital requirements high so provided in this respect theamount of 1 euro, so that provides to the contrary is inconsistent w ith the rationale that has outlined the relevantCommunity legislation by a company widely permissive.

Concluding, the article subject to comment retains those provisions of the new Community act defining thespecific new limited liability company establis hing the European elements while giving the European businessenvironment the interest for it.

Keywords: European Private Society, social capital.

JEL Classsification: K 33

I. INTRODUCTION

This work’s purpose is to bring to the fore an issue tha t is on the table of the Union’slegislative bodies, an issue that presents a strong interest in the business environment of all MemberStates of the European Union. In this respect, the European Council of 8 th-9th March 2007underlined that reducing the a dministrative burdens is important to stimulate Europe's economy,having regard in particular the possible benefits created thus for small and medium enterprises. Itinsisted on the need for an intensive joint action of the European Union and its Member St ates.Under this initiative, have been the company law and the accounting and auditing at the Europeanlevel identified as priority areas.

In order to create a flexible form of society, the European Commission carried out afeasibility study for developing a European statute for small and medium enterprises (PME - Lespetites et moyennes enterprises") based on the obtained results up to December 2005.

On the base of the Commission’s Communication to the Council and Parliament on 21 May,2003 “Modernizing company law and strengthening corporate governance (1) in the EU. A Plan toMove Forward” (2) and on the Report of the Committee on Legal Affairs of the Parliament of29.11.2006 (3), the European Parliament adopted on February 1, 2007 the "Resolution contain ingrecommendations to the Commission regarding the European Company Statute (4) and the requestthat during 2007 the Commission to submit a legislative proposal in accordance with therecommendations of the Parliament, to be adopted in legislative form th e SPE status.

In the planning phase, completed in summer 2008, SPE presented the characteristics of agenuine European entity. The project (inspired by French simplified joint stock companies - SAS)has a different logic from that envisaged in the European society for the purpose of creating anautonomous status in relation to the European national laws.

[email protected]


The topic is interesting because the existing legal forms for "supranational” companies arenot particularly attractive for small and medium en terprises, imposing in this regard the need toregulate (5) a community legal form distinct from the present ones. (6) The existing legal forms for supranational companies are not particularly attractive for smalland medium enterprises. The new for m of laws for small and medium-sized private companies so-called the European Private Society proposed by the European Commission at the pressure of theEuropean Parliament creates a number of advantages, in that by its permissible provisionsstimulates the creation of new enterprises, mainly due to the provision that capital must at least oneeuro. The EPS is designed, according to Union’s newest regulations, as a company with limitedliability and its shares cannot be tender or sold. In addition to a lowe r level of minimum capital, theEPS has several other advantages such as speed of establishment and electronically registration.The proposal of the European Commission also provides that the verification of the validity ofdocuments submitted by the compa ny is to be done only once, and the society’s address and itsadministrative headquarters should not be identical. Not least, through the new legislative provisionwas pursued the creation of a new status of the European Private Company allowing it to oper ateunder the same uniform principles in all Member States. All these specificity items listed above, "outlined" by the new Community act, which alsodefine the importance of this normative rule, will be widely exposed in this paper underlying,where, according to the author’s opinion, the added benefits inserted in the Union’s Regulation.

II. SPECIFIC ELEMENTS OF THE EUROPEAN PRIVATE SOCIETY

On June 25, 2008, the European Commission adopted a communication entitled "Thinksmall first": Priority for SMEs - A "Small Business Act” for Europe (2) encouragingentrepreneurship, the development of legislation favorable to SMEs. SMEs in Europe are 99% ofthe total number of enterprises, providing 70% of the total number of jobs and contributing m orethan 45% of GDP in the EU.

As part of the SBA package (Small Business Act), the European Commission presentsproposals regarding: a general block exemption on categories in terms of state aids (General BlockExemption Regulation – GBER) (7), regarding a new status of the European Private Society (EPS),a new directive on the reduction of VAT (8) for services provided locally and a change of thedirective regarding late payments to ensure the timely payments to SMEs. Actions are designed tosustain the implementation of integrated guidelines and program of Lisbon of the Community bytransposing the Lisbon Strategy into concrete actions for SMEs.

The existing forms of Community societies (9), in particular the European society (ES,whose legal status was established by the Regulation (EC) No. 157/2001 of the Council on October8th, 2001 on the status of the European Society (10) are designed for large enterprises, while aprivate company (hereinafter "SPE"), is addressed to small businesses. Minimum capitalrequirement for an ES and its restrictions on the setting makes this form of society to be inadequatefor many businesses, especially smaller. Given the problems faced by these businesses as a result oflegislations’ diversity on companies and the ES’ ina dequate character for small businesses, it isadvisable to provide some form of European company designed especially for them, which can becreated in the entire European Union.

In this respect, the European Commission has proposed a new legal form for com panies andfor the Private European Company, or “Societas Privata Europaea” (SPE). After the EuropeanStock Company (ESC), The European Cooperative (EC) and the European Grouping of EconomicInterest (EEIG), this new legal form is designed specifically for small and medium enterprises.

EPS has the legal personality from the moment since it was recorded in the register in theState where the society has its social headquarters, nominated by the national law applicable inaccordance with Article 3 of Directiv e 68/151/EEC(11). For the purposes of Article 7 of theRegulation: "An EPS has its registered office and central administration or headquarters of businesswithin the Community." A literal interpretation of the text shows that the two elements may be


located in different States of the European Union. Therefore, the head office and its headquartersmust not be identical being established in different Member States giving the EPS the possibility totransfer their registered office from one Member State to ano ther, without being obliged to transferits central administration or headquarters. The social capital is divided into shares, each shareholderbeing liable only for social obligations only to the limit of the intake of the subscribed capital, butthe fact that shares cannot be offered for public trading (element characteristic of the limitedliability companies).

EPS can be composed of one or more individuals and/or legal entities (12), called 'thefounding shareholders”. Under the provisions of the Regula tion inferred to presentation, MemberStates shall authorize the establishment of an EPS in the following ways: the establishment of anEPS in accordance with this Regulation; the conversion of an existing company; the merger of someexisting companies and the division of an existing company. Under Article 45 of this Regulation,Member States shall notify the Commission the form of the limited liability companies referred toin Article 4 Line 2 until July 1, 2010 at the latest.

III. BRIEF CONSIDERATION OF THE NEWEST ITEMS AND VIEWSCONCERNING IT

a) Capital. This regulation provides that shareholders must flow the agreed intake in cash orin kind agreed contribution. Its capital must be at least 1 euro (13). The previous proposal, of 1999,stipulated a minimum capital of 25,000 Euros and the European Parliament has asked that thisthreshold should lower to less than 10,000 Euros. Member States in which does not apply the thirdstage of economic and monetary union may require the EPS's headquarters are situated in theirterritory to express their capital in national currency which does not exclude the possibility that anEPS’s capital to turn to o Euros. The exchange rate between euro and national currency is the one inthe last day of the month preceding the registration of the EPS.

We believe that through this regulation, the Community legislature has pursued that the newlegal form of the European company should not be subject to mandatory high capital requirements,as this would constitute an obstacl e to the creation of EPS's. On the other hand, it should be bornein mind that one of the fundamental principles of commercial transactions is the protection of thecreditors. Thus, also in the presented case, meaning the one of the EPSs, the creditors mus t beprotect from excessive activities of shareholders, which could affect the ability of the EPS to pay itsdebts. For this purpose, the distributions should be forbidden where the liabilities of the EPS issuperior to the asset value. However, shareholde rs should be free to require the management organof the EPS's to sign a certificate of solvency. Since the creditors’ protection has to be guaranteed incase of reduction of capital of the EPS, certain rules relating to the date on which such capitalreductions are prerequisites should be settled.

b) The formation of an EPS is made in writing and signed by all founding shareholders.Regarding its enforceability, the new Community provision holds that regarding on theshareholders, the management and superv ision of the EPS, if any, it becomes incident on the dateon which the integrant act was signed or, in the case of modifications, on the date on which theywere taken, and as regards to third parties in accordance with applicable national legislation whichtransposes Article 3 Lines 5, 6 and 7 of Directive 68/151/EEC.

Another advantage conferred by the Regulation is that registration will be doneelectronically (14), thus giving a higher speed for the establishment. Simplifications were madewith regard to the documentation that must accompany the application for registration of the EPS,meaning that in the moment of the introduction of application, the Member States only require thefollowing information and documents: a) the name and address of the EPS’s h ead office; b) name,address and any other information necessary to identify the persons authorized to represent EPS inits relationships with third parties, in the court or involved in the administration, supervision orcontrol of the EPS; c) share capita l of EPS; d) the categories and number of shares of each category,the total number of shares; d) the nominal value or accountable equivalent of the shares; e) the


integrant act of the EPS; f) if the EPS was formed as the result of conversion, merger or di vision ofsome societies, the decision of conversion, merger or division which led to the formation of theEPS. In this respect, Article10 Line 4 of the Regulation decides that the registration of the EPSmust be subject to one of the following requirement s: the control of legal documents andinformation on the EPS, or certification of documents and information on the EPS made by ajudicial or administrative body, or certification of the documents and information regarding by theEPS. Under Article 46, the authorities responsible for the mentioned books shall notify theCommission before 31 March each year, about the name, registered office and registration numberof the EPS that have been registered and removed from the register during the preceding year an dthe total number of registered EPS. The authorities cooperate to ensure that documents andinformation on the EPS’s listed in Article 10 Line 2 are also available through the registers of allMember States.

Checking the validity of the submitted document s is done only once, by the legal oradministrative state’s authorities (15).

According to the new Regulation, there will be a greater flexibility in the internalorganization of the new limited liability company, the European Commission does not impose amodel of statute, but certainly will establish a minimum list of issues related to organization,capital, equity shares that are to be regulated by statute. The fact is that shareholders have arelatively large freedom of configuration of the company, whi ch makes this legal form to beattractive to larger companies. National legislation will regulate those areas not covered by statute,such as those elements related to employment law, taxation, and bankruptcy procedures. Flexibilityis seen by the fact that a dual EPS can operate as a limited liability company with a President and aBoard, or unitary, just with a Management Board.

On internal organizational issues, we believe that should be introduced binding rules toensure protection for minority sharehol ders in order to ensure their equal treatment in the sense thatthe "essential" decisions should be adopted by a majority that does not represent less than twothirds of all voting rights attached to shares issued by the EPS. In addition, the right to req uestintervention of an independent expert to investigate abuses observed or seen before can be limited,this right cannot be a condition for the possession of over 5% of the voting rights of the EPS, and sothe integrant act of the EPS can provide a lower limit.

c) The distribution of dividends can be made based on a proposal from the governing bodyto shareholders provided that, after assignment, the EPS’s assets to cover fully the liabilities. TheEPS is not authorized to allocate those reserves which di stribution is prohibited by the integrant act.If the integrant act enforces that requirement, the management of the EPS signs a declaration calledthe "certificate of solvency”, before the division, attesting the fact that the EPS is able to pay itsdebts at maturity, under normal operation of the economic activities within one year from the dateof distribution. Shareholders who received dividends distributed in violation of Article 21 of theRegulation must return it to the EPS, which has to prove that t he shareholder knew or, taking intoaccount the circumstances, should have been aware of the deficiencies.

d) With regard to the responsibility for acts performed before the time of EPS’s registration ,Article 12 of this Regulation provides that if the act s were performed on behalf of the EPS beforeregistration, the EPS can assume the obligations arising from such acts, after registration. If the EPSdoes not assume these obligations, individuals who have achieved it are unlimited and jointlyresponsible for the actions in question. On two latter issues that have been presented, can hold thatthe Romanian law provides exactly as the Union’s legislation.

e) Other provisions. According to the Community standard the EPS dissolves or at theexpiry of the period for which was established by decision of shareholders, or in the cases providedfor by the national applicable law. The national applicable law governs the dissolution. The nationalapplicable law and the Regulation (EC) No. 1346/2000 of the Council gove rn liquidation,insolvency, suspension of payments and similar procedures. The dissolution of the EPS ispublished. Also, the EPS’s nullity is governed by the national applicable legislation implementing


Article 11 Line 1 of the Directive 68/151/EEC [a], [ b], [c] and [e], unless the objects of thecompany as indicated by [c] and the provisions of Article 11 Line 2 and Article 12 of the Directive.

IV. RECOGNIZED WORKERS’ RIGHTS IN THE EPS

Regarding workers' rights recognized in the EPS, the relevant commun itarian acquis,granting employees’ border rights of information, consultation and participation, and ensuring theparticipation rights of workers meaning the Directives 94/45/EC and Directive 2005/56/EC shouldbe fully kept. With regard to the rights of p articipation of employees, are applicable the laws of theMember State where is the registered office of the EPS, called in literature “Member State” shouldgovern them. It requires a great attention to this case because the formation of the Private Europe anCompanies must not evade these rights. Thus, if the national law of the Member State where theEPS transfers its registered office does not provide the same level of employee participation as aMember State of origin, the participation of employees in t he company after the transfer should be,in certain circumstances, negotiated. If negotiation fails, the provisions that apply in society beforethe transfer should continue to apply after transfer. From the date of registration, the EPS is subjectto the provisions in force in the host Member State, if any, on the modalities of participation of theemployees. The above shall not apply where employees of the EPS in the home Member State for atleast one third of the total number of employees of the EPS, inc luding branches or subsidiaries ofthe EPS of any Member State, if the following conditions are met:

The host Member State's legislation does not provide at least the same level of participationwith the existing Member State of origin before the registrat ion in the host Member State(16);

The host Member State’s law does not give employees of the EPS’s offices in other MemberState the benefit of exercising rights of participation they enjoyed before the transfer.The Board may refuse access to information only where this would cause serious harm the

economic interests of the EPS. We believe that the above falls under the Directive 2002/14/EC ofMarch 11, 2002 establishing a general framework for informing and consulting employees in theEuropean Community.

Other rights of employees than the rights of participation should remain subject to theDirective 94/45/EC of September 22, 1994 establishing a European Works Council or a procedurefor informing and consulting employees in undertakings and groups of unde rtakings with aCommunity dimension (17), the Directive 98/59/EC of July 20, 1998 on the proximity of laws ofthe Member States relating to collective redundancies (18), the Directive 2001/23/EC of March 12,2001 on the proximity of laws of Member States r elating the maintenance of the rights of workersin the event of transfers of undertakings, businesses or parts of undertakings or businesses (19), theDirective 2002/14/EC of the European Parliament and the Council of March 11, 2002 establishing ageneral framework for informing and consulting the employees in the Community (20).

V. SPECIFIC ELEMENTS REGARDING THE REGISTERED OFFICESUBJECTED TO TRANSFER

The transfer of the registered office is an issue governed by the present specific Communityrule imposed by even the specifics of this legal form of business in Europe. In practical terms, theregistered office of an EPS could be transferred in another Member State in accordance withChapter VII of this Regulation (21). The transfer of the registered off ice of an EPS should notdissolve the EPS, the interruption or loss of its legal personality or affecting the rights andobligations under any contract of the EPS existing before the transfer. The transfer takes effect fromthe date of registration of the EPS in the host Member State (head office is located in the hostMember State’s territory). Thus, in order of transfer, the management of the EPS advocating atransfer draws up a proposal to establish a transfer, which includes the following information:

the EPS’s name and its registered office’s address in the State of origin;


the name and address of the EPS proposed to its head office in the host Member State; the proposed act of integration for the EPS in the host Member State; the proposed transfer calendar; the date on which it is proposed that the EPS transactions to be considered in accounting as

operated in the host Member State; the transfer for employees and the proposed measures in this regard; where appropriate, detailed information on the transfer of central administration or principal

place of the EPS’s business.At least one month before the decision to shareholders, the management of the EPS shall

submit the proposal of transfer to shareholders and employee representatives or, where no suchrepresentatives, to the employees of the EPS to be considered and makes it available to creditors forverification by which is published the proposal of transfer .

The management of the EPS in a report sent to shareholders explaining and justifying thelegal and economic aspects of the proposed transfer and stating the consequences of the transfer forshareholders, creditors and employees. The report, together with the proposal for transfer is submitto shareholders and employees’ representatives or, wh ere there are no such representatives, to theemployees themselves. In the case in where the board receives in time the approval of theemployees’ representatives of the transfer that opinion is send to shareholders. The proposal oftransfer is submit to shareholders for approval in accordance with the provisions of the integrationof the EPS regarding its amendment. If the EPS is subject to a regime of employee participation, theshareholders may reserve the right to connect the transfer to the express rat ification of thearrangements for the participation of employees in the host Member State. The laws of the MemberState of origin govern the protection of a minority of shareholders and EPS’s creditors who opposethe transfer.

Regarding the legality of transferring the registered office, each Member State shalldesignate a competent authority to control the legality of the transfer by verifying compliance withthe transfer procedure. The competent authority of the Member State shall verify if the requiremen tsmet and, if so, shall issue a certificate certifying that all necessary formalities in accordance withthe transfer procedure was made in the State of origin. Within one month of receiving thecertificate, the mentioned European Private Company presents to the competent authority of thehost Member State the following documents: the certificate; the proposed act for the integration ofthe SPE in the host Member State, as approved by shareholders; the proposal to transfer asapproved by shareholders.

These documents are considered sufficient to allow the registration of the EPS in the hostMember State. The competent authority of the host Member State shall, within 14 calendar daysfrom the receipt of documents, if the conditions of form and substance to t ransfer the registeredoffice met and, if so, respond appropriately for the registration of the SPE. The competent authorityof the host Member State shall notify the competent authority responsible for the deletion from theSPE Member State with regard to registration of EPS in the host Member State. The registrationfrom the host Member State and removals from the home Member State shall be published.

VI. CONCLUSIONS

"Small Business Act" includes an ambitious set of measures to allow the SMEs to fullybenefit from the options of the market, enabling them to expand in international markets bytargeting more resources to small businesses access to finance, research, development andinnovation.

This paper also proposed to present a number of advantages of t his new legal formwhichever has in this respect a greater flexibility, capital of one euro and lower costs due primarilyto the electronic records for SMEs who wish to pursue activities in other states of the EuropeanUnion than they are registered.


Not in the least, the issue of some Union uniform provisions regarding the settlement of aEuropean limited liability company is enforced; the need of some permissible provisions for SMEslies in the fact that according to the European Commission figures, abou t 99% of companies in theEU are SMEs and they provide about 70% of jobs in the private sector, but only 8% of them unfoldtransnational activities and only 5% of SMEs have subsidiaries abroad.

FOOTNOTES:

(1) For a comprehensive analysis of the mea ning of the concept of corporate governance of companies see JohnLowry, Alan Dignam, Company Law, Third Edition, Oxford University Press, 2006, p. 387, Piperea Gheorghe Societăţicomerciale. Piaţa de capital. Acquis comunitar, All Beck Publishing-house, Bucharest, 2005, pp. 534-593. (2) The Commission’s Communication to the Council and Parliament of May 21, 2003 entitled “Modernizingcompany law and strengthening corporate governance in the EU. A Plan to Move Forward”, COM (2003) 284,CELEX: 52003DC0284. (3) The Report of the Committee on Legal Affairs of the European Parliament on November 29, 2006, containingrecommendations for the European Commission on the European Company Statute and the proposal for a resolution ofthe European Parliament in this direction [2006/2013 (INI)] Reporter Klaus -Heiner Lehne. (4) The European Parliament’s resolution 2006/2013 (INI). (5) Proposal Regulation on the European Private Company statute presented by the Commission COM (2008) 396final, 2008/0130 (CNS) Brussels, June 25, 2008. (6) For a detailed presentation of the companies see Stanciu D. Cărpenaru, Drept comercial român, Eighth Edition,Bucharest, Legal Universe, 2008, p. 150 ff., Gheorghe Piperea, Drept Comercial. I er Volume, C.H Beck Publishing-house, Bucharest, 2009, p. 74 ff. (7) A "Small Business Act” for Europe COM (2008) 394 final, Rapporteur: Mrs. Constance Hanniffy(IE/EPP)Member of the Offal Local Council, Regional Authority for the Central District (Midland Regional Authority) and theRegional Assembly for the Border Areas, Central and Western (Border, Midland and Western Regional Assembly). (8) A new General Block Exemption Regulation on state aids will simplify the procedures and reduce costs. This willincrease the intensity of support for SMEs and will facilitate the benefit from aid for training, research anddevelopment, environmental protection and other types of aid for SMEs. (9) A new proposal on the VAT will offer Member States the option to apply reduced VAT rates for services providedlocally, including the services that use intensively the labor force that is provided in particular small and mediumenterprises. (10) The European Public limited -liability Company governed by the Regulation (EC) no. 2001/2157, hereinafter the"European society", the European Cooperative Society under Regulation (EC) no. 1435/2003 of the Council and aEuropean Economic Interest Grouping under Regulation (EEC) no. 2137/85; more details, Vâlcu Elise Nicoleta,Societary Law. Universitary course, Sitech Pub lishing House, Craiova, 2008, pp.113-115 (11) OJ L 294, November 10, 2001, Regulation amended by the Regulation (EC) no. 1791/2006 (OJ L 363,20.12.2006). (12) OJ L 65, March 14, 1968. (13) "Legal entity" means or a limited private company , hereinafter "European society", a European CooperativeSociety, Economic Interest Grouping and the European Private Company. (14) Article 19 of the Regulation. (15) Article 10 of the Regulation. (16) For the registration, it is advisable to u se the registers established by the first Directive 68/151/EEC of March 9,1968 on the coordination, to the equivalence of the guarantees required by Member States to companies within themeaning of Article 58, second paragraph of the Treaty, to protect th e interests of members or third parties; OJ L 65,March 14, 1968, Directive last amended by the Directive (EC) 2006/99/EC (OJ L 363, December 20, 2006,

(17) The level of employee participation is measured according to the proportion of the employees’ re presentatives inthe management or supervisory body or in their committees or in the management units that manage the company'sprofit, subject to the existence of a representation of the employees; OJ L 254, September 30, 1994, p. 64. Directive aslast amended by the Directive (EC) 2006/109/CE (OJ L 363, December 20, 2006) (18) OJ L 225, July 12, 1998 (19) OJ L 82, March 22, 2001

(20) OJ L 80, March 23, 2002 (21) Article 35 of the Regulation.


BIBLIOGRAPHY

1. The Commission’s Communication t o the Council and Parliament of May 21, 2003 entitled“Modernizing company law and strengthening corporate governance in the EU. A Plan toMove Forward”, COM (2003) 284, CELEX: 52003DC0284.

2. The European Parliament’s resolution 2006/2013 (INI) containing re commendations for theEuropean Commission regarding the status of the SPE’s.

3. Proposal Regulation on the European Private Company statute presented by theCommission COM (2008) 396 final, 2008/0130 (CNS) Brussels, June 25, 2008.

4. Vâlcu Elise Nicoleta, Societary Law. Universitary course, Sitech Publishing House,Craiova, 2008

5. Stanciu D. Cărpenaru, Drept comercial român , Eighth Edition, Bucharest, Legal UniversePublishing-house, 2008.

6. Gheorghe Piperea, Drept Comercial, Ier Volume, C.H Beck Publishing-house, Bucharest,2009.

7. Directive 68/151/EEC of March 9, 1968 on the coordinat ion, to the equivalence of theguarantees required by Member, to protect the interests of members or third parties,Directive last amended by the Directive (EC) 2006/99/EC

8. The Directive 2002/14/CE of the European Parliament and Council regarding a genera lframe woek of information and consultation of the work ers in the EU


A THEORETICAL OVERVIEW ON INSTITUTIONS

PhD. Student Ana Iolanda VODĂFaculty of Economics and Business Administration

Department of Economics“AL. I. Cuza” University, Iasi , Romania

[email protected]

AbstractIn time, there were a series of studies on the role of institutions, a number of growth theories and mode ls being

proposed, which have had different impacts on the real economic processes. Institutionalist approaches differ from oneauthor to another, however we must note that economic growth is due mainly to the institutional development. Thisstudy proposes an interdisciplinary approach on the analysis of the institutionalism’s dimension as considered by somespecialists in the field.

Keywords: institutions, institutional analysis, organizations, growth

JEL classification: B52, B25, B0

INTRODUCTION

The literature is vast and diverse; many publications widened the area of possible theoreticaland methodological approaches. Institutions can be viewed as pragmatic solutions, solutions thathave to obey certain rules and norms that limit individual action wi thout being restricted just to that.The purpose of the research is to reflect the role of institutions on national and international level,also the valorization of the historical, philosophical and economical experience as well as thenational set of rules.

We review some of the most important researchers in the field and concentrate oninstitutionalism and institutional change. We begin by pointing to the new and various connotationsof the term ‘institution’ trying to underline the importance of the nor mative and rule frameworks ina society.

THEORETICAL REFERENCE ON INSTITUTIONALISM

There is no universally accepted definition of institutions, therefore will review only someof the most important.

The idea of ‘institutional analysis’ or ‘institutionalism’ became a common ground not onlyin the literature but also in the common language. Institutional analysis represents a term with ablurred definition, used commonly to name an eclectic combination of models and theories inspiredby all social disciplines, a combination that, by its very nature, raises questions not only about theformer disciplinary boundaries but on the very idea of social science with a rigid or almost rigidframework of concepts and themes . (Aligică, 2002: 9-10)

Veblen (1919) defines institutions as deeply rooted habits of thinking, common to themajority of people, while for Commons institutions in existence at a certain moment are justimperfect pragmatic solutions for the reconciliation of past conflicts. These solutions consist of aset of rights and duties, an authority that enforces them and a certain degree of adhesion to thecollective rules of relatively cautious behavior . (Scott, 2004)

Hogson (2006) maintains that institutions are systems of established and widespread socialnorms that structure social interactions and institutional analysis represents the value of a mainlydescriptive work, concentrated on the nature and role of economical and political institutions .

Hall and Taylor (1996) argue that institutionalism, in all its forms helped understanding thepolitical world and DiMaggio and Powel (1991) describe the reappearance of the interest ininstitutions as a renaissance. T. Parsons (1967) defined institutions as a motor for the socially givenrules but not for those established by agreement of contracting sides .

[email protected]


Institutions were defined as a set of conventions and rules of action dominating theeconomy, which are summarized in the local social structure and present visible region aldifferentiation (Krätke, 1999). Institutions are procedures rather than results, influencing thebehavior type that appears in a certain situation independent of individual objectives. The proof ofthe existence of an institution is the regularity of in dividual action and the responses they offer toquestions regarding what they do (Elster, 1989). According to Neale (1987; 1994) an institution is amental construct, but in the same time institutions are both internalized rules that individualsfollow as well as actions to maintain these rules or to protect individuals inside the limits of theliberties and the freedoms offered by institutions .

For North (1991) institutions are constraints created by people in order to structure social,political and economical interactions, being comprised of informal constrains (sanctions, rules,customs and rules of conduct) and formal rules (constitutions, laws, property rights). North alsostates that institutions are the rules that govern the functioning of society, structures the stimuliresulted from human interaction and influence the performance of economies in time (North, 1990)while for Bush (1986) an institution is a socially correlated set of behavior models .

From the previous paragraphs we can clearly concl ude that there is a wide variety ofdefinitions and descriptions of institution and institutions. These definitions and descriptions can begrouped in three main groups (Saeed Parto):

1. First, the definitions based on profile, which refer mainly to form, str ucture andappearance of an institution;

2. Second, the definitions based on behavior that concentrate on actions and activities.These types of definitions also refer to the transactional implications of institutions;

3. Third, there are contextual descriptions of institutions that refer mainly to thepresence or absence of inter-institutional interactions. The focus in this groups dropsexplicitly on the evolutionary aspects of the institutional context.

A first acceptance on the significance of institutions be longs to everyday language,unspecialized, where institution has the same meaning as organization (Pohoaţă, 2009). The twoterms tend to identify one with the other in everyday language. Although they are often confused,there is a clear distinction betwee n the two terms, which does not exclude the fact that certaininstitutions, especially the formal ones have a certain organizational component; in other wordsinstitutions can be incorporated in organizations.

Organizations are special institutions that i mply a) criteria for the establishment of theirlimits and to distinguish members from non -members; b) principles of sovereignty regarding theperson in charge and c) chains of command that delineate responsibilities within the organization.

According to Philip Selznik, through his model, of the natural system, formal structures willnever succeed in taking over the non -rational dimensions of organizational behavior , and one ofthese non-rational dimensions according to Jan Chong is the organizational structure that includesboth formal aspects as well as informal systems which connect members and the relationshipbetween them and those outside official borders . Parson applies cultural-institutional theory in thecase of organizations, examining the relatio nships between an organization and its environment andthe modalities by which the value system of an organization is legitimized by its connections withthe main values of the organization in different functional contexts . Each organization is asubsystem of a wider social system which is the source of means, legitimacy and support on higherlevel. (Scott, 2001)

Young (1994, 2002) underlines the physical difference between organizations andinstitutions. Institutions are sets of rules or codes of conduct which define social practices , incomparison to organizations which are material entities that posses bureaus, personnel, budgets,equipments and, more than that, legal personality .

In a larger understanding, Coriat and Dosi (1998) see institutions as bei ng represented byformal organizations, modes of conduct and negative norms, as well as constrains. In sociology andpolitical theory, institutions are usually treated as different systems of rules that govern differenttypes of organizations and operation al rules of organizations. Rules can be informal, actively


utilized or can remain buried in the law codes or customs long forgotten. Institutions influence thebehavior of organizations by defining satisfactory social practices and codes of conduct. Parson(1960) finds another use for the concept of institution. He maintains that, on a vertical axis,organizations tend to differentiate on three levels or layers someway different: the technical one,related to production activities, the managerial one, which refers to activities of control andcoordination, procurement of resources and distribution of products and the institutional one,regarding the compliance to community norms and conventions. Each organization is a subsystemof a more comprehensive social system, which represents a source of <<sense>>, legitimacy orsupport from a superior level, the one that makes possible the attainment of organizationalobjectives. (Scott, 2001)

As stated by North (1990), if institutions are rules of game, organizations are social actorsor players, and the separation of institutions from organizations is crucial in understanding thedynamics of institutional change . As argued by Hindess (1989) organizations can be treated associal actors as long as they have the possibility to reach a decision and act accordingly . Coleman(1982) reached a similar conclusion. Interestingly, the criteria that allow us to treat organizations asactors necessitate an understanding of organizations as social systems with borders and rules. Still,there is a problem defining organizations as actors. Organizations – such as syndicates and firms –are structures made up of individual actors, often with conflicting aims. Even if the means ofreaching a decision and acting upon it [Hindess (1989)] are ubiquitous, treating the organization asa social actor removes the possibility of internal conflicts; however removal should not become aprinciple or a set definition that may hinder any consideration on conflicts and internal structure.Eliminating and labeling are two completely distinct analytical procedures. When mathematicianscalculate the trajectory of a vehicle or satellite in space, they treat it often as a lone particle. In otherwords, they ignore its internal structure and rotation of th e vehicle and satellite. Nevertheless thisdoes not mean that the vehicle or the satellite is defined as particles.

Hogson (2006) has a different opinion, judging that North does not distinguish clearlyenough if he defines organizations as players or tha t taking into consideration of organizations asplayers is just an analytical abstraction . This fact created a lot of confusion, some authors insistingthat organizations should be defined as players. Yet, North states clearly in his correspondence thathe treats organizations as players only with the purpose of analysis of the social economic system asa whole and that he does not consider organizations as being essentially the same as players nomatter the circumstances. Noting that ‘ organizations are players’ North creates an abstraction,rather than defining organizations this way.

North (1994) notes organizations are ‘ made up of groups of individuals with commonpurpose’. Organizations entail structures or networks, which cannot function without rules ofcommunication, participation and management. The inevitable existence of rules in organizationssuggests that, from the point of view of the northian definition, organizations should be considereda type of institution. Indeed, North accepted that organ izations themselves possess players andinternal rule systems and, therefore, they represent a special type of institution. It is possible fororganizations to be treated as actors in certain circumstances and be regarded, in general, asinstitutions. Individual agents act within the framework of organizational rule system. In turn, incertain circumstances, organizations can be treated as actors and in others, as utilizing a rulesystem. There are multiple levels in which organizations offer institutional rules for individuals, andpossibly, in turn, these organizations can be treated as actors in a wider institutional framework. Forexample, individual act within nation, but the nation can also be viewed as an actor in aninternational framework of institu tions and rules.

The second concept about the meaning of institution is attributed to D. North (Pohoaţă,2009) who considers that institutions represent ‘ rules of game in society’, in other words the set ofrestrictions and incentives which shape human interactions, adopted by individuals according tothe way they solve the problem of social cooperation ’ (North, 1990). This allows the unification ofthe approach of institutions as rules of play with the approach of institutions as rules of conduct,meaning that organizational strategies influence the rules of the game. Conseque ntly, institutions


appear endogenous within social and organizational interactions and represents, therefore, a resultof dynamic (lack of) equilibrium.

Finally, a third direction of research underlines the self-preservation side of the system ofinstitutions. Endogenous arguments prevail in determining their apparition and manifestation. It isadmitted in the opinion of the philosopher Hume who considered that it would be erroneous toregard laws as state creations imposed to its citizens. And, starting from such a hypothesis, R.Sugden, A. Greif, L. Hurwicz, M. Aoki et.al view institutions as the shared beliefs of the political,economical, social and other such types of actors, in order not only to make the game possible butalso equipped with a high capacity of self-preservation (Pohoaţă, 2009).

According to R. Scott (2002), institution characteristics can summarize as such: Institutions are social structures with a high degree of mobility; Institutional are comprised of cultural -cognitive, normative and governing elements that,

together with some activities and resources associated to them, give stability andsignificance to social life;

Institutions are transmitted through several types of factors, including symbol systems,relational systems, routines and artifacts;

Institutions operate on multiple levels of authority, from global system to interpersonalrelationships;

Institutions suggest, by definition, stability, but they are also subject to processes of change,both of expansion or contraction.The vision of R. Scott on institutions is a solid one, institutions being seen as structures with

a number of facets, a high degree of mobility, made up of symbolic elements, social activities andmaterial resources.

CONCLUSIONS:

Based on the documentation carried out we can assert that the term ‘institutionalism’ has nouniversally-accepted definition. Thus we have: a) definitions based on form, structure andappearance of an institutions; b) behavioral definitions which focus on action or activity and c)contextual descriptions of institutions which refer mainly to the presence or absence of interactionbetween institutions.

Institutions are social structures, devised deliberately, made up of cultural cognitive,normative and regulating elements, which g ive stability and meaning to social life. A hierarchy ofinstitutions can be made using three criteria a) the degree of formalization ; b) hierarchy criterion; c)domain of analysis. What is necessary to be remembered is that, by definition institutions hav e aconnotation of stability, but in the same time they are subject to processes of change. Thisinstitutional change may be an issue due to informal institutions, which are often inefficient. For notuntil long ago, researchers directed their efforts towa rds understanding the ways by whichinstitutions develop. However, in the last decade growing attention has been given to the declineand failure of institutions, processes that leave an open road to new logics and institutional forms.All these changes are both endogenous and exogenous.

BIBLIOGRAPHY:

1. Aligică Paul Dragoş, Limitele teoriei economice şi redefinirea frontierelor disciplinare ,Editura Politeia, SNSPA, Bucureşti, 2002,

2. Bush P.D., On the Concept of Ceremonial Encapsulation, The Review of InstitutionalThought, Vol. 3, December, 1986

3. Coleman James S., The Asymmetric Society, Syracuse University Press, Syracuse, 19824. DiMaggio P., Powel Walter, The New Institutionalism in Organizational Analysis ,

University of Chicago Press, Chicago, 1991


5. Elster, J., Social Norms and Economic Theory, Journal of Economic Perspectives , 3(fall), 1989, pp. 99-117 at http://www.geocities.com/hmelberg/elster/AR89SNAE.HTM

6. Hall Peter A., Rosemary C.R. Tayl or, Political Science and the Three NewInstitutionalisms, Political Studies, Vol.44, No.5, Cambridge, 1996, pp.936 -957 athttp://www.mpifg.de/pu/mpifg_dp/dp96 -6.pdf

7. Helmke Gretchen, Levitsky Steven, Informal Institutions and comparative politics: aresearch agenda, Working Paper 307, september, 2003, athttp://nd.edu/~kellogg/publications/workingpapers/WPS/307.pdf

8. Hindess Barry, Political Choice and Social Structure: An Analysis of Actors, Interestsand Rationality, Aldershot: Edward Elgar, England , 1989

9. Hodgson Geoffrey M., What Are Institutions, Journal of Economic Issues , Vol. XL, No.1, March, 2006, at http://www.geoffrey hodgson.info/user/image/whatareinstitutions.pdf

10. Hodgson Geoffrey, Institutional Economic Theory: The Old versus the New , pp. 194-213, athttp://books.google.com/books?id=3R3QN4Cf_MC&pg =PA155&dq=Hodgson+Geoffrey,+Institutional+Economic+Theory:+The+Old+versus+the+New&hl=ro#PPA155,M1

11. Krätke S., A regulationist approach to regional studies , Environment and Planning A,Vol.31, No.4, Berlin, 1999,

12. Moe Terry M., Political Institutions: The N eglected Side of the Story, Journal of Law,Economics, and Organization , Vol.11, No.1, April, 1995, pp.1 -31

13. Neale W.C., Institutions, Journal of Economic Issues , Vol.21, No.3, 198714. North D., A Transaction Cost Theory of Politics, Journal of Theoretical Pol itics, Vol.2,

No.4, 199015. North D., Institutions, Journal of Economic Perspectives , Vol. 5, 199116. North D., Institutions, Institutional Change and Economic Performance , Cambridge

University Press, Cambridge, 199017. North Douglass C., Economic Performance throu gh Time, American Economic Review,

Vol. 84, No. 3, June, 199418. Oprea Dumitru, Işan Vasile, „Construcţia” instituţională a învăţământului superior din

România, in Efectele economico-sociale ale aderării României la Uniunea Europeană, Ed.Sedcom Libris, Iaşi, 2006

19. Parsons, T., The structure of social action , Vol.I, New York Free Press, New York, 196720. Pohoaţă Ion, Repere în economia instituţională, Ed . Economică, Bucureşti, 200921. Saeed Parto, Economic Activity and Institutions at

http://129.3.20.41/eps/othr/papers/0303/0303001.pdf22. Scott W. Richard, Institutions and Organizations , 2nd Edition, Thousand Oaks, CA:

Sage, 2001, pp. 1 -216 athttp://books.google.com/books?hl=ro&lr=&id=kpDUHoaNhqYC&oi=fnd&pg=PR9&dq=53.%09Scott+W.+Richard,+Institutions+and+Organizations&ots=6j5LwqVh3J&sig=hBAZJAnB6_hdfm -Cvifgh9jELwk

23. Sven Steinmo, The New Institutionalism , în Barry Clark and Joe Foweraker, (eds.), TheEncyclopedia of Democratic Thought , Routlege, London, July, 2001 athttp://stripe.colorado.edu/~steinmo/foweracker.pdf

24. Young O. R., International Governance: Protecting the Environment in a StatelessSociety, Cornell University Press, Ithaca, 1994,

25. Young, O. R., The Institutional Dimensions of Environmental Change: Fit, Interplay,and Scale, The MIT Press, Cambridge, 2002

26. *** Biblioteca ASE, Bucureşti, la adresa www.biblioteca.ase.ro/downres.php?tc=1048

http://www.geocities.com/hmelberg/elster/AR89SNAE.HTM

http://www.mpifg.de/pu/mpifg_dp/dp96-6.pdf

http://nd.edu/~kellogg/publications/workingpapers/WPS/307.pdf

http://www.geoffrey

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http://129.3.20.41/eps/othr/papers/0303/0303001.pdf

http://books.google.com/books

http://stripe.colorado.edu/~steinmo/foweracker.pdf


THE ABILITY TO ASSUME THE DECISIONAL RISK IN THE CONSUMPTIONPROCESS

Assistant PhD. Student Laura DIACONUFaculty of Economics and Business Administration

“Al. I. Cuza” University Iaşi, [email protected]

Professor PhD. Corneliu C. DIACONU „Gr. T. Popa” University Iaşi, România

[email protected]

AbstractThe individuals’ ability to assume the risk in taking the consumption decisions was largely debated both at the

theoretical and empirical level. While at the half of the XX th century there were many attempts to find out amathematical solution for this problem, with the help of the statistical and econometrical interpretations, at thebeginning of the XXI st century the analysts’ preoccupation for this subject imposed taking into consideration someelements related not only to the goods acquired but also to the specific feature of the individuals. This is why thepresent paper wants to analyze the individuals’ ability to assume the risk in taking the consumption decisions,considering some objective and sub jective aspects, such as the temperament and the character traits, the socio -culturalparticularities, the possibility to access the information or the products’ intangible characteristics - such as, forexample, the brand name. Assuming that the isoutilit y function does not reflect only the consumers’ preferences forvarious goods, but it is also an assessment for the probability of occurrence of some states/events, in the end of thispaper we tried to determine the way in which the ability of assuming the risk may be associated with the shape of theindifference curve.

Key words: uncertainty, risk, decisional process, consumption

JEL Classification: D81, D11

1. INTRODUCTION

Most of the analysts define the risk perceived by the individuals in ta king the consumptiondecisions with the help of other two concepts: the uncertainty degree and the implicit consequences,resulting from the buyers’ choices. While the uncertainty is associated to the process of correlatingthe individuals’ expectancies wi th the buying decision (1), the consequences of this decision refernot only to the functional performances of the acquired goods but also to the time, effort and moneyinvested in order to reach the established goals. The uncertainty may also be regarded as an“expression of the incomplete, approximate nature of the information related to the concertedinfluence factors and to the consequences of their action, in time and space” (2). Analyzed from thispoint of view, the nature of the uncertainty is more a cognitive one, resulting either from the lack ofthe knowledge, or from the individuals’ limited intellectual abilities. Yet, from the organizationaltheory point of view, the uncertainty is not an individuals’ cognitive feature any longer, but acharacteristic of the environment where people do their activities (3).

Due to the complexity of the subject, the present paper wants to analyze the individuals’ability to assume the risk in taking the consumption decisions, considering some objective andsubjective aspects, such as the temperament and the character traits, the socio-culturalparticularities, the possibility to access the information or the products’ intangible characteristics -such as, for example, the brand name. Assuming that the isoutility function does not reflect only theconsumers’ preferences for various goods, but it is also an assessment for the probability ofoccurrence of some states/events, in the end of this paper we will try to determine the way in whichthe ability of assuming the risk may be associated with the shape of the indifference curve.

[email protected]

[email protected]


2. THE RISK AND THE UNCERTAINTY IN THE DECISIONAL PROCESS. MAINDETERMINANTS

The idea according to which the analysis of the risk and uncertainty may generate relevantinformation for the economic theory was firstly suggested by Frank H. Knight, in 1921, whichmade a clear delimitation between the two concepts in the paper “Risk, Uncertainty and Profit”.According to the Knight’s interpretation, the risk is limited to those situation s in which theindividual may attach mathematic probabilities to the accidental events that may occur. Unlike risk,the uncertainty refers to those cases in which the events can not be expressed in terms of specificmathematical probabilities. Consequently , from the Knight’s perspective, the distinction betweenrisk and uncertainty is related to the assumption that individuals act in view of the existence ofsome well-defined probabilities of the possible outcomes.

The analysis made by Knight was the starting point of some later approaches, among whichwe do notice the paper of John von Neumann and Oskar Morgenstern „The Theory of Games andEconomic Behavior”(1944). They proposed an objective approach to the decisional process underrisk, formulating the hypotheses of the anticipated utility based on the statistical probabilities. Thepurpose of these hypotheses was to study the individuals’ attitude towards risk. The conclusion ofthe two analysts was that the maximization of the expected utility is the opt imal attitude peopleshould take in situations of uncertainty. Therefore, consumers, facing the problem of taking adecision, will opt for the situation that allows them to maximize the utility.

The analysis made by Von Neumann and Morgenstern had various subsequentinterpretations. Nicholson (2002), considering the risk a results’ variation of some decisions takenunder uncertainty, demonstrates why the individuals, when they have to choose between twosituations with the same expected value, will usually opt for the one that has the smallest variationprobability of the final result. In other words, when an individual may choose between two goods ofthe same type, one having the price “n” USD and the other one “2n” USD, it is more likely that theconsumer opts for the first product because the risk generated by a possible loose would be greaterin the second case.

A similar approach is also met at Milton Friedman, Leonard J. Savage or Harry Markowitz,who also analyzes the concept of risk aversion and the relative properties of the anticipated utility(4). So, in order to classify the decisions taken under risk, Markowitz proposed an operational rulebased on the anticipated value and the standard deviation. While the anticipated value is consideredby Markowitz an indicator of the investment’s profitability, the standard deviation is used todetermine the degree of risk. The Markowitz rule starts from the hypothesis that the individuals areadversaries of the risk, preferring the decision with highest anticipated value and lowest risk degree.According to this rule, in the case of the alternative decisions A and B, with the anticipated valuesE(xA) and, respectively, E(xB), with standard deviations σ(xA) and, respectively, σ(xB), if:

E(xA) = E(xB) (1) andσ(xA) < σ(xB) (2),

then an individual with risk adversity will prefer the A decision detrimental to the B decision. Theindividual’s preference for the A decision detrimental to the B decision will also occur when:

E(xA) > E(xB) (3) andσ(xA) = σ(xB) (4).

The interpretation of this last situation is that, between two decisions with the same riskdegree, individuals will choose the alternative with the greatest anticipated value.

The importance of the Markowitz rule is limited because, in the case of two decisions withdifferent anticipated values and standard deviations, respectively:

E(xA) > E(xB) (5) andσ(xA) > σ(xB), (6),

this rule does not provide any indication regarding the preferences of the individual with riskaversion.


To overcome the limits of the Markowitz rule, some analysts have suggested the usage ofthe variation coefficient instead of the standard deviation, as an indicator of the risk degree. Thevariation coefficient measures the normalized standard deviation through the anticipated value andso the Markowitz rule “anticipated value – standard deviation” can be replaced with the rule“anticipated value – variation coefficient” (5).

Few years later, in 1964, the problem of measuring the individuals’ risk aversion waslargely developed by Pratt. He determined the individuals’ risk aversion with the help of acoefficient calculated as a ratio between the utilities of two goods among which the consumers haveto opt for. One of the most significant interpretations of this coefficient shows that the measure ofthe individuals’ risk aversion is directly related to the money amount that they are willing to pay inorder to be sure of their decis ion’s result.

The analysts consider that the individuals’ risk aversion is determined by several factorsincluding the consequences of some previous risky decisions, the confidence degree, theexpectations and the aspirations (6). The ability to take the risk in the consumption decision wasalso correlated with the personality traits. Chauvin, Hermand and Mullet (2007) noticed that thepersons that are extroverted, as well as those with a high level of emotional stability, are moretempted to adopt risky decisions than the others. A possible explanation of this opinion is offeredby Torgensen and Vollrath (2002) which argue that, by definition, the extroverted individuals needa shorter period of time to reflect on their decisions than to act. It was also found that the personswith a high level of education and training, with high incomes, more conservative but veryconfident in authorities, foresee a much lower risk than other people, in any decision they take.

Menon, Raghubir and Agrawal (2008) identify some specific features, which particularizethe individuals in terms of the ability to assume the risk. Thus, they consider that the people’stemper and the predisposition to depression may strongly influence their decisions. More depressivepersons seem to be more realistic in estimations than the average of the population, in this caseKeller, Lipkus, and Rimer (2002) talking about a "depressive realism" (7). Chang (1996), analyzingthe consumption behavior of the Americans and of the Chinese, puts on th e temperament thedifferences in the ability of assuming the risk. According to his study, the Chinese are morepessimistic than the Americans, which is why they are less willing to take risky decisions. Otherresearches, which explain the differences betw een the decisions and the actions of the individualsfrom the two nations with the help of the cultural influences - habits, beliefs and traditions -,suggest that, on contrary, the Americans show a greater risk aversion than the Chinese (8). Arguingthis idea, Weber and Hsee (1998) are focusing their research on the cultural dimensions identifiedby Hofstede (1980), paying a great attention to the issues related to individualism and collectivism.They argue that in those cultures where the collectivism prevails, such as China, a person who madea bad choice in a risky decision could overcome easier the negative consequences because he enjoysthe support and the help of the family members and of the group. On contrary, in the individualistcultures, such as the United States, a person who takes a risky decision will have to face alone theconsequences, possibly unfavorable, of his choice. Therefore, the collectivism plays an importantrole in surpassing the potential losses resulting from a decision, by the social diversification of therisk. Thus, it can be noticed that the cultural foundation of the individuals is a more powerfuldeterminant of the risk perception than the income and even than the individuals’ profession .

A number of studies suggest that the individuals are approaching the risk in different ways,depending on how they make the purchases (9) - (10). Due to the fact that the Internet does not giveconsumers the opportunity to try or see the product before buy ing it, the risk will be greater in thiscase than in the purchases made from the classical stores. However, even in th is last situation, theinsufficient information about the price and the quality of the products from different marketsgenerates a high level of the risk. The limited and imperfect information may have several causes.Firstly, the information could differ from the point of view of the credibility. Since not all the piecesof information are correct and accurate, consumers have to consider their sources. Moreover, theinformation is perishable and, therefore, it must be constantly updated. Secondly, it has to beconsidered the intellectual abilities of the individuals, since not all have the intelligence or the


education necessary to process correct ly the available information. Collecting the informationgenerates a cost. Therefore, any rational individual would not be willing to pay for picking up theinformation beyond the point where the marginal benefit equals the marginal cost of collecting theinformation.

Considering all the factors that influence the risk aversion, the specialized literatureidentifies more types of risk: the financial one, the risk of performance, the psychological and thesocial risk (11). The f inancial risk consists in the fact that consumers may lose a sum of money bychoosing a product or a particular brand. Moreover, if the product is doubtful for the safety or thehealth of the individuals, then we talk about a physical risk. If, however, the good proves to beinadequate for the individuals’ personality, then the risk is a psychological one. The social risk canbe correlated to the cultural dimensions mentioned above - individualism versus collectivism –,because it concerns the attitude that people have towards the decisions made by a person. The riskof performance is correlated to the possibility that a good does not function as it would have beenexpected. This type of risk also reflects the individuals’ uncertainty regarding the products’ quality.It is difficult to distinguish between a good quality product and one with a lower quality because theconsumers’ decisions are often taken considering only the observable characteristics or attributesthat are easily determinable. The risk consists in the fact that these apparent features can mislea dpeople, the real value and performances of a good being noticeable only after the purchase decisionwas taken.

Some analysts, such as Erdem and Swait (1998), consider that the product’s risk ofperformance can be removed by focusing the purchases on the branded goods, because a firm’sreputation can be, sometimes, a guarantee of the quality. The explanation of this statement is that acompany that wants to fidelizeze its consumers has a strong incentive to offer goods of high quality.Moreover, the reputation of the brand does not only certify the quality of the products, but it alsogives consumers the possibility to return the goods if they do not meet their expectations. The ideais emphasized by Dean (1999) who believes that individuals, in order to r educe the perceived risk intaking the consumption decisions, use the brand name of the goods as a choice criterion. A previousstudy conducted by Grewal and Krishnan (1998) comes to reinforce this conclusion, as theydemonstrated that individuals perceive a lower risk when purchasing products with strong brandnames than when buying private label goods or without a known brand. Starting from this idea,other analysts consider that individuals make their consumption decisions based on the brand nameand on other extrinsic features of the products when they do not have enough information aboutthose goods. Thus, Brucks et al. (2000) have conducted a study on several products, both withstrong brand names and with private labels, in order to determine the way in which their price andquality are perceived and the individuals’ intention to buy them. The conclusion of the study showsthat the brand name has a positive effect on the consumers’ decisions, reducing the cost ofsearching and the cognitive effort, because the firm’s reputation reduces the risk related to theproducts’ quality. Therefore, in the absence of the relevant information, a consumer who is notfamiliar with a particular product will use the trademark as an indicator for the quality of that good.

At the opposite pole to the idea underlined in the studies mentioned above, which arguesthat the brand name may reduce the uncertainty and the risk in taking the consumption decisions, itis situated the opinion of Lynch, Miller, Porter and Plotters (1986). They argue that although somecompanies enjoy reputation and strong brand names, the quality of their goods is often similar tothe products that do not have a known brand name. Moreover , even in the case of the purchasesmade through the Internet, Donthu (1999) notes that the brand name of the goods is no t a guaranteeof the products’ quality but, on the contrary, it increases the risk perceived by the individuals. Hejustifies this finding by making reference to the nature of the sample included in his study. This wascomposed of people aged between 19 and 25 years old, with a medium to low income, whoperceived the possible financial loss resulting from the purchase of a cheaper product smaller thanin the case of buying a branded good, more expensive.

The level of the risk perceived by individuals may also be correlated to the possibility ofdetermining the properties of the purchased goods and services. Taking into account this aspect,


Asch and Wolfe (2001) classify the products into three categories: those with easily noticeableproperties, which can be identified prior to the purchase , those with characteristics resulting fromthe experience, by using those goods and services, and services with features difficult to determine -for example the medical, financial and other consultancy services. This last category is usuallyfocused on that services whose characteristics are impossible to be identified and evaluated byindividuals, even after they were purchased and consumed. There is a positive correlation betweenthe ability to easily determine the products ’ characteristics and the size of the risk perceived byindividuals: the more obvious the characteristics of the goods and services are, the less risky thepurchase decision will be. Therefore, we notice that the acquisition of the third category mentionedabove will involve a high level of risk, because in this case the consumers do not have enoughinformation in order to determine whether the services provided were the appropriate ones.According to the observations made by Asch and Wolfe (2001), it is possible that the individualsare more reluctant regarding the purchase of services , in general, rather than of the goods becausethe services are those who have multiple noticeable characteristics after their consumption or,sometimes, even impossible to assess. The more risky, complex and expensive are the consumptiondecisions, the longer will be the process of deliberation, in which the consumer will search andanalyze multiple sources of info rmation.

The ability of the individuals to assume the risk was associated by Deaton and Muellbauer(2007) with the shape of the indifference curve. The two analysts assume that the isoutility functiondoes not reflect only the consumers’ preferences for various goods, but it is also an assessment ofthe probability of the occurrence of some states/events (states are used by Deaton and Muellbauer tocharacterize all the outcomes possible to be achieved through the individuals’ actions).

The 2nd state I

A

C

I’

450 - п/(1-п)0

B The first state

Figure no. 1 The indifference curve and the risk aversionSource: adapted from Deaton, A., Muellbauer, J., Economics and Consumer Behavior ,

Cambridge University Press, 2007, p. 386

In figure no. 1, the chosen good has the same value both in the first state and in the secondone. Considering this aspect, the path of the indifference curve will be calculated in the point whereit is crossed by the 450 line, also called by Deaton and Muellbauer “the certainty line”. Therefore,the path of the AB line reflects the measure in which the consumer, starting from a certaintyposition, is prepared to give up the good in the first state and to buy it in the second state.Supposing that the value of the good is the same in both of the states, any degree of the path,smaller or bigger than the unit, suggests that the person considers that one of the two states has a


higher probability of appearance. If we note the appearance pr obability of the first state with п, thenthe path of the AB line will equal – п/(1-п). We notice that the path of the line is smaller than 1, sothe first state has the greatest probability of appearance.

As it is shown in the figure no. 1, the shape of the indifference curve is a nor mal one:convex. Deaton and Muellbauer (2007) consider that this convex shape of the curve is particular tothose person that have a high risk aversion and, consequently, they will be willing to pay a greatersum in order to avoid the risk. On contrary, i n the case of the individuals that like the risk, theindifference curve will be concave. When this curve is a straight line, we talk about the persons forwhich the level of the risk is less important in taking the consumption decisions.

CONCLUSIONS

Considering all the aspects mentioned above, we can conclude that assuming the risk in theconsumption decisions is influenced both by the extrinsic and intrinsic characteristics of theproducts, as well as by other subjective and objective factors that ha ve a strong impact on theindividuals’ behavior. Therefore, we can notice that the risky decisions seem to be taken easier byboth the extroverted persons and by those who have a high level of emotional stability. Moreover,the individuals that come from t he collectivist cultures – such as China or Japan – will be moretempted to take the decisions under a higher level of risk than those from the individualisticsocieties, these last ones having a convex indifference curve. Of course, the consumers who caneasily access the information, who can permanently complete and keep them up to the date, will notmanifest a high risk aversion because there are small chances that they confront with an unforeseenand risky situation. The same attitude can be met in the case of the individuals with a high level ofeducation and training, with high incomes, more conservatives but very confident in authorities.

NOTES

(1) Giarini, O., Stahel, W.R., Limitele certitudinii, Edimpress -Camro, Bucureşti, 1996, p. 64 -68(2) Popescu, C., Creşterea care sărăceşte, Tribuna Economică, Bucureşti, 2003, pp. 201 -202(3) Zey, M., Rational Choice Theory and Organizational Theory: A Critique, Sage Publications, 1997, pp. 25 -

26(4) Friedman, M., Savage, L.J., „The Utility Analysis of Choice Involving Risk”, Journal of Political Economy,

vol. 56, nr. 4, 1948, pp. 279-304; Markowitz, H., „Portfolio Selection”, Journal of Finance, vol. 7, nr. 1, 1952, pp. 77 -91

(5) Weston, J.F., Brigham, E.F., Managerial Finance, 4 th edition, Holt, Rinehart & Winston, New York, 1972(6) Bontempo, R.N., Bottom, W.P., Weber, E.U., „Cross -cultural Differences in Risk Perception: A Model

Based Approach”, Risk Analysis, nr., 17, pp. 479 -488(7) Keller, P.A., Lipkus, I.M., Rimer, B.K., „Depressive realism a nd health risk accuracy: The negative

consequences of positive mood”, Journal of Consumer Research, nr. 29, 2002, pp.57 -69(8) Weber, E.U., Hsee, C., „Cross -cultural Differences in Risk Perception, but Cross -cultural Similarities in

Attitudes towards Perceived Risk”, Management Science, vol. 44, nr. 9, 1998, pp. 1205 -1217(9) Sheehan, K.B., Hoy, M.G., „Dimensions of privacy concern among online consumers”, Journal of Public

Policy & Marketing, vol. 19, nr. 1, 2000, pp. 62 -73(10) Miyazaki, A.D., Fernande z, A., „Consumer Perceptions of Privacy and Security Risks for Online

Shopping”, The Journal of Consumer Affairs, vol. 35, nr. 1, 2001, pp. 27 -44(11) Huang, W., Schrank, H., Dubinsky, A.J., „Effect of Brand Name on Consumers’ Risk Perceptions of

Online Shopping”, Journal of Consumer Behaviour, vol. 4, nr. 1, 2004, pp. 40 -50

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27. Richardson, P.S., Dick, A.S., „Extrinsic and Intrinsic Cue Effects on Perceptions ofStore Brand Quality”, Journal of Marketing, vol. 58, nr. 4, 1994, pp. 28-36

28. Sheehan, K.B., Hoy, M.G., „Dimensions of privacy concern among online consumers”,Journal of Public Policy & Marketing , vol. 19, nr. 1, 2000, pp. 62-73

29. Vollrath, M., Torgersen, S., „Who takes health risks? A probe into eight personalitytypes”, Personality and Individual Differences , vol. 32, nr. 7, 2002, pp. 1185-1197

30. Von Neumann, J., Morgenstern, O., The Theory of Games and Economic Behavior ,Princeton University Press, 1944

31. Weber, E.U., Hsee, C., „Cross -cultural Differences in Risk Perception, but Cross -cultural Similarities in Attitudes towards Perceived Risk”, Management Science , vol. 44, nr. 9,1998, pp. 1205-1217

32. Weston, J.F., Brigham, E.F ., Managerial Finance, 4th edition, Holt, Rinehart & Winston,New York, 1972

33. Zey, M., Rational Choice Theory and Organizationa l Theory: A Critique , SagePublications, 1997


CONCEPTS, MODELS, TECHNIQUES AND PRACTICES OF ECONOMIC ANDFINANCIAL ANALYSIS

Ec. PhD. Student Alina BALANASE Bucharest, Romania

[email protected]

Abstract„Information gives you power” is the slogan that guides companies nowadays, the world competition being

carried out in the filed of using the most efficient information and the newest technologies and instruments ofcommunication. The informational system of th e financial- economic analysis has as purpose the satisfaction of all theinformation requests at the level of the society that allows a detailed information about all the activities that aredeveloped. The modern system means the operation of a large vol ume of economic information from and for all thelevels of activity of the enterprise. That is why, the financial and economic power of the most important companies isgiven by the their capacity to detain, control and use information in order to reach the desired objectives.

No matter the level at which the management activity is carried out implies the exact cognition of the concretesituations from the studied unit in order to establish the complex of causes and factors that determine it, fact that clai msthe carrying out of an economic - financial analysis that represents a map of reality that will have to be taken intoconsideration in the future decisions.

The financial- economic analysis must be approached as a discipline, profession, management inst rument andpreliminary process to any entrepreneurial initiative.

Key words: analysis, economic analysis, financial analysis, decision-making process, financial diagnostic.

JEL classification: B41, D12

INTRODUCTION

As any present process, the economi c- financial analysis is submitted to the changingprocess. The indicators reevaluation assessment, next to the expansion of the time and spacehorizon, develops new capabilities and dimensions of the analysis based on historical data, statisticssupplied by the accountancy.

As a discipline, the modern economic - financial analysis is a complex and rigorous activitythat appeals to multidisciplinary techniques of phenomenon study that, in time and space, have amultidimensional value that submits to evaluat ions and interpretations through different valuejudgments, mainly for anticipating the clients’ tendencies and expectations.

There can be identified four possible dimensions for the value of an analyzed phenomenon:1. intrinsic value;2. an updated value under the influence of the conjuncture factors ;3. a real value accepted by the market at a certain moment ;4. an anticipated value.Exactly the multidimensional value is the one that increases the complexity degree and

demands multidisciplinary techniq ues in the analysis activity of the financial economic phenomena.An economic agent’s evaluation of the financial – economic activities for a credit agreement

is a study discipline but also a banking practice that is based on rules, principles andmultidisciplinary study techniques of the phenomena that determined and/or will influence thecompany results and especially the reimbursement capacity.

The economic- financial analysis as a management instrument results from the need tomeasure. „Measuring means understanding, understanding means achieving knowledge, havingknowledge means power”.

Analysis and evaluation are a necessity, not a luxury for the contemporary management.Managers must understand that if you can not measure you can not control. And if you can notcontrol you can not administrate. Without measurement/evaluation there can not be carried out theother functions of management. From here it results the strategic importance of the evaluation

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system for the organization. A good system of eval uation directs the company towards a positiveand correct direction.

Analysis, as an instrument accessible to all decedents, favored the change and implicitly thehuman kind evolution.

Unquestionably, the economic - financial analysis is a management inst rument when appearsthe problem of appreciation and resources measurement, including the financial ones and appealingto a bank loan.

The economic- financial analysis, as any present process, is submitted to the changing lawsaccording to specific methods :

- reorganization, retechnologization and specialization at the level of the basic competences;- rapid adaptation to the clients’ new requests through implementing a new flexible

organization, the establishment of a global logistics, the development of a ssistance for criticalactivities and the expansion of collaboration in order to capitalize the existing opportunities at thelevel of the world market;

- a flexible conscription that allows the successful exceeding of fluctuations or rapidmodifications that appear in global the economic - financial environment.

It can be said that the modern economic - financial analysis is a discipline, a profession, amanagement instrument and an independent process with an antidote role of informationalmoderator asymmetry of the time server tendencies, reducer of moral risk that can affect theinvestor.

1. ECONOMIC AND FINANCIAL ANALYSIS - OBJECT, MAJOR CONCERNS,PERSPECTIVES OF DEVELOPMENT

Regardless of the factory’s financial position, the main factor which can positively influencethe running of it is the human factor, the management / the manager. Therefore, it is necessary toplace real, operative, more analytical,information at the management team's disposal, witch willdraw attention to critical points order to intervene promptly and effectively. In providing thisinformation, an important role is aasigned t o economic and financial analysis.

Economic and financial analysis is a set of concepts, methods, techniques, processes andinstrumens that provide treatment for internal and external information in order to formulate somerelevant considerations regarding the economic and financial situation of a trader, identifyingfactors, causes and conditions that have caused it, as well as internal reserves to improve it in termsof efficient use of human,material and financial resources [1].

A modern definition of economic analysis has been contoured by Lionel Robbins, in 1935,which summarizes pretty well the object of the economic analysis [2]: economic analysis studiesthe way in which individuals or society uses rare resources for alternative uses, to meet theirrequirements.

Most of the contemporary economists consider their discipline such as a theory of humanbehavior defined by the care for satisfy their needs witch the scarcity of resources. In the secondhalf of the twentieth century was the extension econo mists concerns about human behavior issues,so there is an economic analysis of marriage, crime, policy, religion , etc..

Any subject witch involves the human rights are now a potential ob ject of economicanalysis, so the selection of a material subject can not make distinguish between economy and otherhumanities and social science, but the method of analysis can.

Economic and financial analysis, as a discipline study phenomena and processes ofeconomic and financial field, at the micro level, which in terms of studying the decompositionfactors, quantitatively and qualitatively; establish causal relationships between factors, quantitativequalitative influences they have on this phenomenon: on this bas e, conclusions are formulated in thesummary, appreciating the concrete situation of the analyzed phenomenon and proposing variantsof necessary correction to ensure the amplification of positive influences and reduce or eliminatethe negative influences, for print the desired, normal behavior on the phenomenon.


For example the quantification of the influences caused by factors witch compose turnoverbelow factorial model are presented in Table. no 1.

Table no.1. Influence of changing the use of human resources and of production recoverydegree o turnover

PeriodNr.crt. Specification UM 2006 2007 20081 Personal no. (Np) pers. 296 285 258

2 Turnover (Ca) Lei 25.823.769 23.225.272 23.072.059

3 Labor productivity ( W ) Lei/pers. 87.242,46 81.492,18 89.426,59

4 Working days no. (z) days 278 280 2785 Average daily productivity (wz) Lei 313,8218 291,0435 321,67846 Quantifying the influence of factors 2007-2006 2008-20057 Np influence Lei - 959.667,90 - 0,7

8 W influence, in witch Lei - 1.638.829,1 -153.212,39 - z influence Lei - 1.220.139,88 -2.350.467,310 - wz influence Lei - 1.378.357,12 +2197255,0111 Total Lei - 2.598.497 -153.213

CAn – CAn-1 Lei - 2.598.497 -153.213

zwzNpWNpCa (1)

2007/2006Absolute change :

leiCaCaCa 497.598.2769.823.25272.225.2320062007 1) influence of Np change:

leiWNpWNpNpCa -959.667,9769.823.25)46,242.87285()()()( 2006200620062007

2) influence of W change:

lei011.638.829,

)46,242.8785(2272.225.23)()()( 2006200720072007

WNpWNpWCa

but W = z wz2.1) influence of z change:

lei

wzNpwzNpzCa zz

,88-1.220.13925.823.769,1224.603.629)8218,313

296280()8218,313280280()()()( 200620062007200620072007

2.2) influence of zw change:

lei

wzNpwzNpwCa zzz

,12-1.378.357

12,629.603.2423.225.272)()()( 200620072007200720072007

Total change:

lei

wCazCaNpCaCa z

2.598.497

12,357.378.1()88,139.220.1(9,667.959)()()(

2008/2007Absolute change :

leiCaCaCa -153.21323.225.27223.072.05920072008 1) influence of Np change:

lei

WNpWNpNpCa

7,0272.225.23

,323.225.271272.225.23)81.492,18285()()()( 2007200720072008

2)

2) influence of W change:


lei

WNpWNpWCa

-153.212,3

)18,492.81285(059.072.23)()()( 2007200820082008

but W = z wz2.1) influence of z change:

lei

wzNpwzNpzCa zz

312.350.467,,323.225.271,9920.874.803)0435,291

280285()0435,291278258()()()( 200720072008200720082008

2.2) influence of zw change:

lei

wzNpwzNpwCa zzz

012.197.255,

)99.803.874.20059.072.23)()()( 200720082008200820082008

Total change:leiwCazCaNpCaCa z 213.15301,255.197.231,467.350.27,0)()()(

The decrees of personal number from 298 persons in 2006 at 285 persons in 2007, and at258 persons in 2008 has an decreasing effect on industry turnover. This effect was more marked in2007-2006 period, when it was - 959.667,90 lei. In 2008-2007 period I observed an improvement ofquantitative factor’s influence , the influence on turnover is just -0,7 lei.

The decrees of labor productivity from 87.242,46 lei/pers. in first year, at 81.492,18 lei/pers.In second year analyzed cause a decrease in turnover with 1.638.829,1 lei/pers. in 2006 -2007period, and the productivity growth in 2008 cause a decrea se in turnover with 153.212,3 lei/pers. in2007-2008 period.

The influence of working days number remains negative throughout the period of analysis,mainly due to decrease in the indicator level throughout the period of analysis.

It notes the important contribution of labor productivity in the reduction of turnover in 2006 -2007 period, and the number of working days have a negative influence on turnover just as in 2006 -2007, but in 2007-2008 they are at a level managing low enough to offset the positive e ffectsgenerated by the average daily productivity.

Analysis, as a general research of the natural and social phenomena, means thedecomposition into their component parts to be studied and discovered causal relationships.Economic analysis aims the economic activities which consume resources and generate results [3]in meanwhile financial analysis is a methodical study of of an enterprise ’s situation and evolutionon its financial structure and profitability, based on the balance sheet, the result and al l otherinformation offered by the company or can be obtained about the company and it’s future [4].

Part of economic and financial analysis, financial analysis is included in the special purposetests, which appeared and developed especially in the last 2 0 years and are in permanent evolution.Among the factors that imposed and stimulated the financial analysis’s development andimprovement can remember: development of anonymous stock, increase the role of banks andfinancial institutions in the economy.

If the first financial analysis performed by the shareholders of limited companies are limitedto verification of financial balances , sufficient for repayment of loans granted by banks, regardlessof developments in the financial situation, the main criterion for granting loans remained just theassets of the company. The financial analysis was limited to the study of rates on the financialsolvency of the enterprise.

This approach has proven limited, which required a modern approach to financial analysis,which tends to become a system for handling information able to provide the data required bymanager for financial decisions. The role of this discipline has increased, meaning that it is not onlylimited to financial data, but integrates economic data and stock, and analysis are integrated in themodels required to prepare financial forecasts.

The developments of financial analysis in recent years is due to several causes [5]:


1. The concentration tendency of firms has led to the development of large -sizedinvestments, whose returns are spread over several years, which required banks and financialinstitutions develop and use methods of analysis developed for the grant or refusal of credit .

2. Failure of banks to require guaranties to cover risk of non-payment it imposed to makeanalysis of economic and financial risk, because the concept of liquidity has become scarce forlong-term commitments.

3. The development of modern financing means required to deepen the study of financialbalance and of the capital cost, regardless of its origin.

4. Credit policy constraints, high interest rates, inflation, exchange rate variations have acutefinancial problems of the enterprise.

5. International development of companies led to search for techniques suitable for makingcomparisons between financial statements and accounts of various countries.

The complexity of economic phenomena analysis prints a double character, namely [6]:1. discipline character with a theoretical background, a set of general principles that can be

applied in the interpretation of the economic past and present problems;2. practical activity that provides answers to the questions on about causal relationships

between factors and phenomena.In carrying out it’s object of study, analysis have some stage, which gives the content of this

process. Regardless of the phenomenon or process addressed in the study, analysis have thefollowing stages [7]:

a) the exact delimitation of the ana lyzed object, which means facts, processes, phenomena,results.

b) identification of components, factors, causes which could help achieve a certain level ofphenomena.

c) establishing the causal relationship between factors and phenomena, and it ’s inclusion ina model used in analysis. The model is based on the causal , objective relationship between factorsand phenomena, such as applying different methods of quantitative analysis to identify thecontribution of each factor and the effect size on the level recorded phenomenon.

d) measuring the influence of each factor on the level and on the change of the phenomenon.In this phase will apply a technical process, depending on the relationship between factors andphenomena.

e) synthesizing the results of quant itative analysis and revaluation using the qualitativeanalysis of the influences table.

f) development of corrective measures in order to increase positive influences and to reduceor eliminate negative influences.

In foreign literature it can be found th e following steps of the process of economic andfinancial analysis [8]:

a) Setting objectives;b) Identify alternatives for achieving the objectives;c) Formulation of hypotheses;d) Estimated costs and benefits - involves estimating all costs and benefi ts for each

alternative for entire duration of the project;e) Comparison of costs and benefits with pre-estabilished values;f) Realize a "sensitivity analysis" (the foreign literature is called "what -if");g) Reporting results and making recommendations .Attention of economic and financial analysts are focused mainly on three major aspects of

business entity taken in the study [9]:(1) study on financing - the nature and composition of resources, stability, financial costs

and risks,(2) study the use of resources - allocation, structure, level and variability,(3) study the results witch allow the release of economic risks.


Confrontation between financing decisions and the decisions of resource allocation leads toquery and variable responses on the adjustment:

a) Structural adjustment between liquidity uses resources exigibility.In common terms the company’s financial fundamental adjustment presupposes

harmonization between duration/maturity/ falling due, as term attached ti resources and uses.(b) Adjustment functional use - resourcesThe second approach requires a significant change of criteria and conditions of adjustment,

defined not by reference liquidity/chargeability, but by reference to cut down that lead to theseparation of uses and resource s by the way for their participation in the four fundamental financialcycles operations of a business structure (current operations, the operations of accumulation cycle,the process of sharing revenue and earnings results) .

c) Global adjustment of cost efficiency and resource uses.Vision recently developed in theory considers the financial system as an open and stable

sistem put in value the resources as input - output of capital - resources - cash within the meaning ofadequate mobilization of efficiency and effectiveness criterion.

2. THE ROLE OF ECONOMI C ANALYSIS IN ACHIEVING FINANCIALMANAGEMENT FUNCTIONS IN CONTEMPORARY ECONOMY

Some authors consider that we deal , in the contemporary economy, with a trend ofeconomic and financial analysis ’s emancipation regarding to it’s the accounting sources.

According to Cohen, the factors witch determinate this emancipation are [10]:- Development of financial markets (which leads to development of portfolio management

tools, based largely on statistical methods of analysis);- In traditional analysis (type analysis of credit in the savings bank based on financing), the

focus is on prospective information, so we are looking after economic, commercial, political, socialinformative elements, to help achieve forecasts;

- Providers of information have an increasingly rich offers in contemporary businessenvironment (financial databases, information extra accounting), which relax the analysisdependence of accounting source.

We can add to the factors listed by C ohen, the development of intangible elements in aknowledge-based economy.

Users are an important category in the design and communication information process. Intime this category has suffered various changes, reflecting the social, cultural, economic aspects andthe system of government.

Analysis is important for all parties participating in the operation:• management company: interested by analysis conclusions for substantiation financing and

investment decisions in order to increase enterprise value;• investors, creditors, shareholders - are interested in company capacity, seen as a current or

potential investment option, to cover current and future liabilities and how are resources allocatedand controlled by the management enterprise;

• business partners (suppliers, customers, employees) interested in the future development ofthe business, financial security and employment;

• State: interested in the company performance for determining fiscal objectives and forformulating economic policies and assessing the macroeconomic performance etc..

But the company’s functions, held by all the leadership attributes, and each of theseattributes is achieved through a specific type of analysis.

Economic and financial analysis realizes, in management process a series of functions:a) the information function, ensure that the data from the entire economic system of records

in order to inform decision centers on how to achieve economic and financial performance and thecauses that have generated any disorder in t he settlement in the following period, position of statescompared with normative levels of competition in different markets, etc..


b) the assessment of technical and economic potential of the company, although defined asthe autonomous, it’s role is to implement in practice the function presented above.

c) the decision substantiation on grounds of efficiency, is an objective requirement of theactivity in any area of economic and social life.

d) the function of reflecting the effective management of asse ts and assessment ofmanagement performance are made by accounting.

e) the function of making connection with the external economic and financial environmentinvolves analysis of relationships with: providers of capital (shareholders and their advisers,investors in banks and other investors, the stock exchange), business part ners (suppliers, customersetc..), the state (fisk, government and quasi-governmental organizations, local authorities), otherusers (professional organizations, analysts and external consultants, auditors, the prosecution or thecourts, the public).

Satisfy this requirements is subject to the provision by undertaking economic and financialinformation as an expression of activity.

Diagnosing the business serves as a bas e for economic and financial decisions.

CONCLUSION

A global image of the company, an explanation of the way of functioning on the whole cannot be contoured than taking into account the specific of economic social, financial environment.Analysis should not stop only at the financial aspects, should be assessed also the strategic, socialelements, taking into account their consistency both within and outside the enterprise.

Currently, "new international economic environment have made the information to becomea strategic weapon. Those who know how to obtain, interpret and to exploit to acquire a rapiddevelopment of high capacity and strengthens its competitive advantages."

NOTES

[1] Niculescu Maria, Diagnostic economic, Ed. Bucureşti, 2003, pag. 22[2] Munteanu Nicoleta, Analiza economico -financiară, Ed. Tiparului, Iaşi, 2006, pag. 5[3] Dumitru Gheorghe, Analiza economico -financiară-note curs, Iaşi, 2007, pag. 3[4] Bîrsan Mihaela, Analiza economico-financiară – note curs, Ed Universităţii, Suceava, in press[5] Petrescu Silvia, Analiza economico -financiară. Teorie şi aplicaţii, Ed. Tiparul Iaşi, 2002, pag. 6[6] Petrescu Silvia, Analiza economico -financiară. Teorie şi aplicaţii, Ed. Tiparul Iaşi, 2002, pag. 9[7] Negrescu M., D., Valorificarea valenţelor de informare a bilanţului contabil, Ed. ASE, Bucureşti, 2005,pag. 222[8] Departament of the army, Economic analisys description and methods, Washington DC, 1992, pag. 7[9] Negrescu M., D., Valorificarea valenţelor de informare ale bilanţului contabil, Ed. ASE, Bucureşti, 2005,pag. 222[10] Robu V., Sandu R., Problematica analizei performaţelor -o abordare critică în contextul teoriilorinformaţiei şi guvernanţei corporative -Economie teoretică şi aplicată, Ed. AGER, Bucureşti, nr. 1/2008, pag.12

BIBLIOGRAPHY

1. Bîrsan Mihaela, Analiza economico-financiară – note curs, Ed Universităţii, Suceava, inpress;

2. Bîrsan Mihaela, Analiza diagnostic şi orientarea strategtică întreprinderii , Ed. Didactică şiPedagogică, Bucureşti, 2004;

3. Chirulescu Ciucaşu Elena, Diagnostic financiar al profitabilităţii şi riscului bancar înacordarea de împumuturi agenţilor economici , Ed. ASE, Bucureşti, 2007;

4. Departament of the army, Economic analisys description and methods, Washington DC,1992;

5. Dumitru Gheorghe, Analiza economico-financiară-note curs, Iaşi, 2007;


6. Harrington H.James, Management total în firma secolului 21 , Editura Teora, Bucureşti,2001;

7. Munteanu Nicoleta, Analiza economico-financiară, Ed. Tiparului, Iaşi, 2006;8. Negrescu M., D., Valorificarea valenţelor de informare a bilanţului contabil , Ed. ASE,

Bucureşti, 2005;9. Nicolescu Maria, Diagnostic economic, Ed. Bucureşti, 2003;10. Petrescu Silvia, Analiza economico-financiară. Teorie şi aplicaţii , Ed. Tiparul Iaşi, 2002;11. Robu V., Sandu R., Problematica analizei performaţelor – o abordare critică în contextul

teoriilor informaţiei şi guvernanţei corporative -Economie teoretică şi aplicată , Ed. AGER,Bucureşti, nr. 1/2008;

12. www.amfiteatrueconomic.ase.ro .

www.amfiteatrueconomic.ase.ro


SECTION 2

MANAGEMENT AND BUSINESS

ADMINISTRATION


HUMAN RESOURCES MANAGEMENT CONTROL*

Professor PhD. Mihaela DUMITRANA, ASE Bucharest, Romania, [email protected] PhD. Mădălina DUMITRU, ASE Bucharest, Romania, [email protected]

Lecturer PhD.Iulia JIANU, ASE Bucharest, Romania, [email protected] PhD.Gabriel JINGA, ASE Bucharest, Romania, [email protected] PhD.Gabriel RADU, ASE Bucharest, Romania, [email protected]

AbstractWe consider that the human being is the most important asset of the company. In the context of the social

politics of the company and of the objectives of the man agement, along with all the other departments, the managementcontrol contributes to the resources of the entity. In this paper we want to demonstrate the importance of human capitalas one of the key factors of the growth process in all countries and the necessity of the organization of a managementcontrol to be able to provide information about human resources. Which are the axes for the reporting of theinformation concerning the human resources? What kind of reports and indicators should be prepared by companiesfor management? Which are the main concerns of the companies connected to profitableness – efficiency – wages? Theanswer will be found in this paper. In the current conditions in which personnel restructuring processes, combined withthe costs reduction efforts and new requirements arise in the management control of the company, our paper willpresent how we can make a correct assessment of the value created by the human resources component of the company.

Key words: Human resources, management control, indicators, reports, accounting.

JEL classification: M41; M51; M54

INTRODUCTION

The human being is the richest resource of the company. The profitableness of the companyis born out of the coordination of the human resources elements. A s a consequence the companieshave to establish as objectives both the social and human profitableness. But the human being is notdriven as a car. His own complexity, variable in time, is added to the complexity of therelationships between persons. A com pany that does not integrate the social criteria, doesn’t riskonly endangering its image, functioning, survival, but, which is more important, it won’t developthrough its trust capital as to its partners. The creation of the richness and value result not only fromthe properties of a product, but also from the intangible services accompanying it. The way peoplecommunicate and work together determines the profitableness of a company.

The relationship between the economical performance and human performanc e at the levelof a company is very tight. Even if this relationship cannot be established/measured dierctly, thereis however a range of indicators that can do this.

An important target of each country is to ensure a development that can continue “for eve r”or at least until the end of a politically relevant time horizon; long term policy. This developmentmust be a positive development that may be defined as a change over time that somehow increasesthe welfare. Welfare can be considered as the outcome of consumption that consists of consumptionof goods and services that are produced and traded in markets as well as goods and services that areproduced in households for own consumption or directly harvested from nature. These goods andservices are produced from total resources or capital base. The capital base is produced by real orproduced capital, natural capital, human capital and social capital. Consequently, human capital(HC) is also an important part of society’s resources base.

The notion of HC was introduced in literature by Becker and Schultze in 1960. Becker(1964) defined HC this way: “HC, viewed education, on -the-job training and health as componentsof HC with consequences for earnings and economic productivity”.

Rower (1987, 1990, 1994) con siders HC as an important element in understandingdevelopment.

OECD (2001) defines HC: “HC is the knowledge, skills, competences and attributesembodied in individuals that facilitate the creation of personal, social and economic well -being”.

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OECD Growth Study (2003) reminds the importance of education and HC for economicdevelopment.

HC is embodied in humans that all are free women and men. HC is therefore not, unlikephysical capital, traded separately in markets. In the literature HC is decomposed into raw labor,education and skills, but in some literature the notion of HC is mostly only connected to educationand skills. HC as a notion is used to present how countries must developed, but for companiesinside a country the notion used is generally that of human resources (HR).

A group of people working together to achieve a common purpose is defined as anorganization (Bounds et al., 1995). Organizations vary in size, structural and the kind of activitiesthey engage. A common thing for al organizations is that they bring people and resources togetherto fulfill some mission and purpose. All these resources must be controlled in order to explain howpurposes were attained. So that is why a part of management control must be directed towardshuman resources. HR is recognized as an important function in an organization, so that it must becontrolled.

To organize a management control (MC) for HR, in our opinion that means: to identifyactivities to control; to specify indicators to calculate; to select report s to prepare for different levelsof management; to reconciliate the data obtained by different departments (human resources,different responsibility centers); to fight against absents, to measure the faithfulness andattractiveness; to budget the need fo r work from one year to another; to integrate the juridical andsocial constraints in the economic reflections; to manage the social risk; to know the assembly ofthe components of the total remuneration; to direct the company’s strategy and the remunerati onpolitics; to manage the performance criteria (tool for control, indicators characteristics); to measurethe performance and the human resources costs.

HRMC is a permanent control performed for the social drive and for measuring the socialperformances of the company, in a tight correlation with the economic performance .

PREVIOUS STUDIES CONCERNING THE HR

HR is an element of the intellectual capital, intangible in nature that creates substantial valuefor the company because of its individual and colle ctive competences developed. Obviously, thereare entities that know to value their industrial, technical and commercial intelligence capital; thesecompanies have a market advantage in today’s economy when the production is supported by theknowledge and capacity to develop relationships with the partners. The human resourcesmanagement has to adapt to this economy of the networks conceiving common criteria with thepartners for the recruitment, training and management processes of the human capital.

Along the time the economists considered the human resources a component of the capital.Starting from 1960 (Herman, Theeke, 2005) in USA started to develop the concept of HumanResources Accounting. The first company interested in applying it was RG. Barry Cor poration. Itincluded the HR as assets items in the company’s statement of financial position. Even if some ofthe companies focused on the human resources appreciated the ides it is very difficult in practice toapply it, because of a lack of standardizat ion and measurement methods for the value created by thehuman resources.

In France at the end of the years 1970 (Martory, 2003) appears the idea of a SocialStatement of Financial Position. This is a report that presents in connection with the socialenvironment the expenses and the services of an organization directed to social groups that haverelationships with it (employees, investors, customers, suppliers and the public). Here are alsodisclosed some social politics, the targets, the measures consider ed for their achievement, the valueobtained by the organization etc.

There are many definitions of this concept, but, yet, a classification and a definition of theintellectual capital presented in the project MERITUM 2002 was accepted by more authors in theirpapers (Sveiby, 1997; Edvinsson, 1997; Guthrie, 2000); IFAC, 1998). It is detailed in the followingtable:


Table no. 1. The classification and definition of the intellectual capitalCategory ofintellectual

capital

Definition of intellectual capital

Human The knowledge that employees take with them when they leave the firm. Includes theknowledge, skills, experiences and abilities of people. Some of this knowledge is unique tothe individual, some may be generic.

Structural The knowledge that stays within the firm at the end of the working day. Comprises theorganizational routines, procedure, systems, cultures, databases, etc. some may be legallyprotected and become Intellectual Property Rights, legally owned by the firm under separatetitle.

Relational All resources linked to the external relationships of the firm, with customers, suppliers orR&D partners. Comprises that part of human and structural capital involved with thecompany’s relations with stakeholders (investors, creditors, customers, suppliers, etc.) plus theperceptions that they hold about the company.

Source: Meritum project, cited by Beattie & Thomson, 2007

Stanciu (2008) tried to synthesize the methods of assessment and recognition of theintellectual capital in the financial st atements. She presents various opinions regarding thepossibility of the recognition of the intellectual capital and the extent to which there is a need torecognize it. The conclusion of the paper is that, the traditional accounting system needs to beextended to capture the company’s value creation potential and to be based on the effectiveness ofits response to the stockholder’s expectations as well.

Sandu & Ioan (2008) asked themselves which are the axes of intellectual capital disclosurein the annual reports of a recently privatized company and what would be the challenges, risks andbenefits involved of such disclosure. They analyzed the financial statements of Petrom Company ona three years period. The study is interesting, as the foreign company t hat took over the Romaniancompany brought an important intellectual capital. Their conclusion is that this company presentsmost detailed information concerning the structural capital and less detailed information concerningthe human capital.

INDICATORS AND REPORTS FOR HR

Alvin Toffler, cited by Anghel & Ipate (2008), said: “I wonder if anybody buys shares to acompany which has not proven its management skills or in which the management system is notcompetitive? Could anybody think to buy a company w hich has no reputation or credibility provedlong-time by the investors? And, in that logic of things, are there not the list of constant customersor subscribers, the efficient distribution networks, the preferred customers or subscribers, theefficient distribution networks, the preferred relationships or the skills of the managers inconcluding convenient agreements facts which determine a better or smaller value for a company inregard to another?”

The main tools developed in order to facilitate HR and/or intellectual capital reporting are:the market value of the company minus the accounting value (Gu & Lev, 2001; Hall, 1993; Luthy,1998); the intangible asset monitor (Sveiby, 1997); the balanced scorecard (Kaplan & Norton,1996); the Skandia Navigator (Edvinsson & Malone, 1997; Edvinsson, 1997); Tobin’s q (Stanciu,2008); the calculated intangible value (Luthy, 1998); intangible value metrics (Lev, 2001); theintellectual capital statements (DATI, 2000) ; and the model proposed by Anghel & Ipate (2008),where the value of the intellectual capital is determined as a difference between the market valueand the net value of the tangible assets .

Indicators and reports to prepare play controllers for managers are in direct relation with theactivities that have to be identified by MC. In our opinion HRMC must be directed towards fouractivities:

i) planning and recruitment


ii) compensationiii) training and developmentiv) performance appraisali) Planning and recruitment

HR planning is a process for developing alignment betwe en the organization’s strategy andthe people it employs to execute the strategy (Bounds, 1995).

Recruitment is a process of attracting the best qualified people to apply for the job and alsoto motivate people to fulfill the mission of the organization. The candidates have to be recruitedquickly and with a minimum cost. The recruitment terms have to be minim and they are calculatedas the number of days between the recruitment request and the occupation of the position. Therecruitment costs have to be al so minim and they include the cost with the announcement of therecruitment, the costs with the resumes analysis, the costs of the recruitment department. In order tosucceed, the recruitment has to end with the occupation of the position by a person that has therequested qualities.

We think that planning as the first part of this activity is important to be under control inorder to identify and to explain differences between forecast figure and real figure.

A report may be presented based on available in formation about planning and recruitmentdivided into two categories: indicators about jobs and employees need for those jobs and indicatorsabout activity.

In the first category we think to report the following indicators:

Table no. 2. Planning and recruitment indicatorsIndicators Plan Actual Variances Causes

1) Total number of jobs X X X X

2) Total number of employees X X X X

3) The need for personnel X X X X

4) Average salary X X X X

5) Total number of workers

- job 1

- job 2

…

- job n

X X X X

6) Average salary per worker X X X X

7) Administrative employees total number and by type of jobs X X X X

8) Average salary per administrative employee X X X X

9) Distribution employees total number and by type of jobs X X X X

10) Average salary per distribution employee X X X X

11) The structure of the qualification of the personnel X X X X

12) The percentage of the personnel using various criteria(qualification, sex, age, religion, nationality etc.)

X X X X

The second category – indicators about activity – should contain information about expensesincurred in this activity and different costs to be calculated such as:

- activity total cost;- number of employees;- employees salaries;


- average salary;- number of interviews;- number of recruitments;- average cost for recruitment (total activity cost/number of recruitment) ;- the degree of the coverage of the necessary personnel;- the number of persons which were unsuitable (that were wrongly chosen for the job);- the degree of the noncoverage of the personnel sche me and the costs for their supplanting .

ii) HR compensation

Compensation is considered as a payment from the organization to the employees for theirservices based on wages and other benefits. Rewards are also considered as another form ofcompensation to reward the employees for their contribution to the company’s performance. Thesystem of remuneration is an important system of the company’s culture, with its rules andstandards. The organization of the work and decentralization of the power within the team s requestsremuneration politics that need the development of the cooperation and collective competences.

From the manager’s point of view to analyze this activity he needs information aboutcompensation’s total value and components and information about t his specific activity. Theremuneration system chosen has to be simple and easy to understand in order to be accepted by theemployees searching for equity and security, to be adapted to change and to incite the personnel forthe change. Consequently, a report will be divided into two parts to present relevant informationabout HR compensation. Indicators about HR compensation may be as following:

- total employees number;- employees salaries;- average salary;- activity total cost;- average activity cost per employee;- personnel expenses/value created- average cost per hour;- pay-list cost;- average number of claims for errors ;- social expenses value.

In the second part of the report, we think to prepare for management a second statementcontaining indicators about salaries/wages expense in order to analyze the importance of thoseexpenses in the total cost as follows:

- total salaries/wages expenses- total wages/salaries productive workers expenses- total salaries/wages administrative employees expenses- total salaries/wages distributions employees expenses- total period cost (only salaries/wages expenses)- % of wages/salaries in production sector- costs with the change of the personnel (unsuccessful recruitment and restarted).

In the meantime we consider that the value of the reward should be analyzed according tothe involvement of the personnel. For analyzing this section we suggest the following indicators:

- the time ratio;- the degree of the yield/work productivity;- the involvement degree;- the structure of the working places;- the supplementary hours/medium cost per supplementary hour;- minimum/ maximum yield.

iii) Training and development (T & D)


Training helps employees to gain particular job skills and development involves on -goingeducation to help prepare employees for future jobs. On a short term, the training has to facilitatethe change: the evolution of the jobs, the development of the potential, the management of thecareers. On a long run, the training accompanies the culture change and helps the adaptability ofemployees. Development involves more than learning a skill such as problem analysis, creativity,team-building and leadership. Training and development is important for accomplishing the missionand vision that managers chose for an organization.

To realize training and development’s targets companies often devote ample resourcespresented in budgets. These resources are allocated to the employees that have the motivation tostay within the organization. This is why, in the first part of the report, we will present indicatorsthat show the maintenance and motivation of the employees:

- fluctuation rate/ fluctuation costs;- accidents frequency/ unused time/ work accidents costs;- sickness frequency/ unused time/ sickness costs;- wages structure/ bonuses etc.;- cost-benefit-motivation analysis;- the report between the personnel training (costs for training) and their stability within the

company;- employees participation to profit;- supplementary social services costs;- the degree of personnel satisfaction;- the time spent by the employees within the organization;- the reason for the personnel for leaving the company.

Budgets contain information about total resources (T & D), number of employee implicatedin this process, T & D cost per employees. So that a report for management wil l contain thefollowing indicators:

- total resources amount;- total number of T & D actions;- total cost of each T & D action ;- total number of employees implicated in T & D process ;- average cost per employee trained ;- days for training per employee ;- the number of employees that change the function within the organization;- the time for T & D per employee per year;- the impact of the T & D in saving the resources within the company;- the structure of the employees involved in the T & D process using different crite ria (sex,

qualification, age etc.).

iv) Performance appraisal

In the social sciences the word performance knows two senses:- the social performance can be defined as the intensity with which a person chooses to

cooperate for the objectives of the company, or, more general, the level of satisfaction touchedby the persons that are a part of the life of the company. The social performance reflects theimpact of the social politics on the attitude of the employees as to the company where theywork;

- the human performance is analyzed according to the result obtained by the employeesconnected to their work. This result is expressed according to the richness created, addedvalue created, the supplement of value obtained by the company etc.

The two notions are distinc t because (Jianu, 2007):


- the social performance reflects the aptitude to raise the level of satisfaction of the personnel,to improve the social climate and the life conditions;

- the human performance supposes the optimization of the social cost to obtain a certain resultor to maximize this result.

The management of the human resources is an essential item for the financial performanceof a company. A study performed by the American counseling cabinet Watson Ayatt shows that themost profitable companies in the management of the human resources create two times more valuethan others. There are five motivations for each person at their working place (Levering &Moskowitz, 1993):

- remuneration;- professional development;- working place environment;- respect and consideration;- work interest.

Performance appraisal is a way to evaluate how well employees have met expected levels ofaccomplishment compared to some standards or goals. Performance appraisal influences HRdecisions on such issues as pay, promotion, train ing and development. The appraisal may focus onoutcome measures such as levels of quality, productivity or financial performance.

Values and methods in performance appraisal may be presented as follows:- direct individuals or direction to the work force- control people and processes- feedback used for ratings, rewards and sanctions- feedback useful for improvement- motivating or de-motivating employees (source: adapted from Scholtes)

Regarding this activity, management controller must prepare a report where ind icators abouttypes of appraisal actions are presented and also the activity cost per each type of action.

We consider that a company that wants to be profitable has to focus the management of itshuman resources on achieving the following objectives:

- to integrate progressively the new employees;- to participate actively in integrating and training the young persons;- to participate in the integration or the persons with handicap;- to update continuously the internal resources;- to practice a responsible and equitable management of the jobs;- to prove flexibility in the work organization;- to take into account the individual aspirations;- to assure the person’s security;- to support the employees with problems;- to value the personal richness;- to recognize the individual and collective work;- to practice a correct remuneration of the employees;- to protect the results correctly;- to manage the resignations;- investments in personnel, by continuous training and development;- the possibilities for the employees reconversion that are found on the working force market at

a certain moment;- personnel leasing.

CONCLUSIONS

1) The management of the HR is more and more complex. We started this research bypresenting human capital concept, because this notion is used to calculate su stainable developmentindicators. For all the countries it is necessary to value the human capital, but this is a difficult


action. In other way the value of human capital is determined based on human resource componentsfor each company. So that HRMC will be a consequence of the importance of these resources forcompanies, geographic area and also for the countries.

2) HRMC may be divided into two parts: a part dedicated to the activity’s control andanother part representing outcomes activity control. In the French literature, HRMC focuses only onthe activities identified in the area of HR. In our opinion, HRMC is more than the activities’control. For this reason, in this paper we presented indicators for two different parts of HRMC.

3) The economic environment along the social system has to propose a strategy at the HRlevel, taking into account the demographic evolution, but also the professional qualification.

4) The preparation of different reports for managers needs information about expenses,costs, number of employees, types of jobs, types of activities etc. Some information is obtainedfrom HR department (employees, jobs, activities) and often from accounting department (expenses,costs, turnover etc).

5) We consider that indicators and reports tha t have been presented in our research representour concept about what HRMC must be. Our model is based on a theoretical research (books,studies etc.) and on a practical documentation concerning the needs of companies in this area.

* This research was financed by CNCSIS-UEFISCU by the contract no. 1858 „MANAGEMENT CONTROL IN THESUSTAINABLE DEVELOPMENT OF THE HUMAN RESSOURCES”

REFERENCES

1. Anghel I., Ipate D.M. – Human capital and management analysis and valuation. The results of anempirical study on Romanian listed companies, AMIS 20082. Bernard M – Le contrôle de gestion sociale: Principes et methodologies. Cas concretsd’application, Paris, 20033. Bernardin H.J., Bernardin R., Joyce E.A. – Human resources management, New York, Mc -GrawHill,19934. Bounds, Dobbins, Fowler – Management – a total quality perspective, S.W.C.P., 1995,Cincinnati, Ohio5. Burland A., Teller R., Chateain -Ponroy S., Mignon S., Walliser E. – Contrôle de gestion,Vuibert, Paris, 20046. Caraiani C., Dumitrana M. (coordonatori) – Contabilitate de gestiune & Control de gestiune,Bucuresti, Editura Universitară, 20087. Doriath B., Lozato M., Mendes P., Nicole P. – Comptabilité et gestion des organisations, Daurd,Paris, 20058. Dumitrana M., Glavan M., Dumitru M. – Pleading for the Management Controller Profession inthe Trade Area, Revista Amfiteatru Economic, 20099. Economic commission for Europe Conference of European Statisticians: Statistics for sustainabledevelopment: A framework for sustainable develop ment indicators, Bucharest, 200710. Horvath & Parteners – Controlling, Bucuresti, ed. C.H. Beck, 200711. Herman A. Theeke – A human resource accounting transmission: shifting from failure to afuture, Journal of Human Resource Costing & Accounting Volume : 9. Number: 1, Emerald GroupPublishing Limited, Year: 200512. Jianu I. – Evaluarea, prezentarea si analiza performantei intreprinderii, Ed. CECCAR, 2007Levering R., Moskowitz M., The 100 best Companies to work for in America, Curency Doubleday,New York 199313. Sandu R., Ioan I. – Beyond the balance sheet: intellectual capital disclosure in transitioneconomies. A case study from the oil industry, AMIS 200814. Stanciu C.M. – Intellectual capital, a challenge to get the „true and fair veiw”, AMIS 2008


THE IMPLICATIONS OF THE FDI FLOWS ON THE ECONOMICAL GROWTH IN THECENTRAL AND EASTERN EUROPE COUNTRIES

Lecturer PhD. Mariana LUPAN“Stefan cel Mare University” of Suceava, Romania

[email protected]

Abstract:In contemporary economy foreign direct investment (FDI) have become significant component of global

economic circuit because they have seen higher growth rates compared to world trade and the last two decades of XXcentury and the beginning of XXI was a source to climb in developing countries. Increasing global flows of foreigndirect investment and international production reflected a significant economic performance for many countries of theworld and was partly driven by increasing corporate profits around the world and the high prices of shares that haveincreased the value of mergers and acquisitions.

Key words: foreign direct investment, international production, multinational corporations, economicperformance

JEL Calssification: F02, F23, R21

INTRODUCTION

The capital, with all its forms, is probably the economical resource with the biggest amountof mobility in the economical context of the new millennium. The capital fluxes are today commonpresences also on the international circuits and a lso on the national tracks, inter -sector and intra-sector. Not only the volume of the capital fluxes and the speed of their movement are in apermanent ascendancy, but also the easiness which these are transformed (direct investments,portfolio investments, banking and un-banking credits, loans), according to the characteristics of thehost-country environment and to the interest and profile of the holder.

According to the fact that in the contemporary economy the direct foreign investments havebecame a significant component of the global economical circuit, and in the last two decades of theXX century have represented a source in continuous ascension for the developing countries, in theforth chapter I’ve analyzed the evolution of the FDI fluxes on the gl obal level between 1990 and2005. From this perspective, in the World Rapport of Investments, elaborated by UNCTAD in2002, is accentuated the fact that the direct foreign investments constitutes the biggest componentof the capital fluxes to the developin g countries, recording oscillations less than the portfolioinvestments and commercial -banking loans. To relieve the importance of FDI in the globalcontemporary economy, I’ve analyzed the global fluxes of direct foreign investments from theperspective of the volume, of the influence factors, of the economical development, according to thegeographical distribution and sector distribution, and also in the relation with the internationalitymodalities and with their component elements.

It is known that the flows of foreign direct investment attracted by a country or region isinfluenced by local conditions and situation of economic , social and international policy .Thus, FDIflows received worldwide have registered an ascendant trend in the period 1998-2000, but wasfallowed by a significant reduction in the period 2001-2003 based on the slowing pace of economicgrowth worldwide, the trend was changed since 2004 , when it recorded anew trend of increasinginternational investment flows. In 2008 shows an inflexible point and this decrease in the volume ofFDI flows is a consequence of the curren t economic and global financial crises.

[email protected]


691

10871388

818679 558

711958

1411

1833

1449

0

500

1000

1500

2000

1998 2000 2002 2004 2006 2008*

Investments value

* preliminary dataFigure 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 , developingcountries and economies in Central and Eastern Europe have seen a different dynamic depending onthe economic situation and domestic politics and the share held in total world. Thus, developedcountries which hold the largest share in total flows of foreign capital have seen an evolutionsimilar to that of the world while the states of Central and Eastern Europe (CEE) have followed atrend different from that.

Year 2000 was an important moment of development , as flows of foreign direct investmentreached a record level, registering an increase of 18%, increase was almost entirely absorbed bydeveloped countries, respectively Triad USA - Japan - EU had 80% share of total foreign directinvestment received (Table no. 1). Therefore, international production was heavily concentrated inthe triad, while flows received by CEE were maintained at the level record ed 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 decreasedgrowth recorded in 2001, but due the terrorist attacks in America. Thus, flows of foreign directinvestment received in 2001 fell significantly which was intensified competitive pressures, stressingthe need to seek out locations were costs were lower. We appreciate that this is the main cause thathas generated an increase in the relative size of FDI flows received by economies of Central andEastern Europe countries to 2% in 2000 to 5% in 2003 , although in developing countries which hasbeen increased from 18% in 2000 to 31% in 2003.

At the end of 2002, flows of foreign direct investment followed the same downward trendstarted in 2001 reaching $ 679 billion. This year, China recorded a record level of capital flowsreceived ($ 53 billion), becoming the largest recipient of FDI. As regards the countries of Centraland Eastern Europe they recorded an absolute growth of $ 4 billion to offset divergent evolution inthe 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 offoreign direct investment. In Romania, the level of FDI attracted a slight increase (with 0,6% ) overthe previous year.

Entries of foreign direct investment fell further in 2003, for the third consecutive yearreaching the lowest level recorded since 1998.The most drastic decrease in inputs of capitalregistered 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 with9% (from $ 158$ billion to $ 172 billion ), the CEE countries have experienced a decline in theirfrom 31 billion to $ 21 billion (with 7%), which led to a reduction in total global share from 5% to 3% (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%


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 EUintegration. Thus, the most significant flows were reported in Poland, which has posted the highestvolume 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 inincreased to $ 711 billion . After three years of decline recorded a slight return of FDI flowsreceived worldwide, particular in developed countries . the main receiver is the U. S. state, followedby Britain and China, and this increase is made in particular on enhancing the mergers andacquisitions operations.

Must point out that 2004 brought a change in integration of national economiesclassification on categories in statistical development achieved by UNCTAD. Thus, Europeancountries that acceded to the EU in 2004 are included in the developed economies, while Europeancountries were not members of European Union appear in the category of developing economiesalong 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 developedeconomies, 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, placedin 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 wasconcentrated in five states that have totaled 81% from foreign capital inflows: Azerbaijan , Bulgaria,Kazakhstan, Romania and Russian Federation . As regards the countries of South –Eastern Europewhich drew 1.87% of global FDI flows as the main receiver is remarkable Romania ($ 6517million) and Bulgaria ($ 3443 million) candidate states for EU integration at that time.


Table no. 3 – FDI flow received during 2004-2006 ($ billion)2004 2005 2006Year

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


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 developedeconomies, whose shared in total input flows of foreign capital increased by about by 4 % (Tableno. 3).

Evolution flows of foreign direct investment in 2006 was influenced by events that tookplace on the political and economic plan on intern and international level, but also the confidence offoreign partners in the development strategy of Romania. Improving the business environment, theeffects of introduction of flat tax, have helped to attract a large volume of foreign investment.

Is notes that the reorientation of transnational companies activities in the countries ofCentral and Eastern Europe aimed, primar ily, the nominees states to integration which hasgenerated for the period 2001-2003 a significant increase in the input of foreign capital in theintegrated states in 2004. The same upward trend was noted, during that period and in Romania andBulgaria which were the main receivers of foreign direct investment in CEE.

Therefore, joining the European Union was an essential incentive for foreign investorsinterested in gaining a better position on regional market, generating an increased attraction of thecountries 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 thisyear our country is in UNCTAD analysis as developed country , with a volume of entries of FDIflows worth $ 9.2 billion and for 2008 to $ 10.6 billion.

Table no. 4- FDI flow received 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

* preliminary dataSource: World Investments Report, UNCTAD , 2008


The volume of foreign direct investment attracted by a national economy is measured interms of two major indicators, namely: the index of performance and potential index. Theperformance index shows the comparison between FDI inputs in each country, calculated as a shareof total world economic power of each country’s share that it holds in world GDP. It is preferablethat the value of this indicator should be as close to 1, which shows that the countries performancein attracting FDI is better in the sense that attracts FDI over their economic power, occupying sucha high position in the world hierarchy.

The potential index measures the potential of each country to attract FDI . Like the previousindex, potential index take the values 0 and 1. According to UNCTAD methodology this index isdetermined by taking into account certain economic, political and social variables, such as the :thestock 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 naturalresources 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 totalworldwide, energy consumption per capita , researching and developing costs as a percentage ofGDP, the number of main telephone lines per 1000 inhabitants, the number of students in highereducation 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 country’spotential is larger, occupying a better place in the global hierarchy. According to the data fromUNCTAD, between the Central and Eastern Europe C ountries are significant gaps both in terms ofperformance and potential for attracting FDI.

Table no. 5 – The performance index of FDI for the countries of Central andEastern Europe (global position)

Performance indexCountry

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 Investments Report, UNCTAD, 2000,2006, 2008

From the analysis of performance index is observed that the changes in the performance ofstates and the gap between them are significant. Regarding the evolution of performa nce index is anapparent reversal of the situation. Thus, in the year 1995 Hungary, Estonia and the Czech Republicattracts a large volume of FDI , While Romania, Bulgaria and Slovenia receive the share of foreigncapital under the power of GDP world. In 20 05, Estonia ranks first place at the regional level , whileBulgaria and Romania occupying two sets in the hierarchy of CEE states analyzed attracting FDIover their economic power, while Hungary and Czech Republic recording foreign direct investmentappropriately 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 recordedin Poland.

Table no. 6 – The performance index of FDI for the co untries of Central andEastern Europe (global position)

Potential indexCountry

1995 2000 2002 2003 2004 2005 2006

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

I’ve started from the premise that drawing foreign capital under the direct foreigninvestments shape is a specific activity, well defined on the international level, initiated andperfected in the developed countries, that aren’t only the main global investors, but also the mainsreceivers of the direct foreign investments fluxes. In these cond itions, the success in drawing directforeign investments supposes the alignment to the international practices in the domain, consideringthe participation in competition conditions to the global offer of investment projects.

The strategically objectives to draw the foreign direct investments aims for building an realexternal credibility of our countries as potential investment market, and also the promotion of theRomania as potential foreign investor, in the context of the competition with countries withdeveloping economy from Central and East Europe. In these conditions, the politics for drawingforeign direct investments must be actively sustained, generating investments, and the businessinitiative must start nut only by offering opportunities of internal investments but also by supportingand keeping a stabile and profit generator business climate

CONCLUSIONS

In conclusion, this analysis highlights and completes the observations on the attractive statesof the CEE 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 directinvestment 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 economicpower.

Should be note that our country had made an improvement on the potential of attracting FDIflows, so that from 2000 to 2007, climbing 27 positions compared with Bulgaria which only goesup 7 positions. This situation is explained if we consider the positive developments of theeconomic, institutional and legal climate, registered in Romania in the European Union pre -accession.


If we analyse the evolution of FDI presented in accordance with theories on the types offoreign direct investments , we appreciate that foreign investors in CEE have watched especially:

potential market capitalization as a result of foreign investors preference for tradeactivities ;

abundand and cheap labor, investors are attracted by industrial activities that do notrequire 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 theshare of services to the detriment of other sectors. This change is due, mostly unprecendentedprogress in technology, particularly in communications technology, with the main sourcetransnational corporation (CTN). CTN exported this trend throughout the global economy, so in thecountries of Central and Eastern Europe through foreign direct investment made in this region.

REFERENCES:

1. Lupan Mariana - Evoluţia globalizării şi impactul acesteia asupra procesuluiinvestiţional în perioada 1990 -2005 în economia românească , Teza de doctorat, ASEBucureşti, 2009

2. Prelipcean Gabriela, Lupan Mariana, Analiza fluxului de investiţii străine directe înRomânia, în perioada 1990-2004 şi implicaţiile asupra creşterii economice , în vol.Experienţe istorice de integrare european ă, Editura ASE Bucureşti, 2006 , pp. 236-244

3. Stiglitz, Joseph, Mecanismele globalizării , Ed. Polirom, Iaşi, 20084. Voinea, Liviu, Corporaţiile transnaţionale şi capitalismul global , Ed. Plirom, Iaşi, 20075. *** PNUD, Human Development Report 1999. Globalization with a Human Face, New -

York, 19996. *** Rapoartele anuale ale Băncii Naţionale a României , 2003,2004,2005,2006, 2007,

20087. *** Raportul privind Investiţiile Străine Directe în România , Banca Naţională a

României, 2000-20088. *** UNCTAD, World Investment Report , 2000, 2001, 2002 2003, 2005, 2006 , 2007,

2008


THE MANAGEMENT OF INNOVATION,A CHANCE TO STRENGTHEN THE ORGANIZATION

PhD. Student Virgil Dan AMZAAcademy of Economic Studies, Bucharest, Romania.

[email protected] PhD. Constantin BRĂTIANU

Academy of Economic Studies, Bucharest, [email protected]

MSc Student Miruna Vladia AMZASNSPA, Bucharest, Romania.

[email protected]

Abstract :The fifth edition of the "European Innovation Scoreboard (EIS)" memoir has been handed over to the

European Commission for the evaluation activities of innovative performances obtained in member states as well as inother countries (such as Switzerland, Norway, Turkey, USA, Japan). It seeks to highlight the degree of achievement ofthe Lisbon strategy which stipulated transforming Europe in the most advanced economy based on knowledge in orderto assure an economical and job market development. Romania is thus the 32nd of the list in the top of 33 countriesranked according to the decreasing value o f the synthetic indicator of innovation level SH.

Key Words : durable development, evaluation activities, management of innovation, organizational culture,research & development.

JEL classification: M10

INTRODUCTION

Innovation is the sole process capable of maintaining a company “in business”, which doesnot only imply introducing of new and competitive products, but also the implementation of themost recent technical solutions found in licensed literature. It may bring its full contribution t o thetransfiguration of your company into an innovative one, perfectly adapted to the demands of theever-changing market.

During 2004-2006, the percentage of Romanian companies that have innovated productsand/or processes, has reached 20%, slightly i ncreasing in comparison to 200 2-2004 when thepercentage of innovative businesses amounted to 17%, according to the most recent statisticresearch conducted by the National Institute of Statistics. Among these innovative enterprises, 67%have applied product and process innovations,9% have innovated only products and 24% onlyprocesses. The most important impediments of innovation have been lack of financing as well as tohigh innovation costs. For 2004, the total sum invested in innovation by companies amo unted to 4.5billion lei.

Of the businesses which have invested in innovation, 31% mentioned as an impediment toinnovation lack of financing and 30% indicated high innovation costs. Among developing regions ,the highest percentage of innovative enterpri ses is found in Bucharest -Ilfov (22% of the total ofcompanies), whereas the lowest, only 4% is represented by the south -west region of Oltenia.

1.THE LISBON STRATEGY AND THE REVIVAL OF EUROPE

The European Council met on the 23/24 March 2000 in Lisbon to launch a strategicobjective for the European Union in order to reinforce de percentage of job occupation, economicalreform and social cohesion as part of the knowledge -based economy.

Aspects referring to innovation are explicitly discussed in two chapte rs: “The creation of aEuropean area of research and innovation ” and “The creation of an environment favorable toestablishing and developing innovative businesses , especially small and medium companies ” .Among other things, the contents of these chapt ers promotes the idea of a superior incorporation

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and coordination of research activities at European level in order to make them more innovative sothat Europe can assuredly offer attractive perspective to high qualified “brains”.

When talking of businesses, their competitiveness and dynamism are directly dependent onthe regulation context that encourages investment, innovation and entrepreneurship, and thusinnovation networks must be stimulated , the interface between companies and economical marke ts,between research & development –R&D- and educational institutions, between consulting servicesand technological markets (Bratianu and Lefter, 2001).

What We understanding, what we should understand about innovation ? Schumpeter (apudDrucker, 2000) identified five types of innovation:

1. new products2. new methods of production3. finding new sources4. the exploitation of new markets and5. new methods of organizing businesses

According to the documents introduced by the Communication of the EuropeanCommission COM 688/1995, innovation is defined by:

- the revival and enlargement of the offer of products, services and associated markets;- the establishment of new methods of production, purveyance and distribution ;- introducing changes of management , work efficiency , work conditions and personnel

training.Research has highlighted that bigger companies invest more in innovation than smaller

businesses. Thus, of all the big enterprises, 42% are innovative. As for medium enterprises, thepercentage of companies that have invested in the innovation of products and processes is 25% andin the case of small enterprises, only 16%. The results of the National Institute of Statistics wereobtained based on the data collected in June 2006 , on a cross -section of 11542 enterprises of over10 employees. The results are guaranteed by a precision of ±5%. The National Institute of Statisticshas also announced that next year a new survey will be carried for the 2004 -2006 period and itsresults published in 2007.

2. INNOVATION AND COMPETITIVENESS

The analysis of the degree of performance in innovation is based on a relatively big amountof factors, categorized in five groups (pointers), as follows:

2.1. Determinant factors for innovation, measuring structural conditions and the innov ativepotential. This category comprises:

- the number of science and technological faculties graduates, aged 20 to 29 correlated to athousand inhabitants;

- the percentage of highly educated inhabitants aged 25 to 64- the number of broadbands (BB) correlated to a hundred inhabitants- the percentage of inhabitants aged 25 -64 participating actively to the process of continuous

education- the percentage of population aged 20 -24 having graduated secondary education (possessing

secondary studies)

2.2. The establishment of informational elements, measuring investments in activities ofresearch& development. The elements of this category are:

- the percentage of the gross domestic product (GDP) used for the public financing ofresearch& development activities (R&D)

- the percentage of the GDP representing the contribution of the business sector to thefinancing of research& development activities


- the percentage of the financing of medium and high technological R&D associated toproduction costs

- the number of enterprises receiving public funds for innovation- the degree of financing by the business sector of universities’ R&D costs

2.3. Innovation and entrepreneurship, measuring the efforts of innovation at company -level.Thiscategory comprises:

- the percentage of small and medium ente rprises developing their own innovating activitiesthe percentage of small and medium enterprises collaborating;

- the percentage of innovation costs out of the total turn -over;- the percentage of GDP used for acquisitions of calculati on and communication technology;- the percentage of small and medium enterprises suffering non -technical metamorphosis

2.4. Implementation, evaluating the level of innovation correlated to lucrative activities,workforce and of the value they add to the innovative sectors. The fact ors of this categoryare:

- the percentage of employees working in the “high -tech” fields of activity;- the amount of exported “high -tech” products;- the percentage represented by the value of new products sold on the market associated to

the total turn-over;- the percentage of new products for companies but which do not represent a novelty on the

market;- the percentage of workers involved in the manufacture of medium and high -tech products.

2.5. Intellectual property, measuring results obtained during a “know -how” successful process.This category comprises a series of factors correlated to a million inhabitants:

- the number of patents registered by the EPO(“European Patent Office”);- the number of patents registered by the NIST(National Institute of Standards and

Technology);- the number of “triadic” patent families (registered in Europe, the USA and Japan) ;- the number of registered trademarks and the number of symbols

3. INNOVATIVE EUROPE AND ROMANIA

Without further detailing the 12 steps methodology used t o calculate a Summary InnovationIndex (SII) and the result analysis, we will undertake s ome of the Report’s conclusions.

According to their SII, European countries can be classified into for categories:1. highly developed countries (Switzerland, Finla nd, Sweden, Denmark and

Germany);2. medium performing countries (France, Luxembourg, Ireland, Great Britain,

Holland, Belgium, Austria, Norway, Italy ) ;3. countries regaining ground (Slovenia, Hungary, Portugal, Czech Republic,

Lithuania, Leetonia, Cyprus and Malta);4. countries loosing ground (Estonia, Spain, Bulgaria, Polan d, Slovakia, Romania

and Turkey).The gap between countries belonging to different categories is consistent. For example, it is

estimated that Hungary needs another 20 years in order to reach t he European average- There is also an important inequality according to the SII between Europe ,USA and Japan.

Analyzing the dynamics of the SII, one notices that the gap related to the USA is relativelystable and is mostly caused by lower values of the p ointers 1 and 3. The negativediscrepancy related to Japan is increasing and is caused by differences of the pointers 1 and5.


- Romania occupies the 32 nd place in the top of 33 countries ranked according to thedecreasing value of their SII. Nevertheless, even though the values of the pointers estimatedfor 2005 were among the lowest, their rhythm of annual boost is proximate to the Europeanaverage, leaving hope for a potential redressing .

4. INNOVATION AND INCREASE OF COMPANIES PERFORMANCES

Innovation is the only process that can maintain "in business" a company and it does notonly mean to embed into manufacturing new and competitive products. By putting into effect newtechnical solutions found in patent literature can utterly contribute on trans forming your companyinto an innovative one, perfectly adapted to market requirements that are always in a state of flux :

- The management of innovation consists of a complex combination of politics, practices andprocedures which organize and evaluate a com pany’s efforts of innovation and directlydepends on the promoting of an organizational culture encouraging brainstorming andcreativity. All the same, innovative management is synonymous to the ingeneration andadministration of internal innovative resou rces.

- The aspects facilitating innovation are usually of organizational nature and the mostimportant innovative competences are intern factors. Innovative competences are present onall hierarchical levels, common to employees specialized in various doma ins. Nonetheless,the capacity of innovation of an enterprise does not reside in the existence of individualinnovative competence but in their correlation and common use. Moreover, the coefficientof innovation of a company depends on the coordination of the innovative competencesavailable inside the organization ,yet strategically making the most of opportunities offeredoutside the company.

- Even though most of the innovation projects do not fulfill initial expectations concerninghigh profits, an efficient management of innovation will always facilitate projects leading todevelopment and a clear outclassing of the competition. Of course, there are several successfactors which must be taken into consideration, the most important being a strategicapproach to the effort of innovation on the organizational level. This implies theacknowledging of the necessity of developing an adequate environment and authenticpractices of innovation inside any company.

CONCLUSIONS

Finally, one can draw some conclusions:

- The increase of public financing for research and development activities is an important andnecessary measure, yet not sufficient , failure being guaranteed by low investments in R&Din the context of globalization, harsh competition and informationa l (knowledge-based)economy.

- The value of the synthetic SII (Summary Innovation Index) is essential, yet its dynamicsbears the same importance. Moreover, one must notice that, as well as any other(internationally) recognized pointer, its numerical value depends on the calculation formulasused. Thus, we believe that the analysis of individual factors may lead to morerelevant/useful conclusions, and, most important, to more efficient actions.

- Romania must adopt a more active attitude regarding the reconsi deration of the function andimportance of innovation in its individualization as a viable partner in the European Union.


REFERENCES

1. Bratianu, C and Lefter I.(2001). Academic strategic management . Bucuresti: RAOPublishing House.

2. Brezeanu, P. and Novac L.(2007). Quality techniques of estimating the impact risk has onorganizations . In: Management and Marketing Review . Bucuresti. Nr.1, p.148

3. Colibasanu, O.A. (2008). Between Intelligence and Espionage in the ContemporaryBusiness Environment. In: Ekonomika a Management. Praha. nr. 4, pp.12-24.- ISSN 1802-8470.

4. Drucker, P.(2000). Innovation and entrepreneurship . Bucuresti: Teora Publishing House.5. Gerber, M.(2004). Manager’s Myth. Bucuresti: Amaltea Publishing House.6. Kotler, Ph.(2003). Kotler On Marketing: how to create, how to win and how to dominate

markets. Bucuresti: Curier Marketing Publishing House.7. Puia, R. (2007). Human resources strategies – resourcing strategy. In: Analele Universităţii

din Oradea, Tom XVI, Volumul I, ISSN – 1582 – 54508. Tripon , A. (2002). Innovation Management: synthesis and applications . Targu-Mures:

Universitatea Petru Maior Publishing House.9. ***Institutul National de Statisitica. (2007). Bucuresti: Anuarul Statisitic al Romaniei.


THE INFLUENCES FINANCIAL MANAGEMENT IN DEVELOPING THE FUTUREFIRM`S BUSINESS

Lecturer PhD. Student Valeria Arina BĂLĂCEANUEcological Univeristy of Bucharest, Faculty of Economics, Romania

[email protected]

Abstract:The role of the financial management is to create a sys tem of managerial reports in order to efficiently develop

the business.In the economy of the future, the intelligent company will put an end to the principle according to which a

higher profit incurrs a higher risk, as the efficient management will reduce the risk to a great extent, by influencing theconditional environmental factors.

Entrepreneurs and managers consider the financial management very important as it is strongly connectedwith the business controllable development and maximizing the profit . Economic analysis and financial diagnosisidentify the “areas” in which the firm wins or loses money.

A modern entrepreneur must be acquainted with the news of his area, must be up to date with the specializedknowledge, and must be able to reflect thes e in the decision-making process, considering the modern evolutions. Healso has to be very clear and precise in denominating the principles and operational alternatives, he has to corroboratethe set objectives and the paths for achievement, he must respe ct the opinions and individuality of the human resourceshe cooperates with, and to consider the positive elements coming from them.

The managers of the future firms will be relatively young but will have a solid background of operational andbusiness experience and will benefit from a highly logistic support from training in specialized institutions in thecountry and abroad. Their concern for competence will be highly interleaved with their activities which will lead toremarkable performances.

Key words: management, financial management, future firms, business, performance

JEL Classification: L21, M21, O16 , P34

INTRODUCTION

While eliminating the old organizational structures and remodelling them, one mustconsider the opinions of the great historian Nicolae Iorga in this matter, according to which «neveroverturn if you can not replace/never tear down if you can not rebuild /never promise if you can notaccomplish».

The financial managers profession is interconnected with the consultance activity in thefinancial management, accounting, control, audit, structural organization and efficient use of humanresources areas.

The managerial behaviour is closely connected to all the skills and the success personality ofthe manager, as it represents their pra ctical configuration and it is formed by self -teaching and byacquiring basic principles of the culture in this field.

Given his cultural component and his qualities, the financial manager may be considered areal artist that gives advice and offers valid alternatives in order to overcome the economic andfinancial obstacles of the future, in the XXI century.

Here are the major directions of a manager’s successful behaviour ( Chart no. 1):a. The manager’s attitude towards the managing authority , namely:

- The safety one must show while managing. This feature, which is essential for the manager’sbehaviour, is difficult to acquire and it brings together some defining features, among whichthere are: Calmness, that is having a moderate attitude (the so -called Olympic calm), which means

avoiding any tensions or stress, both when analyzing facts and when offering solutions andways of solving some disputed issues;

The objective evaluation of the firm activity and of its development possibilities; Professional competence, which is the core of managing efficiency and which leads to

performance;

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Self-improvement and right time management allow a better interaction with the groupmembers and improve the collaboration (internal and external) with the business partners;

Coordination, which means that the manager establishes a logical development of the firm;the appropriate sizing of all stages and the inter -collaboration between parts andcomponents; involving the responsible factors for achieving the strategic and tact icobjectives of the firm under qualitative conditions.

- The manager’s position is also shown throughout the faith in knowing reality and decidingaccordingly, as it follows: Being oriented towards knowing, analyzing and researching data and facts, with no

subjective approach (emotional reporting, opinions with no real grounds, gossip etc); thusthe manager can objectively investigate the quality of financial -economic phenomena andprocesses;

Under these circumstances, the manager will be able to: investiga te new aspects of thephenomena and processes interfering with the firm development; serious research in order tofind the best solutions for the functioning of the firm.

- A permanent search for economic and social progress, which is an important element ofsuccessful management; it is accompanied by: Creativity and a perseverant promotion of new ethnic, economic and social elements; A competent manager must have high quality results due to high productivity, efficiency

and remarkable performances.

b. A successful manager must collaborate both ways, as it follows:- Internal collaboration, by drawing managing collaborators; it can be achieved by: An appropriate delegation of responsibilities to collaborators who can act on their own

responsibility and who can fi nd solutions for those issues they are specialized in. Bydelegating tasks and competences, the manager will be able to focus on more importantissues in the firm’s activity;

A close collaboration with certain collaborators during board meetings and solvin g togetherthe most important issues;

The managers’ collaborators must take decisions and control the way they are achievedthroughout their own contribution, according to their talent, specialization and skills.

- External collaboration – by choosing collaborators and activities that are to be outsourced: whenoutsourcing, the manager can start collaborating with people in related fields, services andmaintenance.

c. The attitude towards third parties is an important feature of a successful manager’sbehaviour; it means:

- Respecting the employees, which can be done in several ways, and which consists in: Having a permanent dialogue with the employees, encouraging them to express their own

opinions and conclusions, including the negative ones, which must be anal yzed calmly andconsidering all possible implications;

Being polite and affable with the employees; Carefully selecting the new employees and training them to be professionals, demanding

and responsible towards the firm’s activity; Clarifying arguments, early identifying their causes, and making arrangements to avoid

them; Being interested in maintaining a state of equilibrium, that is not to allow the existence of

“small groups” with a hostile attitude towards the others, trying to guide all the employee stowards a the same goal, even if it means choosing the best option among all the opinionsexpressed. Therefore it is important to promote educational ways to form a steadyorganizational culture, based on being attached to the firm and identifying the st aff’s hopesto the firm’s development requests.


- Creating and keeping the relationship with the firm’s financial, banking, insurance and otherfield partners, which means: Affability, mutual respect, being interested in the partners’ interests and suggesti ons,

understanding them; Communicating intensely in order to transmit information as fast as possible and to find out

about the main economical and social changes in the field and in economy on the whole; An efficient partnership also means beginning lucr ative business for all the parties, as well

as practising coordinated and harmonized policies which can contribute to offering a goodposition on the market and an increase of the business figure;

According to the Western model, business relations must be in agreement with closerelations after the working hours; private business relationships; closer family relationshipsare also very important.

- The attitude towards third parties can also be seen from the authorities’ opinion about themanager’s activity, as it follows: A positive attitude towards the manager’s activity, which is characterised by completely

observing the laws, which the managers knows and executes according to the instructionsprovided by the authorities;

Carrying out with promptitude the financial, banking, administrative and environmentobligations increases the manager’s credibility in the Business environment and the firmgets superior reliability;

A very important element to be considered when appreciating the manager’s activity is hi sorganizational and financial contribution to the right management of the local issues and thesupport given to the mayoralty;

A lucrative management means carrying out in due time and in accordance with the laws allthe obligations deriving from internat ional agreements and conventions, thus internationallyincreasing the appreciation of the firm and its rating.


CHOOSING THE OPTIMUM ALTERNATIVES TO DEVELOP THE FINANCIALMANAGEMENT

In order to choose the optimum alternatives for the development of th e financialmanagement, we present in the table no. 1 below the following elements:

A) The development areas:a. economic: new input resources; renewable and non -renewable resources ; evolved

organizational and operational structure; strategical grounding and de signing a full-scale plan;b. technical: performant equipmen; modernizing the production; know -how; competitive costs

and productivity;c. social: motivating waging level; learning incentives; social and cultural facilities (canteen,

club); labor protection; medical treatment; the guarantee of retirement; work benefits;professional satisfaction;

d. ecologic: anti-pollution measures; compliance with the standards specific for the area; themanufacture of ecological industrial or agricultural products;

B) The means used in the future development of the financial management that include:a. research-quality domain: designing a model for the future, using caution and creative

imagination; market research and the adequate adjustment of the company on the market; newtrends in the company’s activity; cooperation with the research institutes and elite universitiesin the country and abroad; total quality management;

b. communication domain: electronic clerk that uses the Internet, Mobile -banking, e-Business;leadership, the ability to influence the personnel; open communication environment;

C) Revealing the goals in the company’s evolution, meaning:a. to ensure a high living standard, efficient healthcare; solving adjacent problems (domestic

services, baby care, elderly people care); t he good preservation of the environment;b. company’s expectations as to the employees’ moral behaviour: cultural and educational level;

commitment and dedication; readiness to sacrifice oneself; passion for work; closerelationships with collaborators; hones ty; correctness; ethical behaviour;

c. individual freedoms: taking part in decision -making, time dedicated to ordinary and connexactivities (leisure, entertainment); work teams mobility; prospect visits in the country andabroad; trips for the entire family.


Table no. 1 - TRENDS IN THE FUTURE DEVELOPMENT OF THEFINANCIAL MANAGEMENT

CHANGES IN THE FINANCIAL -ACCOUNTING FUNCTION, MODERNDIRECTIONS

- elaborating the firm’s strategy and global policy, which means having important profits andefficiently using the funds;

- elaborating a modern financial policy, which means selecting capital and credit sources;- determining the liquidities, solvency and reliability of the firm;- elaborating income and expense budgets, which means maximizing incomes, turn over, and

rationing the expenses;- thorough book-keeping and management;- elaborating and approving balance sheets so as to reflect the real status of the firm’s assets;- (thorough) financial and management control, which means expenses of the firm.

In order to develop the business, financial management must collaborate with otherdepartments in the firm and use their input:

- From the informational system and accounting department, data regarding the accountingvalue, gross income, net profit, prod uction costs and the business market evaluation. This

L

EX. O

E

L – legalty: there must be laws that allow (authorize) that specific

expense;

O – oportunity;

E – efficiency, which is given by comparative analysis; organizing an

auction; taking the best decision; luarea deciziei celei mai

bune.


information must be neutral, transparent, easy to check and predictable. It must be inaccordance with the reality and within a short term from the moment of occurrence;

- From the marketing department, d ata about the market, client target systems, salesdevelopment, competition in order to draw a marketing plan to promote new products andservices on the market; the marketing department undertakes the major responsibility toidentify and predict the impor tant environment changes; its methods are well organized toacquire data about the surrounding environment. The marketing staff spends a lot of time inthe real environment with the clients and the competition. By systematic analysis, themarketing agents can review and adopt marketing strategies in order to face the newchallenges and opportunities on the market;

- From the human resource, provisioning – sales and investment departments, data about themodern technology needed, cheaper provisioning sources w ith materials and energy, as wellas the quality of the employees and ways of training them inside and outside the countryborders;

- From the programming, planning and prevision department, elements and analysis aboutthe development of economic and financ ial factors that influence the business figure; at thesame time, informing about threats and risks that may occur;

- The control and audit compartments can have a positive influence on the ways of promotingand supplementing capital, selecting business cons idering efficiency and performance.Profit is the main purpose of a business. Entrepreneurs and managers consider the financial

management very important as it is strongly connected with the business controllable developmentand maximizing the profit. Economic analysis and financial diagnosis identify the “areas” in whichthe firm wins or loses money. Financial objectives and budgets are drawn in order to improve futureperformance.

Financial management means analysing, planning and controlling the financ ialperformances of the firm.

Regardless of the size and the property form, financial management is mostly responsiblefor the financial policy adopted at the micro -economic level, which is to be enforced in order toachieve the objectives established by t he owners and/or the managers of the financial resources.

The role of the financial management is to create a system of managerial reports in order toefficiently develop the business. This system has two major elements: economic analysis andbudgets. It is highly important to implement a system of financial management, represented by allthe internal reports adapted to the managing team’s requests.

CONCLUSIONS

Managers perform prospective analyses from which there result the influences ofglobalization over the considerable increase of business, in general, and especially over trade, anaccelerated trend of investments’ growth, the expansion of privatization, alongside newopportunities for the companies on the new markets. In this way, possessing these features, themanagers will have to observe and to adapt the strategy and the company’s tactics to the followingaspects: to the speed of mergers and to protect the company of some slumps and crises on theinternal and international markets; to the expansi on of business by an accelerated dynamic; to thepossible growth of market share; to the quality and efficiency in serving the clients; to the costcutting; to additional profits for the stockholders; to faster rates of development for the products andservices of the company in accordance with the financial and economic trade performed through theInternet and its components, internet -banking and mobile internet -banking; to ensure a high rate ofliquidity, including the transaction of securities on the sto ck exchange; to the low debt rate on ashort term; to adopt measures and paths that reduce the risks about the uncertainty of a businessrelations network; to recover invested funds by banking credits substitution, by securities issuance;to promote highly sophisticated financial innovations; to prognosis and diagnosis analysis of thefinancial flows evolution; to develop the research and development activity, in order to cope with


the more challenging competition; to the control and audit of the activities ; to the favorable trend ofstocks on the market and to grant stimulating dividends.

The managers of the future will be relatively young but will have a solid background ofoperational and business experience and will benefit from a highly logistic support from training inspecialized institutions in the country and abroad. Their concern for competence will be highlyinterleaved with their activities which will lead to remarkable performances.

Among their qualities, knowledge and abilities, the XXI managers must possess a visionarythinking, in accordance with their company’s adaptation to the environment evolution, an ability toinspire strength and perseverance to the work team, in achieving the set objectives and inimplementing the designed projects.

In order to promote the business, the manager must have a complex personality, possessingsolid knowledge in various fields: investments, marketing, financial, human resources andinformatics. At the same time, the manager must have innate qualities in order to be able to assessthe changes in the financial and economic environment and to make the right decisions.

REFERENCES:

1. Berea O.A., Grigoruţ C., Bălăceanu V.A., (2008), Evaluarea afacerilor. Managementulfinanciar şi realizarea performanţelor , Editura Bren, Bucureşti;

2. Collin A. Carnall, (1990), Managing change in organisations , Editura Prentice HallInternational, Londra;

3. Davies, D., (2000), The art of managing finance , Mc Graw – Hill Book Company, New York;4. Harringtion M.J., (2001), Management total în firma secolului XXI, Editura Teora, Bucureşti;5. M. Le Saget, (1999), Managerul intuitiv, Editura Economică, Bucureşti;6. Tichy M.N., (2000), Liderul – arta de a conduce, Editura Teora, Bucureşti.


BALANCED SCORECARD AND THE MANAGEMENT INTRUMENTSCOMPLEMENTARITY

Lecturer dr. ing. ec. Sunhilde CUCUniversity of Oradea, Romania

[email protected]

Abstract.The Balanced Scorecard (BSC) presents the quantitative goals selected from multiple perspectives for

implementing the organizational strategy and vis ion. This article considers how Total Quality Management, ActivityBased Management (ABM), Customer Value Analysis, EVA and Budgets approaches may complement a balancedscorecard effort. It briefly outlines how this tools are defined, considers their stre ngths and weaknesses. The paperconcludes that when other tools used in conjunction with BSC approach, the resulting hybrid tool can be a powerfulbasis for encouraging organizational change and performance improvement.

Keywords: strategic management, Balanced Scorecard, performance, Activity Based Management, TotalQuality Management, Economic Value Added

JEL Classification: G39, M21

1. INTRODUCTION

Strategic management has become more and more important to different kinds oforganisations. Development of a management and strategic planning system, including total qualitymanagement, moving towards the management of processes, improving customer intimacy, andbetter management of people are among the most topical management issues. Focusing on thefuture, and on the enablers, instead of only measuring the consequences of past actions, is essential.

Performance is the final result of all activities. Performance means the efforts extended toachieve the targets efficiently and effectively.

Efficiency means “doing things right” and effectiveness means “ doing the right things”(Peter F. Drucker, 1981 p. 83.). Efficiency refers to the ability to get things done in the correctmanner. It is the degree to which inputs are used in relation to a given level of ou tputs. A manageris regarded efficient when “he achieves results or outputs that measures up to the inputs (i.e.labour, materials and time) used to achieve them. Managers who are able to minimise the cost ofthe resources, are able to attain their goals e fficiently” (Stoner, James A.F., 2006, p.13) .

Effectiveness has a differen t connotation from efficiency. “ Effectiveness is concerned withthe effect of work on people, with the appropriateness of goals, with long term results and withhumanistic and idealistic values. It is the ability to choose appropriate objectives. An effectivemanager is one who selects the right things to get done. A manager who selects an inappropriateobjective is an inefficient manager. No amount of efficiency can compensate for lack ofeffectiveness”(Stoner, James A.F., 2006, p.14) .

2. CONCEPT OF BALANCED SCORECARD

Balanced Scorecard is a new dimension in the field of performance evaluation. The conceptof “Balanced Scorecard” was first introduced in the journal “Harvard Busines s Review” (January-February, 1992) by Robert S. Kaplan and David P. Norton . Aim of this model is to give managersand leaders a comprehensive view of the business and allow them to focus on critical areas, ascustomer perspective, financial perspective, internal business perspective and innovation andlearning (Wongrassamee, Gardiner and Simmons, 2003) . The Balanced Scorecard is a simple yetpowerful concept. It has evolved based on the recognition that organizations create value forshareholders in several ways:

through synergies and linkages based on corporate strategies- at the corporate level; with emphasis on creation of a differentiat ed value proposition- at the Strategic Business

Unit (SBU) level;

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by reducing the risk of a shareholder's investm ent through transparency and governance - atthe board level.The organization's overall vision and strategy are particularized for the various

organizational structures within each of these dimensions -e.g., accounting for the financialdimension, marketing and customer support for the customer dimension, logistic for businessprocesses, and human resources and business development for the learning and growth dimension.Metrics for calibration performance against the specific strategic goals of the organiz ation'sstructures are then devised.

Kaplan and Norton describe the innovation of the balanced scorecard as follows: "Thebalanced scorecard retains traditional financial measures. But financial measures tell the story ofpast events, an adequate story fo r industrial age companies for which investments in long -termcapabilities and customer relationships were not critical for success. These financial measures areinadequate, however, for guiding and evaluating the journey that information age companies mus tmake to create future value through investment in customers, suppliers, employees, processes,technology, and innovation ."

Fig.1. Balanced Scorecard adapted from Kaplan and Norton

The concept of Balanced Scorecard is new by its name but not by its origin. It has madeonly a development over a number of existing concepts and theories like Activity BasedManagement, Management By Objectives, Total Quality Management, Strategic Management,Behavioural Theory Of Economics, Delegation Of Authority, Decentralization Of Decision -Makingetc.; but what is unique about Balanced Scorecard is that it brought and pooled together the benefitsof such theories and concepts into a single integrated measure of corporate performance coveringall aspects of an organization.

The appropriate performance measurement tool should be: Relevant to the strategic goals of the organization and accountable to the individuals

concerned. Focus on measurable outputs. Verifiable.

One of the strengths of the Balanced Scorecard is the ability to work well in combinationwith existing management theories and associated tools. Figure 1 shows the BSC at the centre of a

VisionandStrategieObjctives Measures

Financial To succeed financially,how should we appear toour shareholders?

Internal Business Process To satisfy our stakeholderswhat business process must weexcell at?

Objctives Measures

Customers To achieve our vision,how should we appear toour customers ?

Objctives Measures

Objctives Measures

Learning & Growth To achieve our vision,how will we sustain ourabilitz to improve ?


strategic management system and five other management tools that can be applied in the pursuit ofstrategic goals.

Fig.1. Links to Balanced ScorecardFurther we look at how some of these common management t ools can link with the

Balanced Scorecard.

3. TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management, TQM, is a management philosophy that seeks to integrate allorganizational functions (marketing, finance, design, engineering, and production, customer service,etc.) to focus on meeting customer needs and organizational objectives. It is a method by whichmanagement and employees can become involved in the continuous improvement of the productionof goods and services. The goal of TQM is to deliver the highest value for the customer at thelowest cost, while achieving sustained profit and economic stability for the company. Topmanagement must commit to a vision and align and train its employees toward a common mission.Finally, it is a combination of quality and management tools aimed at increasing business andreducing losses due to wasteful practices.

The BSC and TQM share a common theme of improving communication in an organization.Organizations must communicate their mission and goals to their employees and customers.Communication links employees and customers to achieve the ultimate goal of an organization,which is to provide “ the best product, at the lowest cost, at the right time .”

Other shared goals of the BSC and TQM are the reduction of costs and improvement ofservices of an organization. The BSC and TQM base decisions on quan titative data and not opinion,to improve services and reduce costs. Furthermore, each management tool stresses the importanceof organizations managing the system and not the people. By analyzing the business process,companies reengineer business proce sses and improve the overall product quality and serviceswhile reducing costs. Another similarity between the BSC and TQM is top management support;each is a long-term process. Top management support is vital to ensure that all employees supportthe new initiatives. Without it, each of the business measurement/management systems will fail.People within an organization generally resist change, and it is the job of the chief executiveofficer/commander to inform employees and customers of any changes withi n the organization.Neither measurement/ management system is a quick fix solution. Although most organizationsmay see initial improvements, the true benefits will not be seen for 1 to 5 years. As a result, topmanagement must encourage employees to suppo rt whatever strategy the company adopts .

The major difference between the BSC and TQM is that the BSC places more emphasis onfinance. TQM does not diminish the importance of financial solvency but focuses more on thesystem(s) of the organization, the co ncept of empowering people, and employee involvement.

4. CUSTOMER VALUE ANALYSIS AND CRM

From the outside, customers interacting with a company perceive the business as a singleentity, despite often interacting with a number of employees in different roles and departments. The

CVA&CRM

TQM Budgets

ABM

SVA & EVA

Balanced

Scorecard


higher level of product or service quality means higher level of customer satisfaction and results inbetter customer loyalty and high level of profitability (Ghobadian, A., Speller, S. and Jones, M. ,1993). To transfer the quality to service means to satisfy customers’ requirements. So that the firmsaspiring to adopt the customer oriented approach should determine the customer requirements andassociate the customer requirements with service design and capabilities. (Chow-Chua, C. andKomaran, R., 2002)

Customer relationship management (CRM) consists of the processes a company uses totrack and organize its contacts with its current and prospective customers.

Several CVA/CRM frameworks have evolved over the years. One illustrative framework(Ghobadian, A., Speller, S. and Jones, M. , 1993) decomposes the customer problem down to threetop-level areas, with further decomposition beneath each of the three:

Value equity refers to the customers’ perceptions of value ; Brand equity refers to the customers’ subjective appraisal of the brand ; Retention equity refers to the firm building relationships with customers and

encouraging repeat-purchasing.These three areas correspond to three distinct disciplines in the CVA/CRM and marketing

literature (brand management, customer value analysis, and customer loyalty analysis) —each withits own detailed measurement approaches.

The implications for organizational performance measurement systems are clear: measuringbusiness activities and outcomes rega rding customers is becoming increasingly complex andincreasingly important to the successful execution of a firm’s strategy.

Proponents of the BSC note that the BSC framework includes the customer as one of fourperspectives, while CVA and CRM techniques fail to account for important noncustomer aspects ofa business. That being said, CVA and CRM are often used by BSC practitioners to driveimprovements in the customer perspective of the BSC. In other words, the benefits of CVA andCRM technologies are increasingly used in a BSC framework evaluation .

5. SHAREHOLDER VALUE & ECONOMIC VALUE ADDED

Value dimensions identified include market, supply chain, customer, enterprise, and productand service, and therefore the adapted value -based BSC framework contains ma rket, supply chain,customer, as well as business structure and process as balanced perspectives.

Shareholder value has become an increasingly important demand among investors nowmore than ever. In the 1980’s, shareholder activism reached unforeseen leve ls among companies inthe United States . (Mäkeläinen 1998, p.1)

The theory of Economic Value Added has traditionally suggested that every company’sprimary goal is to maximize the wealth of its shareholders, which should be a given since it is theshareholders that own the company and any sensible investor exp ects a good return on hisinvestment. Economic value added is a fashionable management performance measure pioneeredby Stern Stewart & Company, a management consulting firm. EVA emphasizes the resid ual wealthcreation in a company after all costs and expenses have been charged including the firm's cost ofcapital invested. In its simplest terms, EVA m easures how much economic value the company iscreating, taking into account the cost of debt and equity capital. EVA is designed to give managersbetter information and motivation to make decisions that will create the greatest shareholder w ealth.

Since EVA is a single metric (although it can cascade down and across an enterprise toevaluate the performance of specific investments) it is complementary to the BSC and can beincluded in a BSC framework (for example, as a financial perspective measure ). Because it is apure financial model, EVA does not serve as a vehicle for articulating a strategy but wh en coupledwith the BSC, the tradeoffs between short -term productivity improvements and long -term growthgoals can be managed. (Kaplan, Robert, 2001)


6. ACTIVITY BASED MANAGEMENT (ABM)

Activity-Based Management (ABM) is a discipline that focuses on the ma nagement ofactivities to maximize the profit from each activity and to improve the value received by thecustomer. This discipline includes cost -driver analysis, activity analysis, and performancemeasurement. ABM draws on ABC as its major source of infor mation.

The concept of ABC looks at how resource costs like salaries, utilities and rental, areconsumed by work activities, which are components of various processes in an organisation. Theactivities and processes are in turn consumed by the output of th e organisation. The output includesproducts and services provided to the customers.

Using the ABC approach, companies get insights into profitable and profitless activitiesbased on a customer or a product viewpoint. ABC then is a way of measuring which o f the firm’sactivities generate revenues in excess of costs and, as a result, provide keen insight into what isreally providing value for customers. (Meyer, Marshall W. 2002)

A major benefit of ABC is thus higher accuracy in products and services costin g, and hencein profitability computations. Bear in mind that in today's competitive environment, profitabilityanalysis is not just about looking at the last figure in the Profit & Loss statement. It is more aboutknowing which the profitable products are and which the unprofitable ones are. Above all, the ABCmethodology provides critical information for the effective management of the activities andprocesses of the organisation.

ABC is used by many organizations that implement the BSC because ABC enable sbusinesses to more accurately define and measure their metrics. While firms will likely benefit fromABC, the system is mainly an accounting and cost -based method of viewing and analyzing anorganization and its activities. ABC also lacks the strategic a nd nonfinancial elements that arecaptured in the BSC.

The BSC benefits from the inclusion of ABC performance measures. These include the costof activities and activity outputs which are used in the internal business process dimension of theBSC of the organizations. This activity information covers support services as well as primarybusiness processes. For companies, ABC profit measures by customer, market segment, market areaand distribution channel are used in the customer dimension of the BSC. Thus, most successfulfirms use ABC and BSC to manage costs and gain insight into their internal competitiveadvantages.

7. BUDGETS

A “budget” can be described as an action plan to transform strategic goals into action andlead the company toward achieving its go als. Simply, a budget is a plan that identifies the financialresources required to achieve programmatic objectives. Once constructed, this plan assists staff andboard in managing the organization both programmatically and financially throughout the year.Budgeting is done by estimating values for various financial parameters relating to future financialrequirements in all organizational activities. This starts with an est imation of ‘sales’, covers the“recruitment needs” to accomplish this, zeroing on the “appropriate sources of funds” and“arranging for the repayments of debts, if any”. Some of the directions in which BalancedScorecard can be formed include management perspective, structural perspective, continuousimprovement and learning, and conforma nce perspective.

Understanding budgeting is a core competency for all leadership teams. The budgetingprocess, if applied correctly, can effectively manage a company's operations. But its approaches andtechniques need to be improved in accordance with cha nges in the company's business environmentor objectives in corporate management.


8. CONCLUSION

The Balanced Scorecard allows strategy to be clearly communicated and links performanceto desired outcomes. In the increasingly competitive world faced by pro fessional firms it givesmanagers a key tool to measure and direct actions, and provides professionals with the informationthey need to outline their performance in pursuit of firm -wide objectives. It helps organizationsmanage the value creation process at each of these levels. In each situation, the Balanced Scorecardcreates a strategy map that links financial results with the key drivers of the business includingcustomers, internal processes, and employees.

Successful firms use the most part of the p resented tools in combination with the BalancedScorecard to drive the achievement of a firm’s strategy and competitive advantage.

REFERENCES

1. Chow-Chua, C. and Komaran, R., (2002), “Managing Service Quality by Combining Voiceof the Service Provider and Voice of Their Customers”, Managing Service Quality , Vol. 12No. 2, pp.77-86.

2. Drucker, Peter F.,(1981), “Behind Japan's Success”, Harvard Business Review, 59 No. I(Jan-Feb, 1981)

3. Ghobadian, A., Speller, S. and Jones, M. , (1993), “Service quality : concepts and models”,International Journal of Quality&Reliability Management, Vol.11, No.9, pp.43-66.

4. Kaplan, R.S. and Norton, D. P. (1992), “The Balanced Scorecard –Measures That DrivePerformance”, Harvard Business Review , Jan. - Feb., pp. 71 - 79.

5. Kaplan, R. (2001), “ Integrating shareholder value and activity -based costing with thebalanced scorecard”, in Balanced Scorecard Report. 15 January.

6. Mäkeläinen, Esa. (1998), “Economic Value Added as a management tool” Helsinki Schoolof Economics, Finland. February 9, 1998, pp.1-34

7. Meyer, Marshall W. (2002), “Finding performance: The new discipline of management”. InBusiness Performance Measurement: Theory and Practice , edited by Andrew Neely.Cambridge University Press.

8. Rust, Roland T., V.A. Zeithaml, and Kath erine E. Lemon.( 2000). “Driving CustomerEquity”, The Free Press.

9. Stoner, James A.F., (2006), “Management”, 6th ed. , Prentice Hall of India Private Ltd.,10. Wongrasamee S., Gardiner P.D., Simmons J.E.L., (2003), “Performance Measurement

tools: the Balanced Scorecard and EFQM Excellence Model”, Measuring BusinessExcellence, Vol. 7 No 1, pp. 14-29


THE WAY IN WHICH METAPROGRAMS AND METAMODELS INFLUENCELEADERS OF ORGANIZATIONS

Ec. PhD. Student Cornel IOSIF”Al. I. Cuza” University of Iasi, Romania

[email protected]

AbstractMetaprograms ensure the soft necessary for the operation of „routine programs” within the parameters.

Metaprograms mean essentially the comparison of two stimuli. Metaprograms repre sent the higher level of mentalprocesses through which we sort experiences and we react. The metamodel has some linguistic distinctions which helpin identifying the linguistic types which hide the meaning in the communication process of deletion and gene ralization.The metalanguage studies the rules of phrases (syntax), and not phrases as such. Metamodels are very powerfulinstruments used to gather information, to find alternatives and clarify meanings. They are used in the interior dialogueand on the other hand internal reality is built from the words used but it can be used as resource. Lacking report, themetamodel generates metamutilation and metainfatuation.

Key words: Metamodel, metaprogram, process, leader, metalanguage

JEL Classification: M11

1. PREAMBLE

Metaprograms can be defined as „general order structures, content independent, whichdetermines our manner of approaching experience” (12). Another definition refers to metaprogramsas: “a superior decision program which filters information c oming from the subconscious, givingspecific information to the conscious” (13). There are two different types of metaprograms: the firstincludes motivational types, while the second includes working types. Motivational types indicatewhat releasers of action a certain person needs so that he wouldn’t lose his motivation. Workingtypes describe a person’s mental processes, in a particular situation (Charvet, 2006).

Metaprograms ensure the soft necessary for the operation of „routine programs” within theparameters (Knight, 2003). The metamessage may be defined as everything we do making animpression to the other people. For example: we sleep on the same side, smoke using the samehand, wash our teeth starting from the same part of the mouth, etc. This inf ormation is sorted withthe help of two filters: option filters and procedure filters. (Knight, 2003) Metaprograms meanessentially the comparison of two stimuli. An old one, already existent with a new one, from theenvironment. We accept the new stimulus if we had a pleasant experience towards the old one andwe reject it if we had an unpleasant experience towards the old stimulus. This helps us in selectingthe information and in enlarging our perspective over the world and our own person. (14). The mainmetaprograms are the following: closeness -farness, options-procedures, details-entirety, internal-external (16).

Various methods of information processing are called metaprograms in the NLP, as they areprograms which start other programs at brain level. The simplest metaprogram is the sensorypreference – auditory, visual, kinesthetic (Bandler, 1975).

The second part comprises the review of the main basic concepts of metaprograms.The third part contains the concepts and methodological specifications of m etaprograms.The fourth part presents the influence of metaprograms upon leaders in company

management.The fifth part comprises the conclusions of leaders using metaprograms in management..Could the leaders’ metaprograms have an influence upon the compa ny behavior?

[email protected]


2. CONCEPTS USED IN METAPROGRAMS

Metaprograms use the following concepts: metaprogram, closeness -farness, options-procedures, details-entirety, and internal-external.

Metamodels use the following concepts: deletion, unspecified verbs, unsp ecified referentialindexes, comparisons, nominalizations, search in past experiences, modal operators, nominalization,presuppositions, cause – effect, universal quantifiers, the importance of sensors experience,complex equivalence, mind-reading, lost performatives

Operational levels of the metamodel:1. Deletion appears when the person misses a stimulus, doesn’t consider it important or isn’t able toexpress himself clearly. At NLP level, it is made of: deletion, unspecified referential index,unspecified verbs, nominalizations, comparisons.2. Generalization represents reliving some personal experiences in other contexts than the initialone. Generalization comprises: universal quantifiers, modal operators, lost performatives.3. Distortions represent our own manner of seeing and interpreting the world through the sensorysystem we have, and it also appears when we communicate and interact. The following are part ofdistortions: nominalization, complex equivalence, cause – effect, mind-reading, presuppositions,and lost performatives.

3. CONCEPTS AND METHODOLOGICAL INDICATIONS OF METAPROGRAMSAND METAMODELS

The motivational type represents that structure necessary to a person in order to staymotivated in a context and which helps that person not to lose it; other elements are necessary:attention, availability, and practice. Any motivational type can be learned by applying variousquestions specific to each one. Once these types are internalized, the questions come by themselves,their distinctions being very easy.

The metamodel closeness – farness combines on the one hand the solutions for fu ture butanticipated problems, and on the other hand it has in view the optimization of the solutions for anorganization.

The metamodel options – procedures shows the way in which objectives can be reached. Itis creative, each time different, strictly keeping to either the regulation or procedures.

The metaprogram details – entirety represents the way in which a leader sees the elementswhich make the whole. Either he sees the whole and doesn’t see the parts, or he sees only the partsand doesn’t see the whole. The ideal situation is that in which the filter is in the middle, but moreinclined to the details and more to the entirety.

The metaprogram „resemblance, resemblance with one exception, difference” represents therelation between the processes and results in the NLP point of view. Therefore, the metaprogramresemblance shows how one can become a very good professional but never a leader, as it refers t ousing always what you have already done before, without innovating anything. The metaprogramresemblance with an exception means trying to do something new once in a while, and it can beused as a training formula for the metaprogram difference. This one means that the leader is neverdoing the same thing twice. It represents ultimate creativity. It is exactly the opposite ofmetaprogram resemblance.

The metaprogram internal – external presents the source of motivation. Therefore, if a leaderhas the internal metaprogram, the source for motivation will come each time from inside, but thedisadvantage is that he will appear as a too calculating person, while filtering the entire informationthrough the personal filter may take a lot of time. Instead, a per son with the external metaprogramhas his motivational source in the exterior. Usually, the information is no longer filtered bu t onlyexecuted. This metaprogram is very good for the employees. Thereby, the best leader should be


more inclined towards an internal metaprogram than an external one, but the proportions shouldn’tbe unbalanced.

The metaprogram closeness – farness presents the motivation of reaching an objective, andwhat should one do to avoid a problem, a crisis.

Deletion represents the elimination of that information considered to be redundant or whichcannot pass the VAK sensory filter.

Comparisons such as „the best”, „worse” represents, according to Bandler, another way ofdeleting information.

Unspecified referential indexes, words such as „who”, „what”, „these”, „people” whichdelete other words, but also replace them maintaining the same meaning of the clause or sentence.

Nominalizations ensure the transformation of an action, usually a verb in a noun. Forexample, „I feel youth running through my veins” can turn into „Youth runs through theyoungster’s veins” [3, p.96].

The search in past experiences – generally, words play the role of references. In this case, itgoes to finding the last reference and accessing it, so that it becomes an anchor.

Unspecified verbs are generally sensory verbs, which when becoming aware of a process,they also activate the sensory impulses, that is the sensory acuity.

Modal operators are of possibility and of necessity. They indicate "the mode" in whic h aperson "operates" the mode of necessity, of possibility, of wish, obligation, etc. The predicates”can”, „cannot”, ”possibly”, ”impossibly”, ”should”, ”would”, etc. are used to motivate us.

Presuppositions are used in a process when there aren’t enoug h elements, and the decision istaken based on intuition.

Cause-effect – all our interpersonal relations are governed by this connection. From anotherpoint of view, the relation can be seen as a presupposition because you presuppose that somethingcauses something else. (Bandler,1993).

Universal quantifiers “always”, “everything”, as a way of generalization, helps at deletingthe information.

The importance of sensory experience – eye orientation, tonality, mimicry, gestures, mayprovide enough information in order to take a decision or in case of a less communicative person.

Complex equivalence – refers to finding the „breach word” and its reintroduction in anothersentence, without changing its meaning. „Having a high market share means increased sale s” maybe changed into „Did you make an attempt to increase your sales using new marketing methods?”The person alone must discover what are those experiences which lead to a change in the initialstate or, in other words, what experiences help in collecti ng pieces of information.

The structure of a complex equivalenceI.S. = E.B.Interior state/meaning = Exterior behaviorNominalization = something referred to, which can be seen, heard, felt

We encode on our mind display the exterior event or the event referred to, usually presentedas an action or a set of actions. By contrast, the map of significance which we build isusually a static image, a semantic interpretation, hence the static code involved innominalization – selfish, trust, love.

The structure of cause-effect statementS → A (answer to stimulus)This event object → Causes this event

We usually create on our mind display a map of an object or event (noun or nominalization)as producing, causing or leading to another object or event.


Chart taken from Dr. Hall Michaell L . – The neuro–linguistic programming, Editura Curtea veche,Bucureşti, 2007, p.148

Mind reading is a model correlating with the presuppositions. „I know what you arethinking of”, „You don’t have to be upset ” means that you can read the other person’s mind . „Youdon’t have to be upset”, „They really hate me” lack the presupposition that the person is upset orhated by somebody. „Speaking in a low voice helps me relax” is a cause -effect relationship butthere is also the presupposition that it may have the s ame effect on the other person as it has on me.

Lost performatives are things such as „mad”, „bad ”, and “resistant”. Is there is anassessment of a lost performative, and the person who made it left and the criteria taken intoconsideration are at presen t unknown, then the performances can be „recovered” by the use of suchquestions as „Who is mad, bad or resistant?”. Other such questions to recover the dataare:”Resistant compared to what/whom?”.

4. THE INFLUENCE OF METAPROGRAMS AND METAMODELS OF LEADER SIN COMPANY MANAGEMENT

„Firstly, the significance of our communication represents the effect it produces. Everythingthat happens to us, every reaction we obtain is the result of our actions and the way we act.Secondly, every person has a unique percept ion over the world. We can even say that there is noreality, just perception. This aspect doesn’t make a person’s perception to be correct and anotherone’s not, but simply to be different” (Knight, 2003). In order to have an efficient communication inan organization, the leader must succeed in using the significant elements in speech, the reaction inbehavior, so that his result would be a position and to reflect in the same manner on the employees.„The environment is a part of the metamessage and it o ften represents the first harbor for makingnew business connections.” (Knight, 2003). No answer could be found to the question ifmetaprograms are inborn or acquired. But they can transform. Two elements influence their change:the context where the person lies and the time when the change must take place. The environmentrepresents the „vehicle” used to carry the codes in the messages. The environment may„impoverish”, or „enrich” a message, depending on the information used previously to load it.

Metaprograms represent „the higher level of mental processes through which we sortexperiences and we react” (Szekely, 2003). A leader who is unable to sort experiences and to reactto them is a weak leader, but a very good executor. The role of metaprograms is t o interconnect theperson with the internal and external environment. Three axes interconnect in metaprograms: „thefirst axis is represented by the logical levels – identity, beliefs, skills, and the second axis –behavior and environment, while the third axis – our own person, the others” (Dilts, 2007). When aleader succeeds in combining these three axes: logical levels, behavior and his own person, it meansthat on the one side he succeeds in coping with the requirements from the internal environment, t omeet them well and in time, and on the other hand he can successfully comply with the externalpressure, stress sources and he can react very well, so much for him as for an organization.

On the other hand, the role of metaprograms is to filter the infor mation coming up dailyfrom the environment and assailing the person. They „sort” the information received according tothe stimuli, keeping the most important ones and sending them to the brain to be processed. Adominant stimulus can help a piece of info rmation pass the filter barriers of the metaprograms andreach the brain to be processed. For example, a prisoner who escaped from jail and reached a townwill see around him only policemen, although they were there before. But metaprograms areprogrammed to follow a certain type of information in the environment while the others areignored. Their number should be improved, as metaprograms ensure the operation of routineprograms.

In the technical literature of the 70’s, they varied from 20 to 70. Today, it is considered that14 metaprograms represents an optimum number. (14).

“Our behavior, the manner in which we dress, affects on one side the others and on the otherside it sends messages about what is important to us” (Knight, 2003). „It is important the manner in


which we communicate, verbally or non -verbally, as well as the way in which we turn to advantageour skills in order to reach a certain result” (Knight, 2003). In order to communicate efficiently, aleader must succeed in transmitting first of all non-verbal messages. Based on Albert Mahrebian’sstudy, 93% of what we communicate is non -verbal that is 55% non-verbal language and 38%tonality, while only 7% is represented by words of the total message sent. (17). Indeed, it is reallydifficult to consciously decode the non-verbal language, but sending it at a conscious level is donequite easy.

The metaprogram „closeness - farness”A leader using the metaprogram „I turn to ...” almost always tries to delete the dangers, the

traps. The motivation of such a leader is done by anticipating possible dangers but having at handthe backup solutions to such problems, also in case of managing priorities. This leader’s weak pointis that they don’t always admit the problems which should be avoided. The other category ofmetaprograms which might be used is „closeness to result”, „closeness to winning”. Theirmotivation appears when it exists or it is foreshadowed an obstacle or a problem.

Such leaders’ weak point is the poor management of priorities, being att racted a lot bydetails, by things which don’t work and they don’t always have a general point of view. Unlike thefirst model, these leaders don’t take dangers seriously, being more preoccupied by findingopportunities and solutions. A leader must be in t he middle, but more towards farness. Adoptedideas (Charvet, 2006).

The metaprogram „options – procedures”A leader with the metaprogram options will have „trials”, „probabilities”, „alternatives”. A

leader who currently uses „alternatives”, „options”, „possibilities” means that he uses themetaprogram options. Creativity is their strong point. This also manifests through breaking theregulations, the rules and procedures. The leaders’ weak point is that even though they start a planor a new idea they don’t finish it. The non-verbal language may help in the identification of the typeof filter used in the metaprograms. Therefore, if a leader gesticulates fully, openly, in manydirections, it means that he uses the filter options. A leader using in his cu rrent speech „a wellestablished plan”, „from this point to that point”, „procedures”, „just so” it means that he uses thefilter procedures. Such a leader having the metaprogram procedures, after knowing the „procedure”he will be able to use it in need, will finish what he has begun. Instead, their weak point is exactlythe procedures – they feel lost without them, they cannot work otherwise (Charvet, 2006). The non-verbal language may help in identifying the type of filter used in metaprograms. If the ge sticulationis calm, steady, rare, it mean that in the metaprograms he uses the filter procedures. In order to bean optimum leader, the balance must be more towards the optional, as he is more flexible in thoughtmore courageous, capable of risking, tries new ways, than the procedural who is always morecalculated, will always do very well the same thing, but sometimes in order to get out of a crisessituation some ingenuity is needed, and the filter options provides this. (14).

The metaprogram details - entiretyFor the metaprogram details, the leader will observe all the details in his surroundings. For

example: „two accounts”, „three workers”, „six windows”. The information is filtered andprocessed in small packages, as detailed as possible (Charvet, 2006). In other words, the person seesthe trees, but he doesn’t see the forest. The weak point of such a leader is that he doesn’t succeedeasily in establishing priorities. As for the metaprogram entirety, the person will „see” the image asa whole. For example, he will say „this accounting program is very easy to use”.

The notion of metamodel was taken from Noam Chomsky. He defined them as being thosefilters of „deletion, distortion, generalization”, but these are limited in amplitude/scope. In otherwords, when receiving information from the environment, a person deletes certain elements he findsinconvenient, in excess, which don’t pass over a certain intensity level. Then the information isdistorted by the receiver as it was determined that the subjec t attaches his own emotional statereceived from the environment which then he generalizes and attributes the value of truth. But atthis point, the information resulted doesn’t always have much to do with the initial information. For


this reason there often appear many deficiencies in interpreting the information. Someclassifications find 12 such deletions, distortions, generalizations, other 10. We can put the bestquestion in any situation, so that we become more and more efficient (14).

The metaprogram „ resemblance, resemblance with one exception, difference”The leader with the metamodel resemblance is doing the same things and has the same

results as before. He can be an executor, a very good professional, but not a very good leader. Thesepersons usually observe the resemblance and some exceptions. (Dilts, 2007) The leader with themetamodel difference is doing something else every time, is trying something new all the time. Henever repeats the same thing. The persons with this metamodel usually obs erve the differences andsome exceptions. (Dilts, 2007) The leader with the metaprogram resemblance with an exception isgenerally an even-minded person, with a combination of the characteristics of both metaprogramsresemblance and difference, but with mo re accents on resemblance than on difference. Thisrepresents a reasonable compromise for an optimum leader.

The metaprogram „internal – external”The leader with the internal filter is motivated from the inside. When a subordinate has the

metaprogram internal, and he receives an order from his superior he will act according to his ownexperience. The techniques used to convince a person with en internal filter „I wonder what is youropinion about…”, „I am curious of what you say about..”, „You probably kn ow already that youhave to write the report..”. These linguistic attenuators allow you to be heard by a person having avery strong internal filter.” (14) Generally, the persons with such metaprograms gather informationfrom the external environment, filt ers them using their own tools, but the decision belong to thementirely, nobody from the exterior must interfere in the decision -taking (Charvet, 2006).

„The leaders with an external filter have their motivational source in the exterior; they getmotivated by doing something. When receiving an order from his superior, the person with anexterior filter executes the order immediately. Such a person is persuaded by being polite withhim”(14). The feedback represents for these leaders the reason to go on. The refore, they confirm tothemselves that what they did was good. The weak point of the leaders with such a metaprogram isthat they will never succeed in starting a new activity without an exterior feedback (Charvet, 2006).

The metaprogram „closeness - farness”The leaders with the metamodel „closeness” succeed in focusing easily on the objectives to

be accomplished. The source of the motivation is represented by: to reach, to accomplish, to win.The persons with such a metaprogram have as their strong poi nt the optimum usage of priorities.Their weak point is the poor identification of possible problems which might appear during aproject.

The leaders with the metamodel „farness” focus mainly on the obstacles which should beavoided. Their motivational source is represented by the obstacles which must be avoided. Thestrong point of the leaders having this metaprogram is the successful crises management, while theirweak point is the adverse treatment of priorities, almost all the time being preoccupied w ith crisessolving.

The metamodel has some linguistic distinctions which help in identifying the linguistictypes which hide the meaning in the communication process of deletion and generalization (15).The metalanguage studies the rules of phrases (synta x), and not phrases as such. On the other side,any person is capable of using his/her own cognitive abilities in order to realize if a group of wordsforms a clause or not and which is its meaning. One of the aims of language is of transformationand modeling, these being accessible to every native speaker (Bandler, 1975). „The metamodel hasas its premise the idea that words (surface structure) get meaning only when they anchor to a personan internal sensory representation or an experience (deep structur e)” (Dilts, 2007)

Operations specific to metamodels are the following: deletion, comparisons, unspecifiedreferential indexes, nominalizations, search in past experiences, unspecified verbs, modal operators,


presuppositions, cause-effect, universal quantifiers, the importance of sensory experience, complexequivalence, mind reading, lost performatives (Bandler, 1993).

Deletion – we delete information at any moment. The idea is not to delete importantinformation and how to do that. Certain models such as „I’m confused”, „I’m upset”, „I’m happy”provide the recovery of the information previously deleted. Words such as „happy”, „upset”,„confused”, „scared”, are predicates. In a clause such as „John ordered wine, while Mary aMartini.” In certain cases, cer tain information can be deleted.

Comparisons – „The best...”, „The worst..”, „Better than..”, „Worse than..”, „Comparedto..”, „many comparisons are a way of deleting.”, according to Bandler (Bandler, 1993). Forexample „This is important.” „How important is it exactly? And especially for whom?”.

Unspecified referential indexes – words such as „who”, „what”, „them”, „this”, „people” arewords that can delete information referring to people or objects (Bandler, 1993). For example „Itried to sell in the area you indicated, but I simply can’t do it”, „How come you can’t do it?”.

Nominalizations – The transformation of the action in a noun as static entity or object. Thetension built in the room" is like saying, "The carpenter built in the room (Bandler, 1993)."

Search in past experiences – for example „I had a meeting...” means searching in theprevious experience until finding a reference of that word, in this case „meeting”. The search isdone until finding the „meeting” which was attended to. This word has also the role of anchor(Bandler, 1993).

Unspecified verbs – „believe”, „know”, „feel”, „touch”, generally verbs of sensation areconsidered to be unspecified verbs. These verbs have the characteristic of making you think of acertain process and also to become aware of your senses (Bandler, 1993). For example: „I think Imade a good impression.”, „How do you think you made a good impression ?”.

Modal operators –, „must”, „mustn’t”, „necessary”, „unnecessary”. Modal operators can beof possibility and of necessity. The modal operators of possibility „I can do this operation, but itwill take a while.”, „I can’t send this....”. They can be „I can”, „I can’t”, „possible”, „impossible”.The modal operators of necessity „should”, „shouldn’t”, „must”, „ha ve to”. For example: „Whatwould happen if you did that operation? (Bandler, 1993)”. For example „I could have made aneffort”, „And what would have happened if you hadn’t done it?”

Presuppositions – are used when one guesses that something will happen. T hepresupposition will only make reference to a presupposed moment of the action. „Next week whenwe shall meet you will tell me how much you have changed? (Bandler, 1993)”. For example: “.Their team also succeeded in reaching their sales plan.”, “That me ans that you too have reachedyour sales plan?”.

Cause-effect – follows the relation „She makes me feel bad...”. All our interpersonalrelations are governed by this connection. From another point of view, the relation can be seen as apresupposition because you presuppose that someth ing causes something else (Bandler, 1993). Forexample: „These excuses are annoying!”, „Why exactly are this excuses annoying?”

Universal quantifiers – „everything”, „each”, „never”, „always”. Universal quantifiers are away of deleting information because these terms help at generalizations, and at including someterms in other categories, usually less (Bandler, 1993).

The importance of sensory acuity – eye orientation, tonality, mimicry, gestures may giveenough information in order to take a decision or in case of a less communicative person (Bandler,1993).

Complex equivalence – means finding the „breach word” and its reintroduction in anothersentence, without changing its meaning. „Having a high market share means having b ig sales” canbe changed in „Did you try to change your sales plan using new marketing methods?” The personalone must discover what are the experiences which lead to changing the initial state or in otherwords, what experiences help in collecting informa tion. In other cases, the need for challenges isfelt, depending on the perception on the self and also on the interventions the person wants to make(Bandler, 1993). „My secretary resigned. I will be bankrupt until the end of the year.”, „Do youmean that your business success depended on your secretary’s status as employee?”


Unlike the metaprogram which is singularized according to each person’s peculiarity, themetamodel succeeds to a certain extent to generalize certain questions, doubt, problems. Forexample, a leader may think that the last presentations were not really a success or that theemployees’ expectations in what concerns the technical demonstrations are really high. Forexample, „These presentations never go as they should”. The challenge t he leader should answer tois – „Did a presentation ever go as it should have? How well should a presentation go for me to becontent? What presentation go wrong?”. Another sentence which is worth analyzing is thefollowing: „They expect me to coordinate t he material and all the technical demonstrations”. Thechallenge the leader should answer to is the following: „Who expects me to coordinate bothaspects? How can I manage the presentation? How do they know that I will coordinate the materialas well as the demonstrations?” Answering to such questions raises the leaders’ personal trust,while the management’s visible, tangible results don’t cease to appear (Knight, 2003).

Managing the exterior dialogue – the exterior dialogue influences the people we work withas we influence ourselves through the internal dialogue. Questions follow us until we find theanswer or until we question the people aimed. People relate with us and interact based on the statewe mainly induce them. Personal limitations in what conc erns the achievement of objectives maybe accomplished by using modal operators of possibility and necessity, such as: „I can”, „I want”,„I must”, „I should”.

5. CONCLUSIONS

Metaprograms are fundamental instruments used by a leader to ensure success an d stabilityof the organization. Any incompatibility between the leader’s metaprograms and those of themembers of the organization may lead to serious functional disorders, in human resources as well asin reaching the objectives set. Therefore, there are certain „incompatibilities” between variousmetaprograms, which are to be avoided for better results at organization level. The following chartis relevant:

Leader Organization Recommendation

Closeness-farness Closeness-farness To be avoided

Options-procedures Options-procedures To be avoided

Details-entirety Details-entirety To be avoided

Internal - external Internal - external To be avoided

Closeness-farness Options-procedures To be used

Options-procedures Closeness-farness To be used

Closeness-farness Details-entirety To be avoided

Details-entirety Closeness-farness To be avoided

Closeness-farness Internal - external Neutral

Internal - external Closeness-farness Neutral

„Metaprograms are „things” that people do, and not things that just „exist”. They are a formof generalization and usually have a specific context. Metaprograms may change in time by usingvarious NLP techniques. Metaprograms are useful in certain contexts, therefore having differentresults, and they cannot be listed as being just „ good” or just „bad” (Charvet, 2006).

Metamodels are very powerful instruments used to gather information, to find alternativesand clarify meanings. They are used in the interior dialogue and on the other hand internal reality isbuilt from the words used but it can be used as resource. Lacking report, the metamodel generatesmetamutilation and metainfatuation. Unconsciously, we delete information when we speak because


we assume a context divided between all speakers and in that context we sha re presuppositions andknowledge with the others (O’Connor, 2001).

Grinder and Bandler, the founders of NLP, took from Noam Chomsky the theory onmetaprograms and adapted it, keeping though his theory on “deletion, distortion, generalization”. Inother words, using our own sensory apparatus, we delete certain information, or those which don’tpass over a certain level we disconsider, then we distort them, because the information we receiveare interpreted by us through our already existing knowledge or we transpose on the informationour own personal experience. Firstly, we generalize what we obtained at the second level, in thissituation the same information seen by two or more people may have two completely differentmeanings. This shouldn’t happen, or a t least not very often, inside organizations.

BIBLIOGRAPHY:

1. Bandler, R., Grinder, J., - Refraining Neuro-Linguistic Programming and theTransformation of Meaning, Real People Press, Moab, Utah, 1981

2. Bandler, R., Grinder, J., - The structure of magic vol. I, Science & Behavior Books, SantaClara, California, 1975

3. Bandler, R., – Time for a change, Meta Publications, Inc, Capitola, California , 19934. Bandler, R., Valle, John La - Persuasion engineering, Meta Publications, Inc, Capitola,

California, 19965. Bodenhamer, B., Hall Michaell - The user's manual for the brain, Crown house publishing

limited, Carmarthen, Wales, 19996. Charvet, Shelle Rose – Cuvinte care schimbă minţi, Editura Amaltea, Bucureşti, 20067. Dilts, Robert – Bazele programării neuro lingvistice, Editura Excalibur, Bucureşti, 20078. [8] Dilts, Robert - Schimbarea sistemului de crezuri prin programare neuro lingvist ică,

Editura Excalibur, Bucureşti, 2007 p2269. [9] Knight, Sue – Tehnicile programării neuro lingvistice, Editura Curtea veche, Bucureşti

200310. Szekely, Andy - Calea succesului, Editura Amaltea, Bucure ș ti, 200311. O’Connor, Joseph, - The NLP workbook, Harper Col lins Publishers, London, 2001Resurse web:12. http://carti.itarea.org/

http://carti.itarea.org/carti/Arta%20Manipularii/Programarea%20Neuro -Lingvistica%20-%20Arta%20de%20a%20deveni...%20simpatic.txt

13. http://www.nlpedia.ro http://www.nlpedia.ro/index.php/Metaprogram14. www.managementsipsihologie.ro15. http://ro.wikipedia.org16. http://www.nlpedia.ro/index.php/Metaprogram17. http://en.wikipedia.org/wiki/Albert_Mehrabian

http://carti.itarea.org/

http://carti.itarea.org/carti/Arta%20Manipularii/Programarea%20Neuro-Lingvistica%20-

http://www.nlpedia.ro

http://www.nlpedia.ro/index.php/

www.managementsipsihologie.ro

http://ro.wikipedia.org

http://www.nlpedia.ro/index.php/

http://en.wikipedia.org/wiki/Albert_Mehrabian


CURRENT TRENDS IN HRM

Assistant Otilia ALBUUniversity „Ştefan cel Mare”, Suceava, Romania

[email protected] PhD. Student Lucia MOROŞAN-DĂNILĂ

University „Ştefan cel Mare”, Suceava, [email protected]

Abstract:The goal of this article is to establish the importance of human resource management (HRM) and ho w it

emerged, to provide some evidence of its context, to discuss its potential and future development. Many specialistsunderlined the fact that human resource requires more attention and careful management then any other resource ofan organization.The role of the HR manager must parallel the needs of the changing organization. Successful organizations arebecoming more adaptable, resilient, quick to change directions, and customer -centered. Within this environment, theHR professional must learn how to manage effectively through planning, organizing, leading and controlling thehuman resource and be knowledgeable of emerging trends in training and employee development.

Keywords: management, human resource, personnel administration, talent management, sk ills, knowledge,international HRM, HRM trends, policies, motivation, relation, HR manager

JEL classification: M12

INTRODUCTION

Human resource management is a process of bringing people and organizations together sothat the goals of each other are met . The role of HR manager is shifting from that of a protector andscreener to the role of a planner and change agent. Personnel directors are the new corporate“heroes”. The today focus in business is personnel. Nowadays it is not possible to show a goodfinancial or operating report unless your personnel relations are in order. The major purpose ofHRM is to increase and improve the productive contribution of personnel to the organization inmore ethical, social, and administratively responsible way. This purpose emerged from commonlycalled industrial relations, personnel administration, industrial psychology and personalmanagement. Research shows that its aim is to create a whole organizational culture that bindsworkers to the company’s objectives with full professional commitment, integration, and qualitywork.

The 21st century brings with it enormous opportunities but also enormous pressure, if thecompanies will not improve the productivity of the people and treat them “human being’ which arethe vital objects of all the economic activities leading towards industrial development. Now there isworldwide consensus on human resource being one of the major means of increasing efficiency,productivity and prosperity of the firm.

Over the years, highly skilled and knowledge based jobs are increasing while low skilledjobs are decreasing. This calls for future skill mapping through proper HRM initiatives.

Organizations are also witnessing a change in systems, management cultures and philosophydue to the global alignment of Indian organizations. There is a need for multi skill development.Role of HRM is becoming all the more important.

With the increase in competition, locally or globally, organizations must become moreadaptable, resilient, agile, and custome r-focused to succeed. And within this change in environment,the HR professional has to evolve to become a strategic partner, an employee sponsor or advocate,and a change mentor within the organization. In order to succeed, HR must be a business drivenfunction with a thorough understanding of the organization’s big picture and be able to influencekey decisions and policies. In general, the focus of today’s HR Manager is on strategic personnelretention and talents development. HR professionals will be co aches, counselors, mentors, andsuccession planners to help motivate organization’s members and their loyalty. The HR manager

[email protected]

[email protected]


will also promote and fight for values, ethics, beliefs, and spirituality within their organizations,especially in the management of workplace diversity.

New Trends in international HRMInternational HRM places greater emphasis on a number of responsibilities and functions

such as relocation, orientation and translation services to help employees adapt to a new anddifferent environment outside their own country.

Selection of employees requires careful evaluation of the personal characteristics of thecandidate and his/her spouse.

Training and development extends beyond information and orientation training to includesensitivity training and field experiences that will enable the manager to understand culturaldifferences better. Managers need to be protected from career development risks, re -entry problemsand culture shock.

To balance the pros and cons of home country and host c ountry evaluations, performanceevaluations should combine the two sources of appraisal information.

Compensation systems should support the overall strategic intent of the organization butshould be customized for local conditions.

In many European countries - Germany for one, law establishes representation.Organizations typically negotiate the agreement with the unions at a national level. In Europe it ismore likely for salaried employees and managers to be unionized.

HR Managers should take into account the following aspects to ensure success: Use workforce skills and abilities in order to exploit environmental opportunities and

neutralize threats. Employ innovative reward plans that recognize employee contributions Indulge in continuous quality i mprovement through TQM and HR contributions like

training, development, counseling, etc Utilize people with distinctive capabilities Decentralize operations and rely on self -managed teams to deliver goods in difficult

times e.g. Motorola is famous for sh ort product development cycles. It has quickly commercializedideas from its research labs.

Lay off workers in a smooth way explaining facts to unions, workers and other affectedgroups

HR Managers today are focusing attention on the followings:a) Policies- HR policies based on trust, openness, equity and consensus.b) Motivation- Create conditions in which people are willing to work with zeal, initiative

and enthusiasm; make people feel like winners.c) Relations- Fair treatment of people for healthy w ork-place relations.d) Change agent- Prepare workers to accept technological changes by clarifying doubts.e) Quality Consciousness - Commitment to quality in all aspects of personnel

administration will ensure success.Due to the new trends in HR, the HR manager should treat people as resources, reward them

equitably, and integrate their aspirations with corporate goals through suitable HR policies.

OTHER TRENDS AND CHALLENGES FACED BY HRM

Workplace DiversityThe dimensions of workplace diversity includ e, but are not limited to: age, ethnicity,

ancestry, gender, physical abilities/qualities, race, sexual orientation, educational background,geographic location, income, marital status, military experience, religious beliefs, parental status,and work experience. The challenges of workplace diversity refers to the fact that the future success


of any organizations relies on the ability to manage a diverse body of talent that can bringinnovative ideas, perspectives and views to their work. The challenge and problems faced ofworkplace diversity can be turned into a strategic organizational asset if an organization is able tocapitalize on this melting pot of diverse talents. With the mixture of talents of diverse culturalbackgrounds, genders, ages and lifest yles, an organization can respond to business opportunitiesmore rapidly and creatively, especially in the global arena (Cox, 1993), which must be one of theimportant organisational goals to be attained. More importantly, if the organizational environmentdoes not support diversity broadly, one risks losing talent to competitors.

This is especially true for multinational companies (MNCs) who have operations on a globalscale and employ people of different countries, ethical and cultural backgrounds. Thus, a HRmanager needs to be mindful and may employ a ‘Think Global, Act Local’ approach in mostcircumstances. many local HR managers have to undergo cultural -based Human ResourceManagement training to further their abilities to motivate a group of professi onal that are highlyqualified but culturally diverse. Furthermore, the HR professional must assure the localprofessionals that these foreign talents are not a threat to their career advancement (Toh, 1993). Inmany ways, the effectiveness of workplace di versity management is dependent on the skilfulbalancing act of the HR manager.

One of the main reasons for ineffective workplace diversity management is thepredisposition to pigeonhole employees, placing them in a different silo based on their diversityprofile (Thomas, 1992). In the real world, diversity cannot be easily categorized and thoseorganizations that respond to human complexity by leveraging the talents of a broad workforce willbe the most effective in growing their businesses and their cust omer base.

In order to effectively manage workplace diversity, Cox (1993) suggests that a HR Managerneeds to change from an ethnocentric view ("our way is the best way") to a culturally relativeperspective ("let's take the best of a variety of ways"). T his shift in philosophy has to be ingrainedin the managerial framework of the HR Manager in his/her planning, organizing, leading andcontrolling of organizational resources.

As suggested by Thomas (1992) and Cox (1993), there are several best practices that a HRmanager can adopt in ensuring effective management of workplace diversity in order to attainorganizational goals. Talent management

Talent management refers to the process of developing and integrating new workers,developing and keeping current workers and attracting highly skilled workers to work for yourcompany. Talent management is a process that emerged in the 1990s and continues to be adopted,as more companies come to realize that their employees’ talents and skills drive their businesssuccess. These companies develop plans and processes to track and manage their employee talent,including the following:

Attracting and recruiting qualified candidates with competitive backgrounds Managing and defining competitive salaries Training and development opportunities Performance management processes Retention programs Promotion and transitioningTalent management is also known as HCM (Human Capital Management), HRIS (HR

Information Systems) or HRMS (HR Management Systems), and HR Modules.Companies that are engaged in talent management ( Human Capital Management ) are

strategic and deliberate in how they source, attract, select, train, develop, retain, promote, and moveemployees through the organization. This term also incorporates how compa nies drive performanceat the individual level (performance management). The term talent management means differentthings to different people. To some it is about the management of high -worth individuals or "thetalented" whilst to others it is about how talent is managed generally - i.e. on the assumption that allpeople have talent which should be identified and liberated.


This term is usually associated with competency -based human resource managementpractices. Talent management decisions are often driv en by a set of organizational corecompetencies as well as position -specific competencies. The competency set may includeknowledge, skills, experience, and personal traits (demonstrated through defined behaviors).

Older competency models might also contain attributes that rarely predict success (e.g.education, tenure, and diversity factors that are illegal to consider in many countries) Organizing Talents StrategicallyMany companies are now realizing the advantages of a diverse workplace. As more and mor ecompanies are going global in their market expansions either physically or virtually (for example,E-commerce-related companies), there is a necessity to employ diverse talents to understand thevarious niches of the market. For example, when China was o pening up its markets and exportingtheir products globally in the late 1980s, the Chinese companies (such as China’s electronic giantssuch as Haier) were seeking the marketing expertise of Singaporeans. This is because Singapore’smarketing talents were able to understand the local China markets relatively well (almost 75% ofSingaporeans are of Chinese descent) and as well as being attuned to the markets in the West due toSingapore’s open economic policies and English language abilities. (Toh, R, 1993)With this trend in place, a HR Manager must be able to organize the pool of diverse talentsstrategically for the organization. He/She must consider how a diverse workforce can enable thecompany to attain new markets and other organizational goals in ord er to harness the full potentialof workplace diversity.An organization that sees the existence of a diverse workforce as an organizational asset rather thana liability would indirectly help the organization to positively take in its stride some of the lesspositive aspects of workforce diversity. Control and Measure ResultsA HR Manager must conduct regular organizational assessments on issues like pay, benefits, workenvironment, management and promotional opportunities to assess the progress over the long term.There is also a need to develop appropriate measuring tools to measure the impact of diversityinitiatives at the organization through organization -wide feedback surveys and other methods.Without proper control and evaluation, some of these di versity initiatives may just fizzle out,without resolving any real problems that may surface due to workplace diversity. Motivational ApproachesWorkplace motivation can be defined as the influence that makes us do things to achieveorganizational goals: this is a result of our individual needs being satisfied (or met) so that we aremotivated to complete organizational tasks effectively. As these needs vary from person to person,an organization must be able to utilize different motivational tools to en courage their employees toput in the required effort and increase productivity for the company.

Why do we need motivated employees? The answer is survival (Smith, 1994). In ourchanging workplace and competitive market environments, motivated employees a nd theircontributions are the necessary currency for an organization’s survival and success. Motivationalfactors in an organizational context include working environment, job characteristics, appropriateorganizational reward system and so on.

The development of an appropriate organizational reward system is probably one of thestrongest motivational factors. This can influence both job satisfaction and employee motivation.The reward system affects job satisfaction by making the employee more comfortabl e andcontented as a result of the rewards received. The reward system influences motivation primarilythrough the perceived value of the rewards and their contingency on performance (Hickins, 1998).

To be effective, an organizational reward system should be based on sound understanding ofthe motivation of people at work. One of the more popular methods of reward systems is gain -sharing.

Gain-sharing programs generally refer to incentive plans that involve employees in acommon effort to improve organiza tional performance, and are based on the concept that theresulting incremental economic gains are shared among employees and the company. In most cases,


workers voluntarily participate in management to accept responsibility for major reforms. This typeof pay is based on factors directly under a worker’s control (i.e., productivity or costs). Gains aremeasured and distributions are made frequently through a predetermined formula. Because this payis only implemented when gains are achieved, gain -sharing plans do not adversely affect companycosts (Paulsen, 1991).

In order for a gain-sharing program that meets the minimum requirements for success to bein place, Paulsen (1991) and Boyett (1988) have suggested a few pointers in the effectivemanagement of a gain-sharing program. They are as follows: A HR manager must ensure that the people who will be participating in the plan areinfluencing the performance measured by the gain -sharing formula in a significant way by changesin their day-to-day behavior. The main idea of the gain sharing is to motivate members to increaseproductivity through their behavioral changes and working attitudes. If the increase in theperformance measurement was due to external factors, then it would have defeated the purpose ofhaving a gain-sharing program. An effective manager must ensure that the gain -sharing targets are challenging butlegitimate and attainable. In addition, the targets should be specific and challenging but reasonableand justifiable given the historical pe rformance, the business strategy and the competitiveenvironment. If the gain-sharing participants perceive the target as an impossibility and are notmotivated at all, the whole program will be a disaster. A manager must provide useful feedback as a guid ance to the gain-sharing participantsconcerning how they need to change their behavior(s) to realize gain -sharing payouts The feedbackshould be frequent, objective and clearly based on the members’ performance in relation to thegain-sharing target. A manager must have an effective mechanism in place to allow gain -sharing participants toinitiate changes in work procedures and methods and/or requesting new or additional resources suchas new technology to improve performance and realize gains. Though a m anager must have a tightcontrol of company’s resources, reasonable and justifiable requests for additional resources and/orchanges in work methods from gain -sharing participants should be considered. Executive Information SystemsExecutive Information System (EIS) is the most common term used for the unified collections ofcomputer hardware and software that track the essential data of a business' daily performance andpresent it to managers as an aid to their planning and decision -making (Choo, 1991). With an EIS inplace, a company can track inventory, sales, and receivables, compare today's data with historicalpatterns. In addition, an EIS will aid in spotting significant variations from "normal" trends almostas soon as it develops, giving the compa ny the maximum amount of time to make decisions andimplement required changes to put your business back on the right track. This would enable EIS tobe a useful tool in an organization’s strategic planning, as well as day -to-day management (Laudon,K and Laudon, J, 2003). Managing EISAs information is the basis of decision -making in an organization, there lies a great need foreffective managerial control. A good control system would ensure the communication of the rightinformation at the right time and relayed to the right people to take prompt actions.When managing an Executive Information System, a HR manager must first find out exactly whatinformation decision-makers would like to have available in the field of human resourcemanagement, and then to include it in the EIS. This is because having people simply use an EIS thatlacks critical information is of no value -add to the organization. In addition, the manager mustensure that the use of information technology has to be brought into alignment with strategicbusiness goals (Laudon, K and Laudon, J, 2003).


CONCLUSIONS

We live in the era of not just change, but an accelerated rate of change. As compared to thepast, the twenty-first century corporations are getting to be globally market driv en ones with ‘investanywhere and share everywhere’ concept.

At a practical level, we must anticipate and prepare for the likely HR challenges in generalthat exists, or may be expected in the coming future - the main purpose and theme of this article.They are consequent to the vastly increased competition for many, and likely in future, due to rapiddevelopment of technology, especially, the impact of IT, and internal necessities, and/or resultingfrom above stated causes. With technology up -gradations, much greater use of it and forthcoming e -commerce etc. new breed of ‘knowledge workers’ in ‘learning organizations’ will make thedifferentiation. This intellectual capital will demand much nurturing from the enterprise, in order togive back in the shape of superior results.

Considerable work will be essential in building a positive organizational climate, withinwhich improving performance level is not only appreciated and rewarded, but becomes a way oflife. The HR team will be only one of the important p illars, and the other functions will certainlyand equally have to do a lot of upgrading for improving the organizational results. Team work, willtherefore, be a key driver in any organization, that will demand and result in high performance bothat all individual levels and also across functions and teams continuously and consistently.

It goes without saying that the effective management of Industrial relations will continue todemand a very high priority - not just to ‘do well’, but now for the very surv ival of both theorganization as well as employee jobs. They will need far greater support and involvement from thetop management and other functions towards maintaining and ensuring the future success of the21st century organizations.

In short, the early practices of jobs forecasting succession planning has broadened into aconcern with establishing a more explicit linkage between human resource planning and the largerorganization strategy and business planning of the organization. Moreover the idea of selection,training, performance appraisal and compensation decisions being heavenly -centred on the role ofindividual employee, with their details of job description, has guided that effective team workingand participative decisions are playing important roles to achieve the effective performance inbusiness organization.

In conclusion, still there is a strong contention and race of struggle to take the lead in theacademic and professional field but obviously only time will fill which of these and other possiblerival scenarios will offer more accurate description of the reality in future. The new technologicalchange, downsizing, right sizing and privatization management can also play role for futuredevelopments/trends and accepts the challenges of the future.

BIBLIOGRAPHY:

1. Torrington, D., Hall, L., Personnel Management , Englewood Cliffs, NJ: Prentice Hall, 19952. Armstrong, Michael, A handbook of human resource management practice , Kogan Page, 20013. Sparrow, Paul; Brewster, Chris ; Harris, Hilary, Globalizing human resource management ,

Routledge, 20044. Harrison, Rosemary; Kessels, Joseph, Human resource development in a knowledge economy: an

organisational view, Palgrave Macmillan, 20045. Beardwell, Ian; Claydon, Tim, ed.; Holden, Len, ed., Human resource management : a

contemporary approach, Prentice Hall, 20046. http://howtomanagehumanresources.blogspot.com7. http://www.chillibreeze.com

http://howtomanagehumanresources.blogspot.com

http://www.chillibreeze.com


THE OUTSET AND DEVELOPMENT OF PUBLIC RELATIONS (PR) IN ROMANIANECONOMY AFTER 1990

Assistant Raluca ZOLTANUniversity „Ştefan cel Mare”, Suceava, Romania

[email protected] PhD. Ghiorghi PRISĂCARU

”Ştefan cel Mare” University of Suceava, RomaniaAssociate Professor PhD. Romulus VANCEA

”Ştefan cel Mare” University of Suceava, Romania

Abstract:Currently, even in Romania the public relations (PR) develops in extremely diverse organizations, have varied

frames of work and implies objectives sometimes hard to conciliate; they are practiced in and for governmentalinstitutions, also in / for non-governmental organizations, for companies which pur sue the profit, but also for civicassociations, for banks, for educational or cultural institutions. The objectives of public relations are different too: frominducement of the public in favor of an organization to compelling an organization for changing its attitude towardspublic, and from sustaining democracy in a society to promotion of a company or celebrity interests.

The present paper is pointing out the reviewing of public relations evolution in Romanian economy after 1990,emphasizing the stage reached in the last years, as well as the trends in development of Romanian PR. Thus, arepresented the results of different studies regarding the way of perceiving the PR activities by the local organizations,the understanding degree of their importa nce for companies development, the preferences for certain types ofcommunication that are specific to the vast domain of public relations. Based on these data, it is prefigured thedirection of PR Romanian market development, which is mainly represented b y the agencies specialized in carrying outPR activities.

Keywords: PR, PR activities, PRS (PR specialist), PR agencies, PR market, on -line PR


1. INTRODUCTION

The public relations (PR) represent a continuous, systematic and pla nned effort throughwhich the organizations try to obtain and maintain the confidence, sympathy, understanding andsupport of the public.

Despite the difficulties of rigorous quantification of PR activities results, even in Romanianbusiness environment the companies need to create their own public communication structures(services, bureaus, public relations offices, bureaus and press attaché, spokesmen) and to develop acoherent relationship policy with the diverse public categories represents an impera tiveness becausethe importance of public relations consist in the fact that they constitute a multiplier of organizationpower when they are used properly.

2. PREREQUISITES OF THE PR BEGINNING IN ROMANIA

As a consequence of the results registered dur ing the too world wars, the PR activity recordsa considerable raising in post -war period; after a decade, almost all governmental agencies fromWest had a public relations structure; at the same time, as a very important matter, the publicrelations succeed in being recognized as indispensable for any organization which (come in the (to)mass-media attention) compel the mass -media attention.

Nevertheless, the public relations were late enough recognized in Europe as an independentprofession. In 1964, France was the first state who made this by establishing a definition for publicrelations and press practitioners, which has been published in Journal Officiel de la RépubliqueFrançaise (the French „Official Gazette”). (1)

After 1990, the public relations ha ve developed rapidly also in Central and East Europe,even in some states in which still exist totalitarian regimes because the public relations involve from

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the organizations the cultivation of some direct contacts, consequently and systematic accomplishedwith the different public categories, with influent persons from other local or foreign organizationsmanagement, with mass-media, with public power representative s, with opinion leaders e tc., forthe purpose of obtaining the support of all these categories in the organizations effort to preserveand develop their interests. As a distinctive activity area, public relations are placed among the mostmodern instruments of communication policy in contemporaneous society, in the same timecomprising also veritable promotional attributes.

In Romania, after a pioneering first stage, in which some journalists have „migrated” topublic relations, the discipline began to be studied in schools and uni versities, which provides basicconcepts about the general process of communication and public relations in particular. Meanwhile,government institutions and business organizations have realiz ed more deeply the public relationssignificance for their general activity success. (2)

The multinational companies entrance (and not only) on the Romanian market, companiesthat develop businesses in the order of hundreds and even billions of euros annually, is and will bethe ideal prerequisite for developing of a real business in public relations domain. (3) Whereas thesemultinational companies have come up with a specific organizational culture, but also sets ofprocedures, rules extremely well defined, inclusively for communication activities and publicrelations. (4)

If the necessity of a PR department inside the organization or the call to a companyspecialized in these type of services have been well understood by the multinationals and very largeRomanian companies, not the same thing can be said about the R omanian companies which aredeveloping now. This is due rather to the lack of tradition of the Romanian PR, and not to thequality of services provided by agencies on the market (even in the West boundaries between whatis PR, media relations, communicatio n, marketing and promotion are still quite vague).

However, increasing competition has made domestic entrepreneurs to realize that PR is notonly the relationship with the press, but much more; that’s for they begun to increasingly resort tothe services provided by PR agencies. (5) The existence itself of these agencies is due to theincreasingly demand for professionals and specialized communication services on the part ofmultinational companies which operate in Romania. And they need a local adaptation of theirinternational message, approach that involves the call to Romanian PRS, whether employees intheir PR department, whether they are employed in multinational agencies with branches inRomania or local PR agencies.

3. THE DEVELOPMENT OF PR ROMANI AN MARKET

The term of „PR agencies” has been applied to firms, individuals, partnerships andcompanies that were founded in the early years after the Second World War. At this stage, most ofthe services offered to customers consisted in the practical im plementation of public relationstactics. Because only a few practitioners were trained in the journalism field, the consultancyelement has developed based on the knowledge of the mass -media, on how the public may react toadvertising media. (6)

The public relations companies (agencies) have developed in the United States along withbusiness and American industry. At present, a public relations agency may have from some people(local agencies) to hundreds of people employed permanently or temporarily, plac ed in the sameoffice or expanded in the world (international agencies), working on the same project or severalprojects, simultaneously or at different times.

The public relations agency is the institution whose main goal is to create the image, tomake the communication media for a cause, an idea, a country etc., planning and carrying outconcrete the public relations campaign. (7) In business area, this definition is broad, covering awide range of services that may be offered by a PR agency, including a dvice on communicationissues and not only.


The PR agencies market in Romania occurred with the entrance of multinational companies,which have brought with them the need to communicate with the public in a professional manner,especially with the press, and has developed with the economic and companies growth.

If 14 years ago, the PR agencies in Romania included only a few names, there are now over20 major players who „dispute” the PR budgets of the larger and many companies on the market.

According to a study on the use of image and public relations conducted by the Club ofPublic Relations Companies (CPRC), the companies budget for PR in 2006 was approximately 70000 euros, over 70% of managers from 200 local companies saying that they will allocate morefinancial resources to PR in the next periods, which shows a significant increase in interest for suchservices. (8)

As stated the CPRC representatives, the study targeted the top companies in terms ofturnover and budget invested in advertising, companie s from Fortune or Forbes tops that havebranches in Romania, companies working with a PR agency or which have potential for publicrelations.

The study sought to identify general perceptions and attitudes of companies towards the PRand the role and importance of this type of communication management. Also, the questionsconcerned the circumstances of use the public relations as a form of communication - the type ofservices used, situations where PR is becoming a necessity, ways of planning, evaluation andbudgeting activities. (9)

Thus, in 62,5% of cases, the top management is the one who decides to hire a PR agency. In53,3% of cases, marketing departments are the main structures that are conducting the PR activitieswithin the company, and distinctive pu blic relations departments are found in only 35,7% ofcompanies. (10)

Over half of those interviewed said that they use public relations both in marketing mix topromote brands and for corporate communication: 34,6% of companies are using exclusivelycorporate communication, and 13,7% use only marketing communication.

Over two thirds of companies interviewed stake on the continuity of public relationsactivity, while 31,9% use occasionally PR as a communication tool, when it is necessary.Moreover, 62,4% of companies consider that the PR activity must be continuously to be effective.This percentage, which will continue to grow, shows great understanding of the fact that majormarket leaders do not stop doing any time what communication suppose to mean, because they lookbeyond the moment. (11)

Then, the services of media relations remain the most requested even in our country,followed by organizing events, internal communication programs, media monitoring, crisismonitoring and CSR* (Corporate Social Respon sibility) programs. As a consequence, companies inRomania have identified five categories of public relations use:

• creating a favorable image of the company;• supporting services and products through communication;• creating the reputation of compan y;• involving and motivating the employees;• crisis management.The same categories are funded again in an similar order in the types of services required by

companies to PR agencies: the organization of events and media relations dominate the top, wit hquite equal values (68,2% and 67,1%), being followed by media monitoring with 62,5%,consultancy on communication problems – 35,2%, crisis monitoring – 14,8% and CSR activities –14,8%.

Among the companies which carry on PR activities, one third (32,4%) includes them in themarketing plan, while 37,4% included in the business strategy of the company, and 18,1% considerthem as a part of integrated communication strategy. Only 12,1% considered the PR as a tacticactivity, as a support for the general strat egy of the company. (12)

Regarding the number of PRS, in Romania is currently working about 15 000 experts,compared with Italy, for example, where 75 000 are registered, but „qualitative differences are


present at the public administration level, where mo st officials are recycled, who not havespecialized faculties. (...) On the other hand, where there are specialists, they are not taking intoaccount by management or are used under the „designed parameters”, usually in relation with thepress and the protocol” considers Borţun Dumitru, former president of the Association of RomanianProfessionals in Public Relations (ARPR).

„The situation is different in the West , where the PR directory is part of active decision -making process. Another significant differe nce between the Romanian PR and civilized world”,says Borţun, „is represented by the areas which were developed: in our country, in many places thePR is reduced to the events organizing and media relations; abroad, it attaches great importance tocommunication campaigns, image campaigns and internal communication. (13)

However, the public relations sector in Romania has real professionals in the field, but theirnumber is insignificant for the growth level of the market (14), whereas „a public relations p ersonmust know his customers very well, must know which their strengths are and be a good friend intimes of crisis. A PRS is not j ust a pretty smiling girl, but an informed, professional person,involved in the business which he represents” said Raluca A nghel, Managing Partner A & M PRAgency. (15) And these qualities require years of experience, difficult to gain in circumstances inwhich, although in Romania there is some PRS with at least 10 years seniority, we can talk about areal market of public relations and communication not more than 4 - 5 years.

However, currently, the market value of PR in Romania is estimated by industry playersfrom around 20 million euros (according to data held by the agency „4 ACE”). Annual growth ofaround 25-30% registered constantly over the past 5 years make the public relations agenciesattractive both to large groups of international communication, and for new local players. (16)

However, the PR market in Romania is difficult to estimate in the absence of rigorousspecialized studies, especially at regional level. If the estimates are not made based on the invoicedamount of actual work performed by public relations agency ( fee billings), but on the basis ofturnover, the information is irrelevant, since there are agen cies to which the fee billings share of thetotal turnover is 15-20% and others to which this share may be 60 -70%, case which does not allowa comparison. Thus, the market share of an agency or another is relative. In addition, PR agenciesreported higher turnover compared to low profit margins. This is because they run through thecounts of agency the entire budget of the client, even if most of expenditure is for an event.

On the other hand, the PR budgets can be consumed directly by the companies, witho ut thesupport of agencies or can be used the PR services provided by the advertising agenciesdepartments, which do not report separate amounts for PR.

It should also be noted that in order to quantify the PR Romanian market, can be applied theprinciple that 20% make 80%: practically, the 20 % of public relations agencies conducted 80% ofthe market. (17)

Regarding the comparison with markets in the region, Romania is on one of the first places,long before Hungary and being get ahead only of the Czech Rep ublic. Explanation is given to thefact that here have central offices on the region many multinational companies; therefore, the needfor PR is much higher. But the position held proves that Romania has grown with this market at apace much faster than they neighbors (18), and the PR seems to found its bench marks and to haveearned its place in the Romanian business environment.

Thus, in 2008, Paul Holmescel, the best known international PR analyst, said during theSABER awards that „Romania is the most c reative and competitive market with such profile inEurope" (19).

4. THE TRENDS IN PR ACTIVITIES APPROACH

In the past five years, the public relations industry in Romania has an increasingly growthabout 15-20% and will continue to grow at a sustained p ace because its main engines of growth arerelated to education, and not only to economic conditions. Constantly increase the number of PR


clients and the companies which began to use this communication tool not waive it, but develops it.(20)

Thus, communication is no longer seen as an exercise to promote easy, but a seriousinvestment of time and experience both from the client / company and the PR agency / department.The briefs** does not include as an objective „the launching of press statements”, but presents thebusiness situations, vision of development and concrete plans and seek to incorporate thecommunication in the transformation processes. (21)

An example in this meaning, along with many others in multinationals case, is the Unileverpassing through a globally repositioning over the past two years. This strategic repositioningassumed the introduction of the Vitality concept for all its brands, redefining the logo, the missionand the environment in which the company has understood to express publicly. „It is a greatadvantage to have a keyword to help you send a message to all environments. It brings coherence,consistency and, ultimately, repu tation”, is the opinion of Alexandra Olaru, corporate affairsdirector of Unilever South Central Europe (USCE). (22)

Evensys conducted a survey which involved questioning of 65 specialists from PR andadvertising agencies and from communications department s of companies. (23) The surveyrevealed that the PR image in the business environment has evolved to better last year and that inthe field exist many development opportunities. In view of PR specialists, the biggest trend in 2009aims the increasing of initiatives in on-line environment, which is followed by diversification ofPR. (24)

Thus, as a result of the survey, a hierarchical organization of the major trends of this year,according to the percentage that each trend occupies, is:

• the increasing of PR initiatives in the on-line environment (78%);• the diversification of PR activities beyond its relationship with the press (70%);• the increasing of number of CSR programs (67%).Less „fashionable” in 2009 is the increasing of PR freelancer*** segme nt (34%), the

detachment of several PR departments in independent agencies (25%) and less „trendy" is theentrance of some new international PR agencies (22%). (25) The small percentage in terms ofentering on the Romanian market of some new international PR agencies can be put on the choiceof multinational firms that operate in Romania either to call for the services offered by internationalagencies already on the market or for those offered by the Romanian agencies or to develop theirown PR departments. Both hypotheses sustain the hiring of Romanian PRS because they knowbetter the Romanian economic reality and the local publics level of understanding of various PRactivities.

Moreover, the category of the most requested services PR this year is compri sed of mediarelations (72%), on-line PR (61%) and CSR (48%). Regarding the evolution of perception of the PRin the business environment, 70% of practitioner respondents said that it is better, 28% think that itnot has changed much and only 2% said that it is less good than before. However, at the questionwhether the benefits of PR are well understood, 94% of the public relations practitioners who tookpart in the poll have a negative answer.

Then, 95% of respondents replied that the main tool used as on -line PR is the e-mail.Reading blogs is a current activity for 75% of practitioners, while 74% use the on -line monitoring.Also, 25% helps themselves by group’s discussion, but only 15% use text ads, e.g. GoogleAdWords. (26)

In addition, the communicatio n people interviewed about the factors limiting thedevelopment of on-line PR considered in proportion of 63%, that the main barrier is themisunderstanding of the environment. The next limiting factor is the absence of competences in thefield, response with which agreed 60% of respondents, while 42% said that the on -line environmentis very unpredictable and very difficult to control. The results of this survey are presented in apartial synthesis in Table no. 1. (27)

As a worldwide trend, „73% of U.S. jo urnalists use blogs as a communication tool. So, PRdoes not have opportunities to develop as an industry if it does not use tools such as blogs. At this


time, even in the U.S. only 30% of specialists use PR blogging ", explained Loredana Visa, PRmanager at Avon Canada. „Today, PR is using language accessible to all, not only to the press, butalso to the public. In 2009 blogs, are called the new press statements”, said Loredana Visa. Thus,the blogers are looked in 2009 as a different kind of journalists. Their power to influence the publichas been called Social Media, concept which describes a living organism that is very sensitive to theauthenticity of PR messages. (28)

It seems that in the next period, any PR message will be followed by users and veri fied. If itwill not be authentic, the reaction can be very powerful, because now any citizen may expressopinions on the blog and company image can be easily affected.

Table no.1. The synthesis results of the survey on the factors limiting the PR and the trends inthe field

The factors limiting the development of several PRactivities in the online environment

Major trends

Environment misunderstanding 63% The increase of PR initiatives in on -lineenvironment

78%

There is not many competences in the fie ld 60% The diversification of PR activities beyond themedia relation

70%

On-line environment is very unpredictable andvery difficult to control

42% The increase in number of CSR programs 67%

Too small budgets at disposal 34% The pronouncement of some distinctspecialization on the part of some agencies

47%

There is worry about the data security 34% The finding out of some new canals for PRactivities

45%

There isn’t instruments for measuring the PRactivities in on-line environment

29% The increase of budgets allocated to publicrelations

42%

The costumers consider that the on -lineenvironment is not adequate for PR

29% The consolidation of PR agencies 34%

There is no interest toward media covering on theInternet

26% The increase of „ PR freelancer” segment 34%

The technology is hard to implemented 18% The detachment of several PR departments inindependent agencies

25%

There is no interest from community toward PR 11% The entrance of some new international PRagencies

22%

The source: Adapted from www.adevarul.ro – The PR develops on-line.

5. CONCLUSIONS

It can be concluded that the areas of gre at interest for the present state and future of publicrelations in the Romanian economy are:

the integrated communication (as a new way of communication with a publicincreasingly varied and pretentious; involves the use of synergistic opportunities for c ommunicationand a good understanding of all the company's operational activities and coordination within theteam);

the internal communication (to be effective for a better prevention of potential conflictswithin the company, which has the duty to use t hose channels and means of communicationrecognized and appreciated by its employees, so they retain the loyalty and fidelity to thecompany);

the financial communication (whatever is happening on global financial markets mayaffect firms in Romania, whether local or subsidiaries of multinational companies, in a very shorttime and with a huge impact);

the crisis communication (with special emphasis placed on crisis prevention); the CSR programs (their role in the communication strategy of any mature and modern

company); the relationship between PR and the press (to be effective and productive);

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the on-line in public relations activity.Since Romania has passed the stage where the PR mean only press conferences and

statements, and the Internet has become a relevant area to urban communities and this will increase(29), the conclusion of public relations specialists is that the communication market will increasedue to increasing number of companies and customers who will need specialized communicationservices, respectively the complex services which belong to the public relations domain.

Along with the evolution of the companies, internationalization of business and growingcompetitiveness will be developed new types of communications activities appropria te to eachcategory of publics, will diversify audiences and will enhance the PR activities.

ENDNOTES:

* CSR (Corporate Social Responsibility) – is a concept regarding to the contribution that the companies shouldhave in the development of modern societ y. In time, this contribution was different theorize by more currents ofthinking. The companies „responsible” initiatives were named in a variety of terms: corporate citizenship, corporatephilantropy, corporate societal marketing, community affairs, comm unity development etc.(www.responsabilitatesociala.ro)

** Brief – (1) Accurate exposure, written or oral, which lay the foundations of a problem and the objectives tobe achieved. (2) Term often used to describe the speech given by an announcer before his agency. (Şerbănică, D. –Dicţionarul comunicării integrate de marketing , Ed. ROSETTI EDUCATIONAL, Bucureşti, 2006, p. 31)

*** Freelancer – an independent contractor who provides services to differen t employers without being tied toany one of them, through a conventional long term commitment. From the employer point of view, the freelancer is aflexible source of working that can be called and also can be easily exempt from, depending on its needs. F rom theperspective of a freelancer, the main advantages are translated into a greater variety of tasks and a greater freedom tochoose which hours, days or weeks are convenient to him. ( www.cariereonline.ro)

BIBLIOGRAPHIC REFERENCES:

(1) Newsom, D.; VanSlyke Turk, J.; Kruckeberg, D. – Totul despre relaţii publice , Ed. POLIROM, Iaşi, 2003,p.59

(2) David, G. – Relaţii publice - garanţia succesului , Ed. Oscar Print, Bucureşti, 2003, p. 15 -16(3), (14) www.curierulnational.ro – Matache, L. - Specialiştii din PR promovează o piaţă de doar 20 de mil. de

euro(4), (11) www.markmedia.ro – Sandu, L. - La început a fost marketing-ul(5), (16), (18) www.standard.ro – PR-ul românesc face 30 milioane de euro(6) Marconi, J. – Ghid practic de relaţii publice , Ed. POLIROM, Iaşi, 2007, p.22(7) Şerbănică, D. – Dicţionarul comunicării integrate de mar keting, Ed. ROSETTI EDUCATIONAL,

Bucureşti, 2006, p.13(8), (12), (17) www.praward.ro/resurse-pr.html(9) www.iaa.ro – Primul studiu asupra imaginii şi utilizării PR -ului în România(10), (13), (15) www.cariereonline.ro – Cu PR-ul la specialist(19) www.dailybusiness.ro(20) www.adevarul.ro – Lipsa profesioniştilor, marea problemă a PR -ului(21) www.sfin.ro – PR-ul românesc. Ce e în tendinţe pentru 2009?(22) www.unilever.ro(23) www.iqads.ro – Public Relations Report prezintă tendinţele locale în relaţii publice din 2008(24), (27), www.adevarul.ro – PR-ul se dezvoltă pe on-line(25), (26) www.iaa.ro – A doua ediţie a PR Forum a ajuns la final, dar şi la nişte concluzii(28) www.standard.ro – În 2009, PR-ul este influenţat de blog-uri(29) www.euractiv.ro – Cresc iniţiativele de PR în mediul online

BIBLIOGRAPHY:

1. David, G. – Relaţii publice - garanţia succesului, Ed. Oscar Print, Bucureşti, 20032. Marconi, J. – Ghid practic de relaţii publice , Ed. POLIROM, Iaşi, 20073. Newsom, D.; VanSlyke Turk, J.; Kruckeberg, D. – Totul despre relaţi i publice, Ed.

POLIROM, Iaşi, 2003

www.responsabilitatesociala.ro

www.cariereonline.ro

www.curierulnational.ro

www.markmedia.ro

www.standard.ro

www.praward.ro/resurse-pr.html

www.iaa.ro


www.dailybusiness.ro

www.adevarul.ro

www.sfin.ro

www.unilever.ro

www.iqads.ro

www.adevarul.ro

www.iaa.ro

www.standard.ro

www.euractiv.ro


4. Şerbănică, D. – Dicţionarul comunicării integrate de marketing , Ed. ROSETTIEDUCATIONAL, Bucureşti, 2006

5. www.adevarul.ro6. www.cariereonline.ro7. www.curierulnational.ro8. www.dailybusiness.ro9. www.euractiv.ro10. www.iaa.ro11. www.iqads.ro12. www.markmedia.ro13. www.praward.ro/resurse-pr.html14. www.sfin.ro15. www.standard.ro16. www.unilever.ro

www.adevarul.ro


www.curierulnational.ro

www.dailybusiness.ro

www.euractiv.ro

www.iaa.ro

www.iqads.ro

www.markmedia.ro

www.praward.ro/resurse-pr.html

www.sfin.ro

www.standard.ro


HOW TO UNDERSTAND THE NEW ECONOMY

Assistant Ph.D. Student Angela-Nicoleta COZORICI”Ştefan cel Mare” University of Suceava, România

[email protected] Ph.D. Student Simona BUTA

”Ştefan cel Mare” University of Suceava, Româ[email protected]

Professor PhD. Ghiorghi PRISĂCARU”Ştefan cel Mare” University of Suceava, Romania

AbstractThe work presents the main evolutions towards the New Economy based on knowledge by passing from the

Industrial Era to the Informational Era. The new economy is the result of a veritable economic revolution, with apowerful impact on the society’s functioning manner. We have introduced the fact that the novelty of the globaleconomy derives from the appearance and the potentiating of a new economic factor, that is the knowledge, and thecompanies’ leaderships have been obliged to accept the capital importance of the fifth resource: the information.

For understanding the concept of new economy based on knowledge, which, according to the New School fromCambridge, are classified as follows: the principle of the human existence in a closed circle; the principle ofreintegrating the human in nature; primum non nocere; preserving and developing biomass, biodiversity and bio -productivity; the permanent insurance of the resources; the principle of the economic, social and ecologic efficiency;the societal existence is interactive with the environment; the passing from the discretionary demographic growth toanother one, based on the conscious responsibility of the man -woman couple and on the adequate implication of thesociety; the principle of the social equity; government accountability for the way the policies promoted, manage andenhance resources and to ensure the new generations’ future, too.

We concluded the work by introducing the main features of the new society and of the new economy b ased onknowledge, specific to the post -capitalist society.

Key words: the new economy, economy based on knowledge, knowledge revolution, informationalrevolution, knowledge, information.

JEL classification: D 83

1. INTRODUCTION

The motivation for the theme chosen for this work is due to the fact that the New Economybecame a reality of the present world. The impact of the information technologies and of thecommunications is great; they determine a competitive advantage and accelerate the globaliz ation.The globalization leads to a more accelerated competition, but also to a better quality of life throughthe access to the information available in electronic format, regardless of the geographical locationand to new conveniences in a business envir onment characterized by the reduction of the economiccycles.

Using the analytic approach, this work presents a theoretical frame referring to certainaspects related to the New Economy based on knowledge and its implications.

The change determined by us ing the information and communication technologies (ICT)affects all the domains and all the enterprises. The Internet phenomenon amplifies thetransformation, offering, on a large scale, to the people and to the organizations, the informationalresources.

2. THE NEW ECONOMY BASED ON KNOWLEDGE

The name of “The New Economy” has been given for the first time by the Business Weekpublication in 1996 to a complex reality, already manifested since several years in the mostadvanced economies. Although so fa r any precise definition hasn’t been adopted, together with thesubsequent literary effervescence, it has been accepted on a large scale that The New Economyrefers to permanently improved products, commercialized by innovative agents who firstly exploit

www.unilever.ro

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the newly opened niches or the ones created by themselves on the markets in process ofglobalization. This suggests the entering into a new paradigm of the economy as social activity (1).It has to be mentioned that this assertion is sometimes disputed. For example, Gordon (2001)sustains that the New Economy isn’t a new industrial revolution (that’s because any new paradigm).Thus, the new historical-economic hasn’t a single name, but a multitude, each one having ajustification, distinguishing a specific f eature of the new economic and technologic forces whichcome into view. Here are some of these:

- Post-industrial society,- Informational society- Technological civilization- Post-capitalist society- Economy based on knowledge and information etc.In this period, we discuss more and more insistently about a knowledge revolution and/or an

informational revolution, like an indistinguishable passing from an economy based on materialresources to an economy based on knowledge (2); it is hard to clearly distinguish between the tworevolutions, because their essence is permanently “mixed” (3) At the heart of this informationalrevolution is the Internet and the computer networks, with all the socio -economic implicationsinduced by this technical component (4).

We can describe the information as being “something new” we find out about a certainsystem or about the manner in which this functions. But the knowledge is more than simpleinformation; it represents, besides the purely mathematical value, the un derstanding of thatinformation. As the knowledge is superior to the information, also the economy based onknowledge is superior to the informational economy.

The novelty of the global economy derives from the appearance and the potentiating of anew economic factor: the knowledge (5). We can define the economy based on knowledge as beingthe economy which surpassed the development step beyond which the knowledge represents the keyresource (6). What makes this knowledge such an important resource? There are a lot of factorswhich have this as consequence, the most important being: the progress registered in IT&C (7), thegrowth of the development speed of the new technologies, the competition at a global level, themarket liberalization, the continuous ch ange of the demand determined by the growth of the numberof persons with medium and big incomes (who develop a sophisticated demand, of good qualityproducts), the increase of the life quality importance.

This type of economy has imposed together with th e phrase the economy of the knowledge .“The real impact of the informational revolution, Drucker says, is hardly beginning to be felt”; yetnot the information or the computer are at the origin of this revolution, but the Internet phenomenonand the electronic commerce, which has become the main means of distributing the merchandise,the workplaces and the managers; this phenomenon thoroughly modifies the economies, themarkets, the industrial structures, the goods distribution, the consumers’ behavior, the valuescategory and the labor market (8).

In order to elucidate the meanings of the presents changes, it is useful even a summaryhistorical analysis of the evolution of the economic -technological systems, from the assertion of theindustrial production manner and until nowadays.

The first scientific-technical revolution, called also “industrial revolution”, the essence ofwhich has been represented by the mechanization, has been characterized by the passing from themanual, the handicraft work, to the m echanized, manufactured activity.

The second scientific-technical revolution had as essence the automation of the production.The new technologies assimilated integrated solutions, regulating entire technological processes,imposing the activities of conceptions and of programming as an essential element of the work andof the process of creating the economic value. The computer and the informational technologiesturned into real symbols of “the second industrial revolution”.

These revolutions in the science and technology domains brought many changes as regardsthe manner of organizing and functioning of the society:


The new technologies are more and more productive, allowing thus the companies tosell better products, at low prices. This leads to the inc rease of the industrial goods accessibility fora wide range of people.

The most attractive investments are those from the high -tech domains. Thus, thecompanies become more and more interested by innovation.

Moreover, many companies straighten the resear ch towards finding solutions forremoving the pollution or for reducing the staple consumption. This means an improvement of theprocess of production, with positive effects not only for the environment, but also for theconsumers.

The development of IT&C determine the increase of the communication between thepeople, the development of new types of businesses (ex. e -commerce), the development of on -lineinformational centers, etc.

The society gradually becomes much more alert at the existent problems. Theaccessibility of the information makes the information and the expression easier for the people. Theimportance of a person as a unique entity becomes greater in the new society, based on knowledge.

Thanks to the development of the science, more and more p eople are engaged in thedevelopment of new activities. The number of frontier research domains increased very much. Forbecoming a good specialist, a person needs more and more years of study.

In the end, the determination of the knowledge and of the inf ormation as developmentresources make us familiar with the phenomena situated at the origins of the new economy. Thesereveal the fact that the generalization of the values of the science and of the technique hasn’t analternative at the scale of the huma n society evolution. Variedly names, as we already mentioned,the new economic and social reality has as specific various features: the technologies centered uponmicroelectronics and informatics, the biologic technologies, the genetic engineering, the gre enrevolution, the nuclear technique, the spatial navigation etc.

The passing from the industrial Era to the information Era changed the organizations and thesociety, the added value relies on information and knowledge, appeared a new type of worker, theworker with the information.

In time, the managers of the companies paid a greater attention to the administration of themoney, of the materials, of the equipments and of the people. Today, they have been obliged toaccept the capital importance of a fi fth resource: the information (9). The companies’ need to beinformed in a more and more competitive society makes that the analysis of the market and of theconsumer’s desires become primordial. The powerful companies try to know all that can be knownabout the consumers: what they want, what they don’t want, how they consume, when, what makesthem faithful to the product, when they prefer to change the brand. The need to know, determinedby the need to take correct decisions in a real time, determined an explosion of using theinformatics’ systems at the level of the companies. In function of the directors’ information needs,the companies elaborated SIMs that is Marketing Informational Systems, by which they can alwaysbe acquainted with what happens on t he market. Also, an increasing number of companies resort tomanagement systems of participative type, where the decisions are taken by several persons, thusreducing the risk of a failure. It is obvious that all these persons must have access to informati onand actually communicate for their step to be successful.

Consequently, within the economy of the knowledge, the successful firm or company – forremaining and flourishing in businesses – is obliged to reconsider the role given to the knowledgeand to the applied management (10). It will further operate with certain active/attainable materials,with a certain infrastructure, but the market value of the company is determined more and moresignificantly by its intangible actives, by the knowledge stock acc umulated, by the intellectualcapacity of its wage earners, by the capacity of getting knowledge, by the capacity of producingand selling knowledge (11).

The propriety and the traditional capitalism, Toffler says, turns nowadays into “somethingnew and bizarre”; more and more, alongside with the physic aspects which define the propriety andgive it value, the intangible aspects which we attach to the propriety multiply quickly and


permanently (12). For successfully working in this new type of economy, the company and thewage earners which compose it must learn permanently (13), explicitly refer to various theoreticaldevelopments and accept the change as a natural behavior in the management applied daily.

3. THE MAIN PRINCIPLES OF THE NEW ECONOMY BASED O N KNOWLEDGE

In order to understand the concept of the new economy based on knowledge, we must startfrom the main principles that have been traced in various studies realized in a group or individually,on their own initiative or from practical reasons of the international organisms which reflect alikethe existent situation and the demands, the immediate aspirations, but also those on long term, inwhich the counterpoise of the negative effects accumulated in the process of the existence up tonow always existed.

These principles, according to the New School from Cambridge, can be classified as follows(14):

1. The principle of the human existence in a closed circle (until the conquest of the extra -terrestrial space). The nature itself exists within some closed cycles or circuits which we must knowbetter for learning another manner of living. From here results the consequence that we cannotappeal to resources from other planet, we cannot move to another place and we cannot get rid of the“derived products” of our existence, that is of the negative effects that we induce on theenvironment and which turn then against us as pervert effects;

2. The principle of man’s reintegration in nature. Acting on the nature, when he producesthe goods he needs, the human being has reached the state in which he must reintegrate in thenature he derived from and he always wanted to subjugate, forgetting he must be in harmony withit. Because the nature is offering more and more evident signs that the present models of the humanexistence cannot be sustained, we must mark their understanding and we must actively align ourexistence to the nature’s exigencies for giving a chance to the perpetuation of our existence;

3. Primum non nocere (firstly, do not harm the environment) . All the countries areconfronted with the problem of polluting the environment, but at different levels. At least untilnow, the most developed have been those which polluted the most, and the pollution, by the naturaland economic circuits, generalized. The under developed countries, although they have a smallercontribution to the pollution, suffer more because they don’t have the necessary resources to theactions of preventing and de -polluting. Romania is among the countries with serious problems inthis respect. But the pollution diminishes a lot the reproducible natural resources and it is a greatdanger for health which increases the expenses in this respect. According to some calculations, over60% of the population from our planet is affected by t he insufficiency of the medical cares;

4. Retention and growth of biomass, biodiversity and bio -productivity. The bio-state and thebio-productivity represent indicators of the human resources quality. Starting with protecting thesoil fertility and finishing with the preservation and the development of the ecologic systems, thereis a large spectrum of problems that need to be quickly solved, mostly in the countries underdevelopment, but not only there;

5. The permanent insurance of the resources. This principle imposes not only the rationalpreservation and utilization of the non -regenerative resources, but also the realization ofequilibrium between the rhythm of the exploitation of the other resources and the rhythm of theirregeneration. The best solut ion here seems to be the conceiving of the economic activities and theexistence of nature itself in a closed circuit of a circular active flux type. This supposes that all thatis taken from nature and at the actual state of knowledge is economic useful t o be utilized, and theuseful substance from the waste and from the used goods to be recycled. We must also have inview the removal of the dissipation, the fact that “in all the sectors of the economy, a considerablereduction of the consumption of natura l resources per product unity is, incontestably, possible andthat without involving a decrease of the life level (15). A lot of more efficient technologies of usingthe staple are already available but they must be applied and generalized, and others coul d bedeveloped by intensifying the research;


6. The principle of the economic, social and ecological efficiency. Conceived in a broadsense, the economic efficiency neglected the costs supported by the nature. Considering also theexpenses for renewing the nature, for protecting and developing the environment is very necessaryin order to redefine the concept of economic efficiency. We can call it economic, social andecological efficiency because to the economic interests are added those of the whole socie ty, andthe society cannot develop ignoring the natural environment. Interpreted on a large term, the actualproduction seems to be very big compared with the one obtained 100 years ago, let’s say, but itscontribution to raising the quality of life was se nsibly smaller than this increase, because thedifference represents expenses and productions destined to the reproduction of some naturalconditions freely offered by nature.

7. The societal existence is interactive with the environment. The theories of the growth and,moreover, the developed activities consider the natural environment as the space where the manmanifests economically in order to get hold of it, but about the man, “only good”; he is thesupreme, intangible value. How should we then act on the man and on the humankind in terms ofthe actual reality hasn’t become yet a very evident preoccupation, but it has become clear that in theeconomic activity, the fluxes must be bilateral, and that sloops towards the nature cannot be wasteor toxic products. This biangular relationship must be favorable for the environment, too. Within it,the man has to answer the environment exigencies for ensuring his perpetual existence.

8. The passing from the discretionary demographic growth to another one, based on theconscious responsibility of the man -woman couple and on the adequate implication of the society.A world in which 25% of population has severe problems with the alimentation and over 60% withhealth ensuring, where the pollution affects the agro -alimentary potential of the planet and thegenetic dowry of the new generations, and the resources seem to be more and more unequallydistributed and worst administrated, reveals the necessity of tackling the demographic growth onmore realistic basis, because the scientific progress allows not only the control over the births, butalso over the normal development of the young generations.

9. The principle of the social equity. It implies a continuation of the following of thedevelopment objective in a modern sense, respectively of reducing the disparities regarding theincomes. Moreover, we have in view the avoidance of discriminations and the assurance of theequality of the chances of assertion for all the members of the society. The durable developmentimposes a larger vision on the social equity by considering the rapports with the environment. Thesocial equity needs also an equal access to the environment actives, not only from a synchronicperspective, but also from a diachronic perspective.

10. Government accountability for the way in which, by the promoted policies, administrateand enhance the resources in order to ensure the new generations’ future, too. The principle isapplicable in the whole world and it is applied, but for Romania it is highly ne cessary, if we takeinto account the robbery made after 1990 and that continues to a greater extent. It is also necessarythe judicial settlement of this responsibility, because its absence offers freedom to the disaster. Thisprinciple is related to the war, the economy, the weaknesses manifested for those who plunder andfor the deplorable state of the society.

4. THE CHARACTERISTICS OF THE NEW ECONOMY

Each society had its economy and that was a new economy compared with the economybelonging to the old society. Anyway, what prefigures at present is totally different from what weexperienced so far. It’s a truism, but we must say it: the past is history, and the new society outlinesmore and more clearly its background coordinates. The new society is, ge nerically, from all pointsof view, a “post” society.

Which are the main features of the new society (16):1. The prevalence of the theoretical knowledge as a consequence of the quasi -general

computerizing of the social space


2. Under an institutional report, the organizations specialized in researching and formingthe human capital will ensure the legitimacy at an expert level for all the decisional instances

3. The economic basis of the whole production will be constituted by the production ofspecialized knowledge

4. The human resources will practically dominate, unlimitedly, for a pragmaticdevelopment of the centers of stimulation and motivation of the individual and collectiveintelligence

5. The politic will preserve the vocation and the prerogatives in conceiving a nd projectingthe economic and social action, but it will concentrate especially on the strategy of research and offorming the human capital

6. The dynamic equilibrium of the new society will be ensured by maintaining thestructural symmetry between the priv ate and the public system

7. The social stratification will have as natural source the types of professionalcomponents, generated by the diversification of the models of qualification and by the standards ofeach qualification

8. The exponential growth of the s ocial space diversity will bring to foreground theproblem of the social cohesion of the global social space

9. The resistance to bureaucracy and its incapacity of ensuring a corresponding level of theefficiency will orientate the historic movement towards a d-hocratism and towards the adverseculture

10. The organizational culture, specific to the industrialism, based on codes andinstitutionalizing of work and duties, will gradually surrender to the attitudes and the behaviorsmarked by materialist hedonism. In the new existential context, will prevail the “inter -relationallife”, the need to communicate, the need to plan the knowledge and to transform the social realityinto a conscience network (17).

The new economy based on knowledge, specific to the post -capitalist society, is defined bythe following features (18): the supremacy of non-corporal values, disintegration of the markets, themodification of the work character, the innovation is the key of the success, the return to the“reduced scale”, the disturbance of the organization, the integration of economic systems,computerizing of the business infrastructure, the acceleration of the rhythm of transactions and ofthe economic operations.

5. CONCLUSIONS

According to Peter Drucker, The New Information Rev olution, revolution that has alreadyaffected each person’s life, is about to change dramatically the organization and the management ofthe institutions of the following two/three decades; in the newly created context, the knowledgebecame accessible to all the wage earners, which turns this resource into the basis of the success forfuture businesses (18). In the emotional economy, the position and the importance of the wageearners are completely redefined; obvious, the future wage earners remain to a gr eat extent areflection of what happens in the “demographic area” of the society (19). As the robots and thecomputers become familiar presences in the daily life of the companies/institutions, three majortrends start manifesting (20):

- The decline of the young population from the total population- The decline of the production/industry in total GDP- Major structural changes in the labor force.We don’t know precisely how the future society will look like and we can only make

suppositions to this hypothesis; but it is absolutely sure that it will be totally different by the presentsociety. “To try predicting the future using of the informational market, Dertouzos says, is likeAlexander Graham Bell would have dreamed of that his invention would lead to… .”automatictelephone centrals, hotlines, faxes and mobiles for cars (21). Today, we find ourselves in a situationsomehow similar to the one in which was Bell a century ago; because we cannot anticipate in which


direction the computer and the IT will lead the society. In other words, if we refer to economy,management, or to other practical activity, today we can exclusively formulate speculationsregarding what will bring the future in the international relationships and the behavior of the futureorganizations.

The knowledge benefits from the information flux, from the production and its endlesscirculation and the knowledge thirst of the contemporary civilizations. We live in a period in whichthe intangible resources (the knowledge) are more and more im portant. The mere knowledge is notsufficient if it is not spread, if it doesn’t become a “good” for everybody. For a society to progress,all the knowledge must be socially verified. For this, the (tele)communications represent the meansby which the knowledge is realized and fructified, in every domain.

NOTES:

(1) It is noted that this statement is sometimes challenged. For example, Gordon (2001) claims that the NewEconomy is not a new industrial revolution (so no new paradigm).

(2) Fukuyama, F., - State Building Governance and World Order in teh 21st Century , 2004, Ed. Antet, 2004, p.127(3) Cooper, C., (editor) - The Blackwell Encyclopedia of Management , 2nd edition, vol. VII, Management

Information Systems, edited by G. B. Davis, Blackwell Publis hing, USA, 2005(4) Anderson, S., ş.a. - Business: The Ultimate Resource , Bloomsbury Publishing Plc, London, 2002(5) Neef, D., (coord.), - The Economic Impact of Knowledge, Butterworth-Heinemann, Boston, 1998(6) Houghton, J., Sheehan, P., - A Primer on Knowledge Economy(7) IT&C - Information and Communication Technology(8) Drucker, P., - Managing in the Next Society , St. Martin Press, 2002;(9) Koetler, P., - Managementul Marketingului, Ed. Teora, Capitolul 5, p. 174(10) Maciariello, J., - The Daily Drucker, Elsevier, Butterworth Heinemann, UK , 2005(11) Burciu, A.,ş.a., - Introducere în management , Editura Economică, Bucureşti, 2008, p.116(12) Toffler, A., Toffler, H., -– Revolutionary Wealth, 2006 ; Ed. ANTET, 2006(13) Burciu, A.,ş.a., - op. cit., p. 116(14) Our Common Future, Oxford University Press, 1987(15) Gabor, D., Colombo, V., King, A., Galli, R., - Să ieşim din epoca risipei , Ed. Politică, Bucureşti, 1983(16) Niculescu, N., - Economia bazată pe cunoaştere – Noua economie, revista Economie teoretică şi aplicată nr.

1/2006, p.49(17) Bell, D, - The Coming of Post-Industrial Society. Adventure in Social Forecasting , Basic Books Inc., New York,

1976, p. 197-199(18) Toffler, A. – Război şi anti-război, Ed. Antet, Bucureşti, 1995, pp. 72 -81(19) Drucker, P., - Management challenges for the 21th Century , Harper-Collins, 1999(20) Coffman, C., Molina, G., - – Follow this Path, Gallup Organization, Warner Books, USA, 2002(21) Drucker, P., - Managing in the Next Society , St. Martin Press, 2002; traducere Managementul viitorului, Ed.

ASAB, 2004(22) Dertouzos, M., - What Will Be: How the New World of Info rmation Will Change Our Lives ; Ed. Tehnică,

Bucureşti, 2000, p. 33

BIBLIOGRAPHY:

1. ANDERSON, S., ş.a. - Business: The Ultimate Resource , Bloomsbury Publishing Plc,London, 2002

2. BELL, D, - The Coming of Post-Industrial Society. Adventure in Social Forecasting , BasicBooks Inc., New York, 1976

3. BURCIU, A., - Introducere în management , Editura Economică, Bucureşti, 20084. COFFMAN, C., MOLINA, G., – Follow this Path, Gallup Organization, Warner Books,

USA, 20025. COOPER, C., (editor) – The Blackwell Encyclopedia of Management , 2nd edition, vol. VII,

Management Information Systems, edited by G. B. Davis, Blackwell Publishing, USA, 20056. DERTOUZOS, M., – What Will Be: How the New World of Information Will Change Our

Lives; traducere în limba română Ce va fi: Cum vom trăi în Lumea Nouă a Informaţiei ,Editura Tehnică, Bucureşti, 2000

7. DRUCKER, P., – Management challenges for the 21th Century , Harper-Collins, 1999


8. DRUCKER, P., – Managing the Non-Profit Organization, Harper – Collins, New York,1990; The Pension Fund Revolution , Harper & Row Publishers, 1976 ; The New Society,Harper & Row Publishers, 1950

9. DRUCKER, P.– Managing in the Next Society , St. Martin Press, 2002; traducereManagementul viitorului, Editura ASAB, 2004

10. FUKUYAMA, F., - State Building Governance and World Order in teh 21st Century , 2004,traducere în limba română Construcţia statelor – Ordinea mondială în secolul XXI , EdituraAntet, 2004

11. GABOR, D., COLOMBO, V., KING, A., GALLI, R., - Să ieşim din epoca risipei , EdituraPolitică, Bucureşti, 1983

12. HOUGHTON, J., SHEEHAN, P., - A Primer on Knowledge Economy, CSES WorkingPaper No.18, Melbourne, 9-11 February 2000

13. KOETLER, P., – Managementul Marketingului – Ed. Teora, Bucureşti, 200814. MACIARIELLO, J., – The Daily Drucker, Elsevier, Butterworth Heinemann, UK, 200515. NEEF, D., (coord.), - The Economic Impact of Knowledge, Butterworth-Heinemann,

Boston, 199816. NICULESCU, N., - Economia bazată pe cunoaştere – Noua economie, revista Economie

teoretica si aplicata nr. 1/200617. TOFFLER, A. - Război şi anti-război, Ed. Antet, Bucureşti, 199518. TOFFLER, A., Toffler, H., – Revolutionary Wealth, 2006 ; traducere Avuţia în mişcare,

Editura ANTET, 200619. *** Our Common Future, Oxford University Press, 1987


SECTION 3

ACCOUNTING - FINANCES


EVALUATION AND RECOGNITION OF INTANGIBLE FIXED ASSETS INACCORDANCE WITH NATIONAL AND INTERNATIONAL FINANCIAL REPORTING

STANDARDS IAS / IFRS

Professor PhD. Dorel MATESWest University of Timisoara , Romania

[email protected] PhD.Elena HLACIUC

“Stefan cel Mare” University of Suceava, [email protected]

University Assistant PhD. Student Marian SOCOLIUC“Stefan cel Mare” University, Suceava, Romania

[email protected]

AbstractIn a post-industrial economy based on knowledge, the value of business does not given only by physical

production capacities, but also by other intangible components such as : trademarks, know-how, patents, technicaldrawings, etc. Many companies may be very valuable because of the control held on these intangible assets and notbecause of some tangible assets. It is especially the case of companies in areas that matter greatly the mark on whichthe property is sold and not necessarily the sold property.

This truth of knowledge economy led to developments also in the accounting area regarding accounting forintangible assets. Intangible assets are classified as fixed assets ( with long life). Accounting of intangible items, namelythe recognition and evaluation, it is far from uniform, but takes different forms depending on the Accounting frame towhich the entity reports and that presents the annual financial statements.

Further, this article deals with intangible assets from two perspective s: a line with International AccountingReference (International Financial Reporting Standards -IFRS), and the second line with the reporting framework inRomania (Order of Minister of Public Finance no. 1752 / 2005, published in Official Gazette no. 1080 b is) complieswith European Directives (Directive IV of the European Economic Community – CEE and Directive VII of CEE).

Keywords: evaluation, recognition, IAS/IFRS, intangible asset, European directive

JEL Classification: M 43

INTRODUCTION

The aim of this work was the very difficulties of recognition and evaluation of intangibleassets in the financial statements of a company.

The motivation of research consisted in elucidating these issues ve ry difficult for those thatprepared the balance sheet in accordance with IAS / IFRS, due to the fact that these assets havestarted to become an increasingly im portant element in companies heritage.

Intangible assets are handled by the International Accounting Standard (IAS) 38 - Intangibleassets.

The objective of this standard is to define the criteria for recognition and evaluation ofintangible fixed assets dealt with in other standards. [3]International Accounting Standard 38 applies to all intangible assets, except: [5]

- Financial assets, as defined b y the International Accounting Standard 32 - FinancialInstruments: Presentation and by the International Accounting Standard 39 Financial Instruments:Recognition and Measurement ;

- Exploration assets and expenditures for capitalization and extraction of resources(minerals, oil, natural gas and other similar non-regenerating resources) - International FinancialReporting Standards 6 - Exploration and evaluation of mineral resources ;

- Intangible assets owned by an entity to be sold in the normal pattern of activity, when theentity will apply the International Accounting Standard 2 - Inventories, or International AccountingStandard 11 - Construction contracts;

- Intangible subject to a leasing contract that make the applicability of Internat ionalAccounting Standard 17 - Leasing contracts;

[email protected]

[email protected]

[email protected]


- Goodwill acquired in a business combination as it is treated by the International FinancialReporting Standards 3 - Combining enterprise; [1] – [2]

- Intangible assets held to be transferred, as handled by Internat ional Financial ReportingStandards - Fixed assets held for sale and discontinued activities;

- Other intangible assets which fall within the scope of the other standard than those shownabove.

THE DEFINITION OF INTANGIBLE ASSETS

An intangible asset is an identifiable non-monetary fixed assets, lacking physical substance.The definition of intangible asset is based on two essential elements: the identifiable character anddefining elements of an active (resource control, the ability to generate future e conomic benefitsand credible assessment of the cost of the asset). [4]

THE IDENTIFIABLE CHARACTER

An intangible asset should be identifiable to be separate from goodwill. InternationalAccounting Standard 38 sets out the conditions under which intangib le assets is identifiable: [7]

- The asset is separable, ie it can be individual and separated by the entity and sold,transferred, patented, rented or exchanged, either individually or together with a contract, an assetor related debt;

- Resulting from contractual rights or other rights guaranteed by law.

RESOURCE CONTROL

A resource is controlled by the entity, if it has the ability to obtain future economic benefitsfrom resource, and also whether he has " the power" to restrict access of other entities to suchbenefits.

Its ability of entity to control the future economic benefits of a tangible fixed asset shouldnot be regarded as a capacity under the legal rights , such as right of ownership for example.However, in most cases are the legal rights that give control over the resource. There is, however,other ways by which one entity can control the economic benefits derived from a resource. [14]

RESOURCE CAPACITY TO ACHIEVE FUTURE ECONOMIC BENEFITS

An entity obtains economic benefits from a tangible asset by achievement of income, or byreducing costs resulting from the use of intangible assets.

Examples of intangible assets

Among the most common examples of intangible assets are : patents, software, copyrights,filming movies, Trademarks and Trade, formulas, technology processes, customers, relations withcustomers and suppliers, franchising, import quotas, market share and marketing rights, the rightsof mortgage services.

These elements, in order to be recognized as intangible assets must me et the criteria laiddown in the definition of fixed intangible assets: identifiable character, control resources andcredible estimate of the cost.

Are not intangible assets under IAS 38: expenses of formation, restructuring andrestructuring costs, goodwill generated internally in the enterprise.


DEMARCATIONS REGARDING INTANGIBLE ASSETS

Sometimes the intangible assets should be kept on a physical support (material). Todetermine whether such an asset should be treated as a tangible fixed asset in accordance with IAS16 – Tangible assets or as an active intangible restrained in accordance with IAS 38 - Intangibleassets, the entity should appeal to professional reasoning to determine that element is moresignificant. For example, operating system of a computer makes the body with the computer andthen the software is treated as a tangible asset.

In other cases where the software is not an integral part of the hardware in question, thenmust be classified as intangible assets.

On the other hand there a re also situations, such as costs of development (development ofprototypes), where all these activities , although are completed in an asset with physical substance,the material element is insignificant in relation to the immaterial component (ie with all theknowledge embedded in realisation of this prototype).

NATIONAL APPROACH ACCORDING WITH DIRECTIVE IV OF EUROPEANECONOMIC COMMUNITY

Accounting treatment of intangible items is regulated by the Order of Minister of PublicFinance no. 1752 / 2005 for the aprovement of accounting regulations with European directives, asamended and supplemented by OMEF no .2374 / 2007. During the work any reference to the Orderof Minister of Public Finance no. 1752 / 2 005 will be made by the phrase " nationalregulations”.[13]

National accounting rules define intangible assets as identifiable assets, non-monetary,without material support and held for use in the production process or supply of goods or services ,to be rented to third parties or for administrative purposes .

RECOGNITION AND EVALUATION OF INTANGIBLE ASSETS, GENERALPRINCIPLES

A. INTERNATIONAL APPROACH

International Accounting Standard 38 requires t wo preconditions to quantify one intangibleassets:

- The likelihood that the entity obtains future economic benefits from the use of intangibleassets;

- The possibility to evaluate a credible cost intangible asset.An intangible assets is charged:

- As a result of a separate procurement;- As a result of production in the entity (internally generated);- As a result of government subsidies;- As a result of the exchange of intangible assets;- As a result of combining enterprise.

B. NATIONAL APPROACH

National ragulations states that an "intangible assets should be recognized in the balance ifstock is expected to generate economic benefits for the entity and the cost of assets can be crediblyassessed."[9]

Form the category of intangible are part concessions also. They will be recognized as fixedassets only if the concession contract provides for a term an d a value determined for the concession.


If the contract provides the payment of rent, the entity will recognize in accounting the charge rentand not intangible assets.[10]

Unlike IAS 38, national regulations allow restraint (enabling) the costs of incorp oration.These are costs incurred by the entity during the formation or modification of the constituitve act,being represented by taxes and registration expenses, costs for issuing shares, expenses prospectingthe market and advertising expenses related t o expanding its business and other expenses of asimilar nature .[12]

INITIAL ASSESSMENT OF INTANGIBLE ASSETS

According to international reference (IFRS) intangible assets are measured initially at cost.Cost is determined differently, depending on the way of entry within the entity: separate purchase,internally generated, as a result of exchange of tangible assets, obtained through governmentsubsidy or the combination of enterprises. [6]

Below is shown schematically the composition of the cost of inta ngible assets depending theentry into the enterprise.

INTANGIBLE ASSETSSeparate

acquisitionInternallygenerated

Exchange ofassets

Governmentsubsidy

Acquisition aspart of a

combination ofenterprise

Acquisition cost= acquisition

price + any othercost directattributable

Production cost =direct production

cost

Just value 1.Just value2.Nominal value(IAS 20) + any

attributable directcosts

Just value at thedate of

acquisition

Under national regulations, an intangible assets at beginning is counted as:• acquisition cost, for assets purchased for consideration• manufacturing cost, for products produced in the entity• amount of intake, for goods that contributed to the capital• at fair value, for assets obtained free

SEPARATE PURCHASE OF A INTANGIBLE ASSET

A. INTERNATIONAL APPROACH

Purchase price is cash or cash equivalents paid or payable for the purchase of intangibleassets, including taxes and excise duties and not returnable, after deducting trading price reductions.Directly attributable costs include: [11]

- Employee benefits costs directly related by bringing restraint in its working condition;- Directly attributable professional fees;- The costs of testing operation of intangible restraint.

Non-cost in acquisition costs:- The costs of launching and promoting the product on the market;- Costs for the transfer of a business in a different location than the original;- Administrative costs and other general manageemnt expenses;- Initial operating losses.


Example:Company "X" acquires software for managing the production process by the amount of

10,000 Euros. Becouse the company "X" is a faithful client of the company producing the softwarehas received a price reduction of 5%. Fees paid to lawyers for proce ssing the transaction is 1,000Euro, and administration expenses related to this purchase is 100 Euros.

Acquisition cost = Acquisition price + Direct attributable costs

Determination of acquisition costs:- acquisition price = 10.000 EURO- commercial reduction (10.000 x 5 % ) = (500) EURO- costs with lawyers fees = 1.000 EURO

Acquisition cost = 10.500 EURO

Administrative costs are not directly attributable costs and will not be included in the acquisitoncost of intangible restraint.

B. NATIONAL APPROACH

Property, entered the entity for consideration shall be accounted at acquisition cost.Acquisition cost includes the purchase price adjusted for commercial discounts provided by thesupplier (if any), import duties and other taxes (except those which the entity may recover from thetax authorities), the transport expences, installation and other expenses which can be directlyattributable to the acquisition of intangible assets in question.

Another possibility for entry into a unit of intangible assets is bringing their contribution tothe capital. In this case given intangible assets are valued by theyr contribution .National regulations allow activation of constitution expenses. The entity can record in its active allthe expenses paid or incurred in connection with the formation of society. If the entity decides toasses the constitution expenses, they will be recorded at initially cost.

EXAMPLE:

A group of people are willing to form a company with limited liability (LLC) which willhave as object of trade dairy products. For the constitution were made the following costs:

- Study on the potential market for consumption in the region amounting to Euro 5000;- Reservation of company name in the amount of EUR 100;- Attorney fees for the preparation of the constitutive act in the amount of Euro 800 ;- Fee auditor to assess the reliability of business amounting to Euro 1000;- Notary fees and registration fees amounting to E uro 500;- Purchase a laptop in order to contribute to the capital amounting to Euro 2000.

The company decided to asses costs up. Expenditure for the estab lishment recorded in theassets of the company are in the amount of Euro 7400. The laptop will be registered as a tangibleasset.

According to national regulations will be recognized in the balance sheet as intangible assetsand advances granted to purchase the assets of intangible nature.

CONCLUSIONS

As can be seen in the definition of intangible asset given by national regulations isintroduced the character of identifiable assets, but without making further details on thecharacteristics of identification.


Compared to the definition given by international reference IAS 38, national norm includesin definition of intangible asset and the purpose for which are held by the entity.Examples of assets that are included in the intangible assets: costs of establishing; costs ofdevelopment; concessions, patents, licenses, trademarks, rights and similar assets, except thosecreated internal by the entity ; goodwill ; intangible assets running ;other fixed assets ; advancesgiven for the purchase of intangible assets.

BIBLIOGRAPHY

1. Andrei Paolo, Azzali Stefano e al, Il Bilancio consolidato , Il Sole 24 Ore, Milano, 20062. Azzali S., II bilancio consolidato secondo i principi contabili internazionali. Problemi

applicativi, soluzioni operative e potenzialità info rmative, Editore Economia e Management,Milano, 2002

3. Azzali S., L’informativa di bilancio secondo i principi contabili nazionali e internazionali , G.Giappichelli Editore, Torino, 2005

4. Bostan Ionel, „Conceptual Approaches Regarding the Financial Statements ”, InternationalConference on "Trends of economic development in the context of EU integration", TheScientific Bulletin of Bukovyna State Finance Academy: Economic Sciences , The ScientificDepartment of Bukovyna State Finance Academy (BSFA), Shtern str., Chernivtsi, 58000,Ukraine, November 7, 2008, in Social Science Research Network (SSRN),

5. Bostan Ionel, Hlaciuc Elena, Andronic Bogdan, Borş Lucian , The Financial-EconomicCommunication At International Level , International scientific symposium ”Durableagriculture in the context of environmental changes ”, 16 - 18 October, Iasi, 2008

6. Danton O., Didelot L., Maîtriser les IFRS, Ed. Group Revue Fiduciare, Paris, 20057. Esnault B., Hoarau C., Comptabilité financière , Editura Quadrige/Puf, Paris, 20058. Feleaga Nicolae, Malciu Liliana, Politici si optiuni contabile , Editura Economica, Bucuresti,

20079. Hlaciuc Elena, Dorel Mates e al., Normalizarea informatiei contabile in Romania , Editura

Cartier, Chisinau, 200810. Hlaciuc Elena, Mihalciuc Camelia Cătălina, Organizarea contabilităţii financiare a entităţilor

economice. Abordări teoretice şi applicative conforme cu prevederile OMFP 2374/2007 şiStandardele Internaţionale de Contabilitate, Editura Didactică şi Pedagogi că, Bucureşti, 2008.

11. Hlaciuc Elena , Camelia Mihalciuc, Normalizarea sistemului contabil pe plan naţional şiinternaţional, The third International Scientific Conference Eco – Trend 2006, Economicsand Globalization, „Constantin Brâncuşi” University o f Târgu Jiu, Universitaria PublishingHouse, Craiova, 2007

12. Mates Dorel, Grosu Veronica –Impactul Standardelor Intenaţionale de Raportare finanaciarăasupra evoluţiei Sistemului Contabil din Romania -Rivista Economie Teoretică şi Aplicată/Teoretical and Applied Economics, vol. 3, Bucuresti , 2008

13. Mates Dorel, Veronica Grosu - Comparative Study Romania -Italia concerning theImplementation of IAS/IFRS , International Scientific Conference -„European Integration –NewCallenges for the Romania Economy”, 4th Editio n Oradea, May 30-31, Oradea, 2008

14. Nedelea Alexandru, Veronica Grosu, The financial economical information - source ofcommunicational development level, Revue Economic Orientations in European IntegrationProcess, Editura Publishing House, Chernivtsi, 2008


MODELS FOR THE ASSESSMENT OF THE ENTREPRISE BANKRUPTY RISK INCRISIS SITUATIONS

Professor PhD. Silvia Melania PETRESCU„Al. I. Cuza” University of Iaşi, Romania

[email protected] PhD. Camelia Cătălina MIHALCIUC

„Ştefan cel Mare” University of Suceava, [email protected]

Abstract:The complex nature of the aspects involved by bankruptcy risk also explains the diversity of the diagnosis and

analysis models, of which we mention: the liquidity - chargeability analysis, the functional analysis, the rate analysis,the financial flow analysis, etc, therefore, bankruptcy risk analysis can be developed in a static manner, using theanalysis of the balance sheet financial balances, or in a dynamic manner, using the analysis of the flows depicted in thefinancing chart.

Based on specialty literature, this paper will outline the national and international contributions in the field ofdiscriminatory analysis and bankruptcy prediction, also known as the so -called score functions.

Several researchers and financial organisations have been concerned with developing a bankruptcy riskprediction method, starting from a small group of rates, closely linked to the he alth or vulnerability of the enterprise.The procedure used is the statistic technique of discriminatory analysis of the financial features (calculated using rates)of the normal functioning enterprises and of those experiencing difficulties in their econo mic and financialmanagement. Most bankruptcy risk analysis methods are based on the score function which helps determine if anenterprise will go bankrupt or will have irrelevant economic results during a period immediately following the analysis(two years max).

Thus, this paper introduces the main scoring methods for estimating bankruptcy risk, also underlining themain analysis schools, the Anglo -Saxon and the continental school respectively, and also outlining the nationaldevelopment in the field, the contributions of the Romanian school of economic -financial analysis.

Keywords: bankruptcy risk, discriminatory analysis and bankruptcy prediction, score functions, solvability,models for the assessment of the enterprise bankruptcy


INTRODUCTION

Bankruptcy risk is related to the difficult state of the enterprise, considered as a permanentfinancial crisis situation. From a juridical viewpoint, an enterprise is in difficulty when it is in anarrested payment situation, no longe r being able to meet the due debts and, in this case, the lawstipulates the reorganisation or dissolution of the enterprise.

Bankruptcy risk can be estimated in the static and dynamic analysis of the financial balancethat outlines the former performanc e of the enterprise, but a global evaluation of its future becomesall the more interesting for the management of the enterprise and especially for its business partners(banks, clients, capital investors, etc). As a consequence of the rapid degradation in time of theresults of the enterprise, there is a more obvious need to develop certain bankruptcy risk predictionmodels.

The impossibility of an enterprise to honour its due debts, leads to the insolvency risk andconsequently to bankruptcy risk. The presence of certain permanent difficulties in honouring itsdebts can lead to a reduction of the activity, dismissal of employees, organisational restructuringand, eventually, bankruptcy.

Bankruptcy risk is related to the difficult state of the enterpri se, considered as a permanentfinancial crisis situation. From a juridical viewpoint, an enterprise is in difficulty when it is in anarrested payment situation, no longer being able to meet the due debts and, in this case, the lawstipulates the reorganisation or dissolution of the enterprise.

The analysis of the causes that have determined the bankruptcy of certain enterprises hasrevealed their diversity and has, at the same time, fuelled the idea that bankruptcy is not a sudden

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phenomenon caused by conjuncture, but is determined by the progressive degradation of thefinancial situation and of the health of the enterprise. But there are examples of bankru ptcy causedby external shocks, for example the petrol crisis in the 70’s and after that the raw mate rials andenergy crisis or the loss of exclusive markets because of the severed economic and diploma ticrelations between countries and also the current economic crisis caused by the difficulties ofbanking system. So far it has been demonstrated that most cases of bankruptcy are caused by errorsin the internal management of the material and financial resources of the enterprise

Bankruptcy risk is closely connected to the solvency state and especially to the paymentability state which reflects the possib ility that the enterprise may not pay its due debts in time.

A rise in the number of bankruptcy cases in competing economies has rushed publicauthorities and financial analysts to find prediction methods for bankruptcy risk in order to assist inthe recovery of enterprises in difficulty.

In the economic life of an enterprise there may be moments of regress and even failure,moments that can lead to financial supervision, reorganisation, restructuring and, eventually, todissolution.

CAUSES OF BANKRUPTY RISK

The analysis of bankruptcy cases tends to emphasize the role of two large categories ofgenerating factors such as factors related to the weakness and internal errors and economicenvironment factors, both categories having a convergent effect in t he degradation process.Therefore, an enterprise whose organisational and management system has severe weaknesses willalso have difficulties in adapting to the unfavourable evolutions of the environment.

The causes of bankruptcy are numerous and are dire cted at a reduction of the activity, areduction of the margins and profitableness rates, treasury problems, management problems, as wellas accidental causes related to the bankruptcy of certain clients, a reduction of the outlets, chainlock-ups, etc.

The specialty literature mentions several methods and instruments that allow theidentification of causes and the approach of the different shapes taken by bankruptcy risk.

Bankruptcy risk is determined by several causes:a) External causes: loss or bankruptcy of an important client; bankruptcy of a key supplier;bankruptcy of the bank where the enterprise has its main account; aggressive policy of thecompetition that leads to the removal of the enterprise from the market; failure to keep up with thetechnological change, leading to less competitive products and market removal; not taking intoaccount certain provisions of environmental protectio n issued in time, etc.b) Internal causes: inappropriate management in the investment policy, leading to productio ncapacities whose product undergoes several updates as a result of a change in consumerpreferences; operating low productivity machinery and equipment that overcharges the productionquality management; repeated losses in the operating activity; inappropriate indebtedness policyduring unstable economic periods; the deterioration of the rotation of circulating assets; erroneouspolicy in the field of commercial credit.

The study of bankruptcy causes has lead to the conclusion that it is not a brutal phen omenondue to conjectural fluctuations but a result of a progressive degradation of the financial situation ofthe enterprise as insolvency risk can be predicted a few years before stopping payments.

MODELS OF ESTIMATING BANKRUPTY RISK

Several studies have been conducted, especially in the United States and France, in order toanalyse and classify enterprises according to their degree of difficulty, based on statistical surveys,with samples of enterprises in difficulty, thus establishing highly predict ive indices.


The studies developed in France and the US have shown that in order to predict thebankruptcy of an enterprise, accounting methods can be used (quantitative and analytical methods –used in comparative analyses to estimate the future evolutio n of the company) and banking methods(that suggest an early detection of vulnerability and bankruptcy risk by means of synthetic risknotes resulted from statistical methods of discriminatory analysis, allowing the calculation of ascore function).

The calculation of the score function requires the prior awareness of certain rates that helpdetermine the bankruptcy risk of an enterprise and the early protection by correcting measures. Anote (Z), called score, is given for the enterprise, representing a l inear combination of rates and,varying with the value of the score, enterprises are classified as vulnerable, bankrupt and healthy.

Most score functions used to determine the probable bankruptcy state of the enterprise, haveused as statistical technique the discriminatory analysis, the latter being highly recommended ,especially when we want to extract from the multitude of calculated financial indices, the ones thatmost clearly explain the bankruptcy risk of an enterprise.

Several researchers and financial organisations have been keen on developing a method ofpredicting bankruptcy risk, starting from a small group of rates, linked to the health or vulnerabilityof the enterprise. The procedure used is the statistic technique of discriminatory analys is of thefinancial features (calculated using rates) of the normal functioning enterprises and of thoseexperiencing difficulties in their economic and financial management. Most bankruptcy riskanalysis methods are based on the score function which helps determine if an enterprise will gobankrupt or will have irrelevant economic results during a period immediately following theanalysis (two years max).

The main scoring methods for estimating bankruptcy risk was established, as well asanalysis schools of the Anglo-Saxon and the continental school respectively, and also outlining thenational development in the field, the contributions of the Romanian school of economic -financialanalysis (Table no. 1.).

Tabel no. 1. International and national models of estimating bankrupty riskNo. crt. Anglo – saxon schools Continental school Romanian school

1. Model Credit – men orSecurity – analysis;

Model Yves Collongues (1976); Model Mânecuţă and Nicolae(1996);

2. Model unidimensional W.H.Beaver;

Model Conan Holder (1979); Model Cămăşoiu - Negoiescu

3. Model E. Altman; Model’s Balances of the CentralBank of France;

Model B – Băileşteanu (1998);

4. Model Edmister (1972); Model of French trade credit (CCF);

Model I – Ivonciu (1998);

5. Model Diamond (1976); Model accountants agree (CA Score1987);

Model I. Anghel (2000);

6. Model probabilistic of Deakin(1977);

Model Scor Function AFDCC 2(1999).

Model of Romanian trade Bank

7. Model Sprinkate (1978);

8. Model Koh and Killough(1980);

9. Model Ohlson (1982);

10. Model Zavgren (1983);

11. Modelul Fulmer ( 1984);

12. Model Koh ( 1992);

13. Model Shirata ( 1999).


We’ll continue with a detailed account of the most used and well -known prediction models forbankruptcy risk.

MODELS OF ANGLO-SAXON SCHOOL

The first research on bankruptcy risk analysis has been developed in the USA in the 30’.The method was called „credit - men” and it aimed at making assessments on the financial situationof an enterprise by means of a synthetic note, t hus establishing the position of an enterprise ascompared to that of a typical enterprise in the same industry. The method has long been abandoned,as it used arbitrary chosen ratios and introduced a financial structure as an ideal structure,something which is not possible even today, despite all the progress of the financial theory. Thepurpose of this model was to study risk in credit granting, including an extension of risk analysis byincluding certain variables linked o the human factor and the globa l economic environment.

The subsequent prediction models are based on the discriminatory analysis which was usedfor studying the evolution of several enterprises in the field, divided into two categories: with agood and with a difficult financial situat ion, on a long period and using different rates. The ratesconsidered as significant have been attached to ratios that reflected their influence on the financialsituation of the enterprise and, by combining them, came out the score, the Z function, as a l inerfunction of several variables, thus:

(1)

where:a1, a2…. an – medium weighing ratios (positive or negative in order to assess the favourable orunfavourable impact on the financial situation);R1, R2…. Rn – rates (or financial structure, dyna mism, management profitableness), taken intoaccount;b - constant (just in case).

The score thus established divides the enterprises in the two categories (healthy andvulnerable), sometimes even into intermediate categories.

The Altman Model (USA, 1968)The development and conclusions of the model are based on the examination of 66

enterprises for a period of 20 years (1946 -1965), of which 35 enterprises have gone bankrupt duringthe specified interval, with data referring to a year before the bankruptcy.

These enterprises are compared to an equal number of healthy enterprises, randomly chosenand considering the existing heterogeneity in terms of size and industry corresponding to enterprisesin difficulty. The examination in evolution has b een conducted for 22 financial indices (financialrates), calculated based on the accounting data. Of these indices, only 5 have been considered assignificant while the aggregated index took the following form:where:

R1= FRN/ Total asset;(2)R2= Reserves/ Total asset ;(3)R3= Gross profit/ Toatal asset ;(4)R4= Stock exchange capitalization ( equity capital)/ Total debts;(5)R5= .Turnover(CA)/ Tatal asset .(6)

Z = a1 x R1 + a2 x R2 +….+ Rn +b


As rates that measure the weight of the total asset from equity capital and medium and longterm debts, or the asset profitableness, or the financial autonomy and the rotation of the asset,whose positive significance means as high a value as possible, it comes out that the Z score mustalso have as high a value as possible.

The analysis of the financial situation based on this model is conducted as follows:- when Z ≤ 1,8, imminent bankruptcy situation;- when 1,8 < Z ≤ 3, the financial situation is difficult, with diminished performance and

the lower the points, the closer is the enterprise to bankruptcy. The improvement of thesituation is possible by applying the right strategy;

- when Z > 3, good financial situation, solvent enterprise.The Altman model can be applied to enterprises quoted on the stock exc hange in countries

where the stock exchange has a balanced functioning, i.e. the exchange rate is mainly based on therelation demand/supply.

MODELES OF CONTINENTAL SCHOOL

The Conan and Holder model (France, 1979)This study has been conducted by C.E. R.E.G. ( Centre de Recherche de l’Universit ẻ de Paris

– Dauphine) in view of analysing the degradation of the financial situation of small and mediumsized enterprises and the model has the advantage of simple calculations, a reason why it is stillbeing used today.

The formula and the conclusions of the model are based on the analysis of 31 rates, for 190small and medium sized enterprises of different industries: industry, commerce, services, transport.Of the 190 selected enterprises for the period 1970 -1975, 95 enterprises were bankrupt and another95 were healthy but whose size and activity was similar to those of bankrupt enterprises. Modelsspecific to the sectors of activity have been developed, thus 5 rates have been retained and thefunction had the following form:

(7)

R1= EBE/ Total debts;(8)R2= Permanent capital/ Total asset;(9)R3= Circulating assets (stocks)/ Total asset;(10)R4= Financial expenses/(credit cost)/ Turnover(CA);(11)R5= Personal expenses/ Value added (VA);(12)

The model shows that the first three rates have a positive impact, the higher their value, onthe financial situation, while the last two represent, by growth, a degradation of the financialsituation, R4, the weight of the financial expenses in the turnover, with a significant negative value,illustrated by the high negative value of the ratio.

The enterprise is considered at risk, varying with the score value, as follows (Table no 2):

Z =0,24 x R1 + 0,22 x R2 + 0,16 x R3 - 0,87 x R4 - 0,10 x R5


Table no. 2 Types of enterprises depending on the score valueScore value Situation of the enterprise Bankruptcy riskZ > 0,16 Very good Lower than 10%0,10 < Z <0,16 Good From 10% - 30%0,04 < Z <0,10 Alert From 30% – 65%-0,15 < Z <0,04 Danger From 65% – 90%Z < - 0,05 Failure Higher than 90%

The contribution of this function can be found in the decision making rule as the probabilityof error in classifying an enterprise is higher if the value taken into consideration in the calculationof the function for this enterprise is closer to the decision threshold.

The Conan-Holder model usually generates important results in predicting the short -termevolution of trading companies. Such a model is accurate only where the bankruptcy rule operates,when the hidden subsidies are cancelled, commercial credit is well managed and where statistics areadequate.

The CBBF Model (The Balance Sheet Central Office of the Bank of France, 1984)The model has been developed by observing a number of 26 rates, on a sample of 3000

industrial enterprises, with less than 500 employees, classified as normal and scanty, for an intervalof 3 years, prior to bankruptcy (1975 -1980).For an increased accuracy of the model, three categories of enterprises have been established usingthis model: bankrupt enterprises; normal enterprises, vulnerable enterprises.

The model predicts bankruptcy risk for a time span of 3 years with 8 rates (variables) whosecombination in the score function takes the following form:

(13)

where:R1= Financial expenses/ EBE;(14)R2= Permanent capital/ Invested capital;(15)R3= CAF/ Total debts;(16)R4= EBE/CA;(17)R5= (Suppliers*360)/Supply;(18)R6= (VA1-VA0)/VA0;(19)R7= ((Spn-Acl+Cl)*360)/ PEc;(20)R8= Corporal investment/ VA(added value).(21)

where:Spn – unfinished production stocks;Acl – advance payment clients;Cl – clients;PEc – corrected exercise production: [PV ± SPS + ½ (Pl + SE)];(22)PV – sold production;SPS – the inventory balance;

100 x Z = - 1,255 x R1 + 2,003 x R2 - 0,824 x R3 + 5,221 x R4 - 0,689 x R5 -1,164 x R6 + 0,706 x R7 + 1,408 x R8 – 85,544


PI – immobilised production;SE – operating subsidies.These rates concern: the covering of the invested capital; the reimbursement capacity; the

gross operating margin; the suppliers credit interval ( in days); the variation rate of the added value;clients payment interval ( in days); the physical investment rate.

The weight of the average rate for the enterprises with the ration determined in the model,for the sample taken into consideration, determines a value of the function Z = 0.

There is an uncertainty shadow around this average value of the score, as it is difficult topredict whether the enterprise is normal or scanty and the bankruptcy risk possibility amounts to50%. The situation of the enterprises in relation to the score v alue and bankruptcy possibiliti es arepresented in Table no. 3.

Table no 3. The situation of the enterprises in relation to the score value and bankruptcypossibilities

Score value Bankruptcy riskZ <-1,875-0,875 ≤ Z < -0,875-0,875 ≤ Z < -0,250

100,095,6 unfavourable area73,8

-0,250 ≤ Z <0,125 46,9 uncertainty area0,125 ≤ Z <0,6250,625 ≤ Z <1,250Z ≥ 1,250

33,417,7 favourable area9,5

The method of the proper scores has the adva ntage of objectively testing the most efficientrate combinations in order to predict enterprise bankruptcy risk. The research that has lead todiscriminatory functions determined the progress in analysing the behaviour of risky enterprises andthe scores have proved to be extremely helpful in detecting risk, providing they are not used in avery mechanical way.

Important contributions of the scoring methods can be noticed for the financial analysis:- they introduce a synthetic approach of the situation, b oth in a predicting perspective

(referring to the prediction or detection of difficulties), and in a retrospective perspective;- they allow an efficient estimation of bankruptcy risk by the external partners and especially

by financing institutions;- they allow the testing of the most efficient rates and rate combinations for predicting the

difficulties of the enterprises;- they contribute to solving the difficulties created by the multitude of financial balance

indices;- they provide a synthesis of the financi al information relative for the enterprise, but they

cannot direct at the origin of the difficulties experienced by the enterprise.There have been attempts to develop discriminatory analysis models in our country,

although they have been slightly shifte d from the international development.

MODELS CONCERNING ROUMANIAN CONTRIBUTION SCHOOL

The MÂNECUŢĂ and NICOLAE model (1996) (specialists in the National PrognosisCommittee)

This model, suggested for the metallurgic industry is based on a solving matrix, necessaryfor developing a score function by means of the empirical Pearson ratio for choosing thediscriminatory financial rates.

The structure of the variables in the model is as follows: the financial expenses rate; the rateof covering the invested capital; the rate of debt reimbursement capacity; the rate of the grossoperating margin; the average duration of the supplying credit; the global indebtedness rate; the


commercial claim rate; the physical investment rate; the average duration of the client credit; theinfluence of the need for working capital; the stock rate.

This model has used the matrix calculation, considering the number of enterprises in thesample (59) and the number of variables (14), as the matrix solved has 59 rows and 14 columns.Thus, the Z function takes the following form:

Z = - 0,02395 R1 – 0,54604 R2 + 0,01263 R3 + 0,33901 R4 + 0,04745 R5 +0, 01752 R6 + 0,02194 R7 + 0,71249 R8 – 0,15459 R9 – 0,09855 r10 +(23)0,02751 R11 – 0,48437 R12 – 0,08536 R 13 + 0,03609 R14The decision rule of the score function established by the authors is:

- Z > 1,56 results in enterprises without any financial difficulties;- Z< - 1,56 results in scanty enterprises.

The I. IVONCIU model (1998)A similar development to the one presented above has been developed by Ivonciu (1998),

and the author used a set of 6 financial rates. The Ivonciu model considers the following financialrates (Table no 5):

Table no. 5 The financial rates of Ivonciu modelIndicator Symbol Value Value

Min Max

1. Asset rotation speed R1 1,00 4,00

2. Income profitableness R2 0,07 0,25

3. Claims rotation R3 6,00 36,00

4. Debt reimbursement capacity R4 0,10 1,50

5. Quick liquidity R5 0,50 1,25

6. Financial steadiness margin R6 0,00 0,25

The function introduced is:I = 0,333 r1 + 5,555 R2 + 0,0333 R3 + 0,714229 R4 + 1,333 R5 + 4,0 R6 – 1,66032(24)The values of the I function are:

- a maximum value equal to 6;- a minimum value equal to -1,66032.

Thus:- I< 0,0 imminent bankruptcy;- 0,0 < I < 1,5 high bankruptcy risk;- 1,5 < I < 3,0 uncertain state;- 3,0 < I < 4,5 average bankruptcy risk;- 4,5 < I < 6,0 low bankruptcy risk;- I > 6,0 highly unlikely bankruptcy risk.

I. Anghel (2001) has developed a model based on discriminatory analysis, starting from asample of 276 enterprises, grouped into non -bankrupt (60%) and bankrupt (40%), and belonging toa number of 12 industries of the national economy. The analysis covered the period 1994 -1998 andhas initially used a number of 20 economic -financial indices.

After the selection stage, four financial rates have been established for the development o fthe score function:

- the income profitableness rate (X 1);- the cash-flow debt covering rate (X2);- the asset indebtedness rate (X 3);- the period of paying off the obligations (X 4).


All the above rates have been aggregated in the following score function:

A = 5,676 + 6,3718 X1 + 5,3932 X2 – 5,1427 X3 – 0,0105 X4

(25)

Varying with the value established for this function, enterprises are included in one of thefollowing three situations:

- when A < 0, bankruptcy/failure situation;- when 0 ≤ A ≤ 2,05, uncertainty situation demanding prudence;- when A > 2,05, non/bankruptcy situation, i.e. a good financial situation.

The analysis of the previously presented models has revealed a certain facility in detectingbankruptcy in time, with the mention that these models also have certain limitations:

- the models consider a small number of rates, considered to be the most significant, but thefinancial health is influenced by a multitude of factors;

- the value of the ratios has been established in relation to the discriminatory power, to theseparation into good and scanty enterprises through the analysis of the evolution of the ratesduring certain periods of time, while the conjectural influences and the environmentconditions change at sometimes short intervals of time.

CONCLUSIONS

The development of certain score functions for predicting the bankruptcy of Romanianenterprises is an extremely difficult attempt; first of all because the bankruptcy process has entirelydifferent coordinates in Romania as compared to most countries where such models have beendevelop. Thus, in Romania there is a high number of bankrupt enterprises, but very few withbankruptcy declared by law. The premises for the further development of such models are set by thesettlement of the Romanian economy on a competitive environment and getting the status ofeconomy on the functional market.

Therefore, the development of a correct diagnosis has required the score -function analysiswith other models as well, where there is a critical approach on aspects related to the managementof the enterprise, the organisation of the accounting and control systems, the means of adjustment tothe latest technological advances and the evolution of the market requirements, and at the sam epresenting the risk factors and the bankruptcy symptoms.

Romanian enterprise practice, considering the fact that the stock exchange is not balancedyet, with a serious lack of available assets on the market and the results of the enterprise have beenstrongly influenced sometimes by a low supply, other times by low purchasing power, by losingcertain markets (the former Soviet market), by a faulty work ethic and, even if there is a bankruptcylaw, it is not applied accordingly. Moreover, there are no wel l-organised statistics concerning theactivities on industries or branches, a comparison between competing enterprises being veryunlikely to develop.

Nevertheless, banks have established certain score grids for the financial situation of theenterprises in view of granting or ceasing the credits, suppliers analyse the financial situation of theclients with instalments and investors are interested in the the financial situation of the enterprisesthey want to invest in.

REFERENCES

1. Anghel, I. (2002), Falimentul, Radiografie şi Predicţii , Ed. Economică, Bucureşti.2. Avare, Ph., ş.a. (2002) Gestiune şi analiză financiară , traducere, Colecţia Romexco, Ed.

Economică, Bucureşti .3. Bărbulescu, C., (2002) Diagnosticarea întreprinderilor în dificultate economică, S trategii şi

politici de redresare şi dinamizare a activităţii , Ed. Economică. Bucureşti .


4. Berceanu, D, Ciurezu, T., (2004) Diagnosticul riscului de faliment al întreprinderii , SesiuneInternaţională de comunicări ştiinţifice, cu tema ,, Economia contemporan ă, preyent şiperspective, Universitatea din Piteşti, Ed. Agir, Piteşti.

5. Bostan, I., (2008) Assessing the risk for the agriculture exploitations entities andmonitoring the liquidity and solvency in accounting , Bulletin UASVM, Horticulture65(2)/2008, Cluj Napoca

6. Brezeanu, P., coordonator, (2003) Diagnostic financiar, Instrumente de analiză financiară ,Ed. Economică, Bucureşti.

7. Buşe, L., (2005) Analiză economico – financiară, Ed. Economică, Bucureş ti, 2005.8. Cibotariu, I.Ş., (2008) Finanţele întreprinderii , Editura Didactică şi Pedagogică, Bucureşti9. Cibotariu, I.Ş., Roman, C., (2008) Banking and Their Management , În volumul „Economic

Orientations in European Integration Process ”, coordinated by Aurel Burciu, ValeryYevdokzmenko, Publishing House Zoloti Lytav ry, Chernivtsi

10. Dragotă, V., (2003) Management financiar, vol. I, Analiză financiară şi gestiune financiarăoperaţională, Ed. Economică, Bucureşti.

11. Hlaciuc, E., Socoliuc, M., Mateş, D., (2008), Bankrupty risk analyzis through financialmanagement, Buletin Ştiinţific, Anul XIII nr.2 (26)/2008, Academia Forţelor Terestre„Nicolae Bălcescu”, Sibiu.

12. Mihalciuc, C., (2008), Diagnostic economico-financiar pe baza sistemului conturiloranuale, Teză de doctorat, Universitatea Al. I. Cuza, Iaşi.

13. Mihalciuc, C., (2005) Modalităţi de manifestare a riscului în activitatea economică , The 2nd International Scientific Conference „ Economy and Globalisation, Volume II, Finance,Accounting, auditing and Banking Management,Sesiunea de comunicări ştiinţifice cuparticipare internaţională, Târgu Jiu, Editura Universitaria Craiova.

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15. Spătaru, L., (2004) Analiza economico – financiară, Instrument al managementuluiîntreprinderilor, Ed. Economică, Bucureşti .


ACCOUNTING ALTERNATIVE TREATMENTS REGARDING FIXED ASSETS - ANATIONAL AND INTERNATIONAL APPROACH

Professor PhD. Ion PERESWest University of Timisoara, Romania

[email protected] PhD. Dumitru COTLET

West University of Timisoara, [email protected]

University Assistant PhD. Student Veronica GROSUUniversity Stefan cel Mare of Suceava, Romania

[email protected]

AbstractBy introducing the IFRS, as main accountancy source for the quoted enterprises, on the markets established by

EU, for making strong its position within the interior of a such large market, IASB could not present itself souninterested in front of a potential extension of own accountancy documents, to a great number of small and middleenterprises, functional on the European market. Everyt hing is directed towards a growth of competitive capacity ofenterprises, thanks to comparability, an existing characteristic within the internal accountancy Standard, generallyapplied (even in the simplified form for the small dimensions enterprises), an d either on sector’s level or upon creditsaccess level.

Tangible assets are handled by the Interna tional Accounting Standard 16 – Tangible assets. The main issuesaddressed by IAS 16 Tangible assets refers to: recognition time of assets, determinati on of their accounting value,depreciation expenses to be recognized in connection with these values, the accounting treatment, requirements forsubmission of information.

This research papers objective consists on verifying the impact generated over the management of enterpriseactivity, by applying the international standards of accountancy IAS/IFRS, in editing and publishing the accountingperiod balance and of that reinforced balance, for the quoted companies. The aspects that we will underline with gr eatimportance will represent the modifications brought to the economic -financial informational system and ofmodifications appeared with a view to analyze the activity and performance of enterprises .

Keywords: alternative accounting treatments, tang ible assets, IAS/IFRS, evaluation, tangible asset

Jel classification: M 43

INTRODUCTION

In accordance to economical theory, the requirement of accountancy information determinesthe informational asymmetry and the economic conflicts existing between th e management and theinvestors (Haley&Palepu, 2001). The balance and the inter -yearly relations are among the mostimportant means, being at management’s disposal with a view to communicate to investors. On thedeveloped financial markets, with a view to s trength the credibility of financial informationprovided it resorts to intermediaries, such as Law -maker, the Setters Standards, auditors, financialanalysts, rating companies. It is not enough that the provided information to be credible, it isnecessary that it has to be relevant or has to prove its utility for choosing the portfolio structure ofthe investor.[5]

The research made proves that publishing the balance will provide new relevantinformation for the investors. The informational capacity of fi nancial situations varies, butdepending on the entity’s characteristics and of the origin country (Collins & Kothori, 1989; AlfordCordt, 1993; Pall & coaut ., 2000; Paolo Andrei, 2006).[16]

Beginning with 80s, a feeling of non -satisfactions, as concerns the capacity of traditionalaccountancy criteria of providing relevant information, was issued. The fact does not surprise,because the accountancy systems evaluate in parallel to the economic system. Different studieshave proved a decline of profit’s cap acity and of other entries of the balance, on explaining theeconomic performances of the entity, the analysis of Chang (1999), Lev and Zarowin, (1999),Brown and the coauthors, 1999, all making consideration to high state reality, thus proving the

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relation between returns elements of shareholders and the profit, as that between the prices ofshares, profit and book values.

The results partially different were achieved by Francisc Schipper (1999), which informedby documents the loss of profit’s relevance o n explaining the shareholders returns on one hand andwhich sustained that the explaining power of book values in confronting with market value didn’tfail during the studying time (1952 -1994) on the other hand; but it seems to be grown

RECOGNITION AND EVALUATION TANGIBLE ASSET ACCORDING IAS -16

International Accounting Standard 16 applies to all intangible assets, except:- Tangible assets classified as held for sale in accordance with International Financial

Reporting Standards 5 Fixed assets held for s ale and discontinued activities;- Biological assets related to agricultural activity covered by the applicability of

International Accounting Standard 41 Agriculture;- Mining concessions and mineral reserves such as oil, natural gas and non -renewable

mineral resources;- Recognition and evaluation of exploration and evaluation assets for which is applying the

International Financial Reporting Standards 6 - Exploration and evaluation of mineral resources.The cost of entry and posterior assessment

Old treatment: according to the implementation of the Law of accounting, evaluation oftangible assets is made at the entrance to the cost of acquisition or production. [18]

Alternative accounting treatments in the presentation of financial statementsAcquisition cost = Purchase price + Irrecoverable taxes + Transportation expenses + Otheraccessories expenses for operation of the asset.

New treatment: according to new regulations (IAS 16 “Revenue” and IAS 23 "Cost ofindebtedness” and MFP Order no. 172/2005 and Directive IV), we have:

A) basic treatment provides using acquisition cost or production cost.Acquisition cost = Purchase price + Irrecoverable taxes + Transportation and supply expenses +Other accessories expenses for operation of the asset.For the initial cost of tangible assets includes also the estimated costs with demolition and removalof assets, respective costs of site restoration at the end of life.These costs are reflected though constitution of a provision, which will be recorded in the profit andloss account over the life of the fixed assets, including depreciation in the annual expense.

The established provision should be used only for the purpose for which it was originallyrecognized. General and administrative expenses are not elemen ts of cost of fixed assets, if aredirectly incurred for the purchase or installation. Start -up costs (start) and pre-exploitation costs arenot included in the cost of fixed assets, except the cases where are necessary to the running of them.IAS 23 "Cost of indebtedness” provides two possibilities regarding the financial costs of tangibleassets:

- the costs inter in the accounting value of assets, according to the method ofcapitalization (alternative treatment);

- the costs are considered expenses of the period and affects completely the result of theyear in which they were made, according to the method by result (basic treatment).

Production cost = acquisition cost of raw materials and consumables + other directproduction costs + share of indirect prod uction costs allocated rationally as related to theirmanufacture.Are not included in production costs the administration expenses and sub-activity costs (due totemporary reductions in the volume of activity, some social conflicts) and the costs of scrap andlosses that can appear during the own production process of the asset.[2]

Alternative treatment: tangible assets are valued, at home, at their purchase cost and arere-evaluated based on their fair value (usually at the market value) at the balance sheet date. Re-evaluation on the ensemble of the assets from the same category and is simultaneously. Re-


evaluation difference should be written in won capital at "revaluation reserves". When rec overablevalue of the property is less than net accounting value, calculated depreciation represents anexpense of the year course, unless the situation when the asset has been previously re -evaluated, inwhich case depreciation is supported from the difference from re-evaluation. [1]Companies can buy tangible assets using leasing contracts. In this case, the entry value of the assetis influenced by the type of contract (operational or financial), the residual value and customs duties(if the lessor is not resident ). In the case of operational leasing, register of th e asset entry shall bemade at the date of transfer of property covered by the contract , and in the case of financial leasingthe moment of the assets recognition in the accounting of the lessee is that of the beginning of use.[7]

Alternative accounting treatments in the presentation of financial statements and MFPOrder no. 1752/2005 , lays down also two treatments: basic and alternative treatment. Thus, itprovides that a fixed asset must be initially evaluated at its cost (acquisition cost for those courtsfor consideration, the cost of production for those pro duced in the entity, the value of thecontribution made to the contribution to the capital, at fair value to those obtained free) , at thebalance sheet date is presented in the balance, less the cum ulative value adjustments (basictreatment). Tangible assets can be re-evaluated at the end of the financial year, the true value atthe balance sheet date (alternative treatment). [3]

We believe that the alternative treatment of the new regulations, the value of tangibleassets reflect more true the financial position , especially if the case of some hyper inflationarysavings. Professional reasoning, interest and management of the enterprise determine the choice ofpresentation variant of the balance sheet. [4]

PROPERTY ACQUIRED BY EXCHANGE WITH OTHER ASSETS

Old treatment: national regulations do not specify this aspect.New treatment: the International Accounting Standards determine that fixed assets entered

by exchange with other fixed assets are va lued at:- fair value ifthe assets exchanged are different , in this situation the cost of entry is the fair

value of assets received in exchange, equal to the fair value of assets assigned, corrected with theamount of any amounts transferred in cash or cash equivalent.

- the net accounting value of the transferred assets when it comes to similar assets used inthe same sector of activity, according to this variation, the value of the asset received is given by netbook value of assets assigned (input va lue less accumulated depreciation and impairment of value )and the value of the asset received is less than the net book value of assets assigned should beregistered a depreciation of the new asset value (if the two assets are similar).

DEPRECIATION (REDEMPTIONS)

Old treatment: Regulation of implementing the accounting law establishes that must be thesubject of amortization both tangible assets as the type of fixed assets and certain intangible assets(expenses, costs of research and development, paten ts, licenses, trademarks, software programs).Depreciation is determined by applying the depreciation rates on the value of input of fixed assets.Depreciation allowances are established according to the normal operating duration for fixed assets.Expenditure for establishment and expenditure for research – development, is amortized within max5 years, the information programs within max 3 years, and patents, trademarks, licenses areamortized according to the duration of their use by the enterprise. [6] – [13]Depreciation methods are determined by the law of depreciation, using one of the followingmethods: straight-line method, digressive method or accelerated method.

New Treatment: Order 94/2001 and IAS 16 "Tangible assets" provide that in the case ofassets with limited normal operating duration the depreciation is calculated based on the cost of


acquisition or production cost which was deducted from the estimated residual value. It willincrease consistently during the operation period by calculating the appropriate redemptions.MFP Order no. 1752/2005 provides that depreciation is calculated on the basis of the depreciationplan, from the date of service until the recover of the full value of their input, according to terms ofuse and economic conditions for their use. Duration of economic use means

- The period during which an asset is set to be available for use by an entity;- Number of units produced or of similar units which are expected to be obtained by using

the asset in question.

ASSETS DEPRECIATION

Old treatment: the issue of depreciation of assets is treated like the French solution. Thus,lowering the value of an asset re sults from the causes whose effect is not judged definitively, leadsto the establishment of a provision for impairme nt.

ALTERNATIVE ACCOUNTING TREATMENTS IN THE PRESENTATION OFFINANCIAL STATEMENTS

If the actual value of an asset become s lower than its net accounting value and depreciationis considered final, the good is the subject of an exceptional depreciation for difference between thenet accounting value and its present value. [9]

New treatment: according to IAS 36 "Impairment of Assets", an enterprise should assess atthe end of each financial year if an asset must be depreciated based on internal and externalindicators. The enterprise must provide that its assets are not registered at a greater value than theirrecoverable amount. An asset is considered recorded at a greater value than the recoverable value, ifits accounting value is exceeding the recoverable value from the use or sale of the assets. If theaccounting value is greater than the amount recoverable, the asset must be depreciated and theenterprise must recognize a loss by depreciation. International ac counting rules require that with anasset revaluation should be re-evaluated the entire class of assets which it belongs. [8]From 1 January 2006, according to MFP Order No. 1752/2005, the assets will be adjusted to thebalance sheet date. Value adjustments may be permanent, in which case the change s will be madethrough depreciation, or provisional, in which case the provisions are used. [14] – [22]

EVALUATION AT THE INVENTORY AND AT CLOSING THE YEAR

Old treatment: The implementation regulation of the accounting law provides that tangibleassets are valued at the inventory at inventory value , determined by the usefulness of the asset andmarket price, and on exit from the heritage at their input value.

New treatment: the two orders of MFP determined that at the inventory of fixed assets isusing the inventory value called the current value, which is the net accounting value, affected by theutility property for the company, the market price for similar assets, the assets situation (physicaland moral wear).On balance sheet date the assessment of tangible assets can be done by two treatments: one basicand other alternative. Under basic treatment, the balance-sheet value of tangible assets isrepresented by the cost, adjusted with the cumulative depreciation value and any accumulatedlosses from impairment.[15]

The alternative treatment provides that, after initial recognition, a tangible asset presentsin the balance sheet at reassessed value, based on the fair value at the time of revaluation, lesscumulated depreciation and loss from impairment. If the fixed assets have no active market, then istaken into consideration the fair value of similar assets on the basis of assessments conducted byauthorized assessors.


In the case of evaluation at the conclusion of the financial year, for assets are applied theprudence principles, and by comparing the two values can appear the following situations:

a) Pluses of value, when the value of inventory is greater than the accounting one and takinginto account the precautionary principle these pluses are not counted;

b) Minuses of value, resulted in situations where the actual value is lower than the input, dueto depreciation, according to the principle of prudence, irreversible depreciation s are recorded asdepreciation, and reversible ones with the provisions.

For the liability elements of debt nature, the differences found in between accounting valueand input value of the liability elements of debt nature is recorded in accounting, on the appropriateelements of debt. [17]Exiting from the company’s management the fixed assets is usually made at the entrance value,taking in view the concrete situation of each asset under evaluation.

We believe that, in terms of inflation, using the new accounting rules that require the use ofthe concept of fair value, is necessary to deal again all the elements of balance sheet, ie the use ofalternative treatment.

Example

Company "Y" acquires a land for the purpose of marketing activities, the purchase recordedat the price of 34,000 um, with a series of spending: tax es 400 um, transaction fees for brokering1200 um, costs related to demolition of a disabled building 2200 um, and an amount of 800 lei fromthe capitalisation of some materials resulted from dismantling. Would result a land cost of 37,000um.

Cost de acquisition = Acquisition price + Direct attributable costs

Determining the acquisition cost:

- acquisition cost = 34.000 u.m.

- taxes = 400 u.m.

- honoraries for brokering = 1200 u.m.

- costs related to demolition of a disabled bui lding = 2200 u.m.

- sums from capitalisation of materials resulted from dismantling = (800) u.m.

Acquisition cost = 37.000 u.m.

Acquisition of land with building at a distinction price is part of the procurement group. Inthis case, taking into account the nature of different asset components according to the duration ofuse, is necessary to separate the single price of them for determination of assets’ cost.

But should not be omitted the estimated costs for dismantling and moving the assets,respective, the costs of restoration of the site, to the extent that the cost is recognized as a provisionunder IAS 37 “Provisions, assets and contingent liabilities ”[19].

The cost should not be always rated as the payment to a supplier. May be also the value weassign initially the specifications of another standard. For example, in the case of a company thathas fixed assets acquired through the contribution in kind to the share capital, will not apply theappropriate treatment IAS 16 to these assets, but will use the provisions of IFRS 2 " Share BasedPayments".

Analyzing the recognition criteria of tangible assets, may reveal some particular situations.


ACCOUNTING OF DEPRECIATION

METHODS OF DEPRECIATION

Old treatment: Depreciation is determined by applying the depreciation rates on the valueof the fixed asset entry. Depreciation of fixed assets is based on a depreciation plan, from the dateof their service and until the complete recover of their input value, according to the terms andconditions of use.

New treatment:Under IAS 16 "Tangible assets", depreciation amounts are distributed to each year during the use ofthe asset after different methods.

Depreciation represents a systematic allocation of the depreciation value of an asset on hisentire useful life duration.

Utile life duration of an asset is determined through the analysis of the following factors:- the estimated use level by the business (based on production capacity or production

estimates);- estimated natural attrition;- moral attrition occurred / will occur;

-legal limits on the possible use of assets .Depreciation value is determined by subtracting from the accounting value of the asset the

net residual value. Residual value is the net value which a company estimates that it will obtain foran asset, at the end of the useful life, after deduction in advance of foreseeable transaction costs . Ifthe residual value is significant, it must be estimated at the date of acquisition (when is applying thebase treatment), or at each review (when is applying the alternative treatment).Whatever the method chosen, it is necessary to be applied consistently, regardless of the level ofprofitability of the company or tax consequences, to allow com parability of the results of anenterprise from an exercise to the next. IAS 16 "Tangible assets" presents depreciation methodsthat can be used: the linear method, the digressive method and total figures method.

Linear method allocates constantly an asset cost on the entire useful life. Using this methodincludes the following:

Alternative accounting treatments in the presentation of financial statements- Subtracting the residual value from the initial value of reassessed value;- Estimate by the enterprise the undertake life.Digressive method establishes a depreciation value greater in the first years of use, which

decreases as the asset is approaching the end of useful life. This method may have several variants:- Applies a constant rate of depreciation at a variable base (eg, accounting value or net

accounting value of remaining cushion);- Applies a variable depreciation percentage at a constant base (accounting value);- Is calculated in proportion to the produced quantity.Method of total figures achieves allocation of initia l cost based on the level of use of the

assets. Accounting value of the asset weighted with an index calculated by adding together theyears of operation and estimated annual production.Whatever the used depreciation methodology we should respond to several requirements:

a) the depreciations to give the possibility to r enew the assets in rate fixed by business,meaning permanent correlation of depreciations with the replacement value of the equipment;

b) the depreciations to be included in cost of produc ts, services and works carried in asufficient measure, so to do not determine the creation of fictitious profits, but neither their artificialdecrease;

c) the chose amortization regime to give the possibility of uniform influence of products,services and works cost.


MFP Order no. 1752/2005 and MFP Order no. 94/2001, provides for the use of the followingmethods of depreciation: linear, accelerated and depressive. Depreciation will be calcul ated duringthe economic use of assets .

Comparing the two methods of depreciation, linear respectively digressive, we can concludethat using the second method, the beneficiary will pay a property tax less than the first two years , asdepreciation costs will be higher (496 and 372 that exceed sum of 310, the amortizat ion value in thecase of linear method).[20]

We believe that in high inflation conditions, the absorption loses the role that has in termsof fixed capital breeding, whereas in the case of lowering the purchase of currency and the rapidgrowth of price, calculation of redemption having as basis the historical cost will not also all owefficient performance of the function of maintaining physical capital, resulting a loss from tworeasons: to obtain a final result more bigger than the real one because of the inclusion in costs ofsome expenses with undervalued amortisations, leading to the reporting of fictitious profits andpayment of over-evaluated taxes and dividends; regarding the cost of a tangible asset element of theInternational Accounting Standard 1 6 requires two criteria for its recognition as active and namely:it is possible to generate by the entity of future economic benefits related to the assets, andcost of assets can be credibly assessed. [21]

CONCLUSIONS

Within their competition, element s of different nature, which cut across both theaccountancy rules of our country, and also the international standards of IAS/IFRS standards, willdetermine changes of the economic -financial informational system, changes that will be producedwithin the storing, discovering, elaborating and releasing the information. Particularly, as concernsthe necessary information for accomplishing certain criteria of evaluation, foreseen by IAS/IFRS,such as impairmetent test, data with predicted character as regards the planning system or externalinformation have to be stored .[11] –[12]

According International Fianancial Report Standard IAS -16, the future economic benefitsare represented by the potential to contribute , directly or indirectly, to the feed the treasury orequivalent of the treasury to the entity, potentially which can be one productive, being part of theoperating activities of the entity. [23]

Under IAS 16, a tangible assets element which is recognized as assets be measured initiallyat its cost, the cost that varies depending on the entry way of the equipment in the enterprise:through acquisition; by production, if construction, own; exchange of tangible assets; as a result ofgovernment subsidies; as a result of combining companies.

According to national regulations, an asset recognized as an active must be evaluatedinitially at its cost determined according to evaluating rules specific for these regulations,depending on how entry entity, A lso, in the tangible assets are highlighted distinct the tangibleassets under production/running.

BIBLIOGRAPHY

1. Andrei P., Azzali S. e al, Il Bilancio consolidato , Il Sole 24 Ore, Milano, 20062. Angheni S., Volonciu M., Stoica C., Drept comercial, Editura All Beck, Cluj, 20053. Azzali S., II bilancio consolidato secondo i principi contabili internazionali. Problemi

applicativi, soluzioni operative e potenzialità informative , Editore Economia e Management,Milano, 2002

4. Azzali S., L’informativa di bilancio secondo i principi contabili nazionali e internazionali ,G. Giappichelli Editore, Torino, 2005

5. Morariu A, Bostan I., Condrea P., European perspectives on public function , Buletinulştiinţific al USAMV „Ion Ionescu de la Brad” Iaşi, Anul L, vol. 1 (50), Seria H, ISSN 1454 -7370, Iaşi, 2007


6. Balducci D., Il bilancio d’esercizio, Edizioni FAG, Milano, 20077. Borgia M., L’evoluzione e l’applicazione dei principi contabili internazionali nelle aziende

di credito, G. Giappichelli Editore, Torino, 20068. Bostan I., Investigatii finanaciare. Control extern. Inspectie fiscala. Expe rtiza contabila,

Editura Tipo Moldova, Iasi, 20079. Bostan I., Hlaciuc E., Andronic B., Borş L. , The Financial-Economic Communication At

International Level, Simpozionul ştiinţific internaţional ”Durable agriculture in the contextof environmental changes”, 16 - 18 octombrie, Iasi, 2008

10. Bostan I., Grosu V., Scutariu L. – The fair value – a new evaluation method in accounting ofcompany, Bulletin UASVM Horticulture, 66 (2), 2009

11. Danton O., Didelot L., Maîtriser les IFRS, Ed. Group Revue Fiduciaire, Paris, 200512. Esnault B., Hoarau C., Comptabilité financière , Editura Quadrige/Puf, Paris, 200513. VanGreuning H., Standardele Internaţionale de raportare financiară. Ghid practic, Editura

Irecson, Bucurest, 200714. Hlaciuc E., Contabilitatea financiară armonizată cu Directivele contabile europene şi

standardele internţionale de contabilitate (OMFP 306/2002) , Editura Didactică şiPedagogică, Bucureşti, 2002

15. Hlaciuc E., Dorel M. e al., Normalizarea informatiei contabile in Romania , Editura Cartier,Chisisnau, 2008

16. Mateş D., Hlaciuc E., Grosu V., Socoliuc M., Iancu E. , Balance Sheet-Expression OfFinancial Condition And Communication At In ternational Level, International ConferenceOn Business: Accounting – Finance – Athens , Greece, Iulie, www.atiner.gr, 2008

17. Mates D., Grosu V., Impactul Standardelor Intenaţionale de Raportare finanaciară asupraevoluţiei Sistemului Contabil din Romania -Revista Economie Teoretică şi Aplicată/Teoretical and Applied Economics, vol. 3, Bucuresti, 2008

18. Mates D., Grosu V., Socoliuc M., Iancu E., Risk insurance evalution accorting to IFRS4.The solvency of the insurance company, methods of calculation of the sol vency rateavailable in the accountancy , Revista – Contabilitate şi Informatică de Gestiune, Nr. 23,2008

19. Mates D., Veronica G., Comparative Study Romania-Italia concerning the Implementationof IAS/IFRS, International Scientific Conference -„European Integration –New Callenges forthe Romania Economy”, 4th Edition Oradea, May 30-31, Oradea, 2008

20. Santesso E., Sostero U., Principi contabili per il bilancio d’esercizio , Il Sole 24 Ore,Milano, 2001

21. Nedelea A., Grosu V., The financial economical information - source of communicationaldevelopment level, Rivista Economic Orientations in European Integration Process, EdituraPublishing House, Chernivtsi, 2008

22. *** Codul fiscal al Romaniei, 200823. *** Ordinul Ministerului Finantelor Publice nr. 1752/2005, Monitorul Ofi cial al Romaniei

nr. 1.080. bis24. *** Standarde Internationale de Raportare Financiara (IFRS) 2007


ASSESSMENT OF INFLUENCE INFLATION STOCKS

Associate Professor Ph.D. Mihaela [email protected]

Lecturer Ph.D. Student Mariana [email protected]

The “Ştefan cel Mare” University of Suceava, Romania

AbstractInflation, one of the most complex and controversial issues of economy, was in some countries and periods

what put in danger the development and progress of the economy. Not negligible at all when it comes to its influenceupon the financial position and the economic entities high standards, inflation is a problem for accounting. A researchregarding inflation influences on accounting involves an analysis of the negative and positive effects of infl ation on theeconomic items evaluation. In this context, it must be highlighted the limits of using the historical costs and theadvantages of using the fair values for evaluation as basis for evaluation. Regarding the property elements, stocks arethose that fallow fix assets in term of degree of liquidity. In practice, we often encounter situations when, from a periodto another, sensitive growth of stocks prices are registered with considerable influence in terms of resumption ofproduction and future production costs. In the paper it is outlined the inflation’s impact upon the stock evaluation intwo different moments: when stocks exit administration and when the financial year closes. The comparative studyregarding application the accounting methods a dapted to stock inflation highlights both the advantages anddisadvantages of each method. The assessment model of inflation influence on stocks presented in the paper it is beinganalyzed in conjunction with the stocks speed rotation.

Key words: inflation, evaluation, stocks, prices, stocks speed rotation.


INTRODUCTION

Inflation is a growing, sustainable and general ised process regarding economy prices inconditions of declining the purchasing strength of monetary unit. The p aper purpose is to establishthe inflation influence on stock assessment and the comparative analysis of stocks inflationadjustments methods.

The reason for choosing stocks as analysis object that derives from the need to modernisestocks accounting. We must have in mind the fact that the feat improvement of a company involvesoperational and as accurate as it can be measurement of the efforts and effects, the efficient use ofthe company’s available resources and also the identification of the ways to re duce consumption,under which stocks occupies a significant position.

Quantifying the influence of inflation on stock assessment involves, first of all, knowledgeof the inflationary phenomenon, of the factors that affect it directly, the forms of acting and itseffects, and secondly, the possession of evaluation tools used to evaluate the issues presented above.

MAIN FEATURES OF INFLATION

Inflation is an economical - financial process which has as effect the national monetarypurchasing power erosion in time. It is a consequence of the persistent price growth in economy andof the decreasing power of monetary purchasing. Inflation is a remarkable tranquilizer which turnsevery thing in pink. If appearance are being taken into account, the beneficiary’s margin increases,the capital rotation increases due to the growth of the turnover and the balance sheet grows at alower rate than inflation, and the capital efficiency (which is equal to the multiplied margin bycapital rotation) increases as well. But t his tranquilizer is dangerous because it affects the selfenterprise ability.

The market functioning mechanism and the inflationist causes are the main criteria used toclassify inflation (Ţugui, 2000). The functioning mechanism of the market can cause on openinflation and a restricted one. An open inflation allows the economic system to function as a

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mechanism where prices are steady. This type of inflation is directly connected to the goods,services and human resources scarcity in economy, so that specu lations can occur. Quell inflation isthe result of government intervention in the growth of prices and wages. By this intervention, therequest of goods and services is forced reduced.

Depending on inflationist causes there can exist cost inflation and demand inflation. Costinflation is characterized by the fact that its release has as a prime cause the costs growth incondition of week competition. The growth of costs appears because of wages demands or becauseof certain situations of the raw material s price, the energy price etc. So, the price – wages spiralappears and the tendency to transfer the cost growth influence to the final consumer or businesspartner in downstream. The inflation by demand it is motivated by the existence of an excessivedemand at the output of the national economy in condition of full employment of the humanresources, which will cause higher prices. This finds its monetary coverage in the existence of ahigh amount of money in the economy which will lead to a increased dema nd of goods andservices.

Inflation is expressed by the rate of inflation starting from the consumption price index.Analyzing the inflation evolution between 2002 and 2008, published in the National Bank ofRomania report a significant decrease of the in flation rate is being outlined, from 25,03% in January2002 to 6,7% in December 2008. During the analysed period, the strongest decrease of the inflationrate was registered in 2002 from 25,03% in January to 16,05% in December. The inflation ratedecreasing continued also in the following years, reaching in 2003 to13,36% , at the end of 20048,27% and the end of 2005 5,88%. In 2006 inflation rate fell significantly reaching in December2006 2,95%. The lowest inflation rate registered in Romania during the analysed period was 1,95%in May 2007. After this significant decreasing of inflation, an increasing evolution of the inflationrate was registered in the second half of 2007, reaching in December 2007 a rate of 7,52%. During2008, after a slight increase of the inflation rate until it reached 9,54% in June, a decrease of the rateuntil 6,7% is being noticed in December 2008. The evolution of inflation rate in 2008 and itsperspective for the following two years are presented in Table 1.

Table 1: The evolution of inflation rate in 2008 and inflation perspective for 2009 and 2010Quarter

(T)

Inflationrate perquarter

Annualinflatio

ntarget

Upper limitof the

variationrange

Lower limitof the

variationrange

Upper limitof the

uncertaintyrange

Lower limitof the

uncertaintyrange

annualvariation

2008 T1 8,38% 8,38% 8,38%

2008 T2 8,61% 8,61% 8,61%

2008 T3 7,30% 7,30% 7,30%

2008 T4 6,70% 3,80% 4,80% 2,80% 7,18% 6,22%

2009 T1 6,03% 7,15% 4,90%

2009 T2 5,46% 6,96% 3,97%

2009 T3 5,09% 6,86% 3,33%

2009 T4 4,50% 3,50% 4,50% 2,50% 6,47% 2,53%

2010 T1 3,92% 6,06% 1,78%

2010 T2 3,23% 5,51% 0,95%

2010 T3 2,83% 5,23% 0,42%

The source: http://www.bnr.ro/Ro/pubs/


For 2009 it is forecasted a decreasing of inflation on the basis of the decline of the oil priceand effects of the world economic crises. But the Romanian currency depreciation and theincreasing food prices might put in difficulty the maintenance of the inflation within 2,5% and 4,5%range forecasted by the National Bank of Romania.

Demarcation of the main characteristics of inflation helps us understand inflation as aneconomic phenomenon. Inflation is a growth of the price level having the following characteristics(Frisch, 1997): it is anticipated with the lack of precision; by the increase of costs leads to new priceincreases; does not increase the employment rate on the actual production; acts as a monetaryphenomenon; it is measured by net prices.

At the macroeconomic level, inflation manifested an a long time horizon, discourageproductive investments and orientates monetary resources towards current speculative stocks,outlines exchanges rates oscillations and has negative effects on the national economy.

At microeconomic level, economic entity correlates a high level of inflation with uncertaintyand with risk in economy. Efficiency and profitability calculations are being put in difficulty,companies meeting difficulties in forecasting expenditures and incomes. The forecast of the profitat microeconomic level involver products and service price determination and the fabrication costsevaluation. In term of inflation, production costs values and selling prices values have a particularlyimportance for the whole activity of the company. New inflationist prices increases sensitively themanagerial activity regarding taking decisions upon what to produce, how much to produce, how toproduce and for whom to produce. In the dynamic appreciation of economic efficie ncy indicatorsfor an economic entity, a major problem is the income and cost actualization as an inflation effect,problem that consists in bringing au scattered values from the past or the future depending on theprice growth at the value of a single mom ent.

INFLATION - A PROBLEM FOR ACCOUNTING

Inflation is one of the most con troversial and complex phenomenon in economics. Notnegligible at all regarding its influence on the financial position and economic entities highstandards, inflation represents a problem for accounting. If there is to be credible, accountinginformation must respond to c riteria of relevance, namely: faithful reflection of reality, objective ,the possibility to obtain information in due time, being able to be published with regularity, thepossibility to be easily controlled, being exposed to comparison in time and space, beingmeasurable in monetary units, being useful in establishing forecast and being close to the concept ofcash flow.

In most European countries, "the financial reports written in conformity with generallyaccepted accounting practices are based on the assumption that the purchasing strength of thecurrency used remains basically stable " (Rodriguez, 1999). For years , in order to solve the problemsregarding the distortion caused by changes in th e purchasing strength of currency and the changesof assets and liabilities values that occur after the date of acquisition or their occurrence, have beenanalysed the following two accounting alternatives: accountin g in a constant purchasing strengthand accounting in a current value.

Accounting in constant purchasing strength is based on the use of historical cost as a basisfor evaluation. In terms of infla tion in order to get an accurate picture of the balance sh eet and theprofit and loss account it is necessary to retreat balance sheets depending on the general fluctuationlevel of prices. The use of the historical cost is based on three qualities: reliability, the capacity tobe defined and the possibility to be checked out. The reliability of the historical cost is general byits capacity to generate accurate information on time. From the moment that it was established, thehistorical cost remains fixed as long as goods remain in the unit. The use of the histor ical cost as abasis for evaluation allows the gain of some objective and verifiable information.

On the basis of different opinions presented in literature (Matiş , 2003; Tugui, 2000) thedisadvantages of the historical cost used as a method of evaluation can be summarised like this :

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- the impossibility to express value correctly in conditions of long t erm assets and incondition of hyperinflation;

- the underestimation of the various items in the balance sheet in term of inflation;- the underestimation of the unit's financial position at the end of the financial year;- distribution of fictitious dividends and retreatment economic units;- reduction of investments and avoidance of sales on credit;- distortion of the overall examination of the development of business unit and

comparable financial results due to the lack of uniformity in assessing the value ofproperty items;

- the impossibility to provide real information both to usual users and management team,finally the decision making process being affected on the long term.

The disadvantages presented determine a decrease of the credible information provided byaccounting in historical costs and options in favour of inflation accounting which might providetool for evaluation and decrease of the currency depreciation impact on property elements.

By law, a set of rules was developed that governs the inflatio n consequence on the propertyelement evaluation. In this regard, Directive 4 of European code sets rules for preparation andsubmission of review documents in conditions of inflation. The Committee for InternationalAccounting, analyzing the inflation inf luences adopted the Accounting International Standard29”The Financial Report in Hyperinflationary Economies” and AIS 21”The Currency FluctuationsEffects”.

Accounting in current value involves the use of the fair value. In the last years , InternationalFinancial Reporting Standards introduced in practice the fair value evaluation, starting with thefinancial tools, investments in real estate and then agricultural products. The fair value is ”the sumfor which an asset can be traded or a debt settled bet ween stakeholders, in good will, in atransaction carried out on purpose. "(Popa and others, 2007)

By adopting the basic assessment of fair value is corrected permanent costs of buying assetsat their market value, achieving to a re -evaluation of the items recognized in the balance sheet.Using fair value affects the performance and improves comparability of accounting information.Unlike the historical cost which is orientated towards the past, the fair value is oriented toward thefuture, allowing financial analysts to make a better estimate of future cash -flow streams.

Using the fair value based assessment can not be generalized for all the assets. Valuation atfair value "would be warranted only for items that are for sale, while those to be preserved s houldbe valued at historical cost (Ionascu, 2003). The main disadvantage of the fair value is the risk ofmanipulation of results. In the absence of market values for some active managers of economicentities could use the internal models of assessment th at would influence the outcome of theeconomic - financial.

In Romania, after the adoption of the accounting regulations harmonized with EuropeanDirectives and with International Financial Reporting Standards, we witness a mixed evaluationmodel, characterized by the use of fair value and historical cost. At the level of individual, for thesake of tax it is being used the historical cost as basis for the evaluation . These companies mayprepare two sets of financial statements: financial statements on the historical cost financialstatements and the fair value model. In the group companies categories, consolidated financialreports use with predilection the fair value as evaluation basis, taking in consideration that thisfinancial reports are addressed exclusively to shareholders and managers.

The increase of the inflationist phenomenon in more and more countries led to thedevelopment and use of some methods, techniques and procedures to adapt accounting to inflation.The impact of inflation on assets is different for every property element. In conformity to IAS29”Financial Reporting in Hyperinflationary Economies” property elements have been divided intwo categories: non – monetary elements and monetary elements. Non-monetary items includethose economic structures that are not expressed at their nominal value at the date of closure of thefinancial year. In this category we state inventory, fixed assets and capital. Monetary items includethose items which are denominated assets at their face value at the date of closure of the financial


year. In this group are part claims, debts and liquidity. Monetary items are not restated because theyare already expressed in relation to the monetary unit current at the balance sheet date. Some non -monetary items are recorded at current values at the balance sheet date, such as the achievable valueand net market value, so they are not restated. All other non -monetary assets and liabilities arerestated.

Worldwide we separate delimit three areas in which the practica l methods adapted toinflation. These areas are: Continental Europe, Anglo -Saxon countries and Latin America.

In Continental Europe, particularly in France, there is a harmonization of legislation on theaccounting impact of inflation with the European dir ectives. Most laws that were developed relatemainly to fiscal measures and less about improving the financial – accounting image.

In countries which practice the Anglo-Saxon accounting system (United Kingdom, USA,Canada, Australia and New Zealand) the law was orientated towards the adaptation of anaccounting expressed in units of general purchasing strength at the closing date of the financial year(Tugui, 2000). In Great Britain was introduced a assessment system of current costs. In the U.S.A.was chosen firstly the presentation of financial accounting information in units of generalpurchasing strength. Subsequently was introduced the replacement costs evaluation .

In Latin America, following an increase of inflation after 1970, accounting for inflation hasgrown very much. In Argentina, Chile and Mexico the focus is on financial accounting informati onexpressed in purchasing strength . In Peru and Uruguay the option was made for revaluation ofassets and facilities tax on tax. In Brazil, economic units re-establishes monthly their stockregistration value on the basis of a general index or a specific one of price growth .

Rules, directives and national and international standards and practice of accounting reveal alarge number of accounting models adapted to inflation. Depending on the methods used literature(Malciu, 2000; Boussard, 1989) grouped these patterns into three categories namely: methods basedon the conversion methods based on assessment and combined or mixed methods.

COMPARATIVE STUDY ON THE APPLICATION METHODS ADAPTED FORINFLATION IN THE CASE OF STOCKS

In terms of applying International Financial Reporting Standards, the stocks must be valuedat the lower value of cost and net value achievable. It is necessary to emphasize that the achi evablenet value must not be confused with the fair value. Achievable net value relates to the net amountthat an entity expects to realize from the sale of stock during the normal conduct of business, whilethe fair value reflects the amount for which the stock could be exchanged in the market betweenbuyers and sellers interested and informed. Achievable net value is a specific entity value, while thefair value is market value - externally. Achievable net value stock may not be equal to the fair valueless the costs to sell.

In conformity with the precautionary principle, the increase of the constant value at the endof the financial year is not being taken into account and the decrease is being taken into account .Therefore, if the feasible net cost is high, stocks will be reflected in the balance sheet at their cost.In the case of stocks with a low speed of rotation and which are recorded at their cost of entry, theissue with their retreatment methods adapted to inflation.

Methods based on conversion involve, in the case of stocks, a retreatment of value based onvariations of the general level of prices . Thus, the restated value of an item will store the valueobtained by multiplying the final balance of the element with the average index of prices. The mainadvantages of this method of stock assessment are: objectively quantifying the influence ofinflation; the possibility of making comparisons between the accounting information of differentperiods; changing the unit of assessment, without changing the evaluation and cost. The maindisadvantages of this method refers to the increasing cost of information and the fact that inflationdoes not act uniformly in all economic entities which manage different types of stocks.


Methods based on assessment con sist in the periodic reassessment of the elements that arestored in order to minimise negative effects of inflation. These methods are based on threeconcepts: economic use value, market value and replacement costs.

Methods of assessment based on the use value involves that for each stored element thefuture value of the cash flow to be adapted is determined. This method involves a big volume ofcalculations and this is why it is rarely used.

Method of assessment based on market value is also little used b ecause it implies that thesame good material can be in different places and in different economic circumstances. Initialbalances of the accounts are restated in stock market values, and stocks of inputs during the periodshould be constantly updated to m arket value according to the most recent price.

Method based on replacement cost is the most frequently used to adapt the accounting toinflation. Also, this method has a wide spread influence of inflation accounting in the a ssessment ofstocks at the closing of the financial year. Replacement cost is determined from the actual cost ofacquisition of an asset a like that which was new or reassessed with a good with potential forserving an equivalent. Practicing the met hod based on replacement cost ensure s a betterappreciation of the quality of management stocks , the results could be determinant in currentvalues. The only disadvantage of this method is that due to technical progress for the cost of anidentical replacement is difficult to determine.

Combined methods adapted to inflation are based on the conversion methods, as well asassessment methods. The main objective of the combined methods is to evaluate the material assetsat replacement costs. By applying these methods we obtain a better basis for comparison and aricher informational content of the summary document.

Analyzing the advantages and disadvantages of the three methods adapted to inflation, wecan conclude that, the method based on the evaluation is the most appropriate in the case of s tocks.

A MODEL OF ASSESMENT OF STOCKS INFLUENCES INFLATION

To demonstrate the need for a model of inflation influence on stock assessment we mustestablish firstly, which are these influences divided in stock categories. If we analyse the stocksfrom procurement, the main inflation influences are:

- the reducing of the quantites of raw materials or goods supplied as a result of depreciationof the purchasing of monetary unit;- the formation of raw materials and consumable materials stocks unjustified;- the immobilization of funds in goods stocks hardly salable.In the case of stocks obtained from own production, we identify a number of influences out

of which we mention:- the overlapping sheets in the cost of values calculation expressed in different purchasing

power;- the introduction to the actual cost of the products of values expressed in purchasing

power scratchy according to the duration of the manufacturing process.The assessing of the influence of inflation on stock can be made knowing the number of

rotations for stocks. The index of consumer prices or pricing increase is related to the specificnumber of rotations and it obtaines the index of a rotation. With this index the stock adjustment aredetermined.

To illustrate the influence of inflation on stock assessment, the following example is beingconsidered:

A company has an initial stock of raw materials stock of 72 000 lei. The rotational speed (V)of raw materials stock is 15 days and the index of annual price increase (Igp ) is 106%. At the end ofthe financial year, the final balance (Sf) of the stock of raw materials is 90 000 lei. Adjusting thestock to the inflation can be done through the following steps:

a) determining the number of rotations per month (No. rotations): No. rotations = 30 days / V (1)


No. rotations = 30 days / 15 days = 2 rotations / monthb) determining the average rate of inflation (Ri) on a rotating basis:

Annual Ri = (Igp – 1) x 100 (2) Annual Ri = (1,06 – 1) x 100 = 6% per year Ri monthly = Annual Ri / 12 (3) Ri monthly = 6% / 12 = 0,5% per month Ri per a rotation = Ri monthly / No. rotations (4) Ri per a rotation = 0,5 / 2 = 0,25% per rotationc) determining the current value of the stock (Va): Va = Sf + (Sf x Ri per a rotation) (5) Va = 90 000 + (90 000 x 0,25%) = 90 225 leid) the adjustment to inflation (Ai): Ai = Va – Sf (6) Ai = 90 225 lei – 90 000 lei = 225 leiThe model of assessment of the influences of inflation on stocks presented in the above

example must be examined in conjunction with the rotation speed of stocks. One can appreciate thatin the case of stocks, the main problem is the possibility of renewal, in spite of increasing prices, aseconomic entity to bear a substantial loss. The accelerated the speed movement of stocks can beachieved in each phase of the operation. In the supply phase are necessary decisions and actions toensure the elimination of the period of inactivity due to lack of supplies. In the production stage, t hevolume of inventories depends mostly on cost and manufacturing cycle. Any way to reduce them isa way to accelerate the stock speed of rotation. Reducing the period of settlement and the time ofsorting and packing are the main ways to increase the speed movement of stocks during trading.

A significant influence of inflation influence on stocks occurs when assessing output fromstocks fungible assets. International Accou nting Standard IAS 2 "Stocks" allows the use of twoevaluation methods: the weighted average cost met hod (CMP) and first in - first out method (FIFO).FIFO method allows assessment of consumptio n at a lower purchasing power in the past periods,and the final stock is valued at the latest. For these reasons, the FIFO method is recommended to beused in conditions of inflation because it allows a minimal influence in terms of value of stocks onthe final inflation.

To preserve the same amount of physical stock, in case of price increases, firms must spendan additional amount of funding them. The use of additional funds should not be considered aninvestment but a benefit cost essential to avoid substantial losses.

CONCLUSIONS

The organization of accounting and stock management is increasingly based on knowledgeof effective means and resources, on pursuit of operational movements of values, on scrutiny of theelements of structure and dynamics a nd especially on decipher trends in the evolution ofphenomena that occurs the economic entity and its external environment. One of these phenomenais inflation. In the paper it is emphasized the idea that inflation is a problem for accounting becauseeconomic entities correlates of high inflation with uncertainty and risk in the economy, and thecalculations of efficiency and profitability are difficult. The presentation of the main specificfeature in constant purchasing power and current value accounting state the advantages anddisadvantages of two different bases of evaluation: cost history, and fair value. Analyzing incomparison these two bases of assessment, we believe that fair value is more realistic, is orientedtowards the future and allow financ ial analysts to make a better estimation o f future cash-flowstreams. However, the use of fair value can not be generalize d for all the assets. Stocks should bemeasured at fair value between the lowest achievable cost and net value. It is necessary toemphasize that the achievable net value should not be confused with fair value.

The comparison study of methods adapted to inflati on leads us to conclude that, regardingstocks the method based on assessment would find it’s greatest opportunities for applic ation, as


long as it ensures the productive capacity, helping to ensure business activities and growthnationally.

Analyzing the inflation influence on stock we concluded that, on leaving the assets it shouldbe used first in - first out (FIFO) method of stock assessment because it allows final stockevaluation at the most recent values . The main way to reduce the negativ e effects of inflation onstocks is to increase their rotation speed . This can be done through the technical, or ganizational andfinancial practices applied at each stage of the operation.

BIBLIOGRAPHY

1. BOUSSARD, D., Comptabilité et inflation. Methodes et aplications , Masson, Paris, 19892. FRISCH, H., Theories of inflation, Ed. Sedona, Timişoara, 19973. IONAŞCU, I., Dinamica doctrinelor contabilităţii contemporane , Ed. Economică, Bucureşti ,

20034. MALCIU, L., Contabilitate aprofundată , Ed. Economică, Bucureşti, 20005. MATIŞ, D., Contabilitatea operaţiunilor speciale , Ed. Intelcredo, Deva, 20036. PEROCHON, C., Comptabilité générale , Foucher, Paris, 20047. POPA, A.F., PITULICE, I. C., JIANU, I., NECHITA, M., Studii practice privind aplicarea

Standardelor Internaţionale de Raportare Financiară , Ed. Contaplus, Bucureşti, 20078. RODRIGUEZ, L. A., La influencia de la inflacion en la contabilidad , Madrid, 1999,

http://www.geocities.com/Eureka/Plaza/6171/links/inflac.html9. TULVINSCHI, M., Gestiunea,contabilitatea şi controlul stocur ilor, Ed. Sedcom Libris, Iaşi,

200410. xxx Standarde Internaţionale de Raportare Financiară incluzând Standardele Internaţionale de

Contabilitate şi Interpretările lor la 1 ianuarie 2007, Ed CECCAR, Bucureşti, 200711. http://www.bnr.ro

http://www.geocities.com/Eureka/Plaza/6171/links/inflac.html

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PARTICULAR ASPECTS OF THE PROCESS OF FINANCIAL COMMUNICATIONFROM THE PERSPECTIVE OF EXIGENCIES REGARDING THE QUALITY

ASSURANCE OF ACCOUNTING PRODUCTS

Associate Professor PhD. Valeriu [email protected]

Associate Professor PhD. Cristian DRĂ[email protected]

University of Craiova, Romania

Abstract:The social role of accounting has increased significantly in the recent decades and this due to the information

they provide more and more influence the user behavior in the process of founding the decisions. The Romanianaccounting has known significant mutations in recent years. Although there are more to be done, should be emphasizedthe accounting development in our country as a tool for infor ming and assisting the economic decisions. Therefore theconcept of quality of accounting products followed the same trend, but currently, given the status that Romania is anEuropean Union Member, there may be done more than ever a separation of issues re lated to this concept starting fromthe specific peculiarities of national accounting rules and the international referential in the field. Analyzing thedifferent conceptual frameworks and accounting text normalization, we see a pluralism of procedures th at see thedefinition of quality notion of the accounting information; differences were noticed in particular as regards theselection and hierarchy of the qualitative characteristics. We support this finding by presenting a succinct way in whichis defined the reviewed concept analyzed in the accounting normalization, setting as benchmarks the conceptual Anglo -Saxon frameworks, the French accounting and as well the national accounting system.

Keywords: accounting information, quality characteristics, qual ity of the accounting information, accountingsystem.


1. INTRODUCTION

The social role of accounting has increased significantly in the recent decades and this dueto the information they provide more and more influence the user behavior in the process offounding the decisions. It is clear that each user wants to have information that will reduce theuncertainties and to provide the opportunities to make the best decisions, designating, in fact, theneed to produce by the account ing some quality information.

Since the range of user accounts is relatively diverse, and their informational needs are atleast as diverse, sometimes even contradictory, the interpretation of quality of information providedby the financial statements is a process characterized by subjectivism. This is also the reason forwhich the definition of the quality concept of the accounting information starts in the specialtyliterature, from the definition and the particularities of the communication process its elf and aims toestablish some quality criteria on which the information must comply.

Analyzing the different conceptual frameworks and accounting text normalization, we see apluralism of procedures relating to definition of quality of accounting informa tion; differences werenoticed in particular as regards the selection and hierarchy of the qualitative characteristics. We willsupport this finding by a succinct presentation of the way in which the analyzed concept is definedin the accounting normalizat ion, setting benchmarks as conceptual frameworks Anglo -Saxon on theone hand, and French books, on the other. However, we consider it necessary to expand research inrelation to issues addressed in the context of significant changes arising by the reform o f thenational accounting system.

[email protected]

[email protected]


2. DELIMITATIONS AND INTERFERENCES REGARDING THE QUALITY OFTHE PROCESS OF FINANCIAL COMMUNICATION IN THE NATIONAL ANDINTERNATIONAL CONTEXT

The accounting systems, which rely on the existence of some conceptual framew orks, makethe quality of accounting information to define a fundamental element, its characteristics beingpresented explicitly by means of documents that are officially as follows:

The American normalization organism, known under the name Financial Acco untingStandards Board, published in 1980 through the norm SFAC 2 (1) entitled QualitativeCharacteristics of Accounting Information, relevant elements regarding this issue;

The International Accounting Standards Board (IASB) (2) included in 1989, in itsconceptual framework, the qualitative of characteristics of the financial statements andrestrictions which must be met to obtain a qualitative information;

ASB (3) published in 1991, the qualities of the financial information through thedocument Statement of Principles; The Qualitative Characteristics of FinancialInformation.

Regarding the definition of the quality concept and of the characteristics that regard theaccounting information, given by the American Forum normalization, we note the followin g mainideas:

Are identified four qualitative characteristics and namely: intelligibility, relevance,reliability and comparability, which are subject to two major restrictions:- reasonableness, respectively the superiority of the obtained benefits of u sing the

information regarding the costs incurred by its obtaining;- the threshold of significance or relative importance.

The criteria according to which are judged the relevance and reliability, considered asbeing he primary characteristics, are expre ssed by:- predictive value, retrospective value and opportunity - for relevance;- possibility of checking, neutrality and fidelity - for reliability.

In addition to those outlined above, we consider to be important also the presentation fromthe point of view of the American norms regarding the hierarchy of the qualitative characteristics ofaccounting information. This way, is considered that, from the beneficiaries point of view of theaccounting information, the usefulness for the decision -making is the first quality being ensured bythe relevance and reliability, qualities considered as primary, and sometimes contradictory. Bothrelevance and reliability are supported by hierarchically inferior quality such as predictive value,retrospective value and desirability, respectively the possibility of checking, neutrality andreliability. Although the importance of comparability and significant secondary qualities areconsidered secondary qualities in relation to the relevance and reliability, the conceptual A mericanframework believes they can still improve the process of adopting the decisions.

Regarding the conceptual framework proposed by the IASB, we notice the promotion of thesame four qualitative characteristics, as well as imposing the same restrictio ns as in the general caseFASB, which refers to the superiority of the benefits obtained from the use of information versusthe cost of obtaining it. In general this restriction is attached to three other restrictions to beobserved that the financial info rmation is relevant and reliable:

timeliness; balance between the qualitative characteristics; true and fair view/fair presentation .At the same time, we notice also the explicit presentation of the criteria that contribute to

achieving the main characteristics, which the IASB proposes: significant size (relative importance) for relevance; true and fair view, the primacy of the economic content of form, neutrality, prudence

and completeness, for reliability; continuity of methods for assessment of co mparability.


Starting from this group, the literature made a hierarchy of qualitative characteristics ofinformation that attracts attention by several similarities to that undertaken by FASB.

Analyzing the ASB point of view regarding the quality of the q ualitative characteristics ofthe financial-accounting information, we notice some differences towards the opinion FASB andIASB, raised by the following main elements:

the primary quality that must have the financial information is appreciated to have arelative importance;

are considered to be the main qualities the relevance (relevance) and reliability, whileintelligibility and comparability are included in the secondary qualities;

regarding the criteria depending on which are rated the four characte ristics, ASBconsiders that:- the relevance is achieved when the information has a value of prediction and

confirmation, and when there are selected the information that influence the decisions;- reliability is obtained if the information does not cont ain errors or elements which

would lead to erroneous interpretations and is appreciated depending on the neutrality,prudence, reliability and integrality;

- comparability is given by the methods permanency and by the informationcommunicability;

- intelligibility is based on the possibility of classification and aggregation ofinformation and as well on the knowledge by the users of language and economicaccounting;

the achieving quality is subject, according to the English, by three restrictions: thebalance between quality, timeliness, cost -benefit report.

And in what regards the hierarchy of characteristics outlined above there can be found somedifferences compared to hierarchies proposed by the U.S. and internationally.

Comparing the three ways list ed above, we notice, on one hand, the exerted influence by theAmerican conceptual framework upon IASB, which identifies four qualitative characteristics(understandability, relevance, reliability and comparability) and FASB, which in its turn, imposesthe intelligibility before any other qualities, as well as the differentiation proposed by ASB, whichconsists in the amplification of the relative importance as a fundamental feature and also in theclustering of the four characteristics in the main and seco ndary.

In an opposite vision of the Anglo -Saxon countries, in the French accountability, the qualityconcept of the accounting information is not explicitly defined by the presentation of somecharacteristic features, but by interposing principles.

It should be noted the fact that in France, the definition of qualitative characteristics ofaccounting information was not taken into account by the National Accounting Council, andtherefore in the Accountant General Plan are only listed some qualities of the information producedby the accounting.

According to Accountant General Plan "the accounting information must give to the usersan adequate, fair, clear and complete description of the operations, events and situations" not beingproposed any hierarchy or articulation of the quality criteria. Another specific element for theFrench accounting is that the Accountant General Plan does not designate users of financialinformation, the accounting information having as an objective the reflection of a true ver ifiers isobtained whether are observed the two general principles: the regularity and honesty. There are alsoremembered, the exhaustivity and coherence of information, which should not lead to acondensation or external aggregation of these and to ensure the comparability of data during thesuccessive periods.

Following the objectives assigned to the French accounting and the accounting principleswhich are associated, we can say that the accounting information is a compromise that should allowthe presentation of a true image of the financial position, of some proper accounts and outspoken,and at the same time, to comply with a series of principles, including the evaluation (monetarynominalism and prudence) have a determined influence on the concept of true and fair view.


Comparison, for example, of the conceptual framework of FASB and of the accountingprinciples accepted by France, as a result of adopting the European Directives 4 and 7, it highlightsmajor differences, from where we retain as being related to the approached theme the fact that onone hand FASB defines a user reference, while the French accounting makes no statement on theusers and their needs, and on the other hand, in France the accounting objectives do not make areference only to its intrinsic qualities (honesty, fairness, accurate picture), while the FASBexplicitly reported the quality of information to the users' needs and expectations.

However, we think that cannot be ignored the process of modernization of the Europeanaccounting directives, resulted on the one hand, in the adopting of the European CommissionRegulation no. 1606/2002, and on the other hand, the Directive 2003/51/EEC of 18 June 2003 ofthe European Parliament and Council of the European Union on the modernizat ion and updating ofaccounting rules, which supplement the European Commission regulation.

The regulation no 1606/2002 aimed, mainly, to achieve two important goals:1. adoption and application of IFRS in the European Community to ensure the

harmonization of the process of communicating information through the consolidatedaccounts, submitted by the listed companies, beginning with 1 January 2005, toguarantee a high level of transparency and comparability of this process and an efficientfunctioning of the communitarian capital market;

2. the option offered to the Member States to extend this process of harmonization and tothe consolidated accounts of unlisted companies and also to the individual accounts;

Why it was necessary to modernize the European direct ives? First, because under the aspectof this framework they have not been updated by their adoption, while the accounting concepts andaccepted practices have evolved considerably, and on the other hand, was found in some areas, acertain incompatibility of foresights of IFRS directives. Basically by this update was followed onthe listed companies, the elimination of the existent discordances between the Directive and IFRS,and in the unlisted companies, for which the application of these rules is optiona l, the possibility tohave access to the accounting options offered by IFRS accounting in maintaining the directives as abasic accounting legislation.

Specifically, the amendments made by the Directive 2003/51/EEC refers in particular to: (4) adapting the format for the balance presentation and of the profit accounting and loss to

the IFRS foresights; possibility of revaluation of all property, including the intangible assets; possibility of valuing assets at the fair value and not only of the financial instruments; adapting of IFRS rules to the constitution rules of provisions for liabilities and charges; the opportunity to submit to additional financial statements; the obligation to strengthen the branches that have very different activities; to eliminate the requirement to hold an equity capital of a company to enhance it, in its

quality of subsidiary, etc.Even if this process of reconsidering the European Accounting Directives does not explicitly

make news on the definition of the concept and cha racteristics of qualitative information relating toaccounting, we believe that the new guidance to IFRS will bring some changes with regard to thisissue. We believe that in these conditions, the influences specific to the IFRS concepts will feel tosome extent, directly or indirectly, also to the continental type systems, such as the French.

For example, adapting the format of presentation of the balance and the profit and lossaccount to the IFRS foresights is a first step in this direction. In the attempt to address the problemof accounting information quality in our country we will do a distinction between the phases ofaccounting reform in Romania.

In the first stage, which corresponds to the period 1991 -1999, one can say that the problemof defining the quality of accounting information and delimitation of quality characteristics hasbeen the subject of intense concern from the normalizers because:

accounting was conceived as an instrument of control;


the state plays a dual role, the normalized sys tem of accounting and informationprivileged user accounts, leading to asymmetry in demand and supply information to thespecialist in relation to other users;

reliability was imposed as the main characteristic of information, precisely due to theinstrumentalist character of accounting;

the true and fair view was obtained in terms of compliance “with good faith of rules onthe patrimony evaluation and other rules and accounting principles”.

Continuing the accounting was passed, since 1999, to the next st age marked in adopting theOrder of the Minister of Public Finance Order no 403/1999, which subsequently was replaced byOMFP no 94/2001 approving the accounting Regulations harmonized with the Directive IV of theEuropean Economic Community and the Intern ational Accounting Standards.

Although there can be identified many critical issues, should be noted that in defining theconcept of quality of accounting information at this stage has been notable progress, which mainlyrefers to:

opening accounts to external users; recognition of the role of accounting as a tool for information and decision support; addressing the economic process for obtaining accounting information and legal weight

reduction; increase the value degree of accounting information in e conomic and financial analysis; introduction of quality criteria in the development and dissemination of accountinginformation.The Romanian normalizers took over the "General framework for preparation and

presentation of financial statements”, prepared by the IASB, it may be said that assessing thequality of accounting information was based on four qualitative characteristics of financialstatements incorporated by the IASB: intelligibility, relevance (relevance), credibility (reliability)and comparability, given explicitly in the OMFP no 94/2001.

At their turn, the relevance, reliability and comparability are interpreted in the light ofsecondary criteria, which relate to:

the threshold of significance, predictive value and the retrospective one, for relevance; fair representation, the prevalence of legal economy, neutrality and completeness, for

credibility; continuity and Communicative methods for comparability.The reform of the Romanian accounting system has continued through a third phase star ted

in 2006 by adopting new regulations in accordance with the European directives. (5) Although inmany ways the current regulation is considered a "step back", we notice that the annual financialstatements constitute the central objective in these regul ations, the main purpose of accounting inaccordance with the European directives, being the measurement, evaluation, knowledgemanagement and control of assets, liabilities and equity and ensuring a faithful picture of thefinancial position, profit or loss each year, through the summary document, to provide informationuseful to those who take economic decisions.

It also requires the emphasis that the accounting information for the destination extendsfrom the decision makers at all interested in making economic decisions, in which a significantplace is taken by the users such as the donors, customers, suppliers, banks, social partners, andothers. In the same vein, be retained and that the faithful image that provides annual financialstatements refer specifically to the assets, liabilities, financial position and profit or loss, if any,which is a new way of understanding this concept.

Although the new accounting regulations in Romania, to which I referred, do not explicitlyaddress to the issue which is the subject of this study, should not be lost of sight that the fact, thequalitative characteristics of financial statements are the basic attributes that make sense usefulnessof accounting information.


Basically, the accounting regulations in accord ance with the European directives not onlystate that "accounting policies should be developed to ensure the supply through the annualaccounts of certain information that must be:

a. relevant to the needs of users in decision making;b. credible in the sense that: accurately represent the assets, liabilities, financial position

and profit or loss of the entity, are neutral, are cautious, are complete in all the materialrespects. "

On the other hand, should not be omitted the fact that the Romanian accounting law foreseesthe application of an accounting regulation in accordance with the European directives, and theInternational Financial Reporting Standards (IFRS) and the EU Member States have proceeded withthe implementation of IFRS in According to the Regu lation (EC) no 1606/2002.

Therefore, in Romania, starting with the requirements of the Regulation (EC) no 1606/2002and the national regulations (6), are required to apply IFRS starting with 1 January 2007, theentities whose immobile securities, at the b alance date, are admitted to trade on a regulated market,to prepare the consolidated financial statements.For a distinct category, represented by the entities of public interest, foreseen with the opportunityin what regards the application of IFRS in p reparing the financial individual situations orconsolidated for the own informing needs , being placed here, according to the rules in force: (7)

a. credit institutions;b. insurance, reinsurance and insurance -reinsurance societies;c. societies of financial investment services, asset management companies and collective

investment, authorized / approved by the NSC;d. commercial companies whose immobile values are admitted to trading on a regulated

market;e. companies and national companies;f. juridical persons belonging to a group of societies and enter into the consolidation

perimeter by a parent society applying IFRS;g. juridical persons, other than those mentioned above, which receive loans un granted or

with the state guarantee.In this context is clear the fact th at for certain entities in Romania the concept of quality of

accounting information will get the specific values of private international accounting standards towhich we referred above.

Theoretically, to be useful, information must meet all of the presen ted characteristics, thedifficulties appear to be determined when the proportions in which these should be applied to agiven situation, even more when certain criteria are complementary and independent, while othersare divergent.

3. CONCLUSIONS

From the practice point of view, no information can meet all the qualities listed most often itfocuses on a feature in the detriment of another, what determines the emergence of some conflictingestates at the accounting information level, such as:

the relevance and credibility, considering that increasing the credibility is realized,usually at the expense of relevance;

increasing the speed in what regards the obtaining of financial information is producedin the detriment of accuracy and integrality (exhausti veness);

increase consistency affects flexibility, resulting in reduction etc.Although there were expressed points of view through which is considered that the

reduction of possible conflict situation could be achieved by carrying out by the normalizati onscheme of hierarchy of qualitative characteristics of financial accounting information, we feel thatsuch an approach does not completely eliminate the risk of antinomic situations. In this respect, webelieve that the continuous reconsideration of the informational needs of users, as a requirement to


adapt to changes in the economic environment, political, legal and social, can lead to a greaterextent, a contribution to balancing the various quality characteristics in terms to obtain informationof good quality.

Moreover, the specialty literature (8) brings into discussion the results of some performedstudies by the researchers that aim to check how the quality criteria proposed by the conceptualframeworks are well understood in practice and if they guarantee the adoption of good decisions.The formulated conclusions following the completion of such studies, supporting our concept that isnot sufficient simply to a hierarchy of qualitative characteristics of financial accounting informationto meet the needs of all categories of users, and relate mainly to the following key issues :

the qualitative characteristics are subjective in spite of the offer that offer thenormalizers;

there is a certain dependency between relevance and understandability, the latter onebeing ensured by the knowledge own by the users;

the favorable information regarding on the business are always perceived to beintelligible and influence the decisions.

Although the accounting products beneficiaries consider that the accounti ng professionalshave the responsibility to increase, by the mode of presentation, the degree of understanding ofinformation by certain categories of users, which would imply a simplification of procedures, webelieve that this idea is contrary to the cur rent trends where the accounting practices tend to becomeincreasingly sophisticated. This is the reason for which we believe that accounting information mustbe intelligible to those who have sufficient knowledge of economic activities. Therefore, we thin kthat the responsibility for the communication and use of information must be shared between theaccounting professionals on the one hand, to be responsible for the provision of quality, and userson the other hand, need to assume knowledge required how t o exploit the received information. Inthe conditions where is accepted the idea of pluralism to the information users from the accountingdomain is difficult for the intelligibility, as a qualitative feature of this type of information, toaddress to all those who request it, without discrimination.

(1) Statement of Financial Accounting Concepts (Enunţuri ale conceptelor de contabilitatefinanciară) constituie un set de texte care prezintă conceptele fundamentale pe care sebazează normele de întocmire şi de prezentare a conturilor.

(2) International Accounting Standards Board este organismul internaţional care are caobiectiv elaborarea şi publicarea normelor contabile internaţionale.

(3) Accounting Standards Board (Consiliul normalizării contabile) este organismul britanicde normalizare în domeniu.

(4) L. Malciu, N. Feleagă – Reformă după reformă: contabilitatea din România în faţa uneinoi provocări, vol. 1, Editura Economică, Bucureşti, 2005, p. 38.

(5) OMFP nr. 1752/2005 pentru aprobarea reglementărilor contabile confor me cu directiveleeuropene , Monitorul Oficial nr. 1080 bis/30.11.2005.

(6) OMFP nr. 1121/2006 privind aplicarea Standardelor Internaţionale de RaportareFinanciară, Monitorul Oficial nr. 602 din 12 iulie 2006.

(7) OMFP nr. 907/2005 privind aprobarea categoriilor de persoane juridice care aplică careaplică reglementări contabile conforme cu IFRS, respectiv reglementări contabileconforme cu directivele europene, Monitorul Oficial nr. 597/11 iulie 2005 (modificat prinOMFP nr. 1121/2006).

(8) M. Minu – Contabilitatea ca instrument de putere, Editura Economică, Bucureşti, 2002, p.123.


REFERENCES:

1. Brabete V. - Managementul contabil în economia de tranzi ț ie, Editura Universitaria,Craiova, 2007.

2. [Colasse B. - Comptabilite generale , 5 edition, Economica, Paris 1996.3. Feleagă N., Ionaşcu I. - Tratat de contabilitate financiară , vol.1, Editura Economică,

Bucureşti, 1998.4. Feleagă N. - Sisteme contabile comparate , vol.1, Editura Economică, Bucureşti, 1999.5. Lande E. şi colab. - Contabilitatea financiară aprofundată , Editura Economică,

Bucureşti, 2002.6. Malciu L., Feleagă N. - Reformă după reformă: contabilitatea din România în faţa

unei noi provocări, vol.1, Editura Economică, Bucureşti, 2005.7. Malciu L. - Cererea şi oferta de informaţii contabile , Editura Economică, Bucureşti ,

1998.8. Minu M. - Contabilitatea ca instrument de putere , Editura Economică, Bucureşti,

2002.9. *** - OMFP nr. 1752/2005 pentru aprobarea reglementărilor contabile conforme cu

directivele europene, Monitorul Oficial nr. 1080 bis/30.11.2005.10. *** - OMFP nr. 1121/2006 privind aplicarea Standardelor Internaţionale de Raportare

Financiară, Monitorul Oficial nr. 602 din 12 iulie 2006.


QUO VADIS INTERNAL AUDIT EDUCATION?

PhD. Candidate Cristina BOŢA-AVRAMBabeş-Bolyai University, Faculty of Economic Sci ences and Business Administration, Cluj -Napoca, Romania,

[email protected]. Professor Atanasiu POP

Babeş-Bolyai University, Faculty of Economic Sciences and Business Administration, Cluj -Napoca, Romania,[email protected]

AbstractThe importance of internal audit education is more than obviously, being in the same time, emphasized by the

settlements of Code of Ethics issued by The Institute of Internal Auditors (I IA). The Code of Ethics states the principlesand expectations governing behavior of individuals and organizations in the conduct of internal auditing, describingthe minimum requirements for conducting internal audit activities, and one of these requireme nts being the professionalcompetence. According to this requirement internal auditors apply the knowledge, skills, and experience needed in theperformance of internal audit services. In the same time, it is absolutely necessary that internal auditors mus t have apermanent preoccupation for the increasing quality of their internal audit education and so the performance of internalaudit services offered. Starting from these premises, our research objectives were focused on the analyzing the contextof the evolution of internal audit education from international to national perspectives. Using the method of literaturereview we made an analysis of internal audit education in the international context, followed by a critical analysis ofthe internal audit education in the Romanian context. Our results show there are some problematic areas that arelooking for quickly solutions in order to assure a good quality of internal audit education, and so a good quality ofinternal audit services, in that way being acco mplished the necessary context so internal audit to be able to add valueto the organization.

Keywords: internal audit education, code of ethics, certified internal auditor, certification of internal auditors,quality of internal audit services

JEL Code: M42

1. INTRODUCTION

Internal audit profession knew a very spectacular developing from the beginning till present,its evolution being marked by some milestones that had big influences transforming this professioninto one legitimate profession. In that d irection, the adoption of Internal Audit Standards, followedby its Statement of responsibilities and its Code of Ethics and finally the certification program forinternal auditors brings legitimacy to the profession that many years of practice could not. It givesto its participants in a recognized profession, higher levels of professional training, recognition byone's peers, better acceptance in the job market, and personal satisfaction in passing a demandingexamination (Sawyer, L.B., 1991).

It is very clearly that internal auditors must imply only in those activities for which theyposses the necessary knowledge, skills and professional competences. Also, it is absolutelynecessary that the auditors must have a permanent preoccupation for the enhanc ing of the efficiencyand quality of offered services. In the situation internal auditors are not in the know of the newprogresses and developments regarding the internal audit standards and practices of internalauditing, than we can say that they are co nducting the internal audit activities into an immoralmanner, that aren’t chiming in with the ethical requirements of the profession (Dittenhoffer, M.A.& Klemm, R.J., 1983).

Next, we will emphasize the most important arguments that could sustain the necessarygrowth of the interest for the enhancing of the quality of education in internal auditing:

Internal auditor detains an unique position inside the organizational structure of an entity,knowing all the processes and activities of the organization, ha ving in this way theadvantage of being able to identify all potential causes for the negative aspects within theorganization;

[email protected]

[email protected]


In order to be able to fulfill all the growing responsibilities of internal auditors, theuniversities must assure for its stude nts the opportunity of obtaining necessary knowledgeregarding the internal audit activity, in the case they intent to become a future internalauditor;

The experience of internal auditors also must include their capacity of identifying theindicators of fraud events, that makes necessary the inclusion into the internal auditcurricula from universities, the examination of audit tests and other instruments useful forthe internal auditors in the prevention and detection of fraud;

The developing of some spec ific internal audit courses in the curricula of learninginstitutions could have a great contribution at the promoting of a completed framework thatmust be shared with the students in order to obtain the best understanding of the ethicalvalues that coordinate the internal audit activity.

2. METHODOLOGY OF SCIENTIFIC RESEARCH

The research methodology of this paper is based on fundamental type of research, trying tomake a review of all main approaches, ideas and opinions of high rated specialists regarding theinternal audit education trying to identify the next perspectives of this problematic. We focused onthe analyzing of the opinions and information provided by specialty literature using the method ofdescription. We used inductive method, but also ded uctive method of research. Our final purpose atthe end of research was to be able to draw some significant conclusions regarding the evolution andthe perspectives of internal audit education through an approach from international to national.

Using the method of literature review we ’ll try to identify the major coordinates thatcharacterize the evolution of education and certification system of internal auditors. The next step inthe construction of the methodology of research was determined by the ident ification of thepotential answers at the questions:

1. Which were the reasons that determined a poor growing of the interest for the educationsystem of internal auditing in the first stages of internal audit’s evolution?

2. What could be done in order to incre ase the quality of this system?3. Which are the perspectives of the educational system for internal auditing from

international context, but also from national context?4. Which is the actual phase of developing regarding this problematic in Romanian context

and what could be done to improve the quality of educational system of Romanian internalauditors?We consider that finding the answers at the previous questions could help us to identify the

ways that internal auditors could improve their educational backg round and the perspectives that aregoing to influence the future of the educational system, an increasing quality of this system beingabsolutely necessary so that internal auditors to be really able to add value to their organization. Inthe process of finding solutions at the problems discussed we investigated high rated articles andpapers, reports and recommendations, combining the documentation process with the observationprocess materialized in its two forms: participative and non -participative.

3. INTERNAL AUDIT EDUCATION AND CERTIFICATION ATINTERNATIONAL LEVEL: EVOLUTION AND PERSPECTIVES

Internal audit profession in the earliest time of its evolution was not enjoyed of very muchattention from specialists regarding the problematic of education. But lately the educative aspects ofinternal auditing started to be more and more important starting from the premise that quality ofinternal audit education has a significant influence over the value added provided by internalauditors in their activity.

The basis of The Institute of Internal Auditors were underlain in 1941, and starting with1954 there could be identified 21 learning institutions that offered internal audit courses ( Phillips,


T.J. & Lewis, B.T., 1991). In the same year, an American Accounti ng Association (AAA)committee report addressed alternative formats for an internal auditing curriculum (AAA, 1955).Next decades after this period, we assisted at a decline of the interest for education necessary forinternal audit activity, this decline being materialized in the fact that in 1972, only 2 colleges hadincluded in their curricula internal audit specialty (Neumann, F.L., 1972). The study realized bySumners G.E. and Roy R.A. (1986) reflected that, along 1985 year, 44 learning institutions ha dincluded in their curricula one or more courses of internal auditing.

But which were the reasons that determined a poor growing of the interest for the educationsystem of internal auditing in the first stages of internal audit’s evolution? Phillips T.J. and LewisB.T. (1991) identified some reasons that could be considered as potential causes for the poorinterest for internal audit education from ’80 -’90 period of twentieth century:

Lack of applied experience among college faculty, very few profess or had internal auditwork experience;

Shortage of textbooks and other teaching materials; Rapid growth in more traditional accounting literature; Academic emphasis on public accounting, this situation being created by at least some

reasons like: public accounting enjoys a certain status and always it has always beenconsidered an excellent training for numerous positions for economic area, and finallypublic accountants generally have been around longer than internal auditors;

Misconception that a general auditing course addresses internal audit requirements and theresult was that academic medium sustained teaching of financial audit courses, in spite ofthe fact from management’s point of view, the internal auditor’s position is totally differentfrom external auditor’s position or public accountant’s position.Internal audit education has to be totally different from the other accounting disciplines even

though, from some specific viewpoints there are some similitude between internal and externalaudit, however each of these areas need specific audit programs operating with differentinstruments (Sawyer, L.B., 1981).

Sumners (1985) identify several benefits and advantages that could be provided for studentsand companies through promoting and regularizing internal audit education at the university level:

Development of a primary source of entry -level internal auditors to supplant the secondarymarkets on which the profession currently relies for its personnel;

Improvement in the consistency of training at the entry-level position; An overall decrease in training cost and an increase in training efficiency ; An increase in awareness and visibility of internal auditing by students, academicians, and

the general public.A very interesting conclusion was dra wn as a result of the study made by Kusel and Oxner

(1987). According to the results of this study demand for new accounting graduates in the internalauditing area represent approximately 30% of the demand of the public accounting job market. Thissignificant need for graduates in the internal audit field requires companies to rely on new hiresoutside accounting. These individuals are costly to train. At best, companies may be able to employaccounting graduates with an understanding of external auditing. But we don’t have to forget thatthe internal auditor's objectives are considerably different from those of an external auditor, andmany firms are forced to hire people lacking the training or disposition to be internal auditors(Phillips, T.J. & Lewis, B.T., 1991).

Major disadvantages of such a practice are that there is some inconsistency in the educationprogram of the internal auditors from entry level, on one side; on the other side, this practicesupposes assuring of some training courses (with big costs) for the professional preparing of theinternal audit staff.

The Institute of Internal Auditors (IIA) pays a special attention for the promoting of internalaudit education. In this direction, in January 1985, it gave all the necessary support for th eimplementation of a pilot program and the “Louisiana State University Internal Auditing Pilot


School” (LSUIAPS) was begun. The major scope of such a program was to serve as a model for theother universities interested in offering a specialty in internal auditing (Phillips, T.J. & Lewis, B.T.,1991). One of the essential objectives of this program was to prepare students for the CertifiedInternal Auditor (CIA) examination, which students are required to take at the end of the program,the graduates being monitored for their exam performance.

The activity of The Institute of Internal Auditors regarding the promoting of internalauditing education wasn’t limited only at this program. Another objectives of this institution wasthe providing of research founds to certain learning institution for developing of their own teachingprogram of internal auditing courses, starting from the premises these programs could be differentfrom LSUIAPS, because internal audit education can be realized in different and many o ptions(Phillips, T.J. & Lewis, B.T., 1991). IIA offered, in the same time, the possibility teaching of someinternal audit courses to be realized by some members of IIA recognized as being very specialistand having a widely experience in internal audit a ctivity. Another way of improving of internalaudit education was represented by the chance for those students interested in this type of activity totake part in a real team of internal audit within a company, this option assuring the possibility todirectly interact cu internal audit practitioners, getting in this way a certain and valuable experience(Greenawalt, M., 1991).

Another significant aspects regarding the professional competence of internal auditing aredetermined by the certification system o f internal auditors, along the quickly evolution of thisactivity, being generated this specific need of finding the best and most relevant way of certificationfor internal auditors, that could allow them to obtain a specific status in their clients ’ vision, butalso to earn the confidence of the audittees regarding their professional competences. It is obviouslythat evolution of internal auditing knew many forms of certification for internal auditors, but themost appreciated one, at international level, assuring in the same time for their possessorsmaximum of credibility all over the world is the one called Certified Internal Auditor (CIA). Thisprogram of certification is organized by IIA at international level, and every country member of thisinstitute through their chapters.

Internal audit profession earned its legitimacy through this certification program such athing couldn’t be assured by the long period of practices. In this way, the participants at thisprogram have the opportunity to belong to a profession with international recognizance, obtainingmore success on job market but also a bigger professional satisfaction through passing some examsthat are not easy at all.

According to the dates mentioned on IIA website ( www.theiia.org) a Certified InternalAuditor is that person who meets the necessary requirements established by IIA. These conditionsare referring at necessary education, necessary professional experience (24 of relevant experience ininternal audit or the equivalent; equivalent experience could be experience in quality assurance,assessment of internal control system or external audit); and finally successful passing of all examsfrom CIA program. Obtaining of CIA certification represents a real proof in the light of the fact theowner of this type of qualification meets all necessary professional criteria established by IIA. Thefirst CIA exams took place in 1974.

Agraval S. and Siegel P. (1989) realized a study among 2.012 internal auditors fro m UnitedStates of America that posses Certified Internal Auditor qualification, the main objective of thisstudy being the evaluation of the benefits obtained as a result of owning such a diploma. One resultof this study shows auditors that also possesse d other degrees like a master degree or CertifiedPublic Accountant (CPA) certification didn’t observe a significant growing of their professionalvalue on job market, while the persons that did not possess other diplomas were optimisticregarding the potential benefits that could be obtained as a result of CIA qualification. One possibleexplanation could be the persons that had as a main certification only CIA could better observe thevalue added obtained as a result of this professional certification.

Nowadays, IIA has been developed a new program called Internal Auditing EducationPartnership Program (IAEP) in order to answer to the increasing interest of universities in internalaudit education. The coordination of such a program IAEP is assured by t he IIA's Academic

www.theiia.org


Relations Committee – ARC, which is an international volunteer committee comprised of educatorsand practitioners whose purpose is to fulfill The IIA's strategic goals and objectives relating tointernal audit education.

The starting point of this program was materialized in the fact that high learning institutionswhich are interested in promoting internal audit education have to detain necessary ability andresources in order to be able to face the coming challenges. IAEP’s objective is to have a strongcollaboration with those institutions and universities interested in including of internal auditingcourses in their curricula. On IIA’s site, at Professional Guidance section there are presented reportsthat offer information regarding th e successful results obtained till present by the universities andother institutions that had been introduced in their curricula internal audit courses, the mainobjective of these reports being to encourage other universities in the promoting of internal auditeducation and its significant results.

The benefits of the Internal Auditing Education Partnership program provided to collegesand universities, students, educators and employers consist in:

A unique partnership opportunity for educational institu tions and practitioners; Internal audit curriculum developed around the Professional Practices Framework; Internship opportunities with leading -edge companies in a range of industries; Graduates with unparalleled internal audit education, ready for recruit ment; Networking events to build relationships and share lessons learned; Educational programs to enhance the learning process; Professional guidance to support program administration.

The IAEP program offers colleges and universities three levels of parti cipation with anEntry level, a Partner level and an advanced level known as a Center for Internal AuditingExcellence. Being a member of the IAEP program requires a commitment from the school, the localchapter/affiliate and the IIA Academic Relations. Th e application for the program requires a five -year plan that discusses all aspects of the school’s program as it relates to the core requirementswhich are listed below. IAEP coordinators are required to submit an annual report that documentstheir progress and successes. Schools are required to recertify their program every five years.

4. ROMANIAN CONTEXT OF INTERNAL AUDIT EDUCATION ANDCERTIFICATION

If we focus our attention on internal audit education from Romanian national context, wehave to start from the premise introduction of internal audit in Romania is recently (1999), being aresult of general efforts of modernizing financial management, in both public and private sector.The trend of internal audit evolution in Romanian context was inversed from the internationalspace. So, if in the international plan the internal audit function was developed starting from thebigger private companies and the multinational companies, extending after to the public sectorcompanies, in the Romania was other way. Th e internal audit was important at the beginning for thepublic companies, and prove in this way is the regulations and the laws adopted which regulates theinternal audit. After that it has been started the growing of investing in the Romanian economy, themultinational companies increasing in the Romanian economy implies influences of theinternational practices through which there is the recognizing of the necessity and the efficiency ofthe internal audit. So, even if the internal audit is at a low level , the internal audit from theRomanian companies is more and more developed, the utility of the internal audit function beingbigger and bigger.

We propose to find answers at next question: What was the evolution of internal auditeducation in Romanian national context and which are the most relevant certification options forRomanian internal auditors?

If we think about the period elapsed from the moment of internal audit introduction inRomania (1999) till present (2009), we cannot say that internal aud it education is spectacular orvery well developed. The first years of implementing period were necessary for Romanian


specialists to understand the way of approaching internal auditing from international context inorder to knew better which the best prac tices of internal auditing in developed countries are, butalso to astonish key points that influenced internal audit evolution at international level. Theinternal audit’s definition settled by Romanian regulators that was accepted at international level byinternal audit specialists was realized barely in 2002. Nowadays, Romania realized the performanceto implement a legislative framework according to international requirements and accepted byEuropean Commission being harmonized with other similar syste ms from the other countriesmember from European context and not only.

A first important step in the educational process of internal audit in Romania could beidentified in the period of 2003 -2004 when we have assisted at introduction in curricula of som eimportant universities from Romania of internal audit and internal control courses (Ghiţă, E., 2007).It is obviously that is necessary a certain period of time for that disciplines to obtain theperformance to impose in academic culture but also in the cultural medium of organizations,especially for the private ones. When we affirm such a thing we are thinking about the situation ofpublic entities where the need form internal audit is imposed by legislation while for private entitiesthis need is an objective-functional one being compulsory only for those private entities that fulfillcertain criteria settled by legal requirements (Law no.31/1990 referring at private entitiesrepublished)

In our opinion, next future is going to give us a significant increasing of progressesregarding the educational process of internal auditing, one ar gument in this direction beingrepresented by the consolidation and growing phase in internal audit evolution process in Romaniancontext that we are going to experience.

A significant and delicate problem, in the same time, is represented by the certifica tionsystem for Romanian internal auditors. Almost all the specialists are agreed with the necessity ofcertification of internal auditors. The big question is: Which form of certification for internalauditors should be adopted and how could that be reali zed?

The potential answers at this question have been generated real polemics in specialtyliterature, different opinions regarding the certification system of Romanian internal auditors beingdivided in two main directions:

One option for the certification system of internal auditors from Romania, especially for theauditors from public sector is that should be realized through an activity of master type ,specific to institution of high learning from Romania. The first step of such an activitysupposes the establishing of the universities that could organize such activities with a goodreputation, being recognized as having a good practice in this area. The curricula of thoseuniversities should be realized in cooperation with the representatives of Public FinancesMinister with a structure on three semesters and having the agreement of Education andResearch Minister. There are more specialists which are agreed with this idea like: GhiţăMarcel (2006), Ghiţă E. (2007) ;

At the opposite pole it could be identified the option sustained by the representatives of IIARomania chapter, the Association of Internal Auditors from Romania (AAIR), which considers thebest solution would be the certification Certified Internal Auditor (CIA) with national recognizance.In that direction, AAIR have been started to action since 2006, organizing preparing courses for thepassing of exam and obtaining of Certified Internal Auditors qualification. The m ain benefits of thisqualification presented by AAIR are the international recognizance that proves the professionalcompetence at the highest level, those four exams included in this process of qualification verifyingthe candidates’ abilities and knowled ge of internal auditing practices.

Of course, every representative of previous opinions tries to argue its viewpoint as best aspossible. In this way, the promoters of master activity sustain the idea certification as CertifiedInternal Auditor is only for elite (Ghiţă, M,. 2006), while certification through master activitywould be more accessible for Romanian internal auditors. But the representatives of AAIR considerthis affirmation without strong arguments because the only one difficulty in obtaining the CIA


certification is sustaining of all exams in other languages than mother language, but the eliminatingof such a difficulty is one of the objectives that AAIR will try to accomplish as soon as possible.

Another argument of AAIR is that obtaining of such a m aster degree supposes bigger costsand a diploma with only national recognizance appreciating that still these types of degrees areobtaining by elites. Even more, the representatives of AAIR initiate the idea of commoncooperation for the progress of educ ational and certification system of Romanian internal auditorsthrough European funds in order to realized the translation of CIA exams in Romanian language,eliminating in this way a major disadvantage for those ones that do not know very well aninternational language.

These divergences went far away and in December 2007, the president of AAIR addressed aletter to the Public Finances Minister (Economy and Public Finances Minister at that time), tryingto argue the official position of AAIR, giving a lo t of arguments, proposing in the same timerelevant changes and completions of Law no.672/2002 regarding public internal audit. The receivedanswer was these proposals made by AAIR will be presented and discussed with internal auditspecialist form public system, in order to find the best solution. Which solution is really the best?Probably the future will give us the answer at this difficult question.

In our opinion, even if the certification through a master activity will be adopted for internalauditors from public sector, in the case of private entities we sustained the efficiency of professionalcompetence provided by Certified Internal Auditor qualification to a certain internal auditor fromprivate sector. In fact, we consider the best qualificatio n for internal auditors from private sectorcould be:

Certification as financial auditor, member of Chamber of Financial Auditors fromRomania, a compulsory requirement in the case of managers of internal audit department in thecase of economic entities according to legal settlements;

Certification as Certified Internal Auditor because is a qualification with a nationalrecognizance assuring for the owner of such a qualification the proof of a higher professionalcompetence.

The empirical study realized by Boţa-Avram C. (2009) among the 105 members of AAIRhad many research objectives, one of these consisted in finding the most relevant certificationmodality in the vision of respondents – Romanian internal auditors. The results of this study wereanalyzed through a comparative analysis between two categories: internal auditors from privateentities and internal auditors from public entities. Next, we present the results obtained (table no.1and table no.2):

Table no.1 Relevant modalities of professio nal qualification forinternal auditors from private entities

Relevant modalities of professional qualification forinternal auditors from private entities (5) (4) (3) (2) (1) Total

Certification as Certified Internal Auditor with thesupport of Association of Romanian Internal Auditors(AAIR)

66% 24% 10% 0% 0% 100%

Certification at national level through a master degreespecific to high learning institutions 2% 15% 22% 22% 39% 100%

Certification as financial auditor - member ofChamber of Financial Auditors from Romania 10% 15% 32% 15% 29% 100%

(5)- Very important, (4) - important, (3) - neutral, (2) - less important, (1) - not at all importantSource: Boţa-Avram C. (2009)


Table no.2 Relevant modalities of professional qualification forinternal auditors from public entities

Relevant modalities of professional qualificationfor internal auditors from public entities (5) (4) (3) (2) (1) Total

Certification as Certified Internal Auditor with thesupport of Association of Romanian InternalAuditors (AAIR)

44% 19% 23% 11% 3% 100%

Certification at national level through a masterdegree specific to high learning institutions 25% 16% 13% 16% 31% 100%

Certification as financial auditor - member ofChamber of Financial Auditors from Romania 9% 6% 19% 17% 48% 100%

(5)- Very important, (4) - important, (3) - neutral, (2) - less important, (1) - not at all importantSource: Boţa-Avram C. (2009)

Analyzing the structure of responses from the previous tables we can easily notice thatcertification appreciated as being the most important is Certified Internal Auditor through AAIR(for 66% internal auditors from private entities and for 44% internal auditors from public sector).The relevancy of certification through a master activity is appreciated as being very important by avery small number of internal auditors from private sector (only 2%), and 25% of internal auditorsfrom public sector are giving a significant importance (25%).

Very interesting is the structure of the answers obtained for the certification as member ofChamber of Financial Auditors from Romania , only 32% of internal auditors from private entitiesand 19% of internal auditors from public sector appreciate this type of certification as being neutralimportant. We consider these results as being at least surprising, especially in the context that legalsettlements (Emergency Government Order no. 75/ 1 June 199 9 regarding the financial auditactivity, article no.23) require that managers of internal audit departments for private entities musthave the quality of financial auditor. One poss ible explanation for the results could be the structureof respondents from their function’s point of view (only 13% of internal auditors of public entitiesand 27% of internal auditors from private entities) are managers of internal audit departments.There are significant differences between internal auditors of private entiti es and internal auditors ofpublic entities regarding this certification, but these could be justified through the obligation ofcertifying as financial auditor and member of Chamber of Financial Auditors from Romania isrequired only for the managers of i nternal audit department from private sector.

5. CONCLUSIONS

As a result of our activity research for realizing this paper, next we will draw the mostimportant conclusions that could better answer at the question: Quo Vadis internal auditeducation?

Internal audit education has been largely ignored in the business curricul a throughout theperiod that the internal auditing profession has been experiencing significant growth.

Promoting internal audit education is one way institutions can provide a broader educationto accounting students and serve companies that are seeking qualified internal auditors.

The need for very good specialists in internal auditing become more and more important,especially in the difficult economic context that we have to face with .

Internal audit education can be as simple as providing a single course in internal auditing,or it may take the form of a specialty in the field of economic universities. Whatever theapproach that will be adopted, we recommend promoting internal audit education to helpfill the gap in the accounting curricul a, because internal auditing helps students to developstronger analytical, problem-solving, and judgment skills.

Especially for Romanian national context, but not only, we consider that according to thecomplexity of internal auditing work it is absolutely necessary the certification of internalauditors. In this way there are going to discourage those passing passengers within internal


audit activity, that are only looking for a job, no matter what t hey have to do, finallyremaining anchored in internal audit profession only those really dedicated to internal auditprofession.

6. REFERENCES

1. Agraval, S. & Siegel, P., (1989), Significance of CIA certification , Managerial AuditingJournal, Vol. 4 No.3, pp.17-22

2. American Accounting Association (1955), A project report of the 1954 Task Committee onInternal Auditing Education, Accounting Review, pp. 58-69.

3. Boţa-Avram, C. (2009), Auditul intern al societăţilor comerciale , Risoprint Publisher, Cluj -Napoca

4. Dittenhoffer, M.A. & Klemm, R.J. (1983), Ethics and the Internal Auditor , IIA MonographSeries, The Institute of Internal Auditors, Altamonte Springs, Flori da

5. Ghiţă E. (2007), Audit public intern, Sitech Publisher, Craiova6. Ghiţă M. (2004), Auditul intern, Economic Publisher, Bucharest7. Greenawalt, M. (1991), Internships: injecting real-world experience into the internal audit

curriculum, Managerial Auditing Journal, Vol. 6 No. 2, pp. 27-318. Kusel, J., & Oxner, T. H. (1987), The internal auditor job market 198 8, Little Rock -

University of Arkansas at Little Rock9. Neumann, F. L. (1972), Auditing education - A decade of transition: And now?, Journal of

Accountancy, March, p. 87-9010. Phillips, T.J. & Lewis, B.T., (1991), Internal audit education: The accounting curriculum's

greatest deficiency, Journal of Education for Business, Jan/Feb, Vol. 66, Issue 311. Sawyer, L.B. (1981), The practice of modern internal auditing, The Institute of Internal

Auditors Inc.12. Sawyer, L.B. (1991), Internal auditing: practice and professionalism, Internal Auditor.

June, accessible on-line la http://findarticles.com/p/articles/mi_m4153/is_n3_v48/ai_10819136

13. Sumners, G. E. (1985), IIA's coordinated, systematic approach to education , InternalAuditor, December, pp.18-23

14. Vinten, G. (1988), Educating auditors: the future of the profession , Managerial AuditingJournal, Vol. 3, MCB University Press

15. Vinten G. (2004), The future of UK internal audit education: Secularisation andsubmergence?, Managerial Auditing Journal, Vol.19 No.5, pp.580 -596

http://findarticles.com/p/articles/mi_m4153/is_n3_v48/


THE DISCRETIONARY FISCAL POLICY IN THE EUROPEAN ECONOMIC ANDMONETARY UNION

Lecturer PhD Candidate Cristian PANAEcological Univeristy Bucharest, Romania

[email protected]

AbstractThis paper reviews the macroeconomic use of national fiscal policy within the European Econ omic and

Monetary Union and the effect the discretionary fiscal policy has on the economic activity. It also considers thedifference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasonsfor the gap between the two. The analysis of the stance of national fiscal policies finds evidence that the quality of fiscalpolicies has improved in two ways: they are more clearly countercyclical – or less procyclical – and they are morereadily used to restore competitiveness than to attempt to boost demand when competitiveness is eroded. In Sections IVand V there are presented two successful cases of discretionary fiscal stabilisation , respectively the lessons to bedrawn.

Key words: Fiscal policy, fiscal stabil ization, Stability and Growth Pact, monetary union, euro, EMU.

JEL classification: E61, E62, E63

1. INTRODUCTION

The Euro area will likely remain for a long time a one -of-its kind arrangement with acentralized monetary policy and decentralized fiscal policies. This is, after all, the samearrangement as in most federal states, with two key differences. First, in Europe, the “federal”budget is very small and largely automatic. Second, in contrast with many federations wheredecentralized budgets are subject to strict imbalance limits while the centre carries out fiscal policy,Europe’s centralized budget must be balanced while sub -central budgets are in charge of fiscalpolicies.

That fiscal policy can be used as a macroeconomic policy tool does not me an thatgovernments do so in an appropriate way. A long tradition has identified a number of lags –recognition, decision, implementation – which could result in badly timed effects. An equally longtradition has pointed out that governments may be more mo tivated by political gains rather than byeconomic management concerns. If fiscal policy actions are not driven by a macroeconomicstabilization motive, it may not be systematically countercyclical. The question, then, is whethereuro area membership affec t policymakers’ incentives and, if so, how. A first place to look at is theStability and Growth Pact (SGP). On one hand, it can help governments to resist pressure frominterest groups and therefore improve the quality of fiscal policy. On the other hand, it reduces theroom for manoeuvre and lead to pro -cyclical policies.

Another consideration is the fact that the exchange rate is no longer available to boostexternal competitiveness, with two opposite potential effects on the conduct of fiscal policy. Fi rst,governments may be tempted to use fiscal policy instead of monetary policy to counteract atemporary competitiveness loss when a euro appreciation reduces domestic demand. A differentcase concerns a loss of external competitiveness due to domestic in flation or to a relativeproductivity decline. In a monetary union, external competitiveness can only be restored the hardway, through sustained cost and price moderation or enhanced productivity gains. Fiscal policy isno longer a substitute to monetary policy (1). Its only possible macroeconomic contribution is toencourage cost and price moderation, possibly by restricting demand in goods and labour markets.This would make fiscal policy countercyclical during upswings and a -cyclical during downswingsas long as the exchange rate is overvalued.

All in all, the impact of the adoption of the euro on the macroeconomic use of fiscal policyis ambiguous. We expect more countercyclical action as fiscal policy substitutes for the lostmonetary policy instrument, less use of this instrument in downswings as a result of the SGP,

[email protected]


especially in countries where the budget deficit is not far enough from its 3% ceiling and anasymmetric use for countries with an external competitiveness shortfall.

2. THE EFFECT OF DISCRETIONARY FISCAL POLICY ON ECONOMICACTIVITY

The question of the usefulness of fiscal policy as a macroeconomic tool is highlycontroversial. At the theoretical level, the debate pits (neo)classical against (neo)Keynesianmacroeconomists. The former as serts that, one way or another, consumers and firms view publicdebts as their own liability; accordingly, they reduce their expenditures whenever the debt increasesor diminishes less than previously expected. The latter relies on price stickiness, borrow ingconstraints and/or other market imperfections to find that fiscal policy can affect output. In view ofsuch conflicting theoretical results, the verdict should come from empirical studies.

Empirically, too, the issue is controversial. Some authors find that fiscal policy affects theoutput, even though the multipliers are small and have possibly declined in recent years. Others findthat consumption moves in an offsetting direction, although the offset effect is partial, which leavesa small output effect. The reason why different authors reach different results is that, even if all ofthem use variables estimates to pinpoint the relationship between output and fiscal policy, and thecyclically adjusted balance as a measure of the fiscal policy stance (2), they differ in the way theyidentify the variables. Those who find a positive effect of fiscal shocks on consumption, andtherefore output, typically use quarterly variables and make the assumption that there is nocontemporaneous effect from cyclical c onditions to policy discretionary actions.

Despite the conventional macroeconomic thinking that fiscal policy can and shouldcontribute to smoothing temporary swings in aggregate economic activity, pro -cyclicality of fiscalpolicy remains a widespread phen omenon around the world. Studies find that in developing andmiddle income countries fiscal policy has frequently moved with the cycle. For developedeconomies the findings are more nuanced and depend on the time period and countries considered.When fiscal policy has been pro-cyclical in industrial countries, it has mostly been so in goodeconomic times (Manasse, 2006 and Alesina and Tabellini, 2005). The deficit bias in good timeshas largely been attributed to political economic motives as policy makers may attach more weightto objectives other than the stabilisation of output. In particular, when competing for publicresources ministers neglect the repercussions of their decisions on overall public finances. This'common pool problem' gets worse in good economic times as more overall resources are available.

The pro-cyclicality of fiscal policy has also emerged as a characteristic of the euro area(Langedijk, 2004). Since the early 1990s, when EU Member States agreed to establish an economicand monetary union and started preparing for the single European currency - which was effectivelyintroduced in 1999 - repeated episodes of pro-cyclical fiscal policy have been observed. On the faceof it, these episodes seem to have vindicated critics who have argue d that the SGP would seriouslyhamper the stabilisation function of fiscal policy. Such judgement was passed well before the SGPcame into force - for instance by Buiter et al. (199 3) - and was reiterated more forcefully - forinstance by Canzoneri and Diba (2001) and Calmfors (2003) – a few years after its inception.

However, available econometric evidence on how the EU fiscal framework may haveaffected fiscal stabilisation in the countries adopting the single European currency is not necessarilydiscouraging. The introduction of the euro does not seem to have weakened the ability of fiscalpolicy to stabilise cyclical swings in general. Gali and Perotti (2003) were among the first toconclude that the SGP has not impaired the stabilisation role of fiscal policy. They actually find thata clear pro-cyclical pattern in the pre-Maastricht period has given way to a more counter - or a-cyclical trend after 1991. Similarly, Fatas and Mihov (2003) document that the SGP constraintsseem to have mitigated the variou s influences that are believed to distort the use of the fiscal policyinstrument. But these findings need to be qualified on at least three accounts.

First, the estimated improvement in the stabilisation property of fiscal policy in the euro areaafter 1991 masks a significant change in the behaviour across the different phases of the economic


cycle. In the period preceding Maastricht (1980 -1991), there is a clear pro-cyclical stance in bothstages of the cycle: the fiscal stance is on average expansionar y in good times and contractionary inbad times. The pattern changed in the second sub -period (1992-1998) when the countries, in aneffort to fulfil the Maastricht criteria for adopting the euro, ran on average tight fiscal policiesirrespective of the cyclical position (3). After the introduction of the SGP and the single currency in1999, the pattern has shifted back to what it was in pre -Maastricht times with pro-cyclicality ingood times being particularly pronounced.

A second important provisio to keep in mind when considering the findings of Gali andPerotti (2003) is that the panel estimates may not necessarily capture the correct policyimplications. While ensuring statistical rigour, panel estimates attach the same weight to eachcountry independently of its relative size in the euro area. Consequently, emerging statisticalregularities may not reflect the factors that actually shape the policy stance and, in turn, the policymix in the monetary union as whole. In particular, they do not appropriatel y highlight the roleplayed by the fiscal performance in large euro -area countries, whose behaviour ran afoul with theprovisions of the SGP and eventually led to the crisis of the Pact in 2003 (Buti and Pench, 2004).Even if all euro-area countries run a counter-or a-cyclical fiscal policy, except Germany, France andItaly (as was for instance the case in the early 2000s) the overall policy stance of the euro areawould still be pro-cyclical.

And third, Gali and Perotti's study accounts only for the perio d up to 2002 and thereforedoes not capture the pro-cyclical episodes since. Across the EU -11 nearly half the years since 2002were characterised by a pro-cyclical stance. Since this included the largest members of themonetary union this has translated in to pro-cyclicality for the euro area as a whole.

To underscore the alleged shortcomings of the EU fiscal framework, critics often calledattention to the US experience since the mid -1990s where, prima facie, fiscal stabilisation appearsto have been more successful. Based on the traditional analysis which looks only at the role ofdiscretionary fiscal policy, fiscal policy in the euro area emerges as having been more pro -cyclicalthan that of the US. The euro -area fiscal policy was characterised by strong p ro-cyclical fiscaltightening in the run-up to EMU, followed by an adjustment fatigue that created a pro -cyclicalfiscal loosening despite sustained economic growth (2000 -2001). When economic conditionsdeteriorated from 2002, fiscal policy tightened again and then moved towards a neutral stanceduring the upswing in 2005-2007. This pattern seems to be in contrast with the experience recordedin the US where discretionary fiscal stance has largely helped to stabilise the economy even thoughthis was not the explicit and prime objective of fiscal policy in every year. In particular, the sharpturnaround from a cyclically-adjusted primary surplus in 2000 to a deficit of more than 3% of GDPin 2002 was not only a response to the economic slowdown following the bursting of theinformation society and technology ( ICT) bubble in 2001. Rather, it largely reflected (i) theincrease in defence spending linked to the war in Iraq and (ii) tax cuts with an electoral motive.

3. THE STANCE OF FISCAL POLICIES

Assessing the stance of fiscal policies is complicated since the cyclical position of theeconomy is not always clear. From the point of view of fiscal policy the most common measure ofthe cyclical position of the economy has traditionally been the output gap. The fi rst ten years ofEMU then roughly coincides with a full cycle, consisting of three phases, dubbed “boom” (or "goodtimes"), “downturn” and “recovery”. A boom is defined here as an episode in which the gap ispositive and increasing. A downturn is called if the gap is falling and turning negative and arecovery is called when the negative gap is closing (4).

There is a strong resemblance with the previous cycle, which according to the same criteriaalso spanned ten years (1989-1998) and portrayed a similar time profile for the output gap. For theassessment of the stance of fiscal policy it is important to consider that governments may have beenled by quite different perceptions of the cyclical position of the economy than suggested by theoutput gaps as estimated ex post. Comparing the actual (ex post) evolution of the output gap in the


euro area with that observed in real time, it can be observed a much smaller variation of the leveland changes of the output gap ex ante than ex post, a phenomenon that is common to virtually allparticipating countries. Apparently, most countries did not perceive the relatively hefty cyclicalswings going on at the time. More specifically, many countries did not recognise the positive valuesand saw much smaller increases o f the output gap in 1999-2000. They were also largely unaware ofthe extent of the 2001-2003 downturn. The record of Euro area countries with respect to the errorsin assessing the cyclical position of the economy over this period compares unfavourably wit h thatof the United States where revisions of the output gap have been relatively small since 2000 (5).

Political economy factors play a role in explaining why official macroeconomic forecasts inEMU display systematic optimism about medium -term economic growth and – by extension – ofpotential output during upswings. While most forecasters had a tendency to overstate growthprospects in the early 2000s, in a number of large euro -area countries, the macroeconomic scenariosunderpinning budget plans exhibi ted a rather persistent upward bias (Jonung and Larch 2006).These optimistic growth projections biased the estimated trend growth upward and as a resultpotential output was overestimated and the real time output gap accordingly underestimated. Thisbias may be partly the result of the incentives generated by the SGP itself. Indeed, anoverestimation of potential output is "convenient" in the sense that it puts a favourable gloss on theannual stability programmes by easing the move towards the close to ba lance or surplusrequirement over the medium term (since a bigger share of fiscal deficits will be labelled"cyclical"). Ex post, however, it causes budgetary slippages as expenditure levels are typically notimmediately adjusted in the face of lower than projected economic growth and the associated lowerthan projected revenues.

The issue then becomes how fiscal policy, as gauged by the change in the cyclically -adjusted primary balance as a share of GDP, behaved during the cycle, both in real time and expost. Differences between the two largely reflect the assessment of the output gaps as revisions inthe nominal budget numbers themselves have been comparatively minor (6). Looking at the recordin more detail, the following can be inferred:

In an ex post sense, although pro-cyclicality has not been widespread in the 1999 -2000boom, on aggregate the stance was slightly stimulatory. This does not compareunfavourably with the boom of 1989 -1990, when fiscal policy was clearly eased in a pro -cyclical manner in the vast majority of countries – with the notable exceptions of Italy andBelgium where high debt levels and an associated surge in debt servicing forced fiscalconsolidation upon them. However, the ex post observed neutrality was not in the plans inmost countries ex ante, with the real time measure suggesting that, on average, the fiscalstance was tightening – i.e. counter-cyclical. This reflects the underestimation of the extentof the boom and hence the cyclical component of fiscal gains.

In the 2001-2003 downturn the fiscal stance was stimulatory in most countries (except forSpain, Portugal and Austria) in an ex post sense – i.e. counter-cyclical. This may have beenmotivated by stabilisation considerations, but it is more likely to have been driven b y themechanism described above: governments were responding as if there had been a structuralimprovement in the fiscal position. This tendency may have been reinforced by theunusually busy electoral calendar at the time – notably in the larger countries (Buti and vanden Noord, 2004). The ex ante stance also suggests counter -cyclical fiscal stimulus in thisepisode, but again this was probably accidental. It is in contrast with the 1991 -1993downturns when many countries tightened their budgets, possibly in response tosustainability concerns and financial market turbulence.

In the 2004-2008 recovery governments were forced to correct the past excesses, withseveral countries facing Excessive Deficit Procedures. The fiscal tightening eventuallyleaned against the wind of the recovery, but this was prompted more by the fiscalconsolidation needs imposed by the SGP than by a desire to choke off the upswing. Thisdrive to consolidate budgets is confirmed by the real time measure, which also indicates atightening stance of fiscal policy. This behaviour is quite similar to the previous cycle, when


fiscal policy was tightened in the recovery phase in a vast majority of countries (France is anotable exception). This reflected the measures taken to qualify for eu ro adoptionsubsequent to the Maastricht Treaty. Electoral considerations may have played a role aswell: qualifying for the single currency was seen to raise the odds of re -election unlike innormal times when governments tend to ease fiscal policy during the election campaign(Von Hagen 2002).Building on the past experience, the macroeconomic projections underpinning budgetary

plans seem to have become more cautious in recent years. However, at this stage there is stillconsiderably uncertainty around t he size of the output gap. There have recently been downwardrevisions of the macroeconomic projections and this may be reflected again in lower potentialoutput, in which case the output gaps may well turn out higher (and the structural fiscal positionsworse) than initially thought. In addition, the structural fiscal positions may be biased upward dueto the (now maturing) housing booms in many countries. The experience of the end of the 1990shas shown that upswings in asset prices go along with buoyant inflows of tax revenues going wellbeyond the expansion of aggregate economic activity, which lead to a temporary increase inimplicit tax elasticity with respect to the output gap (7).

In several countries the convergence towards the euro unleashed a set of events that is likelyto have led to higher than normal government revenues, which in turn may mislead fiscal policymakers to believe in a structural increase in available resources. This risk is further heightened bythe fact that during the upswing the composition of output itself is comparatively tax -rich, withhome pressure of demand and competitiveness effects squeezing VAT -exempt exports and boostingVAT-liable imports. During the 1999-2000 boom these types of mechanisms led to the conclusionthat the high tax content of growth was likely to be permanent, and the policy response was toreduce taxes or to increase expenditure plans at a time when the economy was de facto operatingabove potential. The same type of errors may well turn out to have b een repeated at the currentjuncture.

4. SUCCESSFUL CASES OF DISCRETIONARY FISCAL STABILISATION

In spite of the generally negative findings of econometric studies, one may still raise thequestion whether there are any specific and significant cases of successful discretionary fiscalstabilisation in the recent history of the EU and, if yes, what lessons can be drawn from them.Two episodes are of particular interest, which are however very a -typical as deficits were also runin order to bail out financial institutions: Sweden and Finland in the early 1990s. At the time, thetwo countries went through a very steep recession, in the aftermath of the collapse of the SovietUnion coupled with a domestic crisis of the banking sector, and against the backdrop of anovervalued exchange rate and tight monetary policy. Both economies recorded negative growthover the three consecutive years 1991 -1993, amounting to a cumulated loss of output of 4.3% ofGDP in Sweden, and 10.8% in Finland. In both countries, the cri sis triggered a significant fiscalexpansion, largely focused on the expenditure side. Starting from surpluses, the headline balance ofthe general government accounts moved deeply into negative territory posting in 1991 a deficit of11.4% of GDP in Sweden and of 7.8% of GDP in Finland. Over the whole episode (1991 -1993) thecyclically-adjusted primary budget balance (CAPB) deteriorated by 9.9% in Sweden, while inFinland it deteriorated by 'only' 3.4%. However, the latter fact could also be interpreted as asuccessful switching strategy, with tightening taking place once the economy had been 'kick -started'again. Indeed, by then the Finnish authorities already increased taxation considerably and onlyreversed that policy stance from the mid -1990s onwards. The Swedes took longer to reverse theirfiscal policy stance.

The economies soon returned to a relatively high growth path and the rate of unemploymentdeclined. Fiscal policy remained tight in both countries after the counter -cyclical episode, with theresult that within a few years they were both building up budgetary surpluses, Finland in particularsome of the highest ones in the EU. So overall, and with the benefit of hindsight, both cases appear


to have been a success. On the face of their apparent suc cess, however, much of the fiscalexpansions recorded ex post in Sweden and Finland in the beginning of the 1990s was simply theworking of automatic stabilisers or occurred un -intentionally; i.e. was about not adjustingdiscretionary expenditure in the event of a sharp decline of revenues during the recession. In fact atthe time already fiscal contractions were actually intended (Jonung, 2008), but did not materialisedue notably to a mis-estimation of potential growth. Interestingly, in both countries th e counter-cyclical fiscal stance of policy was accompanied by far reaching measures to scale back publicconsumption, which in Finland started earlier than in Sweden. A major decline of the size of thepublic sector took place after the end of the recessio n period. Indeed, counter-cyclicality in the twoMember States went hand-in-hand with fundamental structural and institutional reforms.

5. LESSONS TO BE LEARNED FOR THE CURRENT SITUATION

Discretionary fiscal policy has the potential to smooth cyclical f luctuations. In practice,however, the potential effectiveness most of the time does not come to fruition. Available evidenceshows that discretionary fiscal policy is at best a -cyclical largely because (i) policy makers do nothave the necessarily information in real time to implement effective measures and (ii) stabilisationof output may not be the primary preoccupation of fiscal policy makers when implementingdiscretionary measures.

One of the key lessons to be drawn from this is that the stabilisation function of fiscal policyshould mainly be taken care of by automatic stabilisers. According to existing work, automaticstabilisers are comparatively effective in the EU reducing the volatility of output by around 25%and more (van den Noord, 2000 and Ba rrel and Pina, 2000). The size of automatic stabilisers inEurope also compares favourably with the US. In the group of countries adopting the singleEuropean currency the budgetary sensitivity, the parameter that measures the automatic reaction ofthe government budget to cyclical swings in output, averages 0.5, twice the size of what isestimated for the US.

To the extent that it does not conflict with the requirements of the SGP, the recourse tosignificant discretionary fiscal stabilisation could be in strumental in the wake of sharp andprotracted economic slowdowns after other policy instruments have not produced the desired effect.These conditions are clearly not met at the current juncture. The EU economy exhibits signs ofrecession, but is more resilient than the US. Automatic stabilisers and the common monetary policyshould take their part first, before any other measures are to be considered.

NOTES:

(1) Tax changes, as enacted in Germany in 2007, may partly mimic a depreciation, but this is not amacroeconomic use and it does not require any change in the budget balance.

(2) A different literature looks at the automatic stabilizers. Some authors claim that a heavy tax burden may wellreduce the effectiveness of the stabilizers.

(3) The on average counter-cyclical stance in good times in 1992-1998 must be interpreted with caution since theoutput gap was positive only in a single year (1992).

(4) The output gap showed another decline in 2005. However, this decline was comparatively small and in termsof changes in the output gap the trough had clearly been attained in 2003.

(5) On the other hand, there is a substantial difference between real -time and ex-post estimates for the US prior to2000. This reflects that forecasters ex post attributed a b igger share of the expansion in the second half of the1990s to stronger potential growth as opposed to the cycle (which led to smaller output gaps).

(6) This is with the exception of cases where accounting issues gave rise to major revisions(7) The increase in the stock of wealth h ad a beneficial effect on government revenues through a number of

channels: (i) via the wealth effect and high consumption on indirect taxes; (ii) via capital gains on taxes onincome; (iii) via transactions on assets on turnover taxes.


BIBLIOGRAPHY

1. Alesina, A. and G. Tabellini (2005) "Why Is Fiscal Policy Often Pro-cyclical?", NBERWorking Paper No. 11600.

2. Buiter, W, G. Corsetti, and N. Roubini (1993) "Excessive Deficits: Sense and Nonsenseof the Treaty of Maastricht", Economic Policy 8(16), 58-100.

3. Buti, M. and P. van den Noord (2004) "Fiscal Policy in EMU: Rules, Discretion, andPolitical Incentives", Economic Papers 206, European Commission, Brussels.

4. Buti, M. and L. Pench (2004) "Why Do Large Countries Flout the Stability Pact? AndWhat Can Be Done About it?", Journal of Common Market Studies, 42(5), 1025 -1032

5. Calmfors, L. (2003b) "Fiscal Policy and Macroeconomic Stabilisation in the Euro Area:Possible Reforms of the Stability and Growth Pact and National Decision MakingProcesses", Report on the European Economy 2003, EEAG, European EconomicAdvisory Group at CESifo, Munich.

6. Canzoneri, M.B. and B.T. Diba (2001) "The SGP: Delicate Balance or Albatross? ", in:A. Brunilla, M. Buti and D. Franco (eds.), The Stability and Growth Pact, Basingstoke:Palgrave, 53-74.

7. Fatás, A. and I. Mihov (2003) "The Case for Restricting Fiscal Policy Discretion ",Quarterly Journal of Economics, 118 (4), 1419 -1447.

8. Gali, J. and R. Perotti (2003) "Fiscal Policy and Monetary Integration in Europe ",Economic Policy, 18(37), October, 533-572.

9. Jonung, L. (2008) "Lessons from financial liberalization and financial crises inScandinavia", Journal of Comparative Economics, pp. 22f.

10. Jonung, L. and M. Larch (2006) "Fiscal policy in the EU — Are official output forecastsbiased?", Economic Policy, 21(47).

11. Langedijk, S. (2004) "The Pro-cyclicality of Fiscal Policy in EMU ", Quarterly Report onthe Euro Area, Vol. 3, 27-37.

12. Manasse, P. (2006) "Pro-cyclical Fiscal Policy: Shocks, Rules, and Institutions – AView From MARS", IMF Working Paper 06/26.

13. Van den Noord, P. (2000) "The Size and Sole of Automatic Fiscal Stabilisers in the1990s and Beyond", OECD Economic Department Working Paper No. 230.

14. Von Hagen, J. (2002) "More growth for stability – Reflections on fiscal policy inEuroland", ZEI Policy Paper.


CONCEPTUAL APPROACHES CONCERNING THE NEW PARADIGM OF THEMONETARY ECONOMY

Professor PhD. Spiridon PRALEAUniversity of Iaşi „ Al. I. Cuza”, FEAA, Romania

Lecturer PhD. Irina – Ştefana CIBOTARIUUniversity Stefan cel Mare, Faculty of Economic Sciences and Public Administration, Suceava, Romania

[email protected] PhD. Candidate Anişoara-Niculina APETRI

University Stefan cel Mare, Faculty of Economic Sciences and Public Admi nistration, Suceava, [email protected]

Abstract:The currency played in generally an important part within the popular conception as concerns the economy

and life. The currency users have placed the currency within the economic activity, but in contradictory with theclassical theory, they have proved that currency has not a real effect, opinion that has been checked within the realcycle theory of the business (according to authors F.E.Kydland a nd E. Prescott).

While during a long duration of time, the monetary theory has been governed by the idea, according to whichthe currency has no significance, the FED has eliminated such an opinion – by its frequent decisions of modifying theinterest rates, fact that confirmed that currency does matter, at least on short term. Within this context, the mostimportant aspect of the economical theory is of explaining why and how it carries pout, in order to propose the bestreferences to the political deciding representatives, when these were trying to use the monetary politics in order ofreaching an economical expansion, until that point where the rate of inflation hasn’t increasing.

The new paradigm of the monetary economy consists in the fact that i t proves the inconsistency of themonetary theory, according to which the transactions have generated the currency demand. The part of the currencyhas been in adjusting between currency demand and available funds. This aspect assumes knowing the importanc e ofthe information imperfections and of banks behavior.

Key-words: Monetary Theorie, The New Paradigm, Monetary Aggregates, Monetary Politics, Taxes;

JEL Classification: E12, E52, E42;

INTRODUCTION

For the theorists, the monetary theories has bee n representing for long time a specialchallenge, respectively the founding of hypothesis that can allow or not the validation of theories.This challenge was difficult, since though the construction of the models where the currency plays acentral part was easy, although the number of those leading to quantitative effects was significantlyreduced, which might have offered the reality.

The macro-economical approaches have been based in generally on the effect that realequilibrium, respectively on the si tuation, when prices are reduced and the value of the currency isincreased, thus allowing a greater satisfaction to the individuals. Actually, the importance of the realeffect is especially reduced, more towards the situation of an economical restarting.

The monetary doctrine, according to which the prices grow proportionally to the increase ofthe monetary offer, no matter the monetary regime, it proves that there are no effects over the realtransactions.

A current opinion assumes that monetary the ories are based upon the principles of themicro-economy. Other economists emphasize the fact that monetary templates and theories are notadapted, and that they have to be established upon the maximization principles, thereforeintroducing the currency wi thin the production and utility functions.

Research carried out after the 1990 year has tried to reaffirm that the currency has nosignificance. For this fact, it has been proved that the public financial politics has no effectsconsidering the monetary point of view.

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Of the government reduces the taxes and increases the public due, the demand of treasurycertificates will grow by an amount rigorously equal to the increasing of currency offer. Amodification within the structure of due’s dates of payme nt will not carry out any effect,

On supporting this theory, certain hypotheses have been carried out, meaning: the absence of distortions produced by the rate installments; the absence of effects for redistributing between generations; the existence of the markets on capital perfect.

One of the most approached problems within the last 20 years was the investment ofconsequences for expensive and imperfect information of the capital market activities carrying out.It was proved that, therefore the mode ls that assume imperfect capital markets are the mostadequate for the reality rather than those that are competitive, which might be characterized byrationalization (limitation) of the credit and own funds. The models established towards theimperfect and expensive information have supplied certain explanations over the secondary andinstitutional character of the capital market, character that proves to be in contradiction to the modelof perfect market.

The model of imperfect market proposes a bas is for the explanation of numerous aspects ofmonetary aggregates functioning, which are not in harmony with the neoclassical competitivemodel.

THE CRITICS OF CURRE NCY DEMAND THEORY BA SED UPONTRANSACTIONAL REQUIREMENTS

There are many susceptibility reasons over the traditional explanations; J.M.Keynes couldnot be comprehensible as concerns the currency definition, comprehension absence that authorizeddifferent behavior and interpretations. Within this context, the attention was towards paid t owardsthe deposits demand, since they represent a part of the currency directly controlled by the monetaryauthority and represents a larger component comparing to M1, which regroups all payment meansunder the form of effective currency (bank tickets and divisionary currency) and of deposits intocurrent accounts, not carrying the interests and that represent the most active part of the monetarymass or primary liquidity.

J.M. Keynes enumerated three reasons of currency preservation; precaution, speculationand transitioning. J. Stiglitz considers pertinent only the third reason, the first two reasons beingrelated to using the currency as value reserve.Therefore, the analysis of requirement has to be focused upon the currency requirement fortransactions. The last 15-20 years leaded to remarkable modification within transactionstechnology, by the fact that a fast circulation of currency is possible. The relationship between theconventional measured currencies mass and the level of incomes was not established in these years.This fact, to which the unpredictable character of the currency speed is added, will prove that thetheory of currency demand has no practical utility and that this theory was exceeded.

THE CURRENCY CARRIES THE INTE REST AND HAS AN OPPORTUNITYCOST

A central topic and very controversial is the following: presently, within the advanced andindustrialized economies, the currency is carrying the interest, and the interest difference between amonetary cost and a thesaurus certificate is determined, not by the monetary politics, but by thetransactional costs. In present, considering the modern technologies, the treasury certificates can beused for transactions also, so that there is no opportunity cost in order to own the currency.

The monetary theories developed within last 30 years have developed an equation ofdemand requirement, where the opportunity cost for owning it can also be taken into consideration.The standard monetary theories explain the fact that moneta ry politics can carry out in order tomodify the currency offer, fact that induces a variation of interest rate. This modification is


rebounded over the real economic compartments. Reducing the currency offer leads towards theincreasing of the currency pr ice, the interest rate, this on its turn leads towards reducing thedemand. Within an opened economy there is a channel, by which the monetary politics can exercisethe influence. Increasing the interest rate makes more attractive the investments for the f oreigners;capital movements induced by the countries that increase the rate of interest leading therefore toreducing the exporters’ demands and towards the increasing of importers’ demand s. This model isvery useful for the currency politics representati ves, since at least few relationships remains stable.The conclusion would be that while the investment function is unstable, the currency demand isstable also.

Recent models assume that currency demand is a function of national income value. Thebiggest part of the transactions does not generate incomes, but are connected to sales or buyingassets. Although, these intertrade of assets do not involve obvious and stable connections with thenational income (the annual incomes of these transactions might be huge).

IS THE CURRENCY NECESSARY TO TRANSACTIONS?

Most of transactions do not need this type of currency that might be accomplished by credit.The reason, for which the credit cannot be used in order to facilitate the intertrade, is related toinformation insufficiency, which have to guarantee the approval of a credit, to an economical agentor an individual. The decentralized character of the information within market economy makesexpensive the achievement of this information. But, the modern technol ogy that allowed so manyprogresses on monetary level, including the use of treasury certificates as currency, might allow theuse of the credit as basis of intertrade.

As concerns the variations of circulation speeds, the currency users have displayed c ertainskepticism on mechanism for interest rate point of view, respectively for the real installment thatresults from the real variables.

The business cycle theoreticians have developed the idea according to which the currencyhas no importance for the real intertrade, it interferes over the prices level.

The explanations of the currency users are based upon the constant circulation speed, whichas compared to the classics that assume circulation speed as depending upon the opportunity cost ofthe currency owning, the calculus proved that annual rate of the interest does not explain butpartially the variations of the circulation speed.

In order that relationship between currency and income to be explained, another definitionof the currency was in grea t demand. The error manifested into relationship between currency andincome needs a reexamination of the monetary theory basis, as more the apparent error of the reportbetween inflation and unemployment towards the end of 70 was produced due to certain p ostulatesof the traditional Keynes’s theory.

The monetary theory that is based upon using the currencies in order to perform transactionscarries out other problems, also:

What do the investments determine? The rate of interest on short or long term? The rate of interest or the price of stockholding? The real or nominal rate of the interest?

The demand for investments is related to the rate of interest, on real terms, on long term or by theprice of stocks. Many empirical studies take into consideration the standard approach by which themonetary politics exercises its effects.The most important variable that influences the investments is the nominal rate of the interest. Theprice of stocks is also the most pertinent measurement instrument of the capi tal cost, since it reflectsthe market perception of the risk associated to the investments.


THE THEORY OF JAMES TOBIN’S PORTFOLIO

J.Tobin explains, by theory of portfolio, which effects of the monetary politics result by themodifications of relative currency offer into thesaurus certificates or by fiduciary currency, or, yetby thesaurus certificates on long or short term (as the Twist operation, the Treasury takes the bondson long term and issues bonds on short term, in order to ameliorate the neg ative balance ofpayments, and in order to maintain the economical growth ). Such an action is based upon the theoryaccording to whom the rate of interest on short term is adapted by international capital movements,while the rate on long term is related t o the internal market, especially by the mortgage market.

Therefore, the theory of J.Tobin is advanced as comparing to the theory based upontransactions, but excepts the part of institutions, since what matter the most in economy is thedemand and the offer for all the assets portfolio. The adjustments of the assets carry modificationsof the rate of interest and of the shares’ efficiency, fact that influences the real economic activity.

According to theory, the monetary politics carries out its effects , as result of the real rate ofthe interest. The graphics prove that during times, the real rate is constant and there is no cyclicalvariability.

The monetary politics balances other modifications of the economy but cannot make thissufficiently, and didn’t succeed on avoiding the reducing of real rates of interest (according tographics, on long periods, except years ’70, of mineral oil shocks). Therefore, it becomes difficulton relating the stability of real rate of interest, with enouncing the moneta ry theory that offer acentral part to the real rate.

The standard monetary theory focuses the rate of interest of the treasury certificates, but theeconomical activity depends upon the rate that has to be paid by investors.

The hypothesis of standard theory is that these two rates of interest are separated dependingon risk; the interval between those two rates often varies. In 1191 in USA, the rate of thesauruscertificates has decreased to 3 -4%, while the rate of interest to credit cards was between 1 6-19%.But, it becomes not justifying that risk adjusting has followed the same evolution with rates ofinterest.

Other drawbacks of the monetary theory established on transactional needments:1. The premises of theory are not enough convincing, where lots o f problems remained

unsolved; do not explain the modifications in efficacy of the monetary politics.2. The theory proposed by Stiglitz advances as alternative the fact that monetary

politics is unable to save economy from recession; it is unable on restarti ng the growth by its creditoffer or by ameliorating the conditions where credit is offered.

The standard approach of the monetary economy places the currency on a central place, butthe studies indicate the necessity of credit part’s emphasizing and also of its determinant factors.

Within recent approaches, the own funds concept is taken into consideration, on the part ofinformation on credits’ offer and on that of institutions, banks or economical agents, which achieveinformation and assume risks asso ciated to credits’ offer. Also, within monetary politics plan, therecent approaches have proved the following aspects:

1. – Over the economical activity, influence is carried out by the conditions where creditis proposed to the private sector; and the volum e of credit and not the currency amount,on general point of view.

2. – The relationship between conditions where credit is proposed (as the rate of interest)and the rate of thesaurus certificates, which might considerably vary in time.

3. – The credit offer cannot necessarily vary in parallel with the currency offer,modifying the relation between currency and credit being more obvious within crisisperiod.

4. – The banks determine, on general point of view, the conditions of credit and itsvolume. The aptitude and their attention towards loan is influenced by the rate ofinterest to thesaurus certificates, but on a manner that depends upon the economicalconditions.


5. – The variations of rate of interest affect the real value of the companies of banks andof their preferences for loans.

6. – The monetary politics affect the economical activity, but no only by its effects overthe credit demanding (for the investments), but also by currency offer (especially whenthere is the limitation of credit). Therefore, the monetary politics influences the offerand demand required, which are interacting.

7. – On particular situations, the effects of currency demand over the offer mutualinfluence (generating a distortion of the economical activity), but the effects over theoffer might be more powerful than those related to demand, in situation of a morerestrictive politics, even that inflationist.

8. – the monetary politics influences the behavior of banks and of companies, not only byan effect of substitution generated by mod ifying the rate of interest, but only by aneffect of richness and cash-flow.

9. – The repercussions over the general equilibrium are propagated by crossing morechannels, other than those traditional. The high rates of interest influence the net valueand influence the risks and incertitude associated to value of assets and bankruptcies.The increased rates of interest affect the preference for loans or for state bonds on longterm. Such effects can be increased, when regulations as concerns making proper th ecapital impose also an inadequate risk adjustment, for certain categories of assets.

10. – The monetary politics has effects on long term. An actual increase of the rate ofinterest, previously pronounced, can have very long term consequences, after the ini tialimpact.

11. – The monetary politics carries important economical distortions and these have to betaken into consideration I order to emphasize the advantages comparing to othermethods of stabilization. The distortions can be corrected, but this solution reachestowards decreasing the efficiency of monetary politics.

12. – When monetary politics takes action first over the bank system, the full effects arerebounded over the economy assembly, due to credit installments.

13. – The competition growth within the b ank system by eliminating or significantlyreducing the profits resulted from the spread of interest rate, will lead towards reducingthe efficiency of currency politics.

14. – Other modifications within the financial structure, as well as the growth ofcommercial effects weight or of the market titles with dates of payment, and also forthe global integration of these, will lead towards alteration and even elimination ofmonetary politics efficiency.

The new paradigm proposes that State has to be highly base d upon the monetary politics, inorder to stabilize the economy, knowing the limits and costs of this action.

The monetary politics , in contradistinction to the politics of public expenses, needs areduced volume of information, since it is based upon ma rket’s mechanisms, in order to guide thelow capacity functioning of the economy.

The monetary politics carries important a predictable multiplications; a growth of themonetary basis leads to a multiplied expansion of the credit.

The monetary politics deform the economic environment and the incidences are not alwayspredictable. The market deformations are amplified once with the financial market development.

The monetary politics has a direct and powerful influence over the small and middleenterprises activity (of the building field), which do not call commercial effects or titles on averageor long term, that can call only the bank credits. In contradistinction to the small enterprises, theinternational companies can take their financing to one count ry to another. As these circulations aremore powerful, as much the impact of limitation to credit over the small enterprises will be reduced,and the global impact of the reduced offer on internal credit will be smaller.

The monetary politics carries hig h costs correlated to the volatility and weakness of thebounds market. Considering the absence of a performance bounds market, the companies prefer the


self-financing or contracting credits. Therefore, the economies that depend upon, more and more ofthe monetary politics, in order to be stabilized, can be marked by a reduced efficacy on globalallocation of capitals and also of the high disparities between marginal efficiencies of theinvestments.

The distortion effects of the monetary politics are empha sized when aiming towards themaintenance of rate of exchange. Such utilization leads towards the increasing of rates of interest toextreme levels, if the economy is within the liquidity crisis.

Not involving within the stabilization of the rate of excha nge carries similar effects, fact thatinvolves the question if there is no problem without solution? The answer is “no”. Reducing the rateof exchange can have minimal effects over the economical activities if the companies exercise apolitics of careful indebtness and covering the rate of exchange.

The exporting companies carry out automatically the partial covering, since the incomes areincreased when the rate of exchange decreases. It becomes remarkable the fact that when the stateassumes such risk, it actually reduces the prices for companies that do not exercise an adequatecovering.

Over a long period of time, the FMI (Monetary International Fund) has supported thenecessity of offering the subventions, in order to avoid the devaluation, since th e companies haven’tpracticed an enough covering over the currency risk. FMI was thinking that if companies do notprotect by specific techniques, it becomes necessary the intervention of public funds, in order tomaintain the rate of exchange or in order to reduce the devaluation diminution. Therefore, a systemby which companies that do not protect against the currency risk has been maintained.

The effects if monetary politics are found specifically on certain sectors of activity. Theagriculture and small enterprises cannot take the effects, being those that support most theinvolvements of rates increased by the rates of interest. Majoring the rates of interests, towards theyears ’70 and beginning of years ‘80 in USA, has reduced considerably the activities of economieshouses, some of them having negative values. Numerous risk investments were made in order tosolve those respective situations. The employers have paid increased costs, and resources were notadequately shared. These effects could have b een reduced by two solutions: more rigorousregulation and subventions, solutions that carried a considerable cost of the monetary politics.

As conclusion, the affirmation according to what the monetary politics is relativelyinefficient is based upon dis tortions and not adequate sharing of the effects. Also, not in theadvantage of monetary politics, the absence of foreseeing the effects and their irreversibility alsoexists.

The monetary theory affirms that effects are predictable and easily reversible , due to thesimple relation existing between the monetary offer and the level of nominal incomes

On recent approach, where the main part is carried out by credit, the things are changing,since a credit line for the individual cannot be substituted wit h a credit line from another. In thisway, the currency is considered to be anonymous, comparing to the credit. If a bank ownssupplementary reserves, and another one no, the reserves in surplus cannot be transferred to theother banks.

Also, within the time of economical recession and financial crisis, it becomes difficult toforce the banks in order to loan more, respectively the amount carried out on increasing themonetary basis. The incertitude that manifests as concerns this aspect comes from the fac t thatbanks have different expectations and that modifying the value of banks can become different.Much more, the banks can have a better appreciation of the expected loss, in comparison to thecentral bank, and each of them can hide the information that it owns.

Due to the high time interval between modification of monetary politics and the impact overthe economy, the authorities paid attention over the currency offer and more recently, on the rate ofinterest to thesaurus certificates. These parameter s progress normally, in tandem.

But, if circumstances are not normal anymore (as for instance: crisis states or inflation), thenfor their economic activity it becomes important the credit offer, and also the conditions of offering.


The responsible people of the monetary politics have reached to conclusion that average rateof the credits’ rates of interest do not provide a fine measure overt the capital’s cost. If theinstallments rates are increasing due to risk increasing, and of the information is sym metrical, andthe debtors and creditors are neutral as concerns the risk, then the increased level of the interestrates do not lead towards restricting certain activities’ sizes.

A new conclusion can be formulated; meaning any type of monetary politics behaves acertain level of uncertainty. The best instruments of monetary politics are these that allow the fastdetecting of an error and fast and facile. If the time interval necessary for detecting and amendmentis high or if consequences are irreversibl e, then this type of instrument has to be carefully used.

When FMI imposed installments of the huge rate of interest in East Asia (60% the nominalrate of interest in Indonesia, real rates of 25% in Korea), affirmed : if they are too high, it will comeback over the monetary politics . But, these rates of interest have brought thousands of enterprises inbankruptcy state. Decreasing the rates if installments could not reestablish the situation,immediately, and the malnutrition and interruption the schooling have been represented the effectson social level.

Considering the traditional way, the monetary politics and that of financial regulation areconsidered separate topics. One is the branch of macro -economy, and the other appears as a branchapplied to micro-economy. One is based upon currency offer, and the other on the stability andsecurity of banks.

The aim of the new paradigm is that of proving that separation of the two systems is anerroneous approach and of proving that financial bank regulation a ttenuates the effects over thegeneral state of the equilibrium.

THE RATIONALITY OF BANK REGULATIONS AND DEREGULATIONS

Why does the public power regulate the activity of financial institutions within the entireworld? The answer consists in the increas ed number of bankruptcies, which carried considerablecrisis into all economies, as well as public expenses dedicated to these directions. Upon basis ofthese bankruptcies, the inadequate practices as concerns the credit exist; they come either by anapparent behavior or by assuming certain increased risks.

Why do the banks perform such risky loans? The answer is the following: the private costshad by banks are less important than the social costs. The argument to such intervention of thepublic power can be analyzed on two points of view: if there are externalities associated to realpractices, then the state can play its part by the alignment of private costs to the social costs. On theother hand, the state manifests its part by having the quality of un derwriter. The state actuallyassures the bank deposits, fact that involves an ethical problem of the risk: the insured personscannot fully support the costs of assumed risks. As result, the insurance companies try to regulatethe behavior of the insured persons, respectively of the banks. Therefore, the problem of thefinancial regulations hasn’t been limited only to the rules of making proper the capital.

The real reason that justify the excessive trust within the norms of making proper the capitalresult from the fact that it represents a solution less bad than free exercitation of bank profession.The pertinence of the capital represents a stabilizer: as more a bank owns more own funds, as muchthe state will support lower costs in situation of bankrup tcy. On the other hand, the pertinence of thecapital leads towards a system of stimulations: as more the owners risk more the capitals, morethese cannot accept the risks of bank activity.

The impact of the capital pertinence has been analyzed by Hellman, Murdoch and Stiglitzauthors. These have proved that trusting within pertinence normative of the capital is not efficient,in the Pareto way, no matter if there is or not an insurance of the deposits. The pertinence normativeof the capital might lead towards a less careful behavior, and the bank’s ability of operating can benegatively influenced.

The fail of the regulations put in a concrete form on capital pertinence is recognized inpresent as having an important part towards financial stability that characterized the greatest part of


the countries developed and in course of development. On the above mentioned authors’ opinion, asignificant cause consists in the absence of the theory related to banks behavior, upon basis which atheory of the bank regulations has to be built. The process of transaction into outgoing direction hasalso been representing another major reason of the financial crisis, therefore manifesting by a vitallack of the qualified staff.

As concerns the Asiatic crisis, this has be en argued that the absence of a powerful financialinstitution. Instead, as concerns the Scandinavian crisis, the institutions apparently powerful couldnot prevent a crisis of proportions. On the other hand, as concerns Thailand, the Central Bank,considered one of the most solid banks of the world in ’80, this knew a diminution of its part, asresult of the process of financial freedom, fact that emphasizes that before liberalization there wereinstitutions in better and powerful situations.

Although the regulation authorities are aware of these problems and propose a gradualliberalization, this objective is difficult to be reached, since the preference for such risks has beenincreasing once the programs of liberalization were announced.

The increased liberalization and integrating the capital markets, as well as creating the UMEhave reached the problem of using possibility related to monetary politics in order o prevent aneconomical crisis or in order to limit an overrunning of the economy. It bec omes improbable, forinstance, for the Central European Bank, to decrease the level of unique interest rate in order torestart the economy of Portugal. In this way, the governments are obliged to abandon suchrepresentative instrument, for their power; th e governments have also a freedom to action in thisfield, where any difference of rate of interest between internal and exterior parts would generatehuge movements of capitals.

The analysis of this topic, within the context a new monetary paradigm, woul d allowunderstanding of why regional fluctuations remain so important, even in situation of certainintegrated economies (as USA) and why the national governments have such possibilities of usingthe monetary politics, and respectively of affecting the cr edit flows. This analysis explains whythere is yet an important part of the central banks in certain countries where using dollars werecarried out (the situation of Ecuador, the currency is related to the dollar).

The credit is funded by information, a nd particular, on information provided by small andmiddle enterprises. From this, it results that information is local. The credit does not circulate on itsown, from one region to another and the part of local banks is very important on credits’ offering .In situation where to these banks level, modifications as concerns the net value are produced, thecasualties cannot be compensated immediately by establishing new banks in those regions.Although the theory admits that perfect information leads to capit als mobility, it was proved thatadjustments as concerns the credit situation are made due to migration of work force.

The connections between the level of regional development and state of recession can beemphasized within integrated economies (as USA and UME). The main problems of this argue isthat of manner when the increase of the labor force is related to the local economic conditions(regional) in comparison to those of world level. For instance, the weak local economic conditionscan carry a deterioration of the banks situation (by increasing the number of debtors with problems)and a decline of the activity. Also, if local services are not developed, the labor force will bedirected towards industry.

In order to develop the correlation between recessions, the regional development andmonetary politics have been developed by two ways:

One based upon the information and regional regulation of the capital market; Another model, based upon traditional approach of the competition.

The model based upon the information has proved that an amelioration of the local conditions,as result of the economical growth can have very good effects over the financial market. Also, ofthe financial markets are integrated, the funds will freely circulate. Rem aking the local banks canlead towards the increasing of the credit activity, directed on the most profitable projects. If theinformation proves to be much localized, at least one part of the supplementary credit capacitieswill remain at the local level.


Within the classical model, the basic idea is that within economies of Eastern Europe, majordisparities are manifested as concerns the capital (and the migration of capitals is produced withincountries so that an equalization of efficiencies has to b e reached). To such situation, certainmechanisms have to be developed, which have to assure a better assignation of capitals, as forinstance, subsidizing the institutions involved, in order to replace the information lack. In otherterms, within this approach, the credit activity remains always under optimal; and the mostimportant problem is that of knowing the type of subsidize. Therefore, direct subventions can beoffered towards banks accompanied by over -evaluation of funds to financial market. This t ype ofsubvention, named sovereign subventions, has the characteristics of being flexible and potentially tobe continuously given, not every year, as the budget subventions. For instance, the central bank cansubvention directly the regional banks, b redu cing the bounds under the obligatory reserves form, orby giving certain credits of rediscounting in exchange of the reserves remunerated to a very reducedrate of interest. Therefore, an increased flexibility is increased comparing to the public subventio ns.

Another aspect of the analysis is that of politics modification to the developed countries, inthe way that modern technologies reduced the capacity of states in order to reduce the competitionwithin bank system. There are also certain regions whe re the development level of the market needsthe intervention of the governments in order to stimulate the economy. Therefore, it results that forcertain regions, the monetary politics is an instrument less and less efficient, in order to solvecertain crisis situations.

CONCLUSIONS:

The alternative paradigm of the traditional monetary theory proposed by authors JosephStiglitz and Bruce Greenwald can be summarized by the following conclusions:

- the relationship between currency and credit is endogen and can be influenced by themonetary politics.

- making hard the conditions for the monetary politics cannot be measured by the real rate ofthe interest, more important being the available credit; if there is the credit rationalization,then the demand matters, not the credit offer.

- the real rate of interest, pertinent for the economical activity is the rate of interest to loans;it can register variations due to the rate of interest to treasury certificates and to the rate ofbank credits.

- the banks have an essential part of the credits allocation.- the bank authorities have to prove attention in order to maintain the organizational and

informational capital, within the bank system, even when the economy starts a recession.- the credit is heterogeneous; ther efore, the monetary aggregates can supply wrong

information, and an excess of liquidity will not compensate the lack of funds from anotherbank.

- the regulation politics, the norms of capital pertinence and the adjustment to risk can havean impact over the credit, where trying of monetary authority on stimulating the economycan be completely compensated by the modifications of the bank regulations field.

- the regulation politics has to be based upon the banks behavior theory.- the ,monetary politics has its effects by actions over the global demand, but traversing the

global offer.- the bankruptcy is a very important variable, which monetary politics has to take into

consideration. Within the monetary politics, the non -linearity and irreversibility phenomenaare manifested. A powerful increasing of the rate of interest can carry an increased numberof bankruptcies, and decreasing the rate of interests cannot protect the companies from theeventual bankruptcies.

- on carryout out the causes and restructuring th e financial systems, the consequences over thecredit flows have to be taken into consideration, which might influence the bankruptcy.


- since the monetary politics affects not equally the different sectors of activity, an increasedtrust of the monetary politics might involve powerful distortions and can carry institutionaladjustments, fact that on long term, reduces the efficiency of the monetary politics.

- the transformations that manifest within the transactional technologies and information cancarry into the future significant effects over the efficiency of monetary politics.

BIBLIOGRAPHY:

1. Basno C., Dardac, N.,(2000) Operaţiuni bancare , Editura Didactică şi Pedagogică,Bucureşti;

2. Cibotariu, Irina-Ştefana, (2008) Finanţele întreprinderii , Editura Didactică şiPedagogică, Bucureşti;

3. Clarida, R., Gali, J., Gertler, M., (1999) The science of monetary policy: a newKeynesian perspective, Journal of Economic Literature, Vol. XXXVII;

4. Costică, Ionela, Lăzărescu, S., (2004) Politici şi tehnici bancare, Editura ASE, Bucureşti5. Hlaciuc, E., Mihalciuc, C.,(2006) The monetary policy- the main responsibility of the

Central Bank: Romanian case towards EU integration, the International economicconference, The preconference for the Internati onal economic history congress(Helsinky, Finland, 21-25 August 2006), Session 44: „Identity, Globalization andUniversality in the Eastern and Centr al European Economic Area and Involutions in theModern and Contemporary Period: Experiences, Meanings, Lessons”, Section 3:Monetary and financial structures in East and Central Europe: Evaluations in the contextof European integration, Volume III, Lucian Blaga University Publishing House , Sibiu;

6. Hlaciuc, E. Mihalciuc,C. (2006), Diagnosticul financiar - instrument al analizeiperformanţei financiare şi al managementului întreprinderii, Analele Ştiinţifice aleUniversităţii de Stat din Moldova, seria socio umanistice”, secţinea Finanţe, Chişinău;

7. Obstfeld, M., Rogoff, K., (2005) Foudations of International Macroeconomics , TheMIT Press;


COSIDERATIONS REGARDING THE ORGANISATION OF FINANCIALMANAGEMENT OF THE ECONOMIC ENTITIES

Lecturer PhD. Lucia RISTI“Aurel Vlaicu” University Arad, Romania

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AbstractThis research deals with analyzing the legal aspects of organizing the financial management at one of the two

participants in the taxing process that is of the tax payer. We managed to analyz e the constitution of the financialmanagement from the perspective of the tax payer as an essential resource of taxing information both for him/her andalso for the other user that is the taxing administration regarding the constitution of the taxing debt.

The analysis of the constitution of the financial management that I have done was made in two ways. In oneway the means (the procedure) were analyzed and also the instruments ( financial vectors) of constituting taxes and thesecond way refers to the means and instruments of gathering these obligations.

The conclusions refer especially to the demands of leading this management so that it will be assured by therightfulness of the transmitting in formation on the taxing vectors of ANAF structures (ANAF – National Agency ofTaxing Administration) as a support for the taxing debts leading by these structures respectively the need to know atany moment, the amount of the debts towards the state, the debts which are at the general consolidated budget,respectively.

Key words: taxing, taxing process, taxes, financial management, financial vectors.

JEL Classification: H30

INTRODUCTION

The open purpose of this paper is to show the role of the tax payer’ financial management inan efficient and operational taxing system in order to fulfil its role. Its first role is to assuresufficient financial resources at the society’s disposal. In this respect I have analysed the serviceswhich revert to the tax payer by the financial management that he is leading. I have also analyzedthe way in which it refers to the above mentioned objective by the way it is organised, taxing andfinancial procedures and used taxing instruments.

THE CONCEPT REGARDING OBLIG ATION AND FINANCIAL MANAGEMENT

The tax payer’s obligations include a larger area, meaning more than paying a tax at thetaxing institution. This term also includes the tax payer’s obligations regarding the declaration ofthe goods and the income, the cal culation, the retention and the recording of the taxes in thebookkeeping records as well as other obligations from the taxing legislations.

However, by defining the term management, which comes from the Latin word ”gestio”,meaning ”organising the management of a patrimony in all its complexity”, and also in the contextof our theme here and of the French expression ”gestion” which co -responds to the Anglo-Saxonterm of management, we could define the notion of fiscal management as ”an assembly ofoperations which have as object the administration of the obligation -financial claim report and therelationship of the tax payer with the ANAF structures, that is, the fiscal units of the localadministration.

The concept of financial management presupposes t he management of the taxing obligationsfrom the point of view of the tax payers and his/her debts towards the state.

According to the juridical form of setting it up, the way it is organised and the functioningof the financial management is different for a natural person or a judicial one.

Therefore when we approach the problem of fiscal management which is necessary to beorganised by the tax payers and the taxes from a conceptual point of view we must take intoaccount the specificity of each tax payer, be it normal or judicial person and also the five main

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groups of fiscal obligations which everyone in particular imposes different documents andmethodologies of quantifying these obligations. Some of them are determined by the tax payer andthe others by the financial institution.

PROCEEDURES REGARDING SETTING UP THE MANAGEMENT OFFINANCIAL OBLIGATIONS

The management of taxes which is set up in the tax payer’s own informational andaccounting system is made up by more categories of taxes, respecti vely:

a) taxes which set up cost elements (local taxes, excise, custom taxes, social contributions,etc);

b) taxes which issue from the newly created value (profit tax and dividend taxes) income tax inthe case of income coming from independent activities;

c) although the tax payer contributes as a physical person or a juridical one to the taxes and inthe case of the tax on the income a nd on their social contribution they issue from theemployees’ income, which themselves, they represent cost elements;

d) taxes, VAT, respectively, whose fiscal management is specific because although the taxingbase is added value, created during the tax payers activities, it being collected and paid byhim/her although its supporter is his/her final consumer.The management of taxes owned to the budget is bound in the whole of the tax payers ’

management (economic agents). By this structure of management the basis of determination,recognition, recording, declaring and discounting the taxes ’ obligations is assured. These are thetaxes that the economic agents owe to the general consolidated budget according to the taxingsystem made by the Law of the Public Finances and the Fiscal Code.

All the taxes which are owned to the budget by a society are included in the content of thetaxes management of the economic agents. In this respect, in order to organise this management , thesociety must set up its own organisation chart of the taxes owned to the budget.

In other terms, we believe that one cannot talk about a proper financial manage ment of thetax payer. This is because in the organisation al system of the tax payer functioning, there is nocertain explicit compartment which deals exclusively with both the determination and thequantification and also with the setting up his/her financial management towards the state. In thefinancial-accounting departments of the tax payer or in the departments which deal with costs thereare employees who calculate the elements of cost which, for instance are formed by the quantum ofcertain taxes, for instance the taxes on the buildings, the taxes on the land, taxes on the autovehicles, taxes of using the state property etc.

Despite all these, we conside r it necessary to set a limit on the procedural technical outlinesin order to instrument the necessary elements in order to determine and remove the taxes which canassure a conceptual unit in what the way of evaluating and of recognising the taxes is concerned.This is from both the tax payer and the financial institution are concerned. From our po int of viewthe organization of the financial management of the two financial partners is concerned, the state,represented by ANEF in the taxing process must undergo many steps, as follows:

1. setting up the management procedures of each type of tax from the organisation chart ;2. setting up the means of making the procedures ;3. determining and recording the taxes in the bookkeeping ;4. declaring the taxes at the local administration ;5. the payment of the due taxes ;6. the control of making up the management opera tions regarding the taxes ;7. setting up a financial management of the tax payer with the debt management of the fiscal

administration.This frame of action ensures the premises for creating a taxing data base, which can be

accessed at any moment, in this way one can know precisely the financial -taxes situation of theinstitution if we refer for example at the tax payer as a judicial person.


We also have to bear in mind when we approach the problem of the fiscal management ofthe tax payer that it presents a set of particularities according to the nature of that certain tax, itsapproach being different in the case of the direct taxes than in the case of indirect taxes, the taxes oncirculation.

Thus the fiscal management regarding the profit tax or the income tax from independentactivities or on dividend tax presupposes other methods and techniques of calculation than in thetaxes which form the elements of cost. The income tax from the independent activities or from thedividend tax are taxes supported from the newly created income.

Therefore, the fiscal management of these two last t axes is organised differently than in caseof the financial management which make up the elements of cost, only after finalizing the financialexercise, on the basis of financial situations and the profit/loss account. This account is temporarythroughout the year and final at the end of the exercise.

Another taxing obligation of the tax payer for which one must set up a specific financialmanagement is the financial obligations from the salary tax and the compulsory contributions of theemployees.

A similar fiscal management is als o organised by the tax payer in the case of the incometaxes made by the non-resident if this is the case.

In what the circulation taxes are concerned, the same personnel or another one from thefinancial departments quantifies the excise by specific techniques or one receives from the customsthe quantum of the determined excises in the customs or the custom taxes.

And later on, these quantified financial obligations are in a certain way reflected in thespending accounts and make up cost elements for the new products or services and at the same timethese are set up in the tax payer’s financial obligation.

In this regard a specific financial management is made up by the VAT tax payers. I haveunderlined a particular fiscal management because in all the other cases of tax management they areeither supported by the costs or they are part of their newly created value, in the case of the V AT.Although it is collected and taken to the financial institution, it is supported by the final consumerand not by the tax payer.

Because of the fact the tax payers are divided into two large categories, juridical tax payerand physical tax payer, they have different rights and responsibilities in what the organisation andthe leading of the financial/accounting system is concerned. Therefore it will be very different thanthe way in which they will be able to organise the fiscal management regarding t heir obligations tothe state.

FORMULATING THE RESULTS

Thus, the tax payer, a judicial persona is obliged to outline the entire patrimony as well asits movement in the technological process, according to the type of the activity, as well as theresults of this process by a bookkeeping based on the double recording. This allows him to haveaccess to the data and to the more complete and precise information regarding the financialmanagement to a natural person who manages the patrimony based on bookkeep ing. This thing willhave a negative influence on the possibilities of organising a correct financial management.

Therefore when we approach the problem of financial management which is necessary to beorganised by the tax payers, we have to take into ac count the category of each tax payer, judicialor natural person as well as the five large groups of taxes which each in particular, must imposedocuments and different methodologies of quantifying these obligations. Some of them aredetermined by the tax payer and the others are determined by the financial institution. There arenotable differences that must be taken into account among the two categories of tax payers whichmust determine the taxes or which influence in many ways the financial management o f the taxpayer in its own computerized and bookkeeping software among which:


a) There are notable differences among the taxes of the ju dicial person’s tax payers and thetaxes of the natural person. We give an example the fact that the judicial personcalculate a profit tax and the natural person calculate an income tax ;

b) There are differences in what the accounting system is concerned regarding thereflection of the income and of the expenses for their activities. Some do this thing withthe help of accounting, based on the double recording - judicial person and the others –the natural person do this thing by a simple party accounting and thereby there are all theadvantages and disadvantages regarding the precision and the rightfulness of reflectingthe operations regarding the income and the spending and finally the taxed database ;

c) There are differences in which regards the way of the quantum of the taxes is concerned.This is because of the accounting system of rendering evident the income and thespending at the two categories of tax payers. We refer here to the profit tax and to theincome tax as well as to the decisive factor which makes this thing. In the case of theprofit tax, the accountant makes the determination and in these conditions we refer toself imposing fact. In the case of the income tax the natural person declares the incomethe quantum of which can or cannot be taken into account by the fiscal institution. Whatfollows is the right dimension of the income tax. This will be done by the taxinginstitution and in this situation we refer to a decision of imposing of the taxinginstitution.

The difference between self imposing and imposing in the case of taxes is that in its case itis the tax payer’s emanation which can or cannot be accept ed by the financial institution whenthere are financial controls and in the great majority of the cases, some differences are seen indetermining the taxes, while in the case of the tax income, the taxation will be made by thefinancial institution and can or cannot be accepted by the tax payer, who can, therefore contest thedecision of the taxing institution.

We mention that in the case of the established differences by the financial controlinstitutions, the tax payer has the legal possibility to cont est these differences.

The rendering evident of the accounting obligations is made on the basis of differentinstruments of taxation, from the self imposing documents to communication of the financialadministration, the pay list of the salaries which on one hand has a closed circuit, all of thesegiving information regarding on accounting and giving internal financial fluxes. On the other handwith the help of the informational -accounting interface, another series of fluxes is released by thisexterior data, that is those informational fluxes to the fiscal administration . On this basis themanagement organises its own management and accounting of the debts lead by the state. This isthe source of information and the justifying instrument for the management and the financialaccounting. The meeting zone of the informational exchange, we call it interface and theinformation which circle in this segment we named it exterior, because they are issued by the taxpayer, the state respectively, in the rolling of the activities from the fiscal process but they circleoutside it.

The reflection in the judicial person tax payer’s accounting of the quantum of the selfdetermined fiscal accounting or of those established by the taxing organisations is recorded on theeconomic subject with its value and in the case of the salaries, these will be diminished by thequantum of the taxes by retention at the source, by debiting the accounts of the third party on onehand and by crediting the accounts of the third party which reflect the fiscal duty to a budget oranother on the other hand.

For example, the taxes which are cost elements as well as the local taxes, excises, thecustom taxes and the obligatory contributions which fa ll on the employer’s shoulder are outlinedand reflected on the spending at the moment of producing the economic operations. For example,in the case of the taxes and the local taxes, it is reflected on the spending accounts, ct. 635“Spending with other taxes and payments” on debits and the account nr. 446 “Other taxes andpayments” on credits. They reflect a tax without which it being produced in fact by the payment.


However this system reflects the principle of obliged accounting with all its advantages anddisadvantages.

Other analytical are reflected in the same spending account, nr. 635 “Spending with othertaxes, and payments”, for instance even the excises, custom taxes, taxes on dividends, on one handand by credit, by the third party account nr 446 “Other taxes and payments” analytical and d istinct,obligations for the state budge t, on the other hand.

In the same manner and under the same principles the duties of the employer are outlined,every month, the duties of the employer regarding the obligatory contributions, in the accounts ofcorresponding expsenses, the 645 account, respectively “ Expenses regarding the assurance and thesocial protection”, distinct analytical for social assurance, unemployment and health on one handand credit corresponding, 431 accounts “Social assurance” nr 437 r espectively “UnemploymentAid” for recording the state social assurance and health and the unemployment aid, respectively.

And also for rendering evident the tax payers’ contribution to the profit tax, according to theactual regulations are outlined by the debit of the account of expenses nr 691 “Expenses on theprofit tax” and on the credit in correspondence with the account 441 “ The profit tax”.

Regarding the way in which the law maker has solved the reflection in the account of thefinancial accountant of the taxes, we formulate the following opinions:

We appreciate that the structure of the account s from the financial accounting of thespending and the third party person must be harmonised with that of a five public budgets, the statebudget, the social security budget, the local budget, the unique National Fund of the health socialsecurities and the budget for the unemployment assurance. This bookkeeping is organised andstructured regarding the budgetary debts from the public bookkeeping. We choose for the similarityof the structure of the accounts of the five budgets from the financial bookkeeping regarding thetaxes with the structure of the accounts on the five budgets from the public accounting, which hasalready been achieved as we have shown p reviously, so as to allow the look in the mirror that is apermanent comparison of the outlined sold in the two bookkeeping systems, in order to improve thecommunication among the two participants at the taxing process . Because of the way in which theactivity is organised today, the process of comparison is very shaky. This is one of the unsolvedproblems until present days from the domain of the accounting interface.

We believe that it would be correct if there were an identity between the structure of thespending of the taxes category and the structure of the account of the third party person, like it is thecase of the profit tax. In other words it would be fair if there would be excises or custom taxes forthe custom taxes in the spending accounts an d to match the discount account.

We appreciate that the law maker has found an inadequate solution when it mattered for theoutlining the obligation regarding the tax profit, an account of spending because the recording ofthe obligation and its payment d oes not represent an expense for the tax payer. It is a tax owned bythe newly created value, from the profit and in this situation the account which should reflect thisthing could not be another account but the account number 129 “The redistribution of t he profit”,following that on the credit, the account must reflect the obligation to remain the same accountabletreatment applied in the case of dividend tax, whose source being also the profit, the newly createdvalue, respectively.

Another category of financial obligations whose quantum and reflection in the accountingfall in the task of the tax payer are tax duties owned by the employers as well as the wage tax andtheir social contributions. Their reflections in the financial accounting outlines the diminishing ofthe employers’ rights by debiting the account number 421 “Employers – due wages” and theaccounts regarding the wages tax, account number 444 “Wage tax”, account 4321 “The employers’contributions to the social assurance”, 4314 “The employe rs’ contribution for the health socialinsurance” 4372 “The employers’ contribution to the employment fund”.

By reflecting the financial accounting accounts as it was above mentioned, the tax payer hasits operations with the help of those who create and d efine the management of the taxes. Bydebiting the analytics of the third party accounts at the reflection of the taxes, the su pporter of that


tax, the tax payer, respectively or a potential beneficiary (employer – account nr 421 etc) of incomefrom that beneficiary.

The third party accounts and their analytics reveal to which budget those taxes are due, fromthe collection of taxes and social contributions.

I have already expressed by reserves regarding the way in which the law maker hasunderstood to structure the third party accounts regarding the reflection of the taxes in the financialaccounting of the judicial person. I believe that a possible modification of the account plan of thefinancial accounting must be taken into account.

As a last thought we underline once again the importance of the taxing instruments and notonly in the case of engagement bookkeeping of the two systems, the financial bookkeeping and thepublic one. This is because they are primary real documents o n one hand and they are the form inwhich the exterior fluxes manifest in most of the cases, on the other hand. So, a correctcommunication in the interference zone, by this taxing vector, this is the premise regarding theevaluation and the correct recognition of the obligation s and the duties of the two participants at thetaxing process.

After making the first informational – accounting flux which has lead to the making the owntaxing management of the tax payer and to those from the ANAF structures and the administrative -territorial units, the second most important flux is that of charging, of closing in one way or theother the budgetary debts made by those financial managements.

We could state, without being wrong, that this flux, this second phase of the taxation, thecollecting is more difficult and much more windy than the first flux, which was describe d in the 6chapters of the paper.

This second flux, that of deleting the taxes is made by the tax payers who are aware of theirduty of tax payers, by paying the debts t hat they have for the state out of their own will.

The effective payment of those duties can be made either by money transfer from the openaccounts or at the state institutions, the Treasury, or by cash. According to these two ways ofpayment by the tax payers, in the banking institutions or at those of the state Treasury, differentfinancial fluxes are generated but they all lead eventually at the same purpose, that of deleting thetax payer’s debts.

These payments of taxes for the state, made by their own will, by the juridical persona or thenatural ones, generate treasury fluxes in the patrimony of the economic agent. These are under theform of outing by the financial resources by the “banking accounts” or the “registry” on one handand the reduction or the deletion of the taxes by the state, things which are reflected in the taxpayer’s duties towards the general budget’s components which was consolidated in the moment oftheir quantification.

As an example, the payment of the profit tax is outlined by debiting the 441 account, “Thetax profit” and the crediting of the 5121 account “Lei deposit account” or the 5311 account “The leiregistry”.

The payment of this deposit, in our example, denotes deleting the obligation that the taxpayer had for the state on one hand and the fact that the tax payer’s patrimony or taken by financialresources, in equivalent, money from the account or cash on the other hand.

Taken separately from the deleting of the taxes by direct payment, these (obligations) canalso be deleted by cancelling, prescription, diminishing with the help of administrative contestationsor compensation.

According to the deleting of the other ways of deleting the taxes than by direct payment,reducing or diminishing the obligation in the tax management of the tax payer, they take placebased on some specific bookkeeping for these operations, such as.

o Deleting from the tax management the taxes which are on the verge to be deleted aftersome financial controls, on the administrative way as the contestations or on theextinctive prescription which takes place by keeping the initial records:

cls.6xxx = cls.4xxx (operation in red)


o Reducing the tax payer from the taxes by compensation. Accounting records take placeon the accounts by third party people, deleting on one hand the right of deb iting on thestate with a payment obligation at its disposal ;

o Also, in the case of VAT, the compensation among the negative VAT sum, accountnumber 4424 ”Repaid VAT” and that of payment, account number 4423 “PaymentVAT” is outlined by outgoing records made by the two accounts (4423=4424) or in thecase of compensation the negative VAT sums, having other debts than the generalconsolidated budget by deleting the right of debiting the VAT with resp ectiveobligations, with the help of third party accounts (cls.4xx = 4424„reimbursed VAT”).

CONCLUSIONS

In conclusion, the tax payer’s tax management is generated objectively by its obligation toknow at any moment which are the debts that the consolida ted budget has, either it is about thecentral or the local administration or about the way in which the sold of this management, bypayment or other ways which have been outlined earlier.

It must be said that the tax management that the tax payer is obli ged to make, as well astheir dynamic revolution is permanently under a state of control and monitoring by the help of taxmanagement which are organised and led by each tax payer individually and partly by the ANAFstructures and the local fiscal authorit ies.

There also has to be mentioned the role and the importance that the computerised -accounting system has, regarding the financial claim, that is that which was constituted by thefinancial accounting, the public one respectively of the budgetary claims for the ANAF structuresand the financial organisations of the local public authority. In this respect, we have in mind therevision of the general accounting plan and its correlation with the structure of clarifying the publicfinance indicator for giving in an unitary way, the information and agreement the date in the easyway.

The treatment for the accessories that is the interest, fines and penalties could be revised inthe tax payer’s financial management by recording on the accounts’ analytics by whi ch the mainobligations are recognised, achieving in this way the harmonisation of the data content and a bettercommunication between the tax payer and the fiscal administration.

We cannot conclude without stating that at least for now the safest compute rised support forthe tax users remains the financial management lead by the tax payer. For so many times, themanagement of the debts lead by the public administration offers incorrect information and requirepermanent communication with the tax payer, lo ss of time various material consumes, on one handand on the other a reason why we think is necessary to create a non -stop access software on thefiscal claims of the two fiscal actors, the tax payer and the public administration.

BIBLIOGRAPHY

BOOKS:1. Belean P., Risti Lucia şi colaboratorii (2007) Finanţele publice ale României , Editura

Economică, Bucureşti;2. Halpern Paul J., Fred Weston, Eugene F. Brigham (1998) Finanţe manageriale , Editura

Economică, Bucureşti prin traducere coordonator lector drd. MBA L ivia Ilie;3. Văcărel I. şi colaboratorii (2006) Finanţele publice Ed.V, Editura Didactică şi

Pedagogică, R.A.Bucureşti;4. Dicţionarul explicativ al limbii române, ediţia a doua, Editura Univers Enciclopedic,

Bucureşti 1998;


ARTICLE AND REVIEWS:5. Comaniciu Carmen, Caraganciu A., (nr.2/2007), Posibile scenarii pentru optimizarea

politicii fiscale româneşti în contextul aderării la UE , Revista Finanţe publice şicontabilitate;

6. Ionică Maria Cristina, (nr.4 -aprilie 2004), Metode de declarare a impozitelor, taxel or şicontribuţiilor sociale , Revista Finanţe publice şi contabilitate;

7. Mitrache R., (nr.1/ ianuarie 2006), Evoluţii semnificative în sistemele de plăţi: sistemelede decontări pe suport de hârtie cedează locul Sistemului Electronic de Plăţi , RevistaFinanţe publice şi contabilitate;

NORMATIVE ACTS:8. Ordinul 537/03.04.2007, pentru aprobarea modelului conţinutului formularului

„Declaraţia recapitulativă privind livrările/achiziţiile intracomunitare de bunuri;9. Lege privind Codul Fiscal nr.571/22.12.2003 , cu modificările şi completările

ulterioare, publicat în M.O.R nr.927/23.12.2003;10. Ordonanţa Guvernului nr.92/24.12.2003 privind Codul de procedură fiscală cu

modificările şi completările ulterioare publicat în M.O.R. nr.941/29.12.2003;11. Legea finanţelor publice nr.500, publicată în M.O.R. nr.597/13.08.2002, cu modificările

şi completările ulterioare;12. ANAF: Portal m.finante.ro


RELEVANCE AND CREDIBILITY OF THE INFORMATION FROMTHE FINANCIAL-ACCOUNTING STATEMENTS

University Lecturer Ph.D. Marilena ZUCARomanian American University, Bucharest, Roman ia

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Abstract:The relevance of the accounting information is one of the most significant features in terms of quality and

refers to its capacity to influence investors, creditors and other users of the financial statements in their decision -making. A relevant piece of information helps the user assessing present, future and past events, confirming andcorrecting potential past errors. The information’s relevance regarding a certain element which must be acknowledgedin financial statements, may not be assessed distinctly, but it must be assessed within the frame of the main objective ofthe financial statement, namely to provide useful inf ormation for decision-making with respect to investments, financingor exploitation. Moreover, the relevance must be taken into account within the frame of the drafting of the entire set ofthe financial statements and the way according to which an acknowl edged element is useful in the decision -makingprocess.

The credibility assumes that the accounting information does not comprise any significant error or subjectivismand it offers a faithful image of the mirrored phenomena or processes. The conceptual frames detail the elements whichensure the information’s credibility equally in terms of content, but underlined in terms of wording. Thus, the accountinginformation must be objective (to faithfully mirror the transactions and events), must reflect the meaning and consequencesof the economic events just as the legal requirements, it has to be neutral (to avoid influencing a decision or issuing ajudgment for the accomplishment of a pre -determined outcome or objective), it must be complete and illustrate d within thelimits of cautiousness.

Subsequently the perusal of the argument for the two classes of opinions, we conclude that the informationprovided in the financial statements must be believable enough and relevant enough at the same time. Thus, th e result ofthe display in the financial statement must comply with the cross point of these two features.

Keywords: financial statements,accounting information, economic decision, the relevance, the credibility

Cod JEL: M41 – Accounting

INTRODUCTION

The professional judgment, supported by the accounting standards, allows companies to selecttheir accounting policies regarding the ascertainment, assessment and display of financial -accountinginformation as long as the user’s decisions are not affected.

Based on such idea, Simmons claims that the deviations, even the insignificant ones, triggerdistortions of the comparability process. Hence, the need of additional certifications which ensure theusers that the drafting grounds for the financial statemen ts comply with approved standards. Moreover, itarises the high significance of a statement regarding the detailed display of the accounting policies in orderto remove any trace of subjectivism upon the information’s supply.

The effective use of the concept of comparability must be ascribed to the elements of materialityand subjectivism.

1. THE INFORMATION’S RELEVANCE. THE RELATIVE SIGNIFICANCE ANDMATERIALITY BENCHMARK

The relevance of the accounting information is one of the most significant features in termsof quality and refers to its capacity to influence investors, creditors and other users of the financialstatements in their decision-making. A relevant piece of information helps the user assessingpresent, future and past events, confirming and correcting potential past errors. The information’srelevance regarding a certain element which must be acknowledged in financial statements, may notbe assessed distinctly, but it must be assessed within the frame of the main objective of the financialstatement, namely to provide useful information for decision -making with respect to investments,financing or exploitation. Moreover, the relevance must be taken into account within the frame of

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the drafting of the entire set of the financial statements and the way according to which anacknowledged element is useful in the decision -making process.

Example given: the ALFA Company manufactures apparel for the BETA Company, whichoperates a domestic retail chain. In time, BETA has become the main client, en suring 80% ofALFA’s retail market. Although, the international standards do not provide explicitly such case, theALFA management has to provide in their financial statements, information regarding the sales’preponderance towards BETA in order to ensure the relevance of the information provided. BETAis a significant client, which may affect the future economic situation of ALFA. Therefore, failureto provide such relevant information may affect the decisions made by users based on the financialstatements.

If the classification of the relevance among the qualitative features is accepted by allstandards, the ways of the presentation and design of the explanatory discourse differs. Thus, theGeneral IASB frame claims that the information’s quality depe nds on the contribution of theinformation’s nature and materiality benchmark to the drafting of the financial statements. Theinformation’s nature refers to the information’s descriptive feature (related to a new activity segment,related to an incorporeal immobilization, etc.) and the materiality benchmark endorses theinformation’s numerical feature (the value of the outcome achieved within the new segment, the valueof the reported incorporeal immobilization, etc.).

By means of an original disposition, the British standard presents the materiality benchmark asa self-contained feature and more over the most significant feature. This significance arises from thefact that failure to provide insignificant information leads to complicated financial state ments, whichlimit the audibility of the other information provided. Two factors are under analysis for making thedecision regarding the removal of insignificant information:

a) The value of the element perused both taking into account the entire set of fina ncialstatements and the availability of the user’s assessment.And

b) The nature of the provided element, mirrored by means of the transaction and eventscarried out, by means of their consequences, by means of the identity of the involvedparties or by means of the class where such element is acknowledged.The two positions regarding the reasoning ascribed to the materiality benchmark regarding

the qualitative features are blended in the American frame. This defines the materiality benchmarkdistinctly from the qualitative features, but closely related to relevance and credibility. Forinstance, the decision to not provide certain information may be made due to the fact that investors(main users according to the American definition) do not need such inform ation (it is not relevant)or the involved elements are too small (both in nature and value) to be provided (the information isnot significant).

Exceeding these details regarding the approach and wording, the actual content displays thedouble role played by the information’s relevance:

1. Foreknowledge role: the information regarding the financial status and the performance areused by management for forecasts regarding the company’s ability to react in the future andto avoid unfavorable situations;

2. Confirmation role: the information from the financial statements is used to peruse previousforecasts and to define the company’s management control (to confirm or correct previousassessments and forecasts).The assessment of the past event’s consequences mixe d with present information generate

information which represents the raw material for reshaping previous forecasts and for establishingnew scenarios with respect to future activity.

We illustrate hereby the relevance’s double role by means of an example based on the caseof a company, which invests its moneys in order to obtain income from interests.We start from the fact that the company keeps during the year if 200X, in a deposit, 20,000 u. m.with a rate of interest of 10%. The company’s investing of the moneys would benefit to thecompany an interest of 13% for the year of 200X. We already have information regarding the


confirmation role of the information, namely the actual value of the moneys which may be investedand the actual interest rate. Therefore, the confirmation value allows the company to compare theamount of 20,000 u. m. from the beginning of the year of 200X with 22,000 u. m. that could beavailable at the end of the year of 200X. However, taking into account the forecasts, we may detai lour perusal by orientation towards the future. Future pessimistic forecasts show an interest rate forinvestments to 12% and the optimistic ones to 15%. Forecasting an investment on term, the amountof 22,000 u. m. from the end of the year of 200X may br ing to the company an overall gain of 2,860u. m., taking into account the interest rate at the beginning of 200X, or a gain of 2,640 u. m.,according to the pessimistic forecast, or a gain of 3,300 u. m., according to the optimistic forecast.Detailing further such information, the company may develop evolution scenarios, ensuring asignificant basis for the decision -making process.

Providing in the financial statements such detailed information bestows relevance for users,as they narrow the decisions’ diversity field and, implicitly, decreases the probability for erroneousconstrual, thus ensuring a guide of construal. In literature, we find various suggestions forinformation display. An alternative claims that it is highly significant to offer past i nformation overpresent information, based on the fact that it offers the possibility to peruse the trend, whichactivates the information’s usefulness in decision -making. Another alternative suggests that thefinancial statements should detail and the man agement’s forecasts and synthetize the present values.Such display of the information helps the users to supersede the border arising from the lack ofeconomic and accounting training and allows them to issue judgments regarding the managingperformance. However, these arguments do not support the removal of present information, butthey claim that such information should be illustrated within a past/future frame.

The study of Sterling illustrates an interesting association of present -past by analogy withnavigation. The author sees the reported elements by means of the two coordinates of a watercraft’sposition: latitude and longitude and supports the idea that the present position is the one generated afuture position. The optimal choice for reaching it s destination may not be achieved in the absenceof possible alternatives. The possible alternatives to be achieved in the future are defined accordingto the present position and the targeted destination.

Moreover, the present position is the result of the distances run in the past, seen by means ofgains (the correct path) or losses (deviations from the correct path) generated by better or worsedecisions. Thus, the present decision is the result of a past position and the distances run in the past.According to the same logic, the author claims that the present information arises from the pastinformation and from the decisions made in the past. This information becomes ground for thefuture together with extrapolations of the past forecasts correcte d with the past and present reality orrelated to forecasts built on future reality. In this respect, the present financial position (as themoment’s image) and the past overall outcome (as reflection of the time period) reflect startingpoints in the achievement of the forecasts regarding the financial position and the performance,which bestow forecasting value to such information. If we bring the future into present, the presentfinancial position and performance are the consequences of the forecasts mad e based on pastinformation, which bestow confirmation value to such information.

Thus, the relevance, meant to ensure that the information provided is correct in order tomake proper decisions, accomplishes its objective by means of the two values:

a. Forecasting value - it uses past and present information to guide future decisions, andb. Confirmation value – ensures the grounds for comparing the effects of past decisions

based on the information from the forecasting financial statements with the decisions tobe made based on present statements.

2. INFORMATION CREDIBILITY OR FEASIBILITY. FAITHFUL IMAGE

The credibility assumes that the accounting information does not comprise any significant erroror subjectivism and it offers a faithful image of the mirror ed phenomena or processes. The conceptualframes detail the elements which ensure the information’s credibility equally in terms of content, but


underlined in terms of wording. Thus, the accounting information must be objective (to faithfullymirror the transactions and events), must reflect the meaning and consequences of the economic eventsjust as the legal requirements, it has to be neutral (to avoid influencing a decision or issuing a judgmentfor the accomplishment of a pre-determined outcome or objective), it must be complete and illustratedwithin the limits of cautiousness.

The faithful display of transactions and events is a primary element which ensures thecredibility of the information provided in financial statements, as it ensures a balance between theinformation provided numerically and descriptively and the information’s inductive phenomenon.Thus, the existence of an event or transaction is compelling in order for faithful information to begenerated. This feature is embodied upon the le vel of the Balance sheet with regard to the display ofthe elements concerning the company’s assets, debts and own capital according to the acknowledgingcriteria.

ExampleA company stipulates, in its financial statements, a piece of information regardin g a doubtful

debt in amount of 50,000 u. m. In order to ensure the faithfulness of the statement, it is necessary tocheck if:

a. There is a sales transaction with due date which generated a debt in the past;b. The due date has been exceeded without being postp oned by means of a payment tool;c. The assessment of the debt to 50,000 u. m. is believable (there are documents or rational and

acceptable arguments);d. The probability of cashing in to future the amount of 50,000 u. m. is confirmed or it is

necessary to re-assess it.

The description of transaction and event in the financial statements depends on the rights,obligations and economic resources, on their ascribed significance, on the assessment grounds andon the display techniques used to recognize them in th e financial statements.

The credibility of events and transactions by means of faithful display is directly related tothe display of the economic phenomena which affect the company’s resources. The transactions’economic reality is comprised by the econo mic benefits generated by each transaction, whichbenefits enter or exit the company, ensuring, together with their believable assessment, thefulfillment of the criteria for the elements’ ascertainment in the financial statements. Thus, thetransactions’ economic reality may ensure, in the absence of a complete legal form, a believable anduseful display of information in the financial statements.

Moreover, a piece of information is believable if it is not influenced. Such neutrality isensured when, by means of information selection and display, the decisions made or the judgmentschosen by the management are not influenced in order to shape the outcomes.

The neutrality requirement refers not only to the possibility to chose between variousaccounting methods, which would generate differences regarding the information’s display, but tothe regulation gaps which allow the accountants to involve into the information’s contents and toshape them in order to comply with the achievement of a pre -determined outcome. This limit mustnot be mistaken for an exclusion of the existence of a purpose governing the drafting of thefinancial statements or an exclusion of the professional judgment. It mainly refers rather to thelimitation of the trend regarding the sele ctive display of information.

It is very difficult to ensure the information’s credibility because of the incertitude whichfeatures certain events and circumstances of the company. Such incertitude must be displayed interms of nature and value and as sessed based on cautiousness. By means of cautiousness, weunderstand that there must be taken into account a sort of cautiousness degree in the assessmentissued under incertitude circumstances, thus the outcomes are not overestimated (the assets andincomes must not be overestimated and the debts and expenses must not be underestimated), butthere must not be displayed highly cautious values as they affect the neutrality.


The limit up to which the cautiousness may reach in order to ensure all the other qualitativefeatures is highly sensitive, especially due to the fact that cautiousness has always been seen as ameans of permanent underestimation of the outcome. When the information held by the companyleads to the same probability, namely an amount of money is lost or gained, the cautiousness tendsto confirm the loss. However, if the probabilities are not equal, for instance, the possiblealternatives generate losses, but with different values, the cautiousness does not compel the choiceof the most pessimistic alternative.

The cautiousness triggers a difference regarding the approach of the qualitative featuresunder different standards. Thus, if on international level, due to European influence, thecautiousness is defined as the credibility’s groun ded justification, the American standard, althoughnot excluding the cautiousness in the information’s display, deals with it critically, trying to bringinto discussion its limits, under present circumstances, of convergence in the accounting regulation.The topics regarding the reassessment of the Conceptual frame underline the support of a flexiblecautiousness.

Another element which ensures the information’s credibility, sustained by all the accountingstandards, is entirety (completeness), which implie s the complete display of information, withinreasonable limits, ensured by the materiality benchmark and the ration cost/benefit arising from theprocurement of such information. Such limits are justified by means of the practical impossibility todisplay accurately the elements or consequences arising from transactions, especially in terms oftheir magnitude. The incertitude characteristic to the value’s assessment, the specific of theprofessional judgment of various experts or even of the same expert at different moments, thepermanent fluctuations of the factors used in mathematical calculations, on which the assessment isbased, are elements which shape and explain the reasonable limits of the entirety of theinformation’s display in the financial stat ements.

Such features of believable information are stipulated under each standard, but the displaymethod differs. For instance, the American standard deems that a piece of information is believable isit is faithfully displayed, if it may be checked an d if it is neutral. If the faithful display and neutralityare met under the requirements of the General IASB frame, the capacity to be checked is not definedas such, but it may be said that it is implicit.

The verifiability is the process by means of wh ich independent observers issue assurancesregarding the relevance and credibility of the information provided in the financial statements, byconfirming the correspondence between the displayed image and the purpose perused for the eventsand transactions carried out. This quality is embodied by means of the accomplishment of anagreement between observers and of a correspondence between the economic and accounting aspects,but, also, between the direct and indirect verification of the displayed informatio n. Thus, theinformation assessed by an evaluator may be deemed believable if it may be confirmed by anotherexpert. This agreement presents various accomplishment degrees according to the nature of thedisplayed phenomenon or element. For instance, it is significantly easier to ensure an agreement forthe presentation of a building than of a provision for disputes.

The need to ensure correspondence between economic and accounting aspects arises from thereality of erroneous construal made intentionally or unintentionally and which distorts the providedinformation. Such construal errors may be limited by direct control (quantitative inventory,confirmations debtors/creditors, confirmation of market values) or by indirect control (reassessmentof inputs and recalculations of outputs, using the same methods). Examples of directly controllableinformation are those which mirror the transactions carried out on the market between variouscompanies and examples of indirectly controllable information are those ari sing from costs’ allotmentarising from mathematic calculations, such as the calculation of the input cost as amount between thepurchase price and the costs directly allotted to purchase or the calculation of the value recovered bymeans of amortization.

The American frame ascribes to credibility, features such as the appropriateness of theinformation’s display or the ratio cost/benefit, which elements, according to the British or


international concepts are dealt with within the limits of the display o f qualitative information and notamong proper features.

3. CONCLUSIONS. THE CROSS-POINT RELEVANCE-CREDIBILITY IN THEFINANCIAL-ACCOUNTING STATEMENTS

In order to justify the features ascribed to credibility, it must be taken into account togetherwith relevance. The usefulness of the provided information is carried out when both requirements aremet. Although, the starting point is the idea that a relevant information may be as believable (or theopposite) as it may generate errors in the decision -making process, we deem that the two requirementsmust be met, without trying to decide if a better credibility supplies a lower relevance or the opposite.They are clearly defined features, which complete each other mutually, without intersecting. Thus, therelevance refers to the accomplishment of the connection between the economic phenomenon and thedecision made for the company while the credibility describes the connection between the economicphenomenon and its display in the financial statements, both desc riptively and in terms of value.

In order to provide a believable and relevant piece of information in the financial statements,the professional judgment must follow the following path:

Decisionprojection

Existence of anevent

Projection in thecompany’sactivity

Informationusefulness

The high generalization degree of the relevance concept triggers its layout in the decision -making frame in order to check the information’s relevance. For instance, the assertion, accordingto which the supply of information regarding own capitals is relevant for investors’ attraction, hasquite another representation than the assertion, according to which the supply of informationregarding own capitals is relevant. Identifying the decision which must be made based on theprovided information must be placed within the frame of an event, transaction or phenomenonwhich may be related to the company’s activity. Thus, the assertion, according to which reportinginformation regarding the provisions for disputes is relevant in order to establish the risk degree,which describes the company has a completely different meaning that reporting informationregarding the provisions for disputes is relevant.

Detailing further, we may say that placing the dec ision within an event characteristic for thecompany triggers relevance for the information only if such information may be described. A pieceof information, although relevant for the company, may be believably displayed (the control of thegenerated economic resources belongs to the company and the assessment of such resourcesprovides a justifiable and acceptable value) or may not ensure credibility. Resuming theaforementioned example, the display of the provision in the financial statements, although r elevantby means of the fact that it helps the company with the control of the result’s allotment and it arisesfrom a disputes regarding the trial’s loss, is not high enough or the value of probable losses may notbe assessed related to reality.

Starting from such mutual assessment between the relevance and credibility of a piece ofinformation provided in the financial statement, the regulators have brought into discussion acomparison of the significance of the two features for the guidance of the pro fessional judgment.

For instance, the decision to provide the information in historical costs or real values isascribed to the significance that the two features have in the endorsed alternatives. As mentioned inthe first chapter, at present the regulat ors’ trend is to leave the assessment is historical costs in thedetriment of the one in real values. One explanation is that real values ensure a higher relevance thanhistoric costs, although they are not as believable as the historic costs. However, the opinions differ.Certain experts assert that a higher credibility justifies the supply of less relevant information while


other experts place relevance before credibility. In this respect, those who draft financial statementsincline to give a higher importance to the supply of believable information, although it is not relevantenough, while auditors incline to place on first position the information’s relevance and then tocheck if the relevant information is believable, as well.

Subsequently the perusal of the argument for the two classes of opinions, we conclude thatthe information provided in the financial statements must be believable enough and relevant enoughat the same time. Thus, the result of the display in the financial statement must compl y with the crosspoint of these two features. Using mathematic rapports, we are able to build a function of theprovided information, such as:

Provided information = /(relevance n credibility)

The comparability endorses the need of users to compare the information provided in financialstatements in time, for the same company, and in space, for different companies and to extract trendsregarding the companies’ financial positions and the performances. The purpose for the assurance ofthis feature is that of perceiving and explaining the differences and similarities between certaininformation provided in the financial statements. For this point of view, the comparability involves theexistence of common features for the compared elements. In this respec t, it is necessary:

a. Display of the accounting policies used for drafting the financial statements and theirchanges and the consequences of such changes;

b. To ensure the consistency of the display in time and space by keeping the chosenaccounting policy as long as possible, without distorting the resulted information.

However, the comparability must not be mistaken for the information’s equality and, attimes, it may be better mirrored by means of the perusal of differences than similarities’.Therefore, it is necessary to supersede the consistency’s inflexibility (the methods’ permanence)by waiving certain accounting methods which do not ensure the supply of relevant and believableinformation given the display of all information regarding the respective change. Thecomparability’s quality is preserved if different accounting methods are used and even if there areadjusted, given that there are displayed comprehensibly, believably and relevantly all theconsequences arising from such situations.

The comparability between companies and the consistency of the accounting policies intime ensure the increase of the informational value of the economic opportunities andperformances and the information’s meaning, especially the qualitative one, depends on the user’sability to relate it to certain standards.

J. K. Simmons underlines in his article A concept of comparability in financial accounting, thesignificant role played by the endorsing of the financial statement of a Conceptual frame. Given theabsence of such frame, the concept of comparability may not be applied and the comparisons of twocompanies which do not use the same accounting frame on specific elements do not have informationalusefulness. Simmons defines comparability by means of the econo mic substance and claims that we mayspeak about comparability when there are similar reflections of the information’s economic substance,which allows establishing differences and similarities.

BIBLIOGRAPHY:

1. N. Feleagă, I. Ionaşcu, „Tratat de contabilitate financiar ă – Contabilitatea ca joc social”, vol.I, Ed. Economică, Bucureşti, 1998.

2. M. Ristea, „Metode şi politici contabile de întreprindere”, Ed. Tribuna Economic ă,Bucureşti, 2000.

3. „Illustrative Corporate Consolid ated Financial Statement 2005”, study published by PriceWaterhouse Coopers, www.pwc.com


THE RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT AND THEINFORMATION SUPPLIED BY ACCOUNTANCY IN THE PROCESS OF

SUBSTANTIATING THE FINANCIAL DECISIONS AT THE LEVEL OF ANECONOMICAL ENTITY

Assistant Irina CHIRITAUniversity “Ştefan cel Mare” Suceava, Economic Sciences and Public Administration Faculty

[email protected] Assistant Claudia GRIGORAŞ -ICHIM

University “Ştefan cel Mare”, Suceava , Economic Sciences and Public Administration [email protected]

Abstract:The present paper outlines the relationship that exists between the financial management and the accountancy

science regarding decision making mostly of financial order.The paper called “The relationship between financial management and the information supplied by

accountancy in the process of substantiating the financial decisions at the level of an economical entity ” is structuredinto three parts, starting from an general view of what financial management is, followed by the information suppliedby accountancy used in making mostly financial decisions, because it consists the purpose of this paper also .

The third part refers to the types of decisions which can be made as a consequence of analysis of aneconomical entity from the financial management point of view but also of the information from accountancy. From thefinancial management point of view, decisions are clearly state d, the specialty literature offering a plenitude ofinformation regarding types of decisions, on what are them substantiated and what is their concrete form after applyingthem. From the accountancies point of view decisions are based on the interpretation s of the annual financialstatements, which offer us a clear and faithful image over the analyzed economical entity.

The finality of the paper are the conclusions based on the analysis, which is composed of a summaryappreciation of the types of decisions that can be taken in an economical entity after analyzing the information fromaccountancy and having at hand the organization of the financial management of the economical entity. Also, we wantto outline the importance of having an organized financial m anagement whose results to take into account in theeconomical entity, as well as the importance of correctly producing the annual financial statements, these being of agreat influence, both positive and negative, of the financial decision making system.

Key words: financial management, financial analysis, the budgeting prediction, decision process, financialframework

JEL Classificaton: G32, M41, M51

INTRODUCTION

In the actual conditions, those of the existence of a market economy, the efficiency o f aneconomical entity depend in a high proportion of the manger’s capacity to understand and applymodern management principals, methods and techniques.

The quality of the management act is a primordial condition for the firm to gain competitiveadvantages and withhold the competitive mechanisms. The previous statement is further moreimportant since, in the last few years, it has been proven that the main factor leading to bankruptcyof an economical entity is the incompetence of managers and leading mis takes due to errors indecision problems. In a structured analysis, this factor owns a 60% ratio, being followed at greatdistance by the unfavorable evolution of market (with a ratio of 20%), natural phenomenon , fires,calamities, earthquakes (with a rat io of 10%) and other causes (10%),

From those presented above we can notice the importance of organizing a well structuredmanagement in order to make the adequate decision in a certain given situation but also the mostcorrect ones, and if we refer to th e financial decisions, these, through the present paper can beoutlined with the help of the annual financial statement analysis. If we speak of making a decisionfrom the financial point of view, we will analyze each component from a complete set of annua lfinancial statements. The information regarding the element from the income statement, are capableof presenting to us the net turnover, which results from the accountant notes, turnover which is

www.pwc.com

[email protected]

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parceled on activity segments and geographical markets, al so here there are presented informationregarding the average number of persons employed during the financial exercise.

Also the balance sheet is a very important element because it reflects the movement ofdifferent elements of fixed assets, as well as t he reevaluation of different elements of the balancesheet and the moments in which these reevaluations are made, thus influencing the financialdecision making process.

The financial decisions can’t be characterized as insignificant, finding correct solu tionsmeaning the processing of a large amount of information, the factors which must be taken intoconsideration being very numerous and the mistakes with serious effects.

COMPONENTS OF THE FINANCIAL MANAGEMENT

Financial management is a component if the general management of the firm. Its mainobjective is to ensure the efficient use of the capital utilization, to sustain the process of creatingnew capitals necessary to the economical entity and to produce this way the necessary supportneeded to gain market performances.

The financial management operates always in a well outlined framework defined by themarket strategy of the firm and is subordinate to the objectives of the strategy. The financialmanagement of the enterprise can be understood as a gro up of persons, methods, techniques,procedures, instruments and actions trough which the financial decisions are substantiated in thecontext of the organization’s objectives accomplishment who are formulated in a firm’s strategy.

Inside the financial management we can identify four domains, each with very distinctiveobjectives, forming at the same time a whole because of the strong interactions between them:

1 The financial analysis aims to give an appreciation of the economical entity under theaspect of profitability, risk, tracking deficiencies and estimating possible growth possibilities. Itmakes possible, both as a separate procedure (used in the actual financial state evaluation) as wellas a procedure used in other domains, the examination of the d ecision’s consequences.

2. Financial planning has as objective establishing a growth strategy of the entity, which willbe registered in the budgeting system. The budgeting prediction have a strong influence on financialdecision, and adopting real decisio n will generate, at its own turn, a feedback process in the sense ofcrayoning and adjusting the predictions.

3. Short term financial management refers to the circulating assets and debts administration,the decisions adopted having an immediate effect on the financial state of the entity. Studying moredetailed what we call the treasury administration we can observe that in this point all of thefinancial decisions meet, including those regarding long term financial management.

4. Long term financial management has as objective the analysis and selection of theinvestment projects and financing sources, the decisions adopted being registered in the investmentbudgets as an integrated part of the budgeting system of the entity. The terms in which the entitymakes business suffers a continuous adjustment, which leads to a constant need of finding rationalways of organizing and leading the processes affected. The selection of the organization andleadership ways which responds the best to the firm’s objective, is made trough the optimumcombination of the material, human and financial resources available.

This is what defines the enterprise’s administration which is a practical method of leadershipand organization of the productive activities. Manifesting auto nomy, exercising the right toorganize and lead the activity, also imposes action and means of reaching the predeterminedobjectives

The economic administration concretizes itself in an ensemble of decisions and operationsregarding the accomplishment of, on one side, the efficient producing and using process of theproduction factors, and on the other side, the self -management of effects resulting from the activity.


ACCOUNTANT INFORMATION – PLACE AND ROLE IN THESUBSTANTIATING OF DECISION PROCESS

The main sources of information used in financial management are the accountant papers,especially the balance sheet and the income statement. They help to know the enterprise’s situationat a certain time, occasion with which it is verified if the previous dec isions were valid andaccording to the reality, and if they contributed to the objectives accomplishment.

The extent to which the obtain results come close to the predictions is the measure in whichone can say that the managerial team has reached the expe cted performance. The accountantinformations have a historical character, because they refer to a past period and they are the resultof some conventional norms of data producing, specific to accountancy. That is why most of thetime the management must reorganize the information from accountancy.

The reorganization of the accountant information is made according to specific criteria,compatible with the financial domain and must be a support in the substantiation and adoption ofdecisions, because management works with the future, uncertainty and risk. The balance or thebalance sheet of the firm, as well as other synthetic accountancy documents, must be just startingpoints in the analysis and diagnosis of the present situation, in the characterization of the changesthat have produced themselves in the interval marked by the administration period. They are troughtheir content, a situation that offer information regarding the results obtained by management in thepast periods regarding the efficiency of c apital use.

Relevant information for the financial management is the cost. It represents the monetaryexpression of the financial effort of the firm to finance its actions. In means of cost calculating,there are conventional rules with their advantages a nd disadvantages, reason for which the costrelevance for the financial management becomes crucial.

TYPES OF DECISIONS THAT CAN BE TAKEN BASED ON A ACCOUNTANTAND MANAGEMENT ANALYSIS

The financial decision needs a thinking effort from the managers with t his type ofresponsibilities, in order to chose the best option from all those possible.

The variety of situations taken into consideration and played , generate a multitude offinancial decisions, and their classification and be made based on more criteri a, in our opinion, weconsider it’s worth insisting only on two basic criteria, which outline the most representativefinancial decisions of the enterprise, thus:

a) After the nature of the objectives (the time horizon aimed), we have the followingcategories of financial decisions: strategic decision, tactical decisions, operational decisions.

The strategic decisions refer to engaging in high perspective objectives, having a complexcontent and an essential role in the enterprise’s evolution. They establis h the major coordinates ofthe financial strategy promoted on the long term. To some opinions of these decisions is consideredto depend the very own survival of the enterprise. It is the case, for example, of the introduction of anew product, of an expensive investment or an out of border expansion through the acquisition ofanother firm. Taking such a decision requires a complete analysis of the enterprise and itsenvironment in order to limit the possible error risk. The decisional process is in this ca se long andit appeals to numerous techniques (market studies, financing plans, profitability analysis of theinvestments).

Tactical decisions are the ones regarding the daily financial operation and theiraccomplishment, being subordinate to the strategi c decisions, and representing a continuation oftheir logic, which they will segment and detail. They are more numerous, but simpler troughcontent and more specifically crayoned. It is the case for example, of the budgeting process andsupplying policy. These decisions demand limited information, but are never the less important.

Operational decisions are the most numerous ones. In their case it is about the solution to aproduction stopping problem, as a consequence of a machinery brake -down or of some disorders in


the supplying system which has generated a stop in stocks. Such decisions ask a reduced number ofinformation, but have a special importance, because of the rapidity with which they are handleddepends the efficiency and productivity of the ent erprise.

b) After the nature of the activities that generate the financial fluxes, financial decisions areof three types:

-investment decisions, with a direct influence on the enterprises assets structure, so on theirliquidity

-financing decisions which determine the structure of the debts and bring modifications inthe demanding time of the debts and in the capital costs

- profit repartition decisions which influence the ways of distributing the dividends and thusexercising direct implications on invest ments and self-financing

The investment decision can be considered one of the most important decisions taken by thefinancial managers, but not the most important. By the correct substantiation of the investmentdecision are depending the enterprise’s capa city to stand out into the business environment and thegrowth of its market share. The decision to invest approaches the capital allocation problematic forphysical and financial assets: the central place goes to the immobilized assets gained as a result ofthe capital investments. Trough this decision the monetary resources which the enterprise disposesof, are rationally and efficiently allocated to buy, build, and modernize fixed assets and accumulatestocks of material etc. in the volume and structure adequate for it to function at its highestperformance.

The financing decision purpose is choosing the enterprise’s financing structure, byanalyzing trough the optimum criteria the cost of each source of capital. Within these decisiontypes, it is chosen the ratio between the self -owned capital and capital coming from loans. Also, wemust take into consideration the possibility of attracting temporary monetary resources that belongto other persons (individual, juridical, the state) with which the enterpr ise maintains financialrelationships.

STAKEHOLDERS - THE CATEGORY OF USERS INVOLVED IN THESUBSTANTIATION OF A FINANCIAL DECISION

Interest groups also called stakeholders represent a less known notion in the corporategoverness in our country. In Romania there are only two group categories whose interests are takeninto consideration in the decisional process: employes and creditors. With all of this, neither ofthem is treated systematically by the Administration Board as legitimate interest groups.

Regarding the financial decisions that form the content of an entity’s financial management,these can be represented trough a financial circuit. This financial circuit resulted as a following ofthe enterprise’s three basic financial decisions’ execution wh ich are the investment decision, thefinancing decision and dividend one and which presume the following stages.

In a first stage the economical agents who dispose of liquidities grant enterprises thenecessary funds for their investment operations. Thus , appears a confrontation between the demandfor liquidities of the enterprises and the offer of liquidities of the capital’s owners. As aconsequence, the enterprise issues titles (financial assets) which are either property titles (shares),either demand titles. The capital market is the result of the confrontation between the offer anddemand of financial titles. The operations of collecting capitals are financing operations (externalfinancing). In the second stage the leaders of the enterprise use the f unds to purchase assets,decision which generates investment fluxes. The purchased assets are either in industrial orcommercial assets, either in financial assets issued by other enterprises or financial institutions. Theentity can afterwards sell the purchased assets and receives in return a flux of liquidities; this is adisinvestment flux.

The investment in industrial and commercial assets is made with the intention of generatingfuture liquidity fluxes from exploitation operations such as supplying , production, retail whichimplicate the acquisition or creation of exploitation assets (stocks, demands, clients etc.). These


assets are partially financed through the credit obtained from suppliers. The liquidity fluxesobtained from the exploitation ope rations are completed by the fluxes determined by the financialassets (participation titles, placement titles). The fluxes of exploitation liquidities, increasedeventually with the value of the fluxes determined by financial assets and disinvestment oper ationsand diminished with the fiscal assay, can be used with the following purposes: to pay back thecredits and their interest, to pay dividends to the shareholders, to reinvest in the enterprise.

The remuneration operations (as interest) and those of r efund belong to the category offinancing operations, because they result from the collecting of capitals decisions. The operation ofreinvestment of the formed fluxes is also a financing operation (internal financing or self -sufficiency). In the process of the financial operations from a financial circuit, interfere thefollowing participants, with a direct or indirect, role in the substantiation of the enterprise’sfinancial decisions; shareholders, leaders, creditors, the state.

The shareholders are the owners of the property titles over the entity, these being mostlyunder the form of shares. The shareholders are taking a risk because their remuneration is accordingto the financial results that the enterprise is going to obtain. They search for a maxim umremuneration for their subscription, taking into account the risk that they are taking.

The leader of the financial compartment can, usually, be included in the managers’ category.He must check, trough the financial criteria’s perspective, the level of efficiency of all the otherelaborated share programs and the implementation from the leaders of other responsibility centers.In this case he collaborates on horizontal with all of the deci sion factors in order to crayon the bestaction alternative in financial plan, without diminishing from a quantitative and qualitative point ofview the economical action put at work.

Another category of participants involved in the substantiation of the entetity‘s financialdecisions are the creditors. These are of mo re than one type, as: creditors note -holder whosedemands appear under the form of a title, listed on the market and slightly negotiable, called bond;banks and different financial institutions that finance most entities, creditors who rent differentfixed assets, the financing operations being under the form of a location or location with thepossibility of purchase (leasing).

In general, foe each entity that has a clear strategy of action and wants to maintain itselfviable, there are certain minimal lim its set by owners, whose un-accomplishment draws themanager’s penalization. To avoid such negative consequences, the managers will commit inprofitable projects, but extremely risky, that need them to recur to bank credits, In thiscircumstances, monitoring the activity of the firm with debs by the crediting bank seems fullyjustified, even if it generates displeasure for debtors.

CONCLUSIONS AND PROPOSALS OF IMPROVEMENT OF THE ACTUALSITUATION

From the beginning of this paper we may ask the question if there is a relationship betweenthe financial management as part of the general management process and the data fromaccountancy?, and who’s answer may be found inside it, from where we can draw the conclusionthat the information from accountancy are imp ortant in substantiating a decision of a financialnature. Decision making is indeed very important, but just as important is its implementation andespecially improving the existing situation, so that the new strategy can work as predicted.

The situation existent in every economical entity is that, not every manager has a wellorganized strategic plan, decisions being implemented without a strategic plan, without even takinginto consideration any king of accountant information in the decision making proc ess, especially inthe financial decision.

The conclusions of the present research are that the system of decision making should bechanged at the level of every economical entity, should be better organized, should take more intoconsideration the financial director’s opinions who can supply data very important for the entity,even more hence the entire financial situation of the entity is in his hands. Avery well organized


financial management system would be possible first of all trough a manager’s train ing regardingthis type of management and about the importance and relevance of the financial data for the entityhe is leading. Such a solution may be expensive, but the advantages can be numerous, since it canbring benefic results for the entity.

REFERENCES

1. Berheci, M., -“ The Financial Reports – Purposes, Drawbacks and its Improvement ”,articol în Analele Ştiinţifice ale Universităţii „Alexandru Ioan Cuza” , Iaşi 2005/2006

2. Bucătaru, D., - “ Decizia financiară a firmei în condiţii de risc “, Universitatea „ AlexandruIoan Cuza” Iaşi, Facultatea de Economie şi Administrarea Afacerilor, Suport de Curs, Iaşi,2008

3. Onofrei, M., - “Management financiar” , Ed. C.H. Beck, Bucuresti, 20064. www.ase.ro/bibliotecadigitala-


CONCEPTUAL DELIMITATION OF FIXED ASSETS PROCUREMENTIN PROJECTS WITH GRANT FUNDING

Assistant PhD. Student Mihaela Nătăliţa LESCONI-FRUMUŞANUUniversity “Eftimie Mugu” Resita, Romania

[email protected]. Student Ec. Ioan Anton PAULESCU

University Eftimie Murgu, Resita, [email protected]

Abstract:In recent months, the notion of economic crisis is a “fashionable” one, and it affects also the access of

Structural funds. It can be noted that nationally a series of measures have been taken to reduce the time of the selectionprocess of projects so as the period from writing the project until implementation it to be as short as possible. Let thisbe a strategy to hasten the absorption of funds allocated to Romania for this year?

Due to the economic crisis through which we pass, at the level of European Union certain measures are takenin order to combat it, one being that the grant funds will be mainly awarded to projects that promote sustainabledevelopment of the implementation zone (infrastructure, productive activities, creative job s, etc.) projects, in which,fixed assets must be purchased.

In present paper we will stop over some terminology issues (national vision, continental, British andAmerican), related to fixed assets (tangible and intangible valuations), because as it occurr ed in literature, but alsoamong practitioners, a series of discussions on this assets category. These discussions are caused by lack ofcommunication on the existing organizations involved in the process of accounting harmonization, imposed by theglobalisation of economies, especially of financial markets. Harmonization or the convergence of accounting isconsidered an irreversible process, as determined by the need for comparability of financial statements.

Keywords: grants, fixed assets, tangible, inta ngible valuation, depreciation, accounting


INTRODUCTION

To exist, and especially to work of developing an economic entity it needs money formaterial goods or purchased services, after which it will gain certain benefits, which can beobtained either in the current period or future periods. If benefits are obtained in the current period,the value of goods and services consumed becomes expense during the same period. If benefits areexpected in future periods, then the goods and services will be considered fixed assets in the currentperiod and the payments made to purchase will be capitalized.

Due to the economic crisis through which we pass, at the level of European Union certainmeasures are taken in order to combat it, one bei ng that the grant funds will be mainly awarded toprojects that promote sustainable development of the implementation zone (infrastructure,productive activities, creative jobs, etc.) projects, in which, fixed assets must be purchased.

1. THE DEFINITION OF FIXED ASSETS

The definition of fixed assets, met in IAS 16 “Tangible”, IAS 17 “Leases”, IAS 38 “Fixedassets”, IAS 40 “Property investments”, is as follows: fixed assets are the controlled resources bythe enterprise and meet several conditions:

a) have a duration of more than 1 year;b) are used in the operation of institution exploiting, given with a rent (including leases) to

third parties for use and also for financial investments on long term (equity investments of otherfinancial companies, including claims relating to such investments);

c) are acquired or manufactured to be used in the company (including for rental or forcapital growth) and are not for sale.

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Intangible assets, known as intangible fixed assets or intangible assets include all theeconomic value of investment that do not take the physical form of tangible assets.

According to Ministry of Finance Order no. 1752 from 2005 , an intangible asset is anidentifiable, non-monetary asset, with no material support and held for use in the supplyingproduction of goods or services in order to be rented to third parties or for administrative purposes.Intangible assets are assets without physical form , represented mainly by concessions, patents,licenses, computer software, costs of research - development etc. All these are an importanteconomic potential, through which enterprise business develops and diversifies. Intangible assetsare subject to amortization, durations ranging from one intangible element to another. Consideringthe heterogeneity of intangible fixed assets, as well as some features that intervene in the financialbehavior of each of component element, it was necessary to ensure accounting for each of theseparate components.

International Accounting Standard IAS 38 “Intangi ble assets”, which is the accountingtreatment of intangible items, defines intangible assets as a non -monetary asset identifiable withoutmaterial support and held for use in the production or goods supplying, services providing for rentalor administrative purposes.

38 International Accounting Standard requires two preconditions in order to accountintangible assets: probability that the entity to obtain future economic benefits from t he use ofrestraint intangible, probability assets for the entity to o btain future economic benefits f rom usingintangible restraints, and opportunity to evaluate on a credible manner the cost of a intangiblerestraint.

In British accounting provisions on intangible assets are found in the following rules: SSAP (Statement of Standard Accounting Practice) 13 (accounting for costs of research- development); SSAP 22 (accounting for goodwill and differences in acquisition); SSAP 12 (accounting for depreciation).Basic features in England accounting are: simplicity and professional judgment freedom,

this being built on the Anglo -Saxon accounting school. Within the intangible (Intangible fixedassets), according to British standards are included: the costs of development (Development costs),concessions, patents, licenses, trad emarks and other similar rights and assets (Concessions, patents,licenses, trade - marks and similar rights and assets), goodwill and flow accounts.

Specialists in this field have noted the absence of a general rule regarding intangible assets,therefore the draft rule FRED (Financial Reporting Exposure Draft) 52 “Intangible ValuesAccounting” is aimed to remedy this issue, as will later be applied to standard FRS (FinancialReporting Standards) 10, which will resolve problems connected to this type of fix ed assets,defining intangible assets as active ones, designed for a sustainable use within the society activitiesof non-monetary nature and without physical substance .

To be recognized as intangible assets, an asset must meet the following three conditio ns: thehistorical cost is known with precision, the nature of goodwill and other assets is clearly distinct; anindependent cost can be determined independently of the goodwill and other assets and also fromthe profitability of a sector or the society as a whole.

In American accounting, there are rules regarding the intangible assets, the most popularbeing APB (Accounting research bulletins) 17 which issued in 1970, being applied until 1995 whenthe rule FAS will be issued (Financial Accounting Standard) 121, this one based on at least twostructures that affect the accounting and classification in terms of their start (identified orunidentified) and in terms of the entry mode (enterprise development or acquired business). Theintangible category may inc lude: patents, trademarks, concessions (identified), goodwill, anddifferences from acquisition (unidentified).

As regarding the capitalization of fixed assets, we can notice that the acquired intangibleassets may be capitalized whether identified or unid entified, whereas those developed by the sameenterprise are not recorded in the profit and loss account and only sometimes the identified ones can


be capitalized. As regards depreciation linear method is preferred on this issue we will be back inthe next chapter.

Tangible assets, known as material or tangible fixed assets are material tangible property touse on long in an enterprise.

Accordingly to OMF 1752/2005, a tangible asset is an active owned by an entity to be usedin the production of goods or s ervices, to be rented to third parties, or be used for administrativepurposes, being used for a period of more than one year.

They are in the form of land and fixed assets (buildings and constructions, hard machineryand energy equipment, machinery, equip ment and facilities, equipment and installations formeasuring, control and regulation, transport, animal work, plantings, production tools and inventoryhousehold accessories). When the purchased or made material assets are not completed, they areincluded in the fixed or ongoing investments in progress.

International Accounting Standard IAS 16 “Tangible assets”, the one which describes theaccounting treatment applicable to tangible assets, defines them as those assets which:

are held by an enterprise for use in goods production or services, to be rented tothird parties, or to be used for administrative purposes;

it is possible to use them several times.Te generically term for tangible assets (also known as tangible actives) is used generally to

identify those assets generally used especially in productive activity from which the company willbenefit over a period of more than one year. The term “body” or “tangible” is distinguished fromintangible assets which are assets without physical substance, or whose value can not be completelyspecified by their physical existence.

As regarding the exceptions and situations where this standard is not applicable, we canremember existing approaches within the standard IAS 17 “Leases”, which provides that thetangible assets recognition that are lease taken is to be made based on the principle of risks transferand benefits of the user. Leasing contracts have become an extremely sought method for assetsacquisition (mainly fixed assets), even in grant funding proje cts the budgets have an item designedfor expenditure categories, generally eligible, because they allow the beneficiary to use throughoutentire project lifetime without obliging him to fully pay (financial leasing) or to take risks(operational leasing). IAS 17 requires the accounting treatments applicable to all leasing contactsclassifying them as:

financial leasing contracts , through which risks and benefits within the property goodsare mainly transferred; title of ownership can be finally transferre d or not;

operational leasing contracts are outside the first category, the asset being shown in thetenant’s accounts, which he amortized throughout the entire useful life accordingly to the specificprinciples and the tenant as recording periodically the costs for lease payments/lease rates.

A new generation of leasing contracts are the “leaseback” by which the owner of theproperty sells it while it leases it from a third party. Therefore, this contract type, has two referencepoints: the sale of property to a third party (ownership transfer) and rental property to former owner.This last stage may take the form of financial or operational leasing.

Another exception is found in the case of a real estate investment, where an enterpriseapplies IAS 40 “Investment property” upon completion of built or developed properties for use asfuture real estate investments. Property investments are defined as those real estate (land orbuildings - or parts of buildings - or both) held by the owner (or the tenant under a contract of lease)to rent or to benefit from the growth of their value and not to be used in the goods production,services or for administrative purposes or to be sold during the normal conduct of business.

According to British approach, in case of tangible assets (Tangible fixed assets), should beemphasized that the property criterion is not retained to define them, those encompassing goodsowned (used) by company (tenant) within the location contracts – financing, from this category are:land and buildings, plant and machinery, installations, equipment and furniture and payments onaccount and assets in course of construction.


In American accounting, there is no specific rule for keeping account for this category ofassets notions on tangible assets are met in several texts. Analyzing these texts we can see thedifferent conception from the concept of heritage property, whether in the French system theheritage concept is based on legal ownership of goods in the American system is based on theconcept of economic control, which leads to the fact that goods entered by contact location –financing to appear in fixed asset.

2. EVALUATION OF FIXED ASSETS

Next we will underline two very important aspects, namely, evaluation and depreciation offixed assets.

In continental vision on assessment is deemed that restraint in order to be recognized firstlymust me be evaluated. The entrance of tangible assets in an enterprise can be done through manyways: classic acquisition, own production, leasing contracts, subsidies, trades with other assets,share capital or donation. The most common way of entering of tangible assets is the acquisition inthis case the cost is the amount by which the asset that will be recorded in accounting (IAS 16 “anelement of tangible assets which is recognized as asset must be measured initially at its cost”). Onwhich concerns the intangible assets some discussion may take place, it should be evaluated at cost,which is done as it follows:

the intangible assets if it is purchased se parately, its cost is the purchase price plus directassociated costs (with interest costs may be capitalized according to IAS 32 - Cost indebtedness);

if an asset is freely received through a government subsidy, it will be valued at fair valueor nominal value (according to IAS 20 - Accounting government subsidies ) to which it is added anyexpenditure that is directly attributable to the asset for its use;

if an asset is acquired through a combination of enterprises, it is assessed at fair value atthe date of acquisition under IFRS 3 - Combining enterprises ;

if an intangible asset is acquired in exchange for other different intangible assets, theasset is assessed at fair value, which is equivalent to the fair value of assigned asset, adjusted by anyamount of money transferred.

In order to specify whether a generated intangible asset by their own resources meets thecriteria for recognition, a company must separate the generation asset process into two phases: thephase of research and the phase of devel opment.

In British approach, important provisions on intangible assets and not only are found inFirms Law (CA 85) which retains the historical cost as the main assessment method.

In fixed assets case is forfeited:

The amount of inputrestraint

-Depreciation (Provision

for depreciation)-

Provision fordepreciation (Provisionfor diminution in value)

=Net book value

(Net book value)

Tangible assets are booked as a general rule at historical cost, but the British companies canquantify them at their rea l value, usually only lands are registered at their fair value becauseconstructions must be redeemed at their book value. On what concerns the lands and buildings adistinction is made between “freehold” property and “leasehold property”. The first constr uctioncategory (made on land owned) is amortized over the lifetime of 40 -50 years.

For other tangible assets (machinery, equipment, technical equipment , means of transport),the depreciation calculated on the basis of economic life applied to the differen ce between cost andthe residual value, most common method depreciation method is the linear method, on this issue wewill be back in the next chapter.

Costs of establishment occur very rarely as an item in British stock companies, which areincluded in the profit and loss account when they appear as costs of establishment, or to charge overthe premiums on issuing, in case of expenditure growth of capital. Under the Firms Law, suchexpenditure must be listed in the expenses charged to the first year or the premiums of issuing,


unlike the French system adopted by Romania, where under the IV th Directive, the establishmentexpenses are amortized.

Within the intangible assets is a separate “D evelopment expenditure” item which underSSAP 13, are not necessarily included in the profit and loss account. Such expen ses may becapitalized only if are related to a project clearly defined, are identifiable, income project isestimated with reasonable reliability and revenue estimated size is greater than the totaldevelopment costs engaged or to be engaged in connection with this project.

As regarding intangible assets assessment in the American vision, the basic rule is that fixedassets are valued at acquisition cost. Price return (production cost) of intangible assets developed bythe company or expenses incurred in order to maintain them must be estimated based on the incomethey generate. The methods used for determining the cost are: purchase price, fair value, the actualvalue of the expenditure incurred for the pu rchase of intangible asses and the fair value of the goodsoffered in exchange for the assets received.

Fixed assets should be reported at historical cost which is the amount of money (or cashequivalent) paid for their acquisition. This value is then adju sted by depreciation. Under U.S.GAAP, the cost of a fixed asset (less any residual value) is the cushion during the estimatedeconomic life so as to obtain an allocation of this close to the rate at which benefits are obtainedresulted from the use of tha t asset. A modification of the depreciation method for a class ofidentifiable assets represents a change of an accounting principle and requires an adjustment for thecumulative effect of change in the respective results.

Some aspects should be underlined concerning the tangible assets, namely that allexpenditure incurred during the entry, put into service of restraint or incorporated into its cost, andits evaluation is at historical cost. The cost of demolition and arranging the purchased land forexecution of constructions, are part of the cost of land, land not being subject to depreciation.

Intangible assets acquired must be recorded at purchase cost, whether they are acquiredindependently, as part of a group of assets or as part of a purchased compa ny. Their cost isestimated at the size of the amount of money paid or at the amounts up to date to be paid inexchange for buying those assets. The cost of non -identifiable intangible assets is evaluated as thedifference between the cost of all identifia ble assets (tangible and intangible), less assumedliabilities.

Goodwill is recorded only when it is purchased as part of a group of assets and isrepresented by the cost of non-identifiable assets acquired. If a purchase results in the appearance ofnegative goodwill, it must reduce proportionally the value of acquired assets (including identifiableintangible assets value). The general costs of producing a software system designed for sale must beregistered as expenses, until the technological feasibilit y of the program is established. Subsequentcosts of establishing technological feasibility should be capitalized until the moment product isavailable to be sold. Until the 1st of January 2002, the acquired goodwill and the identifiableintangible assets were capitalized and amortized over the useful lifetime. Under FAS 142,intangible assets that have finite lifetime are amortized during the useful lifetime. The goodwill andidentifiable intangible assets that do not have a finite lifetime are not amortiz ed but are annuallytested for impairment.

3. THE DEPRECIATION OF FIXED ASSETS

As regarding depreciation, international standard IAS 16 “ Tangible assets” argues thatdepreciation is a method of passing on the costs of initial purchase cost of fixed asset s, over theiruseful lifetime. It is neither a mean of adjusting the asset value to fair market value nor a mean ofproviding funds to replace assets subject to depreciation.

There are different methods in accounting practices to liquidate an asset of tang ible nature.The standard regulates that: the depreciation method used should reflect how the economic benefitsbrought by these assets are consumed by enterprise and that the depreciation value for each period


should be recognized as an expense (depreciat ion expense), unless it is included the value ofanother asset.

The method of depreciation applied to tangible assets should be periodically reviewed and ifchanges in the expected rate of economic benefits arise from these assets, the method should beamended to reflect the rhythm changes. Where such a change in depreciation method is necessary,this must be accounted for as a change in accounting estimate and the depreciation expenses on theyear and future years must be adjusted.

Economic agents amortized intangible assets using the following schemes in Standarddepreciation: straight-line method, sum total years of useful lifetime method, digressive method.

In the British approach, depreciation finds the loss accounting value suffered by assets as aresult of depreciation over time by lowering the level of economic benefits expected to be obtainfrom use, proceeding to correction of to the value of the assets in order to restore them to a valuecloser to reality. As the basis for depreciation is considere d the cost from which is deducted theresidual value, but according to regulations on this matter, tangible assets can be accounted in thebalance sheet at a higher value than historical cost, and that without tax incidence.

In British accounting are found alternative treatments or current cost accounting , based onwhat the company can choose between two methods: you can use the market price valorising foreach asset at the end of the year, or if not possible you can appeal to current price.

Most British companies assess the tangible assets at their historical cost. Exceptions are abig part of large enterprises, which from time to time, have to revalue the asset using the marketvalue. Especially land and buildings are subject to periodic revaluations. Also an annual revaluationof some tangible assets can be done, or a revaluation of all tangible assets, based on replacementcosts.

Generally, the British companies reassess, usually land, but not the buildings and technicalinstallations (because they must a mortize them based on the amount of their accounts value). Forfixed assets outlined in market value, subsequent amortization will be calculated based on the newassessed values and of the economic lifetime remaining.

In addition, although in accounting pr actice is considered at the level of principle that arestraint can not be charged at an amount above fair value, in the United Kingdom, no inventory isperformed annually for this category of assets. Therefore, a British company can keep a restraint onasset at a value higher than fair value, even if it devalues over the year, under the condition thatsuch impairment is temporary.

As methods of depreciation that can be used we can remember: linear method (straightmethod), digressive method with fixed quot a (reducing balance method); proportional damping tothe numerical order of reverse years (SYDM) and method of production units (unit of productionmethod). The depreciation method used in UK practice is the straight method.

According to American approach accounting rules do not have specifically a text devotedonly to tangible assets, treatment of those structures involves the usage of the following regulations:ARB 43 - Depreciation and inflation; APB 6 - Depreciation and revaluation of assets (digressivedepreciation method) APB 12 - Explanatory notes and annexes regarding asset depreciation andcorresponding depreciations FAS 121 - Impairment of long-term assets, FAS 66 - Sale of fixedassets.

Northern American accounting practice respects the principle of historical cost, so that bothin the United States and Canada the value of fixed assets is not likely to be subject of review inmost cases. The basic rule of assessing the assets is historical cost rule; however ARB 43 states thatin the past, restraints could be subject to reassessments or revaluations and in these circumstancesthe depreciation base is given to the depreciation of value and not to the historical cost.

For the Americans Donald E Kieso, Terry D Warfield, depreciation is not a problem ofevaluation, but a way of allocating the cost, which is defined as the process of allocating onexpenses of tangible assets costs in a systematic and rational manner over those periods in whichbenefits are expected from the use of that asset. From the cost of assets, in order to account thedepreciation the residual value is deducted (salvage value) in order to sharing systematically the


depreciation expenses over the useful lifetime. No principle set the lifetime of the intangible assetsas long as this policy is the result of repairs and maintenance carried out by each company.

Although there are several methods accepted for depreciation, methods such as straightmethod, unit of production method, SOFTY method, the most common method is still the straightmethod. The difference between the accounting depreciation and that recognized by financial pointof view which uses shorter lifetime periods for intangible, neglecting the residual value incalculating of depreciation methods and prefer the digressive me thods. American literaturerecognizes that inflation is a complex of phenomenon that motivates the choice of a method ofaccelerated depreciation companies being clearly tempted that by increasing depreciation expensesto reduce profits and to avoid such l ack of capitalize phenomenon.

FASB states clearly that, for accounting evidence, a society should not make reference tothe envisaged financial rules; if amortize tax differ from those accounts, adjustments are required tobe made under the tax retreating form.

The two methods of tax depreciation introduced by the Congress - ACRS (Accelerated CostRecovery System) in 1981 modified in 1986 by MACRS (Modified Accelerated Cost RecoverySystem) stimulate enterprises to invest in new fixed assets in, enabling th em to quickly recover thecost of these assets using the following correctives: to renounce the concepts of duration of use andestimated residual value by replacing with the calculation of a provision for cost recovery based onthe adjusted cost of asset for a period fixed by law for all types of assets.

For the calculation of depreciation five methods may be used, namely straight method,method of production and regressive methods (with fixed rates, method of decreasing quotas,constant quota method (fixed rate applies to the remainder value).

As a result of a study done by the American Institute of Certified Public Accountants,Accounting Trends & Techniques, where they interviewed 600 large U.S. companies on thedepreciation method used, they could concl ude that the most used method is the straight one,followed at a great distance by the digressive method with fixed rates, the production method, theconstant rates method, and on the last place is the method of decreasing rates. By changing thefederal tax law, many U.S. companies have begun to choose more regressive methods.

Instead of conclusion regarding the similarities and differences between the American andcontinental previsions, we use an example to calculate the depreciation: The Alfa Company has afixed cost of acquisition of 30.000 u.m., accumulated depreciation is 5.000 u.m. The present valueof fixed asset is 60.000 u.m. Under the U.S. GAAP, revaluation of assets is prohibited and shallremain recorded in the financial statements at net book v alue of 25.000 u.m. In IFRS, if the basetreatment is applied the resolution is identical, and if the alternative treatment is applied, the assetmay be recorded in the balance sheet at reassessed amount.

As regarding the depreciation, there are two metho ds: the proportional increase of this or theinitial annual depreciation.A. Proportional depreciation increasing methodThe value of gross assets: 30.000 x 2,4 = 72.000Depreciation: 5.000 x 2,4 = 12.000Net accounting value = 60.000The Coefficient of 2,4 was calculated as follows: 60.000 / 25,000 = 2,4.

Revaluation generates the following accounting entry:Fixed Assets 42.000 (72.000 – 30.000)Depreciation 7.000 (12.000 – 5.000)Revaluation differences 35.000

B. Method of cancellation initial depreciationApplying this method generates the following accounting entries:

Accumulated depreciation 5.000Fixed Assets 5.000Fixed Assets 35.000


Revaluation differences 35.000

4. THE ACCOUNTING RECORDS FOR EXTERNAL GRANT FUNDS

Because this work has as starting point, the acquisition of fixed assets in the grant projects, Iconsider appropriate to present the accounting records for external grant funds:

Evidencing the value of the received loan subsidy g rant for investment:4452 = 132

“grants loans with grants subsidy” “grants loans with grants forinvestments”

Receiving the subsidy in the current account :5121 = 4452

“bank accounts in lei” “grants loans with grants”

Reception equipment suppliers (supplier invoice):% = 404

231 “suppliers of fixed assets”“property assets in progress”

4426“deductible VAT”

Invoice payment:404 = 5121

“suppliers of fixed assets” „bank accounts in lei”

Due value for assembly equipment:2132 = 722

“equipments and installations for measuring,control and regulation”

“revenues from the production oftangible assets”

Putting into service:212 = 231

„constructions” “tangible assets in progress”

Refund unused subsidy:132 = 5121

“grants loans with grants for investments” „bank accounts in lei”

Depreciation of investment in N year of use:6811 = 2813

“operating expenses for depreciation on fixedassets”

“depreciation of installations, vehicles,animals and plantations”

Concurrently, there is a transfer rate of the subsidy for the year N attached to theinvestment income:

132 = 7584

“grants loans with grants for investments” “incomes from investment grants”

Repayment of received grants, when they do not have fulfilled the requirements for fu ndingunder IAS 20 and the Ministry of Public Finance Order no. 1752/2005.


A situation may occur when an entity is forced to repay a grant from the infringement ofobligations for which it was granted. In this case an accounting estimation is done in orde r tomodify only the results of the current financial year and future years.

Reimbursement the received grant:% = 5121

472 „bank accounts in lei”“revenue recorded in advance”

6582“grants and donations”

Evidence of loan subsidy grant receiv ed for direct investment in the bank account in lei:5121 = 132

„bank accounts in lei” “grants loans with grants forinvestments”

In the Structural Funds case should be noted that transfer of funds will be made only afterthe expenses were done from own funds, on the basis of documents certifying these expenses (onlyfor the proportion considered to be eligible), so that passage of loans to grants subsidies in the 5121“bank accounts in lei” will record during remitting amounts to the Payment Authority within theMinistry of Finance.

It should also be noted that if the accounts of projects financed by European funds haveperformed analysis for each account that keeps track of an item patrimony (an economic good)purchased under the project. For example, for property acquired by ERDF (European RegionalDevelopment Fund) through SOP HRD (Human Resources Development Sectoral OperationalProgram) will create the following analysis:

208.POS HRD “Other intangible assets” is used to record other acquired intang ibleassets (for example, licensed operating system, antivirus license, License Office, server operatingsystem license, license antivirus server);

2131. POS HRD “Equipment (machinery and equipment work) ” is used to account forall technological equipment purchased for the project implementation (for example, servers,laptops);

214. POS HRD “Furniture, office equipment and other property” is used to track officeautomation equipment purchased under the project (for example, printer, multifunctional switches ,rack);

2808. POS HRD “Amortization of other intangible assets ” is used to record theamortization of other intangible assets (for example software licenses) acquired under the project;

2813. POS HRD “Depreciation of technological equipment, vehicles, ani mals andplantations” is used to record depreciation of equipment (for example servers, laptops) purchasedunder the project;

2814. POS HRD “Depreciation of other tangible assets ” is used to record depreciation ofother tangible assets (for example printer , multifunctional switches, rack) purchased under theproject;

CONCLUSION

Instead of conclusions, I consider it appropriate to present comparative regulation betweencontinental and American provisions on assets, while stressing the need to harmonize th e provisionsthereof.

Generally, both in continental regulations (IAS 38) and the American regulations (U.S.GAAP) the recognition of intangible assets created internally is barely allowed. In the case of


software, GAAP requires the demonstration of techno logical feasibility, aiming to capitalize furthercosts, and IFRS distinguishes between research phase and development phase, capitalization beingallowed only for the cost of the second phase.

Both U.S. GAAP and basic treatment provided in IAS 38 (intangi ble assets) and IAS 16(tangible assets) do not allow the revaluation of fixed assets, while under the alternative treatment,fixed assets may be reassessed if certain criteria are met. Typically, these criteria can be met veryrarely. Thus, U.S. GAAP requires that land and fixed assets to be valued at depreciated historicalcost, taking account of possible depreciation. Basic treatment of IAS 16 is identical, but theapplication of IAS allows an alternative treatment in accordance with the land and fixed a ssets maybe reassessed.

Along with IAS 38 and U.S. standard SOP 98 -5, the capitalization costs of establishmentcan be done only in certain circumstances. Depreciation of intangible assets is identical in bothreferential, meaning that only amortization i ntangible assets which have a finite lifetime areamortized. Both intangible assets which have a finite lifetime and those that have an indefinite lifeare subject to annual impairment test. Another difference relates to the costs of repairs of capitalassets that can be capitalized under IFRS, but which must be reported as expenses under U.S.GAAP. The various components of a different active lifetime can be depreciated separately underIFRS (with durations and different methods of depreciation), whereas u nder U.S. GAAP thispossibility is not allowed.

We conducted this review because of these differences are problems facing accounting ingeneral, but affects the accounts of various European projects, in which a high share of eligibleexpenditures related to procurement of ERDF type, that the acquisition of assets.

BIBLIOGRAPHY:

1. Feleagă, N., Malciu, L ., „Contabilitate consolidată. O abordarea europeană şiinternaţională”, Editura Economică, Bucharest, 2007;

2. Feleagă, N., „Sisteme contabile comparate ”, vol. I, II, III, Ed. Economică, Bucharest,2000 ;

3. Stăiculescu Camelia, Mogoş Gabriela, „Solicitarea cu succes a fondurilor europene” ,Editura Forum, Bucharest, 2007;

4. *** Acte normative (Legea contabilităţii nr. 82/1991 republicată; Ordinul 1752/2005 pentruaprobarea reglementărilor contabile conforme cu directivele europene; Ordonanţa 19/2008de modificare şi completare a Ordonanţei 29/2007 şi Ordonanţa 29/2007 privind modul dealocare a instrumentelor structurale, a prefinanţării şi a cofinanţării alocate de l a bugetul destat, inclusiv din Fondul Naţional de Dezvoltare, în bugetul instituţiilor implicate îngestionarea instrumentelor structurale; Hotărâre nr. 491 din 14/05/2008 pentru modificareaşi completarea Hotărârii Guvernului nr. 759/2007 şi Hotărâre nr. 759 din 11/07/2007 privindregulile de eligibilitate a cheltuielilor efectuate în cadrul operaţiunilor finanţate prinprogramele operaţionale.

5. *** „Diagrama Fondurilor Structurale”, 2006;


THEORIES REGARDING FINANCIAL INTERMEDIATION AND FINANCIALINTERMEDIARIES – A SURVEY

Research Assistant PhD Student Alin Marius ANDRIEŞ„Alexandru Ioan Cuza” University of Iaşi, Romania

[email protected]

AbstractIn this paper we propose to make a presentation of the m ain theories on financial intermediation and financial

intermediaries. Modern theory of financial intermediation examine the main functions of financial intermediation, howthe financial intermediation affect the economy as a whole and the effects of gover nment policies on financialintermediaries. We will focus on issues of function of financial intermediaries, such as reduction of transaction costs,liquidity provision, information provision, debt renegotiation.

Key words: financial intermediation, financial intermediaries, informational asymmetry, transaction cost, assettransformation

JEL Classification: G20

1. INTRODUCTION

In this paper, we survey the results of recent academic research on financial intermediationand financial intermediaries.

The goal of intermediation theory is to explain why these financial intermediaries exist. Thesavings/investment process in capitalist economies is organized around financial intermediation,making them a central institution of economic growth. Financial interm ediaries and financialmarkets are two important institutions, which contribute to the optimal allocation of resources in aneconomy. Financial intermediaries are firms that borrow from consumer/savers and lend tocompanies that need resources for investme nt.

2. FINANCIAL INTERMEDIATION

The modern theory of financial intermediation analyzes, mainly, the functions of financialintermediation, the way in which the financial intermediation influences the economy on the wholeand the effects of government polic ies on the financial intermediaries. The financial intermediationtheory highlights the role of financial intermediaries in economy, most of the studies performedhighlight their role in achieving a durable economic growth, and the impact of regulations onfinancial intermediation, accentuating the role of the central bank in the regulation, supervision andcontrol of financial intermediaries.

The theory regarding financial intermediation was developed starting with the 60’s in theXX century, the starting point being the work of Gurley and Shaw (1960). The financialintermediation theory is based on the theory of informational asymmetry and the agency theory. Inprinciple, the existence of financial intermediaries is explained by the existence of the follow ingcategories of factors: high cost of transaction, lack of complete information in useful time; and themethod of regulation.

The main and most used factor in the studies regarding financial intermediation isconstituted by the argument regarding informa tional asymmetry. This asymmetry can be of type: exante generating the o called problem of adverse selection; concomitant generating the moral hazard;or ex post leading to the need of applying some costly verification and auditing procedures or eventhe forced execution of the debtor. The informational asymmetry generates imperfections of themarket, deviations from the theory of perfect markets in an Arrow -Debreu sense.

According to the model of perfect financial markets in the neo -classical theory, they fulfillthe following conditions: no one participant can influence the prices; the placement/borrowingconditions are identical for all participants; there are no discriminatory fees; the lack of competitive

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advantages at the level of participants; all fi nancial securities are homogeneous, dividable andtransactional; there are no transaction costs for obtaining information or of insolvency; allparticipants have immediate aces to the complete information regarding the factors and elementsthat can influence the current or future value of the financial instruments.

Many of these imperfections generated by informational asymmetry lead to the emergenceof some specific forms of transaction costs. The financial intermediaries have emerged exactly toeliminate, at least partially, these costs. For example, Diamond and Dybvig (1983) consider banksas being a coalition of the depositors that ensures those who save up against the risks that couldaffect their state of liquidity. Leland and Pyle (1977) define financ ial intermediaries as a coalitionthat deals with the distribution of information. Diamond (1984) shows that these financialintermediaries action as authorized agents of those who save up and that they can achieve scaleeconomies. Thus those who save up t rust their available funds to these intermediaries in order to beinvested in whichever projects they consider viable, the depositors having the possibility towithdraw their funds at any time under the pre -established conditions.

The studies regarding informational asymmetry approach especially the problematic ofrelationships between bank and creditors, respectively bank and debtors. In the relationship betweenbank and borrower the main aspect analyzed is the function of the selection bank and the track ing ofthe granted loans, as well as the problematic of adverse selection and moral hazard. In therelationship between bank and depositors (creditors) a special attention is given to the factors thatdetermine depositors to withdraw their money before due date.

The second approach for the financial intermediation is founded on the argument oftransaction cost. This approach was developed by Benston and Smith Jr. (1976) and by Fama(1980). Unlike the first approach this one does not contradicts the theory o f perfect markets. Thisapproach is based on the differences between the technologies used by the participant. Thusintermediaries are perceived as being a coalition of individual creditors or debtors who exploit thescale economy at the level of transacti on technologies. The notion of transaction cost does notcomprise just the costs regarding the transfer costs for the amounts or of foreign exchange, but alsothose for research, evaluation and monitoring thus the role of financial intermediaries is totransform the characteristics (due date, liquidity, etc.) of assets, the so called qualitativetransformation of financial assets, offering liquidity and opportunities for diversification ofplacements.

The third approach of financial intermediaries is based on the method of regulation of themonetary creation, of saving and financing of economy. This approach was developed byGuttentag, and Lindsay (1968) and by Merton (1995). The method of regulation influences theliquidity and solvability of intermediaries . Diamond and Rajan (2000) show that the regulationsregarding the capital of intermediaries influence their “health”, the ability for refinancing and themethod for recovering debts.

3. FINANCIAL INTERMEDIARIES

Financial intermediaries are financial instit utions specialized in the activity of buying andselling (at the same time) assets and financial cotracts [1]. As their name suggests, financialintermediaries mediate between the providers and users of financial capital[2]. The transfer of fundsfrom agencies with surplus to agencies with deficit through financial intermediaries is also calledfinancial intermediation .


Fig. 1 Process of financial intermediation

The analysis of financial institutions that achieve the financi al intermediation can be madefrom two perspectives: as firms or as intermediaries.

3.1. FINANCIAL INTERMEDIARIES – COMMERCIAL COMPANIES

The financial intermediaries are commercial companies, firms, whose behavior can beanalyzed in the same way as the econo mists analyze any other type of firm [1]. Thus financialintermediaries can be regarded as commercial companies that produce different types of loaningproducts for the individuals who wish to borrow. The main finished products of financialintermediaries are the loans granted to clients, and the main variable inputs are the depositsattracted from the depositors. Furthermore we can regard financial intermediaries as companies thathave as sole purpose the maximization of profit, profit that occurs as a res ult of the differencebetween the interest perceived for the granted loans and the interest abated for the attracteddeposits. The maximization of profit is made when the difference between the total incomes minusthe total costs is maximum, that is when t he marginal income is equal to the marginal cost. In orderto attract more resources necessary for the increase of the volume of granted loans the financialintermediary must increase the abated interest of the depositors which is transposed into theincrease of costs, thus the cost of resources for short term is increasing. Financial firms are large insize and this is owed to the scale economy which is manifested in the production of financialproducts. In this analysis we must consider that financial int ermediaries do not activate on a marketcharacterized by a perfect competition but rather on one with an imperfect competition, oligopoly -type, dominated by a few large firms. The main characteristic of the oligopoly -type marketstructures is the interdependency of the actions of different participants [3]. The competitionbetween financial intermediaries is manifested both on a price level and on a product differentiationlevel. The financial intermediaries often give up the profit maximization objective a nd have asobjective the increase of the market share.

In the analysis of financial intermediaries as commercial companies we must consider thesimilarities with other firms but also the numerous differences: the characteristics of the productsand the motivation of the clients in purchasing the products of financial intermediaries.

3.2. FINANCIAL INTERMEDIARIES – “INTERMEDIARIES"

Financial intermediaries have the role to create assets for creditors and liabilities for debtorswhich are much more attractive f or each of them than if the transfer of funds from creditor to debtorwere to be made directly between the two parties [4].

The analysis of financial institutions as intermediaries implies the analysis of the servicesthey offer to clients.

Creditors Debtors

Financial markets

Financialintermediaries

Securitization of assets


Fig. 2 Services offered by Financial Intermediaries*Processing after Greenbaum, S., Thakor, A. – Contemporary Financial Intermediation, page 50

The brokerage activity of financial intermediaries entails the bringing together of the twoparties with complementary needs, the elimination of informational asymmetry and the performingof the transaction; in order to achieve brokerage activities information is needed. The financialintermediary achieves these activities better than other participants because he has the ne cessaryinformation, information that is obtained because of his abilities in the interpreting of marketsignals, unnoticeable for other participants, and of the reuse of the previously obtained information.The financial intermediary presents two competit ive advantages: he has special abilities in theinterpretation of the signals unnoticeable for other participants and an advantage of the reuse of theinformation obtained from several clients over a long period of time. The broker is most timesreimbursed for the reuse of these services with a certain commission.

The brokerage activity does not imply that the financial intermediary becomes a party in theagreement signed between his clients, but he merely facilitates the meeting of the two parties.

The activity of transforming the quality of the assets made by financial intermediariesimplies the adjusting of the different characteristics of financial assets depending on the needs ofthe two parties. If in the brokerage activity the intermediary did not be come a party in theagreement signed between the 2 parties, in the activity of transformation of the quality of assets theintermediary is interposed between the two parties. This interposition entails the purchasing of anasset from a client and the resel ling of the same asset identical or modified, to another client.

The characteristics of the assets that are more often transformed by the intermediary are: duedate (intermediaries grant long term financings based on the short term resources), the nominalvalue, liquidity, credit risk, interest rates and measurement unit (the currency the respective asset isin).

This activity implies the undertaking of certain risks by the financial intermediary, the gainof the financial intermediary is made from the diff erence between the price for which he resells thefinancial asset and the price for which he purchases it.

4. FUNCTIONS OF FINANCIAL INTERMEDIARIES

The theory distinguishes between the following functions of financial intermediaries: (i) thereduction of transaction costs; (ii) the reduction of liquidity risk; (iii) the information provision; and(iv) the debt renegotiation. The first of these functions concerns the problem of accessibility offinancial markets for households/individuals and for firms. The s econd and the third functionsconcern the services the banks offer to savers, which cannot be obtained from financial markets.


The last function is discussed in the literature starting in the late 1990s and concerns the services abank offers to its borrowers rather than to depositors.

4.1. REDUCTION OF TRANSACTION COSTS

Financial intermediaries transform the credit portfolio demanded by borrowers into a depositportfolio desired by lenders[5]. This transformation is twofold:

(1) First, financial intermediari es engage in the transformation of terms: firms prefer tofinance their projects with long-term credits, and households prefer short -term deposit for liquidityreasons. Financial intermediaries are able to accomplish this transformation, though non -financialfirms could themselves issue instruments like demand deposits or short -term savings contracts.However, it would be costly for small creditors to write debt contracts with firms (these arecomplex agreements with restrictive clauses on firm activities). Moreover, small creditors typicallylike to diversify their risks, which implies greater number of contracts and thus greater transactioncosts. An intermediary is able to exploit economy on scale considerations by writing and enforcingdebt contracts with firms.

(2) Second, financial intermediaries reduce transaction costs through the payment system.Centralizing this process at the level of financial intermediaries avoids wasteful duplication ofverification costs. As Dewatripont and Tirole (1994) note, the vision of banking activities in termsof transaction costs reduction, although relevant, is only incomplete (especially if the issues ofcontrol and regulation are concerned), which has stimulated the development of other viewsregarding bank function.

For example, in his famous model of banks as delegated monitors, Diamond (1984) showsthat the existence of banks help to avoid the duplication of audit costs on the part of all creditors.The reduction of monitoring costs, though related to the transacti on costs, unveils the informationprovision function performed by banks.

The examples above show the reduction of transaction costs on the side ofdepositors/creditors. On the side of borrowers/firms, the transaction costs reduction can be seen inthe example of financial instrument such as loan commitment. A loan commitment may beconsidered a financial option, which enables a borrower to obtain a loan at predeterminedconditions, and may or may not be exercised. Loan commitments may reduce borrowing rates andeliminate the associated moral hazard problems on the borrower’s side. Therefore, the loancommitments provide a possibility for the reduction in transaction costs. At the same time, loancommitments are an example of lending relationships, which prov ide a basis for debt renegotiation.

4.2. LIQUIDITY PROVISION

Depositors (acting as creditors in their relations with financial intermediaries) face liquidityrisk in sense of possibility needing liquid funds. The trade -off between liquidity and return forcesthem to hold their wealth (at least partially) in form of bank deposits. Therefore, models of banks asliquidity providers focus rather on bank liabilities than on bank assets. In the famous Diamond -Dybvig model, depositors do not know a priori whether th ey will face liquidity needs in the future.In order to provide depositors, who withdraw their deposits, with liquid assets, banks need to sellless liquid but more profitable assets thereby reducing their profit opportunities. If many depositorswithdraw, others are pushed to imitate this behavior, which produces a phenomenon known as bankruns.

Consequently, banks face a dilemma: either to invest in short -term (liquid) assets and not toperform their term-transformation function or to invest (at least par tially) in long-term assets andthus face the possibility of bank runs. A solution to this problem is an insured deposit contract,which guarantees the depositors that they get their money back. This prevents the bank runs andsuggests an allocation of resources, which is superior to the one without insurance. At the sametime, the need of deposit insurance illustrates the necessity of regulatory intervention.


4.3. INFORMATION PROVISION

A firm that looks for debt financing typically has a choice between being i ndebted to thegeneral public or to financial intermediaries. The public debt is inefficient since it forces eachlender to assess firm’s solvency, or at least to continuously update rating information provided byspecialized agencies. This results either in an increase in monitoring costs, or in subnormalmonitoring due to free-riding. Gorton and Penacchi (1990) suggest that debt is a less informationintensive asset than equity and thus attracts relatively less informed creditors. Given the naturalmonopoly aspect of information provision, it is logical to presume that the bank debt is moredesirable for such creditors than the public debt. A natural monopoly aspect arises here not onlybecause of economies of scale in information provision, but also becau se of economies of scopesince information about a borrower may be obtained by the bank through that borrower’s bankaccount flows.

The information provision function of financial intermediaries is broadly discussed in theliterature on information asymmet ry, especially when issues of moral hazard and adverse selectionare addressed.

Diamond (1984) introduced moral hazard in his model to study how crucial informationasymmetry is for the bank. In extension of the transaction costs approach, delegated monito ring notonly presumes economies of scale (it is socially optimal when the bank monitors the creditors/firmson behalf of depositors), but also answers the question, why the depositors do not need to monitorthe bank itself (to monitor the monitor). The mo del shows that the moral hazard problem within thebank decreases when the size of the bank increases, and even completely disappears when the bankholds a fully diversified portfolio of assets.

Hence, if the bank holds a fully diversified portfolio of ass ets, the depositors hold risk-freedebt contracts and do not need to monitor the bank (at least, they do not need to monitor the bankcontinuously).

4.4. DEBT RENEGOTIATION

If financial markets were frictionless, solvent firms would always have access to fund s toraise their capital for new investment opportunities. Microeconomics of asymmetric informationsuggest some plausible explanations into why friction in the market, such as moral hazard, adverseselection, and/or agency costs create barriers for the fl ow of capital to firms with profitableinvestment opportunities. The role of financial intermediaries as information producers, discussedabove, provides a solution of this problem. If capital can flow from creditors (depositors) to theborrowers (firms) through the system of financial intermediation, credit contracts between banksand firms should resemble the debt contracts in the market without financial intermediaries.However, empirical work strongly suggests that bank loans are different from corporat e bonds indomestic as well as international capital markets [6].

Theoretically, in a reputation-lending framework, private creditors deny the future access ofsovereign defaulters to capital markets. If a firm defaults on its bonds, it cannot raise additi onalcapital with a new issue of bonds. If such funds can be obtained from banks, firms in financialdistress may prefer bank debt to the public debt (bonds).

Diamond (1991) continues to develop his concept of banks as delegated monitors to showwhy banks can offer loans to firms who can potentially default. Since banks can monitor firms, andthe bondholder cannot, the firms can acquire good reputation through borrowing from banks.

The firms, who have acquired good reputation can then switch to the bond mar ket to financetheir investment.

Bolton and Freixas(2000) stress the relationship aspect of the intermediation. Thisrelationship acts as another kind of commitment: firms know that the banks provide better loanconditions than markets in the times of fina ncial distress. Therefore, firms prefer banks to markets.


Hence, there are at least three reasons, which demonstrate advantages of financialintermediaries in debt renegotiation (compared to markets): (1) the monitoring advantage of thebank, which acts as a punishment instrument, and therefore allows banks to create better provisionsfor the reputation creation by firms (2) reputation of the financial intermediary as a reliable creditor,which acts as an informal commitment, and (3) the relationship aspect , which also acts as acommitment instrument.

5. CONCLUSION

The modern theory of financial intermediation analyzes, mainly, the functions of financialintermediation, the way in which the financial intermediation influences the economy on the wholeand the effects of government policies on the financial intermediaries. The financial intermediationtheory highlights the role of financial intermediaries in economy, most of the studies performedhighlight their role in achieving a durable economic growth, and t he impact of regulations onfinancial intermediation, accentuating the role of the central bank in the regulation, supervision andcontrol of financial intermediaries.

Financial intermediaries are define by the fact that they mobilize funds (financial asse ts)from the money holders (savers), registering a debt (liability) towards them, and they issue theirown assets towards fund users. For example, a commercial bank attracts deposits (indebting itselftowards depositors) and grants loans (creating debts in relation to their clients – the fund users).

In other words, financial intermediaries do not resell the assets they buy, but create new assets,which they sell on the market; they are debts of clients to the banking institutions and not to the saverswho initially owned the assets bought by the intermediary. So intermediaries change the nature offinancial assets which are distributed on the market, issuing their own assets.

NOTES:

[1] Freixas, X., Rochet, J.C. – “Microeconomics of banking”, 2 nd ed. The MIT Press, 2008, p.15[2] Greenbaum, S., Thakor, A. – “Contemporary Financial Intermediation”, 2nd ed. Elsevier Academic Press,

2007, p. 43[3] Ignat, I., Pohoaţă, I. ş.a. – “Economie Politică”, Ed. Economică, 1998, p. 220[4] Howells, P., Bain, K. – “Financial markets and institutions”, 5th ed', Pearson Education, 2007, p. 6,[5] GURLEY, J.G., E.S. SHAW "Money in a theory of finance", Brookings, 1960, p.23[6] HALLAK, I. – “Bank Loans Non-Linear Structure of Pricing: Empirical Evidence from Sovereign Deb ts”,

Center for Financial StudiesWorking Paper 2003/33, Frankfurt University

BIBLIOGRAPHY:

1. BENSTON G.W., C.W. SMITH (1976) "A transaction cost approach to the theory offinancial intermediation" The Journal of Finance , Vol. XXXI (1), pp. 215-231

2. BOLTON P., X. FREIXAS (2000) "Equity, Bonds and Bank Debt: Capital Structure andFinancial Market Eequilibrium under Asymmetric Information", Journal of Political Economy , Vol.108, pp. 324-351

3. DEWATRIPONT M. AND J. TIROLE (1994) "The prudential regulation of bank s",MIT Press

4. DIAMOND D. (1984) "Financial Intermediation and Delegated Monitoring", Review ofEconomic Studies 51, pp. 393-414

5. DIAMOND D. (1991) "Monitoring and Reputation: The Choice between Bank Loansand Directly Placed Debt", Journal of Political Economy, Vol 99, pp. 689-721

6. DIAMOND D., P. DYBVIG (1983) "Bank runs, deposit insurance and liquidity",Journal of Political Economy 91, pp. 401-419

7. FAMA E.F. (1980) “Fama Banking in the theory of financ”, Journal of MonetaryEconomics, 6 (1), pp. 39-57.


8. FREIXAS, X., ROCHET, J.C. (2008) “Microeconomics of banking”, 2 nd ed. The MITPress,

9. GORTON G., G. PENNACCHI (1990) “Financial Intermediaries and LiquidityCreation”, Journal of Finance 45 (1) pp. 49-71

10. GREENBAUM, S., THAKOR, A. (2007) “Contemporary Financial I ntermediation”,2nd ed. Elsevier Academic Press,

11. GURLEY, J.G., E.S. SHAW (1960) "Money in a theory of finance", Brookings12. GUTTENTAG, J. M., LINDSAY, R. (1968). “The uniqueness of commercial banks” ,

Journal of Political Economy , Vol. 71, 991-101413. HOWELLS, P., BAIN, K. (2007) „Financial markets and institutions”, 5th ed', Pearson

Education14. LELAND H., AND D. PYLE (1977) "Informational Asymmetries, Financial Structure

and Financial Intermediation", Journal of Finance, Vol. 32, pp. 371 – 38715. MERTON, R.C. (1995), "Financial Innovation and the Management and Regulation of

Financial Institutions," Journal of Banking and Finance (July), 461-482


ACCOUNTING POLICIES APPLIED IN DETERMINING CASH FLOW

PhD Student Florin HOSTIUCAlexandru Ioan Cuza University of Iasi, Romania

[email protected] student PhD Ciprian Dan COSTEA

Vasile Goldis West University of Arad, Satu Mare branch, [email protected]

AbstractThe internationalized economy must have a common language. The first step is the implementation and

acceptance of the International Accounting Standards. A healthy economical entity always determines exacly and basedon serious and largely accepted accounting policies its cash flow. Why? Because everibody knows that cash means thedifference between going ahead with the business or staying back out of stage. This is why this study tries to show somelargely agreed accounting policies in determining the cash fl ow and some methods such as the direct method, theindirect method and a banking method.

Keywords: accounting policy, cash flow, cash flow table, direct method, indirect method

JEL clasification: M 41, M 51

INTRODUCTION

The explanatory dictionary of t he Romanian language defines the word politics dependingon its many meanings: (a) the governance science and practice of a state; (b) the social historicactivity field that contains the relationships, the orientations and the manifestations that appear i nthe parties, between categories and social groups, between peoples, etc. related to the promotion oftheir interests, in the fight for power; (c) orientation, activity, the action of one party, of some socialgroups, of the state power, etc. In the domai n of the management of internal and external business;(d) ideology that reflects this orientation, activity, action; tactics, habile behaviour used by someonefor a purpose; (e) a totality of purposes and objectives owned by the social groups and classes in thefight for their interests as well as the methods and means which help to achieve their goals; (f)means to understand and action in a certain field of the public affairs.

WHAT ARE THE ACCOUNTING POLICIES AND THE TREASURY FLOWS

The accounting policies represent, the according to the OMFP 1752/2005 for applying theaccounting regulations in conformity with the European Regulations, the principles, the basis, theconventions, the rules and specific practices applied to an entity for drawing and prese nting theannual financial statements. Examples of accounting policies: the depreciation of the assets(choosing the method of the depreciation duration), re evaluation of the tangible assets or keepingtheir historic cost, the capitalization of the intere st or the recognition of it as expenditure, choosingthe evaluation method of the stocks etc. We have to note that this approach of the expression“accounting policies” is in concordance with the International Standards of Accountancy. [14]

The management of each entity must establish accounting policies for the operations thattake place. These policies must be elaborated taking into account the specific of the activity, by thespecialists in the economic and technical area, who know the activity that is d eveloped and thestrategy adopted by the entity. When elaborating these accounting policies it is necessary to respectthe general accounting principles that are stipulated by the regulations applicable. The accountingpolicies must be elaborated in such m anner that it would ensure the supply, through the annualfinancial statements, of some information which must be:

a) relevant for the needs of the users in the decision making process andb) reliable so that:

- they represent faithfully the assets, the financial position and the profit or loss of theentity:

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- they are neutral;- they are cautious;- They are complete under all their significant aspects.The modification of the accounting policies is allowed only if it is requested by the law or it

results in more relevant information or more reliable referring to the operations of the entity. Theentities must mention in the explanatory notes any modification made to the accounting policies, sothat the users can appreciate if the new accounting policy has been chosen adequately, the effect ofthe modification on the reported results of that period and the real tendency of the results of theactivity of that particular entity. The following are not considered modifications of the accountingpolicies:

a) adopting an accounting policy for the events or transactions that are different fromthe events or transactions produced previously;

b) adopting an accounting policy for the events or transactions that have not taken placepreviously or that have been insignificant.

In the national and international specialty literature, in different legal references, TheInternational Accounting Standards, or in different working procedures at the level of firms andorganisms, the treasury flows (treasury, the cash flow) are defined differentl y.

Univ. Prof. Dr. Mates Dorel (Dorel Mates, Dumitru Matis, Dumitru Cotlet and collaborators,Financial Accounting of the Economic Entities, Ed. Mirton, Timisoara, 2006) consider that theTreasury of the company ensures the evidence of the existence and th e movement of the short termfinancial investments, of the available cash in the banking accounts, of the short term bankingaccounts, of the credentials, of the treasury advances, of the internal transfers, and of other similarvalues and the administration of the treasury has the role to ensure at an optimum level the cash andits equivalents, of the volume of the financial resources existing in the banking accounts, of theshort term credits, of the values to cash, of the short term investments considere d advantageous forthe firm for ensuring the optimum level of liquidity.[3] – [4] – [5] – [6]

In the same paper we find also a definition of the Treasury Flows, which reflect the availablecash that are successively in different stages, starting from liqui dities, stocks, claims, whichultimately will be transformed in cash.

Univ. Prof. Dr. Petru Stefea from the West University in Timisoara considers that during theclasses in the Doctor School of the discipline “The analysis of the Position and of the Finan cialPerformances of the Economic Entities” as “the cash flow is one of the most important managementweapon, in the fight for avoiding risks and for ensuring the performance of the firms. This point ofview can be justified by a simple question such as: “Why do we sell?” and the answer is very simple“To make money” in other words to generate a plus of cash.”[7] - [8]

Prof. Univ. Dr. Ion Stancu understand by cash flow (in the paper Finance, The EconomicPublishing House, Bucuresti, 2002), the increase of t he net treasury during the financial year, or inother words, the variation of the net treasury from the start to the end of the financial exercise. In thesame time professor Stancu underlines the two trends of explaining the treasury flow: the Frenchone, according to which the cash variation appears as a sequence of the interaction between the longterm balance and the short term balance, respectively based on the variation of the trading capitaland of the necessary trading capital. The Anglo -Saxon approach sees the problem of the treasuryflows through the cash variations caused by the operational activity, investments and financialactivity.[9]

The American Professor Robert Higgins (in his book Analysis for Financial Management,Irwin Homewood, Boston, M.A., U.S.A., 1992), considers that the cash flow is a process ofcontinuous transformation in a period of time of the money in stocks, and then again in liquidity andwhich represents the blood of any company. If this circuit is slowed down determinately , theinsolvency can occur. [1]

University professors Roman L. Weil, Clyde P. Stickney and Sidney Davidson (in his bookAccounting, the Language of Business, Thomas Harton and Doughters, Arizona, U.S.A., 1990),


considers that through cash flow we understan d the difference between “the receivable cash and thepayments for the goods sold or purchased in a certain period of time.” [10]

The International Accounting Standard IAS 7 “The Statement of the cash flows” defines thetreasury flows (also known as cash f lows or cash-flow in some papers) as inputs and outputs of cashand cash equivalents. The cash has the cash availabilities and the deposits at sight and the cashEquivalents are the short term financial investments and extremely liquid which are easilyconvertible in amounts of cash and which have a risk of changing the value insignificant. Theequivalences of the cash are kept more for the purpose of respecting the short term investments,than for investments or other purposes. [12]

In order to qualify an investment as a cash equivalent, this must be easily convertible in apre established amount of cash, and the risk of changing the value must be insignificant. That is whyan investment is normally qualified as equivalent of the cash only when it has a s hort due term, letus say three months or less from the date of the acquisition, The general frame for drawing up andpresenting the financial statements where the “statement of the cash flow ” is included stipulatesthat their purpose is “to supply inform ation about the financial position, the performances and themodifications of the financial position of the company, which are useful to a large sphere of users ineconomic decision making.”[2]

The users of financial statements include the present and pote ntial investors, the employedpersonnel, the creditors, the suppliers and other commercial creditors, the government and itsinstitutions, as well as the audience. Regarding the “statement of the treasury flows”, IAS 7considers that this offers useful inf ormation for the evaluation of the company capacity to generatecash, as well as the necessities of the company to use the cash flows, respective of the moment andsecurity of their generation. [13]

Within the treasury flows statement, according to the fun ctional approach of the activities ofthe company, the flows are grouped in three categories:- Cash flows that come from the exploitation activities (operational): the activities of exploitationare the main activities that produce investments and financi ng. The value of the cash flows thatcome from exploitation activities is the key indicator of the measure in which the activity of thecompany has generated enough cash flow to reimburse the loans, in order to maintain thefunctioning capacity of the comp any, in order to pay the dividends and to make the newinvestments, without going to external financing sources. The cash flows that come from theexploitation activities are mainly derived from the main activities that produce the income for thecompany. That is why they generally result from the transactions and other events that enter indetermination of the net profit and loss. Examples of cash flows that come from exploitationactivities are: the cash from the sale of goods and services; cash that come from redevences, fees,and other incomes; cash payments to the suppliers of goods and services; cash payments to and inthe name of the employees: the cash and payments of a insurance company for bonuses andpayments; the cash and payments in cash from th e insurance policies, cash payments and profit taxreimbursements unless they cannot be identified specifically with the activities of investments andfinancing; and the cash and payments that come from contracts closed in investments andtransactions.- flows that come form investment activities: the investment activities consist of purchase and saleof long term assets, as well as other investments that are not included in the cash equivalents. Theseparate presentation of the cash flows that come form i nvestment activities is important becausethe cash flows represent the measure in which the expenses have been made for the resources meantto generate income and cash flows in the future. Examples of cash flows that come form theinvestment activities are: the cash payments for purchasing land and tangible assets, intangibleassets and other such long term assets.

These payments include those that refer to the costs of development capitalised and to thetangible assets realized in own the cash from the sale of land and buildings, installations andequipments, intangible assets and other such assets on long term; cash payments for the acquisitionof instruments of capital and claim of other companies and the interests in associating the


participation (others than the payments for these instruments considered to be equivalent with thecash or that kept in purposes of investment and transaction): the cash from the sale of social capitaland claims of other companies and the interests in association in partici pation others than thepayments for these instruments considered to be equivalent with the cash or that kept in purposes ofinvestment and transaction; the advances in cash and the loans made to other parties (others than theadvances and the loans made by a financial institution); the cash from the reimbursement of theadvances and the loans made by other parties (others than the advances and the loans of a financialinstitution); payments in cash for the contracts futures forward, the options contract and the swapcontracts, except the case when the contracts are made in purpose of investment or transaction orwhen the parties are classified as financing activities; and the cash from the futures contractsforward, options or swap contracts, except the cas e when the contracts are made for investment andtransaction or when the cash are classified as financing activities. - - - Flows that come fromfinancing activities: financing activities are the activities that consist of changes of the dimensionand the composition of the social capital and the debts of a company. The separate presentation ofthe cash flows that come from financing activities is important because it is useful in estimating thefuture demands of cash flows on the side of the company financ ing. Examples of cash flow thatcome form financing activities are: the cash income from the obligations emissions, and otherinstruments of social capital; the payments in cash towards the shareholders in order to purchaseand buy the shares of the compan y; the cash income from the treasury bonds, obligations, credits,mortgages, and other short or long term loans; the cash reimbursements of some borrowed amounts;and the payments in cash of the habitant for the reduction of the obligations connected to th ereduction of the obligations connected to a financial leasing operation.

Making a synthesis, my conclusion is that the accounting policies regarding the analysis andthe observance of the cash flows, represent the principles, the basis, the conventions, the rules andpractices specific applied by an entity when making and presenting the treasury tables, as well asthe observance of the existence and movement but also of transformation of the treasury structurethat is of the cash and cash equivalents.

METHODS REGARDING THE DETERMINATION OF THE TREASURY FLOWS

The analysis of the treasury flows on the three types of activities is useful for: thecorrelation of the profit (loss) with the cash; the separation of the activities that imply cash fromthose that do not, the evaluation of the capacity of the company to meet its obligations of cashpayments; the evaluation of the cash flows for the future activities (cash -flow strategic).

The utility of the analysis is given by the fact that the global variation of the treasury is seenin the treasury balance, resulted from the administration of its real assets (from the exploitationactivity) and through that result from the capital operations, which regard the investments andfinancing. When the real flows and t he money flows are not the same, as it also happens, thetreasury, the treasury is ensured through payments intervals associated to those flows.

Each of the three flows categories has the impact on a source or on a liquidity use..There are two methods known for the determination of the treasury flows (generated from

the exploitation activities, of investment and financing.)- the direct method ;- the indirect method.

There are of course in the economic practice other different variants that do not fol low theInternational Accounting Standards, being consecrated various other methods used especially by thebanks, the main characteristic being the detail of every month of the treasury flows and the formatthat the cash floe tables have from the point of view of the cash and cash equivalents recognized asbeing part of the cash flows.


THE DIRECT METHOD

The companies are encouraged to report the cash flows obtained from exploitation activitiesusing the direct method. The direct method supplies infor mation that are used in estimating thefuture cash flows and which are no available through the indirect method. Through the indirectmethod the information regarding the major classes of payments and cash can be obtained asfollows: from the accounting re gistrations of the company; through the adjustments of sales, theircosts (interest and other similar income and expenses with the interest and other similar expensesfor the financial institutions) and other elements in the profit and loss account with th emodifications during the stocks period and the claims and debts from exploitation, other elementsthan the cash; and other elements for which the effects of the cash are the cash flow and frominvestments or financing.

According to this method there are cash and payments in casha) the cash flow come from exploitation activities:

- the cash from the good and services sales;- Cash that come from dues, fees, commissions and other income (which can be estimated

based on the size of the turnover made, correct ed with the modification of the balance ofcommercial claims from the financial year.)

b) Payments in cash to the good and s ervices suppliers (raw materials and consumables; othermaterial expenses, other exterior expenses, such as energy and water; expens es regarding themerchandises, expenses regarding the external services.) Their size is adjusted with the variation ofthe balance of the stocks of raw materials, the consumables and merchandises by adding thedifference between the final stock and the ini tial one, respective with the variation of the balance ofthe commercial debts through the decrease of the difference between the final and initial balance ofthe financial year;

- Payments in cash to and in the name of the employees (expenses with the perso nneladjusted with the variation of the balances in the uncorresponding accounts)

- Payments in cash or reimbursements of profit tax, only if they cannot be identifiedespecially with the investment and financing activities (it refers to the expenses regardi ngthe profit tax, if it supposes that the whole profit tax corresponds to the exploitationactivity.)

c) The cash flows that come from the investment activities: payments in cash for the purchase ofland and tangible assets, intangible assets and other lo ng term assets. They can be determined basedon the increase of tangible assets presented in note 1 in the financial statements and they areadjusted with the variation of the company debts towards the assets suppliers;payments in cash forthe purchase of equity capital and claims of other companies;cashing from the sale of land andbuildings, installations and equipments, intangible assets and other long term assets;cashing fromthe sale of equity capital and claims of other companies;advance cashing and l oans made to otherparties;cashing from the reimbursement of advances and loans made to other parties.d) Cash flows that come from the financing activities: cash income from the share emission andother instruments of equity capital. It is determined base d on the increase of the social capital,including the capital premium and it is adjusted with the variation of the claims regarding thesubscribed capital unpaid;payments in cash to the shareholders for purchasing or buying the sharesof the company. They are to be found when eliminating the equity capital and the reserves;cashincome from the debentures, credits, mortgage and other loans.

They are constituted from the increase of loans and assimilated debts, registered by thecompany in the corresponding accounts, the interests income and other financial expenses thatare visible in the profit and loss account;- Cash payments of the lodger for the reduction of the obligations related to an operation of

financial leasing. It is determined based on the analys is of the leasing contracts.Cash flows- total- Cash at the beginning of the period


- Cash at the end of the period.The result of the cash flows from the exploitation activities, investment and financingrepresent the net treasury.

THE INDIRECT METHOD

IAS 7 presents the indirect method as an alternative to the direct method of determination ofthe treasury flows. The singularity of the method consists of the fact that the net prodit (or the netloss) is adjusted with the effects of the transactions that a re not of monetary nature, the delays or theengagements of payments and cashing from exploitation past or future and the elements of incomeand expenses associated to the cash flows from the investment or financing activities.

The situation of the cash flows through the indirect method is presented as follows the cashflows from the exploitation activities: [15]

- the net result- the modifications during the period of the working capital- Adjustments for the non-monetary elements and other elements included in theinvestment or financing activities.

a) Cash flows from the investment activities;– cash payments for the purchase of land and tangible assets, intangible assets and long term

assets, cash from the sale of land and buildings, installations and equipments, intangible assets andlong term assets;cash payments for the purchase of equity capital instruments and claims of othercompanies;cash payments for the sale of equity capital instruments and claims of othercompanies;cash advances and loans made to other parties;cashing from the reimbursement of theadvances and loans made to othe parties;

b) Cash flows that come form the financing activities :cash income from the debentures andother equity capital instruments;cash payments to share holders in oerder to pu rchase or buy theshares of the company;the cash income from the debentures, credits, mortgages and otherloans;reimbursements in cash of some loans;cash payments of the lodger for the reduction of theobligations related to a financial leasing operation;

Cash flows- total– Cash at the beginning of the period;– Cash at the end of the period.

The result obtained from applying the indirect method is the same as the one obtainedthrough the direct method but the structure of the cash flows is different related to the exploitationactivities. The cash flows form the investment activities and those from the financing activities aredetermined through the direct method.

Through the indirect method, starting from the accounting v alue of the financial year result,there are adjustments made for the determination of the cash flow. It must be taken in considerationthe fact that the practice of an engagement accountancy are regidteres the incomes and the expensesin the moment of their invoicing and not in the moment of the cashing or the payment, and in thecalculation of the profit there are considered some non monetary income and expenses elements,that do not suppose inputs of outputs of cash in the treasury, which makes the diffe rence betweenthe size of the accomplished result and the size of the treasury cash.

Through the adjustments the purpose is:- the elimination of the effects of the engagement accountancy by taking in consideration of

the net working capital. As a result, from the result of the exercise we diminish the variation of thestocks (raw materials, and consumables, production in course of execution, final products andmerchandises, advances for the stocks purchase), the variation of claims (commercial calims andother claims) and we add the variation of the exploitation debts (the payments delays favourable tothe company underlined by the variation of balances of the corresponding accounts.)- the elimination of the income and non monetary expenses (depreciation and provisions constitutes

or taken from the income) by adding the calculated expenses with the depreciation and the


provisions constituted and the decrease of the income from taking the provisions (practically , allthe adjustments places from the profit and loss account: the adjustments of the value of the tangibleand intangible assets , the adjustments of the circulating assets; adjustments regarding theprovisions for risks and expenses; the adjustnment of the value of the financial investments held ascirculating assets)- the elimination of these elements of income and expenses which are not related to the exploitationactivity.

Regarding the calaculation method of the treasury flows IAS 7 recommends, I underlineagain, the direct method, as this su pplies useful information for estimating the future flows oftreasury, and through the indirect method these information is not available. In practice though,especially in the Anglo-Saxon area, some economic entities prefer the indirect method as it has acalculation logic that is close to the accounting reporting format.

OTHER METHODS OF DETERMINATION OF THE TREASURY FLOWS

As I have previously specified there are also other methods of recognizing the treasuryflows which are used in the current activity these of course do not exclude the stipulations and theformats that are requested by the International Accountaing Standards.

In this way I will present below the exemplifying structure of the treasury flows situationaccording to the OMFP 1752/2005 stip ulations: [14]

a) Treasury flows from the exploitation activities: Cashing from the customers, Payments tothe suppliers and employees, Paid interests, Profit paid tax, Cashing from the ensurance againstthe earthquakes, net treasury from exploitation a ctivities

b) Treasury flows form the investments activities: payments for purchase of shares,payments for the purchase of tangible assets, cashing from the intangible assets sale , cashedinterest, cashed dividends, Net treasury from the investment act ivities

c) Treasury flows from financing activities: cashing from shares emissions, payments ofthe debts corresponding to the financial leasing, Paid dividends, Net treasury from financingactivities, net increase of the treasury and the treasury equ ivalents.

d) Treasury and treasury equivalents at the beginning of the financial yeare) Treasury and treasury equivalents at the end of the financial yearAs we can notice this model is taken according to the recommendations of the International

Accountancy Standards and represent the direct method of determination of treasury flows. Foreach element we must present the value corresponding to the previous financial year.If the valuesabove are not comparable, the absence of comparability must be presented in the explanatory notes,accompanied by the relevant comments. An elemnt from the treasury flow statements for whichthere is no value must not be presented, except the case when there is an element corresponding forthe previous financial year. A very im portant stipulation in the professional accounting reasoningfrom the OMFP 1752/2005 is represented by the enumeration of risks that can influence the futurecash flows from the point of view of the quantity and the quality when the economic entitiesdevelop transactions with the financial instruments (to make a connection with the crisis that hasstarted in 2008, about which we have mentioned in our introduction to this study and with extremesby the well known term “toxic effects”):

a) The market risk incorporates not only the loss potential, but also the earning potentialthat include the three types of risk:

- The currency risk – the riskMarket risk incorporates not only the potential loss, but the gain and includes three types of

risk:the exchange risk – is the risk that the value of the financial instrument to fluctuate because ofthe variations of the currency exchange;the risk of the interest rate at the fair value – is the risk thatthe value of a financial instruments to fluctuate because of the varia tions of the market rates of theinterest; the price risk – is the risk that the value of the financial instrument to fluctuate as result ofthe change of the market prices, even if these changes are caused by specific factors of the


individual instruments or their emitent, or factors that affect all the instruments transactional on themarket.

b) Credit risk – is the risk that one of the parties of the financial instruments not to executethe obligation assumed, causing the other parties a financial loss.

c) The liquidity risk – (called also the financing risk), is the risk that an entity meetdifficulties in procuring the necessary fonds for can result making the engagements that correspondthe financial instruments. The lisquidity risk can result from th e incapacity to sell quickly afinancial asset to a close value at the fair value.

d) The risk of the interest rate at the treasury flow - there is the risk that the future treasuryflows to fluctuate because of the variations of the market rates of the int erest. For example, in caseof the loan instrument with variable rate, such fluctuations consist in changing the effective interestrate of the financial instrument, without a change corresponding to its fair value.An economic entitymust present its objectives and its policies of risk administration, including its covering policies.Asfar as the associations of risks with the treasury flow; a responsible management takes inconsideration permanentlt these correlations.

In the following lines I will present the vision that some banks have on the accountingprinciples of recognition of the cash and cash equivalents in making the cash flow table

The forecast of the cash flow is a very important instrument in the analysis of a customer,because the result obtained proves the capacity of the business financed by the bank to supply theliquidity necessary for the reimbursement of the credit and payment of the correspondinginterest.(that is the first and the most important objective that is observed by the credito rs, ingeneral, as the reimbursements of credits and rates ensures as a financing institution liquidity,minimum provisions and of course profitability.)

Unlike the accounting balance sheet, which presents the historic information the cash flow ismainly a forecast of the future performance. Because of that, it is very important to attach to theforecast a list of hypothesis from which they start in estimating the evolution of the sources andexists of cash corresponding to the future activity of the compan y. For example: what rate ofincrease/decrease of the sales is assumed, if they take into consideration the season variations, whatinterest rate is taken into consideration, what currency is used, what will be the effects of the newinvestment from the point of viewof the inputs/outputs.etc.

The projection of the cash-flow refers only to the cash movements towards and out of thebusiness. For example, the expenses with the depreciation will not be taken in consideration,because these do not assume that t he cash leaves the business when an asset is paid off.

In order to start filling in the used form (see the cash flow model already filled in), we willpass from the balance of opening amount between the balances of all the banking accounts held bythe customer at the location of the company. The value of the cash at the end of the period (theclosure balance sheet)- which becomes the starting value of the next period of time (the openingbalance) flows then mathematically from the amount mentioned above fun ction of the otherinformation that will be included in the form.

The main elements that compose the forecasted liquidity flow are: [16]

INPUTS/ENTRANCES

- Sales with cash payment on spot – it represents the cash that enters in the business from themain sources of financing: the existing sales, without considering the effect of new investments.

- It represents the cash that enters in the business from the main financing sources: theexisting sales, without considering the effect of the new investment, as well as the cash from theplanned to obtain as a consequence of the new project. In case of a spectacular increase of the sales,the account managers will request to the customers to justify this forecast (the economic contractsthat sustain this increase)

- To cash from the debtors- the credit periods offered to the customers will be taken inconsideration- when do the money effectively enter in the account of the company after the sale has


been made? The numbers that have been obtained by the sales will be explained, those existent, asthough the business would continue without the project of development considered, as well as thoseprojected- the direct result of the project financed by credit.The season effects will be taken intoconsideration.

- The approved credits – represent credits for which there is also approval but there havebeen taken totally.

- The entrances from the long term financial debts (credits) do not influence the liquidityflow as the issuance of the credit is made by the bank in the measure in which there are acquisitionsof fixed tangible acquisitions and/or intangible of the respective modernisations.

- The entrances, repective the exists of the liquidities corresponding to the medium and longterm can take place integrally, one time, or partially, in parts of utilization according to thecreditation contract.

- The cash flow is influenced only by the assets acquisitions, endowments, ormodernisations which represent the contribution of the economic agent at the accomplishment ofthe investments.

- Subventions – the given subventions for the investments, as sources of completing theequity capital, represent liquidity entrances.

- Increase of capital in cash- the increase of the equity capital paid by supplement cash.- Other entrances – sales of tangible assets, associated credit, VAT reimbursement, etc. In

case of the tangible assets sale, there will be taken in consideration the credit periods offered to thebuyers, and in the form we will write the amount obtained from sale e xactly from the month wherethe cashing of the value is forecasted, and not in the month of the transaction closure.

Payments- Cash payment acquisitions – ex. Raw materials. The season character of the business will

be taken into account. Is i t necessary to constitute some big stocks for satisfying the seasondemand? The correspondence will be kept between the numbers of the monthly stocks and thenumber of the stocks from the accounting balance sheet.

- Payment for the acquisitions on creditth at falling due- the exact moment of making thepayment to the supplier will be taken into consideration.

- Personnel expenses – the tax corresponding to the salaries will be added. Also it isnecessary to take into consideration the need to hire personnel supplementary or possible raises ofthe salaries for the personnel already employed. The premises in estimating the numbers referring tothis category corresponding to this category will be detailed in the cash - flow annex.

- Rent, ensurances- the payments corresponding to the leasing contract for the industrialspace. You must include also the payments of the supplementary rent for the new buildings when itis the case. For the payments that correspond to the insurances, you will put the amountscorresponding to the contracts of insurance for the buildings/equipments/vehicles etc., at themoment of the due term of the premiums (monthly, trimestrial, semestrial, and annual.)

- Marketing and advertising expenses – the character of the expenses ofr advertisi ng will betaken in consideration – they appear only in the case of new products launch, it is for seasons, etc.

- Credit instalments payment - the long or short term credit reimbursements refer to all thecredits that the economic agent benefit of, includi ng those employed by other banking societies.There will not be taken in consideration the credits that are given and reimbursed in the samemonth. In the case of the credit lines there will be taken in consideration only the positive ornegative difference between the credit and debit turnover, which will be registered in payments andcashing, depending on the case.

In the end, I recall the rules that must be taken in view for the elaboration and the analysis ofthe liquidity flow projection: (a) the forec asted cash flow will include all the revenues that will becashed and the payments that will be made in the prognosis period, (b) the cashing and thepayments are calculated for the month in which there certain perspectives that will be cashed orpaid effectively. The value of each prognosis is determined by the manner of fundamenting of thehypothesis presented.


CONCLUSIONS:

During the life of the economic entities the management of the treasury flows is extremelyimportant, as having or not having cash is finally the difference between functioning in optimumconditions and being in a deadlock regarding the economic activity deployed. The adoption of somehealthy accounting policies in the management of the treasury flows is a fundamental pillar inexercising the functions of the administrators and managers and it is a request of the relationships inbusiness. The assimilation of the stipulations of the Accounting International Standards and theirapplication does not represent a simple imitation and mecha nic application of some requests andindications but, an attribute of the normality in the international accounting and financial field,whose vectors, the standardization, the harmonization, and the convergence, will help the economicactors on various continents to have a language which, even if it is not commun, it is at least close.In the same time, these stipulations must not eliminate other formats of presentation of the treasuryflows, such as the banking ones because these do not eclude each other, they are complementary.

BIBLIOGRAPHY

1. Higgins Robert, Analysis for Financial Management, Irwin Homewood, Boston, M.A., U.S.A.,19922. Ilies Ciprian, Fluxurile de trezorerie -expresie a modalitatilor de finantare a intreprinderii petermen scurt si foarte scurt, Studia Universitatis seria Stiinte Economice, Universitatea de VestVasile Goldis Arad, nr. 16, 2006, vol. III,3. Mates Dorel, Costea Ciprian Dan, Delia David, Mihaela Stet, Laurentiu Mariut, Ali nDumitrescu, Luminita Paiusan, Contabilitatea Intreprinderii- aplicatii practice, Editura Mirton,Timisoara, 20044. Mates Dorel,Contabilitatea financiara a intreprinderii, vo lI si vol.II, Editura Mirton,Timisoara,20045. Mates Dorel, Matis Dumitru, Cotlet Dumitru si colectiv, Contabilitate financiara a entitatiloreconomice, editura Mirton, Timisoara, 20066. Mates Dorel, Peres Ion, Peres Cristian, Bazele Contabilitatii, editura Mirton, Timisoara, 20057. Stefea Petru – note de curs, modulul Analiza Pozitiei si Performantei Financiare a EntitatilorEconomice, ciclul de studii doctorale, Facultatea de Economie si Administrarea Afacerilor,Universitatea de Vest Timisoara, 20088. Stefea Petru, Analiza rezultatelor întreprinderii, Editura Mirton, Timişoara, 20029. Stancu Ion, Finante, Editura Economica, B ucuresti, 200210. Weil Roman L., Clyde P. Stickney si Sidney Davidson, Accounting, the Language of Business,Thomas Harton and Doughters, Arizona, U.S.A., 199011. ***Legea Contabilitatii nr. 82/2001 republicata in 2005, Monitorul Oficial nr. 48/200512. ***Standardele Internationale de Raportare Financiara, Editura Ceccar, 200613 ***Ghid de aplicare al Standardelor Internationale de Contabilitate, Editura Economica 200114. ***OMFP 1752/2005 pentru aplicarea reglementarilor contabile conforme cu Directiv eleEuropene, Monitorul Oficial 1080 bis/200615. ***Norme de analiza financiara si de creditare de la banci comerciale16. ***Norme de gestionare a lichiditatii de la banci comerciale17. ***www.dexonline.ro, www.ceccar.ro


SECTION 4

STATISTICS, DATA PROCESSING

(INFORMATICS) AND MATHEMATICS

www.dexonline.ro

www.ceccar.ro


A STATISTICAL ANALYSIS OF THE NORTH -EAST REGION OF ROMANIACOMPARED TO THE OTHERS IN TERMS OF TOURIST ACTIVITY

Assistant PhD. Student Ioana CIOTIRFaculty of Economics and Business Administration

„Al. I. Cuza” University of Iaşi , [email protected]

Assistant PhD. Student Adrian Liviu SCUTARIUFaculty of Economics and Public Administration

“Ştefan cel Mare” University of Suceava, [email protected]

Abstract:The present paper aims to achieve a comparative analysis of the North –East development region of Romania

with the other regions from the perspective of some economic and tourist relevant indicators. The analysis is precededby a short presentation of the regional development frame in which it will take place. For the study, we will use thestatistical method of the variance analysis of some quantitative numeric variables, which in our case are the economicindicators from the tourism field, under the influence of a qualitative variable (the region), that allows the sharing ofthe population in categories. The analysis is made using the SPSS program, and during the study we will feature theconclusive aspects that occur.

Key words: regional development, regions, tourism, analysis of variances

JEL Classification: L83, C10

1. INTRODUCTION

This paper intends to reveal some differences betwen the tourist activity of the North -Eastregion of Romania and the others, based on some tourist indicators. The statistic analysis method ofdata is did with the help of Levene test, Bonferroni test and Tamhane test. In this s tudy, we willconsider at a time, the relevant tourism indicators as dependent variables.

The structure of this work has a theoretical part, which includes general concepts regardingregional development and tourism, as well as, a short description of t he mathematic system we use,and a practical part that includes an empirical part on the influence of the region factor on sometourism indicators, finishing with some conclusions based on the research results.

2. THE TOURISM IN THE CONTEXT OF THE REGIONAL D EVELOPMENT

The necessity of analysing the tourism in regional profile appeared as a result ofdevelopment regions creation in the E.U., of decision decentralization and incresing the role ofstructural founds that follows the lines of the Social and Econo mic Cohesion European Policies –especially The Regional Development European Found ; in this conditions, the tourism is a chancefor the development of some regions insufficiently developed.

We will shortly present some aspects regarding the region, regio nal development and therole of tourism in the regional development policy, with the purpose of designing the frame inwhich our research will take place – the regional one.

There is no definition to contain all the aspects that characterize a region. Comm on to alldefinitions given to the region is the idea of space as entity, so the most significant statement thatcan be made about it, is that it represents a unit, which includes a limited number of zones, ofmedium size and territorially adjacent .

Regarding the context in which the regions appeared in the E.U., it must be mentioned thatNomenclature of Territorial Units for Statistics (NUTS) was created by Eurostat (The E.U.Statistics Office) in 1981 with the purpose of having a unique and coherent schem e of the territorial

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repartitions for the unification of the regional statistics and for the application of the E.U. regionalpolicies (including the efficient absorbtion of founds for regional development). These aspects areat the basis of the medium ter ritorial units, called regions, creation in the E.U. In the same time, theactual tendency in the E.U. is the one of decission decentralization.

Regionalization became in this way a common tendency of the territorial organization ofEuropean states evolution, besides the one of decisions decentralization, the regions being theresponsible structures for institutional convergence ensuring of the E.U. member states. Althoughthe regions apparition is not necessarily a consequence of the E.U. regional developm ent policy, thehigh level of founds for the achievement of its general objective (obtaining economical and socialcohesion) had an important contribution on regionalization.

Although, in some E.U. member states, the regions have also an administrative rol e, inRomania the 8 development regions, created in 1998 by the reunion of several counties, are notadminstrative territorial units, they have not juridical personality, being the result of a freeagreement between the councils of the counties and the loc al ones, having the same function as inthe other E.U. coutries.

The regional development (1) means not only the boost and the diversification of theeconomic activities, the private sector investments boost, the contribution at unemploymentdecrease and living improvement, but a whole environment of supporting and adaptation of thedurable actions that converge with the competence domains of the region.

The regional development policy strengthens the role and the responsibilities of the localpublic administration and of the regional organisms in the economical and social development ofeach settlement and of the development regions, in the same time with the reduction of governmentinstitutions involvement in such activities. One of the objectives is the r eduction of the economicaland social disparities existing among diverse E.U. regions, focusing on the balanced developmentstimulation and the disadvantaged zones revitalization; is stimulates the economic growth and theSME sector development acting on s ome significant fields for development such as: transports,agriculture, urban development, environment protection, employment and professional training,education, chance equality, etc.

One of the ways which E.U. uses for the achievement of these objectiv es is the creation ofThe Structural and Cohesion Founds (especially The European Found Regional Development),which are the financial instruments that E.U. uses to eliminate the economical and social disparitiesamong regions, with the goal of economical and social cohesion achievement.

The policies and plans of regional development in the last years take into account more andmore the tourist sector, as a strategic sector for providing a dynamic and durable economic growth,of certain regions with an important tourist potential.

The Regional Development Agencies existent in every development region have animportant role in the implementation of the Regional Operational Program 2007 -2013 (Regio),which is one of the Romanian Operational Programs agreed wit h the E.U., financed by TheEuropean Regional Development Found (ERDF), constituting itself as an important instrument toimplement The National Development Strategy and policies for regional development. Programuleste accesibil tuturor celor 8 regiuni d e dezvoltare ale României. It is structurated in 6 priority axes,and the presence of tourism in the frame of the Priority Axis 5 of Regio, reveals the fact thattourism has an important place and must know a better development in every region.

The tourism development causes the development of some other fields related to it. Thebenefic effects will observe don the population incomes level and on some other fields, extern fromtourism. The tourism multiplier (2) is represented by the fact that an initial e xpenditure made by atourist, in an area or country, is successively converted into revenue for other areas of the economy(agriculture, manufacturing industry of consumer goods, construction and materials of constructionindustry, trade, services), direct ly or indirectly related to tourism, until the funds in question leavethe country, the zone or the economic sphere, in general by the payment of taxes, savings(hoarding), imports, etc. called leaks from the system.


After this presentation of the context inwhich we develop our research, we will reveal andanalize, next, with the help of some specific means the diferences between the North -East regionand the other regions from the tourist activity point of view.

3. THE STATISTICAL METHOD

The statistical analysis is done in two steps. In the first step we apply the statistical Levenetest to study the homogeneity of the variance. If the significance level less or equal then 0,05,meaning that the probability of the null hypothesis is less then 5%, we have to reject the nullhypothesis, meaning that the variance is not homogeneous.

In this situation we need to use the Tamhane statistical test to determine the presence ofsignificant differences between the average values of the variables in the North -East regioncompeered to the others regions.

If, we have the opposite situation, that is the significance of the Levene statistical test isgreater then 0,05, we have the homogeneity of variances and in this case we use the Bonferronistatistical test to compare the avearge value of the variables from the North -East region and theother regions.

4. STATISTICAL REASARCH CONCERNING THE INFLUENCE OF THEREGION ON SOME BASIC INDICATORS IN TOURISM

The scientific research on the tourism activity assumes the use of an ap propriatemethodology that assures the quantification. In the present paper we shall consider the followingeconomical indicators from the tourism area: the GDP (gross domestic product), the turnover (forhotels and restaurants), the investments in tourism , the accommodation capacity, the tourismcapacity utilization index and the number of overnight stays in hotels.

The general hypothesis of the research is that there are significant differences between theNorth-East region and the others regarding the l evel of the indicators presented above.

4.1. THE INFLUENCE OF THE REGION ON THE VARIABLE GDP (GROSSDOMESTIC PRODUCT)

Before observing the differences between the North -East region and the other regions fromthe perspective of the tourism activity, we shall analyze if there are differences from the point ofview of general development. The GDP is an indicator essential in the study of the level of socialeconomical development of and it is expressed in RON/ habitant/ year for each region. In thepresent paper we shall study this for the period 2000 -2005.

We consider that the level of development of the North -East region is different from thelevel of the others regions if, from a statistical point of view, there is a significant differencebetween the average values of the GDP in the six years considered in the study.

After using the Levene statistical test with the SPSS we have obtained the significance Sig =0,08 > 0,05 proving that the variances of the 8 regions are homogenous.

Table no. 1 Test of homogenity of dispersions for the GDP

LeveneStatistic df1 df2 Sig.

1,991 7 40 ,080

In consequence we shall use the Bonferroni statistical test to compare the North -East regionto the others.


Table no. 2 Bonferroni test for the GDP

*The average value is considered significant if the level of significance is < 0,05.

As we can easily see in the table above, from the Bonferroni test we can conclude that theaverage value of the GDP in the North -East region is significantly different from the average valuein the region Bucharest-Ilfov, but, compared to the other regions, there are not statisticallysignificant differences.

4.2. THE INFLUENCE OF THE REGION ON THE TURNOVER IN TOURISM

In this paper the turnover is calculated for hotels and restaurants for the period 2000 – 2005and it is expressed in RON.

We shall consider that the level of the variable is significantly different for the North -Eastregion compared to the others regions if there are differences statistically significant between theaverage values of the variable for the six years we have considered.

After applying the Levene test using SPSS we have obtained the significance Sig = 0,007 <0,05 proving that the variances of the 8 regions are not homogeneous.

Table no. 3 Test of homogenity of dispe rsions for the turnover


3,329 7 40 ,007

Table no. 4 Tamhane test for the turnover in tourism



As we can see in the table above there a re not statistically significant differences of theturnover in tourism, between the North -East region and the others.

4.3. THE INFLUENCE OF THE REGION ON THE INVESTMENTS IN TOURISM

The variable investment in tourism is expressed in RON and will be consider ed in thepresent paper for the period 2000 – 2005. We shall consider that there is a difference on the level ofinvestments if the difference between the average values for the six years is statistically significant.

Applying the Levene statistical test w ith SPSS we obtained the significance Sig = 0,34 >0,05 proving that the variance of the 8 regions are homogeneous.

Table no. 5 Test of homogenity of dispersions for the investments in tourism


1,172 7 40 ,340

In consequence we shall use the Bonferroni statistical test to compare the North -Eastregion to the othrs.

Table no. 6 Bonferroni test for the investment in tourism


As we can see in the table above there are not statistically significant differences of theinvestments in tourism, between the North -East region and the others.

4.4. THE INFLUENCE OF THE REGION ON THE ACCOMMODATIONCAPACITY

The variable accommodation capacity is expresse d in number of accommodation places andit will be analyzed for the period 1991 – 2005, the average value being consequently calculated for15 years. Applying the Levene statistical test of homogenity with SPSS we obtain the significanceSig = 0 < 0,05 proving that the variances corresponding to the eight regions are not homogeneous.

Table no. 7 Test of homogenity of dispersions for the accomodation capacity in tourism


5,076 7 112 ,000


Applying the Tamhane statistical te st with we have obtained that we have the followingdifferences between the average value of the accommodation capacity of the North -East region andthe accommodation capacity of the others regions.

Table no. 8 Tamhane test for the accomodation capacity


According to the table above we have the following conclusions:- The North-East region has an accommodation capacity which is significantly greater

then that of the South-West and Bucharest-Ilfov regions.- On the other hand, the North -East region has an accommodation capacity significantly

smaller then one of the regions South, South – East, West, North – West and Center.

4.5. THE INFLUENCE OF THE REGION ON THE TOURISM CAPACITYUTILIZATION INDEX

We have to say at the beagining that the variable tourism capacity utilization index refers tothe the period 1991 – 2005. We shall consider that there is a difference on the level of investmentsif the difference between the average values for the six years is statistically significant. Applyingthe Levene statistical test of homogenity with SPSS we obtain the significance Sig = 0 < 0,05proving that the variances corresponding to the eight regions are not homogeneous.

Table no. 9 Test of homogenity of dispersions for the accomodation tourism capacityutilization index


9,128 7 112 ,000

Applying the Tamhane statistical test with we have obtained that we have the followingdifferences between the average value of the accomodation tourism capacity utilization index forthe North-East region and the accomodation tourism capacity utilization index of the others regions.


Table no. 10 Tamhane test for the accomodation tourism capacity utilization in dex


According to the table above we can formulate the conclusion that the North – East regionhas the accommodation tourism capacity utilization index significantly sma ller then the South –East and the South – West regions. There are not significant differences compeering to the othersregions.

4.6. THE INFLUENCE OF THE REGION ON THE NUMBER OF OVERNIGHTSTAYS IN HOTELS

Applying the Levene statistical test of homogenity with SPSS we obtain the significance Sig= 0 < 0,05 proving that the variances corresponding to the eight regions are not homogeneous.

Table no. 11 Test of homogenity of dispersions for the number of overnight stays in hotels


22,724 8 126 ,000

Applying the Tamhane statistical test with we have obtained that we have the followingdifferences between the average values of the number of overnight stays in hotels.

Table no. 12 Tamhane Test for overnight stays



According to the table above the North – East region has the average values of the numberof overnight stays in hotels significantly smaller then the South – East and Center regions.

5. CONCLUSIONS

From our study, we can feature some conclusions that we present next.Although there are some differnces between the North -East region and the others from the

tourist activity point of view, concerning the GDP, only the Bucharest -Ilfov region has asignifiantly higher value than North -East.

Concerning the turnover, there are no signifiant differences between the North -East regionand the others, and about the investments, we can notice that only in Bucharst-Ilfov the value issignifiantly higher than in North-East.

Regarding the accommodation capacity we can observe that, the region we focused on,registers signifiantly lower values than the majority of regions, only South -West and Bucharest-Ilfov having lower values.

The net using index of accommodation capacity in the North -East region is signifiantlylower in the North-East region than in the South-East (which includes the Black Sea season) andSouth-West one.

Regarding the stayings over night, the North -East region has much lower values than South-East and Center, which can be considered touristic zones par excellence.

So, we can conclude that the North -East region is not among the regions that outstands byan intense tourist activity, that’s why we consider as necessary and welcomed any measures thatcan stimulate the increase of this field of activity in the region, as a premise for the generaldevelopment of the zone.

NOTES

(1) Violeta Puscaşu – Dezvoltarea regională, Editura Economică, Bucureşti, 2000, p. 87(2) Rodica Minciu - Economia turismului, Editura Uranus, Bucureşti, 2001, p. 303

BIBLIOGRAPHY

1. Asandului L. - Statistica turismului. Aplicatii , Editura Junimea Iasi, 20022. Avramescu Tiberiu Cristian - Direcţiile implicării autorităţilor publice centrale şi locale în

dezvoltarea turismului durabil, teză de doctorat, ASE, 20053. Bodnăraş Emil– Finanţarea locală: practici comparate România - U.E., Seria Probleme

Economice, vol. 245-246, Centrul de Informare şi Documentare Economică, Bucureşti, 20074. Constantin D.L. – Introducere în teoria şi practica dezvoltării regionale , Editura

Economică, Bucureşti, 20005. Puşcaşu Violeta – Dezvoltarea regională, Editura Economică, Bucureşti, 20006. Ivan Ungureanu Clementina – Dezvoltarea regională – prezent şi perspective , în volumul

Dezvoltarea regională în contextul integrării în Uniunea Europeană, Coordonator RoşcaE.R., Editura Economică, Bucureşti, 2006

7. Jaba E., Grama A. - Analiza statistica cu SPSS sub Windows , Editura Polirom, Iasi, 20048. Platon Victor, Turdeanu Andreea - Dezvoltarea durabilă în U.E. şi România: Analiză

comparativă, Revista Română de Economie, Anul XVI, Vol. 23, Nr. 2/20069. * * * Programul Operational Regional 2007 -2013, Ministerul Dezvoltării, Lucrărilor

Publice şi Locuinţelor10. Anuarul Statistic al României Institutul Naţional de Statis tică, Bucureşti, 2002, 2003, 2004,

2005, 2006, 2007,11. www.adrnordest.ro12. www.inforegionordest.ro13. www.insse.ro

www.adrnordest.ro

www.inforegionordest.ro


DATABASE ACCESS THROUGH JAVA TECHNOLOGIES

Professor PhD. Ion LUNGU Academy of Economic Studies, Faculty of Cybernetics, Statistics and Economic Informatics,

Bucharest, Romania, [email protected]. PhD. Student Nicolae MERCIOIU

Academy of Economic Studies, Doctoral School, Bucharest, Romania, [email protected]

Inf. PhD. Student Victor VLĂDUCUAcademy of Economic Studies, Doctoral School, Bucharest, Romania, [email protected]

AbstractAs a high level development environment, the Java technologies offer support to the development o f distributed

applications, independent of the platform, providing a robust set of methods to access the databases, used to createsoftware components on the server side, as well as on the client side.

Analyzing the evolution of Java tools to access data, we notice that these tools evolved from simple methodsthat permitted the queries, the insertion, the update and the deletion of the data to advanced implementations such asdistributed transactions, cursors and batch files.

The client-server architectures allows through JDBC (the Java Database Connectivity) the execution of SQL(Structured Query Language) instructions and the manipulation of the results in an independent and consistent manner.The JDBC API (Application Programming Interface) creates the le vel of abstractization needed to allow the call ofSQL queries to any DBMS (Database Management System). In JDBC the native driver and the ODBC (Open DatabaseConnectivity)-JDBC bridge and the classes and interfaces of the JDBC API will be described.

The four steps needed to build a JDBC driven application are presented briefly, emphasizing on the way eachstep has to be accomplished and the expected results. In each step there are evaluations on the characteristics of thedatabase systems and the way the JDBC programming interface adapts to each one.

The data types provided by SQL2 and SQL3 standards are analyzed by comparison with the Java data types,emphasizing on the discrepancies between those and the SQL types, but also the methods that allow the con versionbetween different types of data through the methods of the ResultSet object.

Starting from the metadata role and studying the Java programming interfaces that allow the query of resultsets, we will describe the advanced features of the data mining with JDBC.

As alternative to result sets, the Rowsets add new functionalities that enhance the flexibility of the applications.These are analyzed and the approach is described.

Next, we will describe Java Data Objects (JDO) Application Programming Interf ace, which is a way to storepersistent data in databases, using plain old Java objects (POJO) to represent persistent data. The approach makespossible separation between data manipulation and database manipulation.

Keywords: Java, JDBC, database access, SQL, JDO

JEL classification: C88

INTRODUCTION

Java plays a dominant role in client -server programming, in the presentation layer of thewebsites, but also in the business logic on the applications servers. A large contributor to thissuccess is attributed to the ability to interact with data. Starting from these advantages, a descriptionof the JDBC (Java Database Connectivity ) was needed, also the way these instruments can be used,emphasizing on the new features the latest version have to offer.

The standardization of SQL (Structured Query Language ) did not block several DBMScreators to develop proprietary extensions to SQL, rezulting in the creation of different interfacesfor data manipulation. However, JDBC technology offers a consistent interfac e for manipulatingdata, regardless of the format in which the data is stored (fig. no. 1).

www.insse.ro

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[email protected]

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Figure no. 1. The role of Java technologies to access data at enterprise level .Derived from [4] , pag. 7

1. THE EVOLUTION OF DATA ACCESS JAVA INSTRUMENTS

When Sun Microsystems released the first JDBC API 1.0 (Application ProgrammingInterface) in 1997, it had several shortcomings, for instance the interface to access SQL databases.JDBC 2.0 arrived with new features such as cursors and batch files. Also, the Optional Package,javax.sql as well as other advanced features such as distributed transactions or the RowSet interfacearrived.

JDBC 3.0 brought transactional intermediate saving points and support for SQL99 types ofdata. The optional packages have been in cluded in the Java 1.4 distribution. JDBC 4.0 providessupport for SQL 2003 but also extended support for CLOB (Character Large OBject) and BLOB(Binary Large OBject).

Currently, the Java API includes a JDBC -ODBC driver (Open Database Connectivity -JavaDatabase Connectivity) that allows the JDBC driver access to a native system database, when anODBC native system driver exists for that database. The Java API does not include drivers for alldatabases. The existence of a common programming interface brings several benefits. Otherwise, ifany database creator would built its own API, that would lead to thousands of ways ofprogramming databases, so any interface would have to be known. About new JDO technology, theoriginal JDO 1.0 is Java Specification Requ est 12 (JSR 12), and the current JDO 2.0 is JavaSpecification Request 243 (JSR 243). Beginning with version 2.0, the dev elopment of the API andthe Technology Compatibility Kit (TCK) takes place within the Apache JDO open-source project.

The Apache JDO project is focused on building the JDO API and the TCK. Com mercial andopen-source implementations of JDO, providing the APIs - witch is used by application developers-, are available for relational databases, object databases, and for file systems.

2. THE ARCHITECTURE

In a client-server architecture the databases reside on the same or on a different machine onwhich the client connects to the intranet or Internet. JDBC allows to use SQL instructions and toprocess results of the queries in an indepe ndent and consistent manner. Using a high level of


abstractization represented by the JDBC API, the situation of the programmer to handle differentSQL calls to a certain DBMS (Database Management System ) is avoided. (figure no. 2).

Figure no. 2. The role of JDBC in accessing data –Derived from [3] , pag. 442

In order to be able to connect to a certain DBMS we only need to switch the driver,operation that can be done dynamically, even when the application runs, without the recompilationof the application.

The way those drivers are built is standardized through the JDBC specifications whichdescribes the standard interfaces that are to be implemented. During time an evolution of thosespecifications occured, and the functionalities have been enhanced without compromising thecompatibility with previous versions of the specifications. Generally, the JDBC specificationsdescribe a series of interfaces that the people who develop the drivers should implement. Somedatabases do not allow stored procedures or other functionalities due to non -standard developmentof databases in general. Therefore, the JDBC specifications that have emerged from time forced thedrivers creators to implement a reduced set of interfaces, other things remaining optional, withoutrestricting the real posibilities of existing databases.

JDBC provides object-oriented access to databases through the definition of classes andinterfaces that cover several abstract concepts. Also, the JDBC standard defines a series ofinterfaces that are to be implemented by the drivers creators in order to give the developersinformations about the queried database, the DBMS used and so on. Those intels are also known asmetadata, which means „data about data”.

JDBC programming covers many aspects: clie nt-server communication, drivers, APIs, datatypes and SQL instructions. The JDBC API releaves much of the burden needed to createapplications with databases. It comprises many simple and intuitive components that can work forthe programmer. In order to create an application one just need to assemble these components.Programming JDBC is also a very methodical way. 90% of the JDBC application uses the sameobjects and methods.

The first step is to obtain, install and configure the JDBC driver. Afterwards the neededcomponent can be utilized in all the JDBC applications. After that compiling takes place, runningthe application and solving the eventual issues.

JDBC is an API that encapsulates calls on two levels needed to access database data andinteracts through a common interface. JDK (Java Development Kit) and JRE (Java RuntimeEnvironment) both contain the standard API, the interfaces and classes being contained in twomajor packages java.sql and javax.sql. The first package includes standard components , whilst thesecond includes enterprise level components.

The entire communication with the database occurs through the JDBC drivers. This driverconverts the SQL instructions into a database server comprehensible format, using the correctnetworking protocols. JDBC abstracts the specific communication with the database. (fig. no. 3).


Fig. no. 3. The relationship between the application -JDBC-databaseDerived from [4] , pag. 31

The Java SDK includes the ODBC -JDBC driver, thus allowing the access to OD BC driversto database. Instead of accessing directly the database, JDBC “talks” to the ODBC drivers, which,in its turn communicates with the database.

Figure no. 4. The relationship application -JDBC-ODBC-databaseDerived from [4] , pag. 31

Installing the JDBC driver is similar to installing any other Java API. You only have to addthe path of the driver in the CLASSPATH variable when compiling and running the application.When using the ODBC-JDBC bridge driver, this step is not required, however other additionalsettings have to be done.

First of all, the application should be able to communicate with the database. Afterwards,the application has to be able to establish connections with the database to create a communcationchannel in order to send SQL commands and retrieve results. Finallz, the application has to have amechanism to deal with the errors. In order to accomplish all these things, the JDBC API providesthe following interfaces and classes:

- Driver – this interface controls the communicat ion with the database server. Rarely oneshould need to interact with objects of the Driver type. Given this, the DriverManager objects canbe used instead. These have an abstract representation of the details associated to the work withDriver objects.

- Connection – instantiating objects of this interface represents the physical connection tothe database. The result set and tranzactions can be controlled using Connection objects.

- Statement – objects created with this interface in order to send SQL comm ands to thedatabase. Some derived interfaces accept supplemental parameters in order to execute storedprocedures.

- ResultSet – these objects contain the retrieved data from the database after the query hasbeen performed using Statement object. These objects allow the browsing of the data like aniterator.

- SQLException – a class that traps any error that is encountered in the applicationAny Java application that uses databases works directly or indirectly with those four

components described earlier.

3. STEPS IN WRITING A JDBC APPLICATION

Practically, the steps that are to be followed when writing a JDBC applications are:1. The registration of the JDBC driver with Class.forName().newInstance() .2. The connection to the database is open with DriverManager.getConnection().


3. A Statement type object is created in order to send SQL commands using the methodConnection.createStatement() and afterwards execute(), executeUpdate() or executeQuery()

4. The connection is closed using the method close().The first step that is to be made in order to use a JDBC driver is the exact determination of

the class for the driver provided by the creator. Usually, the producers respect the namingconventions of the packages when naming the drivers. The java.sql.Driver interface and thejava.sql.DriverManager class are the tools to work with drivers. Registering a driver means theregistration with a DriverManager object. There are several techniques to register JDBC drivers:

- Class.forName(String driverName).newInstance()- DriverManager.registerDriver(Driver driverName)- jdbc.drivers propertyIn JDBC, an instance object of the type Connection represents a physical connection to the

database. The method Driver.connect() can be used, being prefered though the getConnection()method of the DriverManager class because it allows the choose of the right driver. Also, themethod can be overriden in order to allow opening of different menas o open connections. JDBCneeds a special name system to be used when connecting to a databa se. The general format isjdbc:<subprotocol>:<subname> where <subprotocol> represents the specific protocol of theproducer and <subname> is the source of the data (the logical name of the database we’re trying toconnect to).

To open connections, the getConnection() from the DriverManager class returns a validConnection type object. If the method fails, DriverManger throws a SQLException containing thespecific database error.

Closing the connection means the mandatory usage of the close() method. The methodConnection.isClosed() does not check whether the connection is stil open or closed, but returnstrue if the method close() has been used. The best way to check a connection is to try a JDBCoperation and the trap of the exception to determine whether the connection is still valid.

For the beginning we must be sure that the client’s session has been closed on the databaseserver. Some databases cleanse the remains if the sessions terminate unexpectadely. Then, thedatabase sees that the user’s session failed and executes a rollback to all the changes between theexecution of the programme (for instance sessions that ended in the middle of the tranzaction).Explicitly closing the connections ensures that the client -server medium has been cleansedcompletely and makes the database administrator happier, conserving the resources used by theDBMS, for instance free licenses used on open sessions. Also RAM and CPU is spared on theserver on which the database resides.

We can interact with the database in two ways. This way we can send a SQL query to obtaindata about the database schema or to “learn” the values stored in some database fields, all thesetaking place at runtime. In that case we would need to create parametric JDBC or stored procedures.In this case we need to create. Regardless of what we want to do, the Statement, PreparedStatemen tand CallableStatement object provides the sufficient tools in order to attain our goals.

The corresponding interfaces define models and properties that allow sending commandsand receiving data from and to the data database, as well as methods that help creating a bridgebetween different types of data defined in Java and specific to each type of SQL database types. Forinstance, the data types that have NULL values in the database in contrast with the int type in Java,or the different representation of date and time data between Java and SQL -92. There are methodsthat allow conversion of data from Java into JDBC. Statement objects offer DBMS interaction.They allow all the types of DML (Data Manipulation Language ), DDL (Data Definition Language )commands to be executed, as well as other specific commands, batches and tranzactionmanagement commands.

The three methods of the Statement objects are execute(), executeUpdate() andexecuteQuery() that allow sending commands to the database and retrieving results. Execute()processes DML instructuions, or DML or other specific database commands. It can return one ormore ResultSet type objects. The method has flexibility, but the processing of the results is a little


bit difficult. executeUpdate() is used for INSERT, UPDATE, DELETE or DDL instructions andreturns the number of records affected by the sent command. executeQuery() queries the databaseand returns a result set (a ResultSet object).

A ResultSet type object contains data returned by the SQL queries, run with one of themethods: executeQuery() sau execute().

Given the fact that many databases use a query language that have supplemental commandsother than the DML or DDL, Java has support for a special type of commands format – JDBC SQLescape that allows access to specific functions of the database. When used this feature, the drivertranslates the commands in the specific format of the database. The execute() method is the mostflexible way to interact with the database because it cas process result sets or number of records.The disadvantage here is that when used you cannot anticipate the type of the results returned – setsof results, number of records, or both.

The next figure shows the way the results returned by the execute() method are processed.

Figure no. 5. The process of returning results from the execute() method -[4] , pag. 68

The interface set Statement can be used to process batches, i.e. sending mu ltiple DMLinstructions (executed as one command) in a single call, that allows using a tranzactional controlover the database. This control allows, for instance, the return to the initial state of all changes ifone of the change failed, and by that insu ring integrity and database consistency.

The tranzactions allow control of whether and when the changes are applied to the database.They allow the representation of a single instruction or a group of SQL instructions to be treated asa single logical unit, and if just one instruction within fails, the whole tranzaction fails. Tranzactionspresent both advantages and disadvantages. One advantage is that they allow consistency andintegrity of the data. The disadvantage is that the blocking system for each d atabase is different


from database to database and the effect of initial blocking of the data initiated by the tranzactioncan be sometimes surprising.

With JDBC tranzactions can be administered through the Connection type objects; forinstance using the auto-commit module and the usage of rollback() method. A saving point isactually a logical tranzaction rollback point within the tranzaction. If an error occurs between thelast saving point, the rollback method can be used to restablish the state of the d ata at that savingpoint.

The PreparedStatement interface offers some advantages over the classic Statementespecially because of the feature of adding parameters dynamically. Still, not all the databasessupport this feature. Also, all the commands of thi s type remain in memory in this open session oruntil the PreparedStatement object is closed. This PreparedStatement allows input and outputstream, allowing us to store files in the database as values.

The CallableStatement objects allows us to execute st ored procedures in the database fromthe application. These objects utilize parameters as OUT or INOUT

The result sets are nothing more than rows and columns obtained from the ResultSet objects,creating a logical view of the data from the database. JDBC p rovides a class that implements theResultSet interface that offers method to allow data interactivity.

Although a result set contains multiple records, at a time it is possible to get access to onlyone record, the “active” record. Accessing this record m eans moving the cursor with specificmethods. There are several types of results:

The predefined type Standard that allows only sequential and forward browse of the set. Thedata cannot be updated. It is useable to populate a simple list or other simple op erations.

The second type would be Scrollable, which allows the browsing of the results forth andback and jumping to a specific records. This one reflects the changes in the database, so it can beused in real-time applications.

The third type would be Updateable that allows the update of the result set withoutadditional SQL instructions.

The Scrollable and Updateable must be used only when really needed as they can affect theapplication’s performance.

4. MAIN TYPES OF DATA

Generally, the database support a limited types of data. If SQL2 (SQL92) offered supportfor a limited standard types, SQL3 allows customized built types, the dimension of data that can beaccomodated in a column is now bigger than 1GB of binary or character data. Also, SQL offerscomplex object support in business modelling and multimedia applications as well as objectidentifiers, abstract data and inheritance. However, not all the databases support SQL3 standard.

There are discrepancies between Java types and known database types, that requires theconversion of those Java types into SQL types and viceversa. These conversions are made throughthe getXXX(), setXXX() and updateXXX() methods that belong to the ResultSet object. It isimportant to know that every JDBC data type has a co rresponding recommended Java type. Still,these methods are not very strict, they allow conversions from more precise into more loose typesof data and even into other types (for instance: getString()).

Given the fact that primite Java types do not have to be defined, they store directlyinformation, remaining constant from one application to another and from one virtual machine toanother. Because primitive objects cannot be instantiated, Java offers the wrapper classes thatallows treating the primitive values as objects.

In SQL, NULL represents a data with unknown or undefined value. In Java, this NULL canpresent a problem, especially for numeric data types. For instance, the integer type from Javacannot have NULL values. Using the ResultSet.getInt() method JDBC will translate this NULLvalue into 0, which untreated can lead to an erroneous interpretation of the data. Objects, on the


other hand, can have NULL values in Java. The ResultSet.wasNull() methods determines whetherthe last column read from the database returned a NULL value.

Data returned from SQL queries must be formatted as JDBC types. The conversion to Javatypes must be made before assignation to variables.

SQL UDTs (User-Defined Types) allows the developers to create their own definition o fdata types in the database. These are exlusively defined with SQL instructions, but JDBC offerssupport for UDT in Java applications. The custom types are materialized on the client, so the accessis not directly to the value, but through an intermediate LOCATOR that references a value in thedatabase. The UDTs allow the usage of large data and the way those can be used will be presentedlater on.

The DISTINCT data type allows the assignation of the new custom data type with anothertype of data, in a similar manner classes are extended in Java.

STRUCT is a data type built that has several members, named attributes, each of themcarrying different types of data. A Java class without methods is an analogical representation of aSTRUCT. In SQL3 STRUCT types of data can be constructed, each being able to hold any type ofdata, including other STRUCT.

Example: Declaring a STRUCT:CREATE TYPE Sal_DATA(CNP Number(9),Nume VARCHAR(20),Prenume VARCHAR(20),Salariu NUMBER(9,2) )JDBC allows the creation of Java classes to mirror UDTs on the database servers. The

process of creation and usage of a Java class is called mapping of types. The advantages are: controlof access through classes, data protection, the possibility to add new methods and attributes.

5. DATA MINING WITH JDBC

Understanding the concept of data mining implies the knowledge of the role of the metadata.These are data about data. In databases, metadata represents information about data and

structure and applications that deal with data. An exampl e would be tables and attributes of thecolumns.

The JDBC API allows the descovery of the metadate about a database through the query ofthe result set using the DatabaseMetaData and ResultSetMetaData interfaces. The first one allowsgathering information about the database attributes and allows taking decision at runtime upon theseinformation. The second interface allows gathering the attributes such as number of columns, nameand type of data of the result set. This information can be used, for instance, to populate a reportwith the name of the column and to determine which kind of getXXX() method should be used.

A ResultSetMetaData object can be used to create a generic method for processing resultsets. This way, the types of the data from the column o f the result set and the correct version ofgetXXX() methods to obtain data. DatabaseMetaData allows the creation of tools which databaseadministrators can use to inspect databases, the structure of the tables and the users schemas.

JDBC 3.0 defines a new interface for metadata - ParameterMetaData. This one describesthe number, type and properties of the parameters used in prepared statements.

The ResultSetMetaData provides information about the columns in the result set, such asnumber and type. The interface does not provide information about the number of records in the setof results.

The DatabaseMetaData interface is useful when inspecting the structure of the database.Creating a DatabaseMetaData object can be done by using the getMetaData() method of theConnection object. A DatabaseMetaData object has many methods and properties, all those can begrouped in two categories: refering to the characteristics of the database, or refering to the structureof the database.

The first category of methods and properties answers to questions such as:


- Does the database support batches?- What is the user which I am connected to the database?- What kind of SQL data types does the database support?- What are the SQL keywords supported by the database?

The methods from this category refer to information about the database return String results,the ones that offer information about database limitations return int.

The methods from the second category return a ResultSet object which depends on themethod used to query the database. The majority of the methods are simple and allow the usage ofreplacement wildcards: “_” is used to replace a single character, while “ %” can be used to replacezero, one or more characters.

6. ROWSETS

Rowsets represent an alternat ive to result sets. The RowSet interface extends the ResultSetoffering the same functionalities for viewing and manipulating data, but adds among features,functionalities that enhance the flexibility and the power of the application. Rowsets implement th eJavaBean architecture, can operate without a coninuous connection to the data source and can offertabulary data about any data source being in constrast with result sets that can only work withdatabases.

Extending the ResultSet interface, the RowSet allows access to the same methods andproperties. A RowSet object can obtain data from a source in many other ways. The maindifferences betwessn these two interfaces are:

-The RowSet interface supports the JavaBean component model, allowing the developers touse the visual tools for Beans. RowSet can inform the “listeners” about events that appear.

-The row sets can operate connected or disconnected. The first way is similar to the resultsets, but the disconnected stores the rows and the columns in memory, allowing the manipulaton ofdata in this manner.

Because the RowSet is in the javax.sql package, Sun Microsystems does not provide astandard implementation. Still, in JDBC 2.0 there are some implementations like: JdbcRowSet,CachedRowSet and WebRowSet.

The development of RowSet object based applications implies a different technique than theone with standard components. Mainly we need a single object to implement the RowSet interface.The steps to be pursuit when using a row set are:

1. Registering the JDBC driver.2. Setting the connection parameters.3. Populating the row set.Because the RowSet object supports the JavaBean model it is impossible to access the

properties of the object directly, which requires the usage of the methods get and set to configurethe properties of the class that implements the RowSet interface.

RowSet objects can generate JavaBean events and allow the notification of othercomponents the events that appear in the RowSet object. A row set, acts differently than a result set,because it automatically connects to the data source when it has to retrieve or update data.

Both DDL and DML commands can be used with RowSet objects but the execution isdifferent than in standard JDBC. First of all, it is not necessary to instantiate Statement,PreparedStatement or CallableStatement objects to execute SQL instructions. The objectdetermines if there is a parametrized query or a stored procedure to be executed.

The retrieve of the data from the row sets is done with the getXXX() methods, where XXXrefers to the Java type of data in which we store the value.

Since the RowSet interface extends the ResultSet interface, for browsing the rows the samemethods exposed by the ResultSet can be used. Also, the properties can be controlled withscrollable and updateable by the setType() method.


After usage, the RowSet object must be closed in order to free the database resources used.The RowSet.close() method frees all the resources of the database. Closing the object is criticalwhen this is of JdbcRowSet type, because this object maintains an open connection to the serveronce the execute() method is called. Objects of type CachedRowSet and WebRowSet connect to thedata source when needed. However to eliminate the possibility of unwanted closing by the gar bagecollector, they must be explicitly closed.

Using a JdbcRowSet object is simple because it is a JavaBean component. Once the row setis populated, the methods inherited from ResultSet can be used to work on data. This object doesnot require a JDBC driver, or an open connection to the database.

The CachedRowSet object provides a disconnected and serializable implementation of theRowSet interface. Once the object is populated, it can be made serialized so we can shareinformation with other users. It i s not recommended for large amounts of data since it can exhaustthe system memory.

The WebRowSet can work independent and is able to serialize data. This object is able togenerate an XML (eXtensible Markup Language ) file which can be used as it is or use an XML fileto repopulate itself. Having a row set represented as an XML file, the data can be presented onvarious devices and browsers.

7. JAVA DATA OBJECTS (JDO)

We start with benefits of using JDO for Application Programming. This benefits are:- Ease of use: Application programmers can focus on their domain object model and leave

the details of persistence (field -by-field storage of objects) to the JDO implementation;- Portability: Applications written with the JDO API can be run on multiple

implementations without recompiling or changing source code. Metadata, which describespersistence behavior external to the Java source code, is highly portable;

- Database independence: Applications written with the JDO API are independent of theunderlying database. JDO implementations support many different kinds of transactional datastores, including relational and object databases, XML, flat files, and others;

- High performance: Application programmers delegate the details of persistence to the JDOimplementation, which can optimize data access patterns for optimal performance.

JDO helps the programmer to write data access programs with less programming and thusincreasing the productivity of the programmers. JDO operates at a higher level, transparentlytransferring data between in-memory Java objects and your database.

The steps that are to be followed when writing a JDO applications are:1. Data Object: Create an Object that we wish to persist in the database;2. Persist: Create an Object that will take ca re of persisting, reading, and updating the

datastore;3. JDOEnhancer: Create an JDO descriptor to tell the JDOEnhancer what we are doing;4. Build: Go through the steps to build and run the system.First step: We'll start creation of the Object that we wi sh to persist in database. This object

follows the standard JavaBean conventions of get and set on the attributes. Notice that although weare persisting this class, there is nothing special about it. It doesn't have to inherit or implement anypersistent interface/base class. The requirements for a class that can be persisted are:

-Fields must be accessible to the JDO classes (public, or set methods);-The field's data type must be permitted in accordance with the JDO specification;-Certain fields can not be supported (unserializable ones like Thread, File, Socket).Second step: Now we need to create tasks that will manage the persistence.-Initialize the JDO Persistence Manager;-Persist the Objects to the database;-Display the Object from the databa se;-Change the properties of the Object;


-Delete the Object;-Run through these things in the main() method.Third step: The JDO architecture is built with the idea that a JDO implementation can

take the bytecode for your classes and manipulate them to a dd needed functionality. For example,the JDOEnhancer will make the class implement the PersistanceCapable interface (so you don'thave to), and may implement some of the methods in that interface. So we will see that after wecompile our code, we will have to run the JDOEnhancer to do the bytecode manipulation (this issomething that Thought Inc. doesn't like about JDO). We need to create a descriptor file that givesinformation about the classes that we wish to persist.

Step four: There are only a couple of steps to build the system that we have created:-Compile the code;-Run the JDOEnhancer;-Set up the database (using output from the JDOEnhancer);-Run the application-Here is an example of running the JDOEnhancer for application:

% java com.prismt.j2ee.jdo.enhancer.JDOEnhancer -oc . -pdperson.jdo -db oracle -od db -cp .

CONCLUSIONS

The designers of IT systems choose the combination of Java, JDBC and JDO because itallows the disemination of the information contained within databases in a simple and economicway. The operations within the organization can go on by utilizing existing databases even if theseare used on different operating systems. The time used to develop new applications is shorter andthe installation and versioning control is si mplified. All these advantages determined us to try todescribe in a non-exhaustive manner the concepts, the methods and the techniques related to JDBCand JDO technology to access databases, offered by the Java platform from Sun Microsystems.

REFERENCE:

[1] – Leţia T., Programare avansată în Java , Editura Albastră, 2002;[2] – Patel P., Java Database Programming with JDBC , The Coriolis Group, 1996;[3] – Tanasă Ş., Olaru C., Andrei Ş., Java de la 0 la expert, Polirom, 2003;[4] – Thomas T., Java Data Access JDBC, JNDI, and JAXP , M&T Books, 2002;[5] –Văduva C., Programare în Java, Editura Albastră, 2002;[6] – Sun Microsystems, JDBC Data Access API, http://java.sun.com/products/jdbc;


MATHEMATICAL MODELING OF THEDISSEMINATION PHENOMENON CONCERNINGTHE CURRENCY CRISIS OF SUOTH-EASY ASIA

Lecturer PhD. Student Tudor COLOMEISCHIUniveristy „Ştefan cel Mare” of Suceava, Faculty of Economics and Public Administraion, Romania,

[email protected] PhD. Student Anamaria G. MACOVEI

Univeristy „Ştefan cel Mare” of Suceava, Faculty of Economics and Public Administraion, Romania ,[email protected]

Abstract:The coincidence of speculative crisis within more devel oping economies has become more and more an

emphasizing phenomenon, being analyzed by specialty literature. The way of inflationary tensions taken over theThailand’s baht currency in 1997, which has lead fast to theoretical tensions over some other curren cies, by using abasic mathematical model of the currency’s crisis, is analyzed within this paper.

Keywords: mathematical model, inflationary , the currency crisis, probability, inflationary

Jel classification: C02, C20

1. INTRODUCTION

The currency crisis that occurred in Mexico (1994 –1995) and expanded towards othercountries of Latin America, but considering also the crisis of Thailand (1997 –1998), whichextended to neighbor countries (Indonesia, Malaysia, Philippines and even towards countries havi ngstrong economies, as Hong Kong, Singapore and Korea) have determined the occurrence of a newconcept within specialty literature: the contagion. The models of contagion accomplished duringtime have based upon certain currency’s crisis model, built by M asson (1998). These currency crisishave generated powerful tensions over the exchange rates and prices of assets concerning otherdeveloping countries’ markets.

The model includes two states in progress of development. The external environment(particularly represented by the rate of interest on industrialized countries r*) is assumed to beknown. Firstly, the model takes into consideration the first country. An external debt „ D”,expressed by national currency, is assumed of existing and for this, a vari able interest is paid; butfor its facilitating, it is considered that no other net capital flows exist. A crisis is started at a certainmoment of time, with authorities financing any shorts (or overs) of present account, determining inthis way several changes at the reserves level. The uncertainty source is represented by thebreakdowns over the trading balance „ T”. If these are strong enough in order to determine adecrease “t” of Rt reserves under the critical level R to certain moment of time, then depreciationwill take place. If St represents the spot rate of exchange at „ t” moment of time (the price ofcurrency), and 1

dtS its value within the following duration of potential depreciation (otherwise, one

might meet St = St+1), then as concerns the bonds of national currency, the ex -ante profit per assetwill be calculated according to relation:

1

1

1ln ln 1 ln 1 ln 1 ,

dt t

t t t t t t t tt t

t

r SM r r r

S SS

where t represents the probability of depreciation occurre nce, „δ” the percentage size of expecteddepreciation.

[email protected]

[email protected]


Forwards, the probability of a crisis occurrence might be noticed as being influenced bythose expectations that lead towards multiple equilibria, also.

The changes arisen at reserves level will be therefore calculated in accordance to relation:

Rt + 1 – Rt = Tt + 1 – ( r* + t δ )D, (1)

where r* signifies the rate of exchange without riskAt the moment t + 1, a crisis will occur, if:

R t + 1 – R < 0. (2)

Considering the relations (1) and (2), it results that probability, calculated at moment „ t”, ofa currency crisis at moment t + 1, will therefore become:

t = Pt[Tt + 1 – ( r* + t δ )D + Rt - R < 0 ]. (3)

Using the notations

bt = Tt - r*D + Rt – 1 - R , α = δD şi Φt = Mt( bt + 1 ),

and replacing them in relation (3), it results:

t = Pt(Tt + 1 – r*D + Rt - R < t δD ) = Pt( bt + 1 < α t ). (4)

The existence of multiple equilibria depends upon the values of variables α and Φt. It isassumed that the variation of bt variable given by εt = bt - Φt – 1 has a normal distribution, with zeroaverage and variance σ2. Expressing the probability t by considering the cumulative distributionterms and depending upon variation of bt, the following can be written:

t = Fσ( α t - Φt ), (5)

where Fσ represents the cumulative distribution function of a normal distribution of variance σ2. Therelation (5) defines the forming of expectations by the investors. A necessary condition for multipleequilibria existence would be as:

12

z

.

This can be considered as an imposed condition over the external debt level, and also overincreasing the indebtness in case of a crisis.

The interval for multiple equilibria is defined of two tangency conditions between the 45°line and the function of cumulative distribution; these conditions are obtained when essential data

are high, respectively, weak. If one take into consideration 2logw z , then the two tangencyconditions will define the next interval for Φt, where multiple equilibria are possible:

αF1( - w ) + σw < Φt < αF1( w ) – σw. (6)

The double inequality (6) mainly represents a condition over the reserves. If these exceed acertain value, then a crisis will become thinly probable; if they decrease under a certain minimal


value, occurring a crisis will become almost surely. Between these two values, Φmin and Φmax,multiple equilibria might take place.

The situations met in Mexico and Thailand prove an attack, followed by an essentialdepreciation, which might provoke several effects over the confidence and “health” of financial andnon-financial corporations, having important debts on foreign currency.

2. DISSEMINATION OF CURRENCY CRISIS OF THAILAND TOWARDS OTHERSTATES OF SOUTH-EAST ASIA

The currency crisis started in June 1997 in Thailand has expanded straight away towardsother states of South-East Asia, producing negative effects over the economies of these countries.These crisis effects have been emphasized by an amazing similarity as concerns the exchange ratesevolution, related to American dollar of Indonesia, Malaysia, Philippines and Thailand, after a longtime of relative stability, as can be seen in Figure 1.

Figure 1. US dDollar per Domestic Currency Unit

The coincidence of speculative attacks over many currencies discovers one of its causes onthe economical development of the states based upon the industry, by means of monsoon al effects,which have involved the rates of interest and capital flows. The trading connections with theindustrialized countries can contribute towards the existence of certain monsoon al effects over thedeveloping markets. In this way, it become interesting to analyze the charac teristics of commercerelated to these states. The crisis affecting the states of South -East Asia has seemed to be inaccordance to the impact produced by exchange rates fluctuations yen/dollar, considering the highvolume of these countries’ trade, carried out both with United States and Japan, as can be seen inTable nr.1.

Table nr.1 Selected Southeast Asia Countries:Exports to Various Countries (in millions of US Dollars)

Other Southeast AsiaCountryUSA JapAn Of which*:

Thailand

Allcounties

Indonesia 7,948 13,839 5,539 854 48,059


(16.5%) (28.8%) (11.5%) (1.8%) (100%)

Malaysia14,245

(18.2%)

10,484

(13.4%)

21,377

(27.3%)

3,207

(4.1%)

78,246

(100%)

Philippines6,966

(33.9%)

3,668

(17.9%)

2,791

(13.6%)

780

(3.8%)

20,543

(100%)

Singapore23,062

(18.4%)

10,254

(8.2%)

31,908

(25.5%)

7,069

(5.7%)

125,118

(100%)

Thailand10,026

(18.0%)

9,373

(16.8%)

10,240

(18.4%) --

55,789

(100%)

Source: Direction of Trade Statistics Yearbook : 1990-1996 (IMF, 1997)* Indonezia, Malaezia, Filipine, Singapore, Tailanda

Starting from this point of view, the high weight of dollar within these trading connectionshas lead to a powerful effective nominal appreciation as concerns the currencies of these states,when dollar has been appreciated by relating towards y en, during April 1995-July 1997, factdescribed in Figure 2.

Figure 2. Effective Exchange Rates and the Japanese yen per U.S. Dollar Rate

Nevertheless, the moment of dollar’s maximal appreciation related to yen is foregoing withat least one year the crisis of exchange rates of South -East Asia; taking into consideration theessential differences between the trading characteristics of the region’s states has become necessary.

The spillover effects represent another potential explanation of overlapping i n time of thosespeculative attacks. Notwithstanding, the data presented in Table nr.1 shows the fact that exportstowards Thailand represent a very small percentage of the exports done towards other states fromregion, fact that leads to conclusion that, as concerns the Asiatic crisis, the effects of overflowinghad an unassertive part. As crisis have been disseminated within region, the effects of regionalcompetitiveness have been naturally amplified. As seen in Table nr.2, several estimations of lossesin competitiveness, related to each of the five countries more affected by crisis , are presented.


Table nr.2 Real Effective Exchange Rates of someAsian Economies (January 1997 = 100)

Korea Indonesia Malaysia Philippines Thailand

1997Jan

100.0 100.0 100.0 100.0 100.0

Feb 100.2 102.5 102.2 101.8 101.6

Mar 97.1 102.8 103.3 103.0 102.6

Apr 98.0 102.9 102.6 103.4 102.6

May 96.8 101.1 101.2 102.0 101.9

Jun 96.8 100.1 99.8 101.7 101.3

Jul 97.9 98.8 99.0 98.6 87.5

Aug 99.5 91.4 95.0 93.8 85.1

Sep 99.4 85.7 87.5 85.7 77.1

Oct 99.2 74.1 81.0 81.4 75.8

Nov 90.5 79.7 80.2 83.6 74.1

Dec 66.0 60.7 75.6 81.0 67.4

1998Jan

60.6 33.5 67.7 72.6 59.1

Feb 63.6 39.6 77.1 75.3 68.1

Mar 71.3 38.1 77.5 80.0 75.7

Taking into account the previous table, one mig ht notice that until November, when theKorean won has started to significantly depreciate as related to very small changes occurred untilthat time, the overflowing regional effects of competitiveness were significantly weak. Moreover,there was no doubt that, by means of this channel, a crisis might have been started in South Korea.

The analysis previously presented over different types of basic effects, towardsdisseminating the currency crisis of South -East Asia, has proved to be quit approximat ely. Thissuggest that an essential part of these crisis was taken by th e effects of pure contagion.

The part of contagion effects is described by simultaneous manifestations of the crisisproduced, without having connections occurred over the fundamenta l macro-economical data.

Forwards, several simple calculations will be presented, in order to analyze if fundamentaldata of the states affected by the crisis were favorab le towards multiple equilibria existence andaccording to payments balance model pr oposed by Masson. In order to appreciate the potentialrelevance of the model, the following issue has to be solved: the debt value of a country has to belimited to the debt represented by the internal currency owned by foreigners or it should include allthe external debt (which would be natural, if we take into account that risk of not paying and therisk of depreciation are almost similar). One have chosen the second situation as concerns this mainanalysis done over the Asiatic crisis; its aim consists in achieving the highest image towardspotential contribution of different types of effects. This approach is also justified by the fact thatAsiatic crisis had at least an essential external size, and a great part of the external debt included theforeign currency.

Table nr.3 External Debt, Reserves, Trade Balance and Criteria for Multiple Equilibria, 1994and 1996 (in percent of GDP)

Country( ) Date Dt Rt Tt zt mint max

t t

India (0.46) 1994 33.3 6.7 -0.7 7.22 1.11 7.22 3.50*


1996 27.2 5.8 -1.6 5.90 1.07 5.73 2.80*

Indonesia(1.23)

1994

1996

55.5

46.9

6.9

8.1

2.3

1.3

4.54

3.81

2.71

2.61

11.29

9.14

4.72*

7.46*

Korea(2.38)

1994

1996

14.9

21.2

6.7

7.0

-0.7

-4.0

0.62

0.88

--

--

--

--

5.43

3.20

Malaysia(3.53)

1994

1996

39.5

38.6

35.1

27.0

-1.6

0.7

1.12

1.46

4.85

4.77

5.15

4.98

31.97

26.30

Philippines(2.76)

1994

1996

57.9

51.1

9.4

12.0

-6.3

-9.8

2.10

1.84

4.98

4.77

9.52

7.98

-0.72**

0.44**

Thailand(2.47)

1994

1996

46.2

50.1

20.9

20.9

-4.3

-5.7

1.86

2.02

4.28

4.40

7.22

8.10

13.57

13.47

* Inside the region of multiple equilibria** Fundamental is below multiple equilibria region, that means in crisis region

Table nr.3 presents several relevant data at the end of 1994 and 1996, which preceded thecrisis of South-East Asia. One will use the simplest version of the model, so as to notice thepotential existence of multiple equilibria (by using relation (3) of the above paragraph). The modelsuggests that a fundamental component, noted Φt, has to take certain values, so that the multipleequilibria might take place. This fundamental component is an increasing function related to thelevel of reserves and the expected trading balance, and a decreasing function related to the value ofdebt and the rate of external debt. The calculation assumes that critical level of reserves, R , is zero(meaning that depreciation is not produced until the reserves are completely exhausted). Thisassuming is tough non-realistic, and a positive value for this minimal threshold might have an effectconsisting in reducing the values of Φt, previously calculated. The probability of multiple equilibriaalso depends upon the value of debt, upon the size of a potential depreciation and upon the variationof trading balance. In the view of implementing these parameters, a self -regressive process wasestimated for each country, process of first order over the trading balance (as percentage of GDP),and the standard error of estimating this regression ( during 1980-1996) was considered anapproximation for σ. As rate of foreign debt, the yearly r ate of American treasury effects was used.The data concerning reserves level, of debts and trading balances, all regarded as parts of GDP arepresented in Table nr.3. Although difficult on appreciating over “ex -ante” expectations related todepreciations, a depreciation δ of 25 % was assumed. This is significantly smaller than the real lev elregistered in several Asian countries, but it can be considered as an approximation od initialcurrency adjustments. A higher value of δ would bring towards the increasing of „ z” values and ofinterval size (Φmin, Φmax ).

Interesting on emphasize is the fact that in most situations (but not necessarily for all ofthem), there is an interval of values of Φt, for which multiple equilibria might take place: it is aboutimproper values of zt, as result of an essential external debt. The exception was represented bySouth Korea, which had an indebtness level relatively weak, but leading towards values of zt thatdidn’t allow multiple equilibria .

Although, the value of fundamental data Φt, which reflects among others the reserves level,hasn’t been always within the intern al part of multiple equilibria region. For instance, Malaysia,


even if registering multiple equilibria , had a level of fundamental data over that maximum allowed,where they were mainly provided to occur, since its reserves were high.

The results achieved have shown that effects of contagion were possible in situation of crisisof 1994 – 1995 and 1997, although these crisis haven’t corresponded to general mode ls ofcontagion, by considering all points of view. As certain consideration, one might say that countriesavoided by the worst effects of crisis seemed to be in a quite good situation, as concerns the level offundamental data, on which this model of payments balanc e is based upon. This observation wasvalid only for certain countries (for instance, Brazil, Chile or Columbia). Instead, Korea andMalaysia, considered apart, should have been immune to multiple equilibria, fact that brings us tothe following conclusion: other factors have also played an essential part on disseminating thecurrency values over these states.

3. CONCLUSIONS

The results achieved showed that effects of contagion have been possible in situation ofcrisis since 1994-1995 and 1997, although these crisis haven’t corresponded to general models ofcontagion by considering all points of view. According to certain consideration, one might say thatcountries avoided by the worst effects of crisis seemed to be in a quite good situation, as concernsthe level of fundamental data, on which this model of payments balance is based upon. Thisobservation was valid only for certain countries (for instance, Brazil, Chile or Columbia ). Instead,Korea and Malaysia, considered apart, should have been immune to multiple equilibria, fact thatbrings us to the following conclusion: other factors have also played an essential part ondisseminating the currency values over these states.

BIBLIOGRAPHY

1. Ahluwalia, P.: Discriminating Contagion, Explanation of Contagio us Currency Crises inEmerging Markets, IMF Working Paper, WP / 00 / 14, 2000;

2. [2] Eichengreen, B., A. Rose and C. Wyplosz: Speculative Attacks on Pegged ExchangeRates: an Empirical Exploration with Special Reference to the European Monetary System,The New Transatlantic Economy, Cambridge University Press, New York and Melbourne,1996

3. [3] Flood, R. and N. Marion : Self-Fulfilling Risk Predictions: an Application to SpeculativeAttacks, IMF Working Paper WP / 98 / 124, 1998:

4. [4] Glick, R. and A. Rose: Contagion and Trade: Why Are Currency Crises Regional?,NBER Working Paper no. 6806, 1998;

5. [5] Jeanne, O.): Are Currency Crises Self -Fulfilling?, Journal of International Economics,vol. 43, no. 3 / 49, pp. 263 – 286, 1997

6. [6] Masson, P.: Contagion: Monsoonal Effects, Spillovers, and Jumps Between MultipleEquilibria, IMF Working Paper, WP / 98 / 142,1998

7. [7] Van Rijckeghem, C . and B. Weder: Sources of Contagion: Is It Finance or Trade?, IMFWorking Paper, WP / 99 / 146, 1999.


SECTION 5

LAW AND PUBLIC ADMINISTRATION


ROMANIA AND BULGARIA IN THE EUROPEAN UNION: A SPATIAL ANALYSIS OFCOUNCIL VOTING

Adjunct Professor PhD. Diego VARELAUniversity of A Coruña, Spain

[email protected]

Abstract:In this paper I investigate the voting behaviour in the Council of the European Union between January 2006

and February 2009, i.e. immediately before and after the accesion of Romania and Bulgaria. In order to do so I havecoded the results of the 339 codecision votes that took place during the period of reference and applied variousmultidimensional scaling methods that commonly used for the analysis of voting behaviour in legislatures: metricscaling, W-Nominate, Heckman-Snyder, and optimal classification. The results of the analysis tell us about the relativeviability of the different methods in the EU context and provide us with a preliminary ideological map that representsthe ideological positions of Romania and Bulgaria vis -a-vis the other member states of the EU.

Keywords: European Union, Council, voting, preferences, scaling

JEL Classification: D 72

INTRODUCTION

On 1 January 2007 Romania and Bulgaria joined the European Union, which, since then iscomposed by 27 member states. In th is paper I investigate how the two new member states havebehaved in the main legislative institution of the Union, the Council.

There have been a number of empirical studies that have tried to extract member stateideologies from empirical evidence of Cou ncil voting (Mattila and Lane, 2001; Thomson et al.,2004; Hagemann, 2007). All these studies suffer from the scarcity of data available about aninstitution that leaves much to be desired in what regards transparency. Most voting is undertakeninformally, so that we end up with a very reduced sample of explicit votes (Hayes-Renshaw et al.,2006). Yet the studies have been able to process that limited evidence and produce ideological mapsof member states, usually on a two -dimensional space (Mattila and Lane, 2001; Thomson et al.,2004; Hagemann, 2007).

The results of these studies allow us to learn about the main dimensions of conflict in theCouncil, as well as the positions of particular member states along those dimensions relative toother member states. They allow us to see whether a member state has extreme or centralpreferences, and who are its main allies and opponents as far as Council voting is concerned.

But all of these studies cover periods in which Romania and Bulgaria were not members ofthe European Union, so I know very little about the ideological position of these countries. That isthe reason why I have decided to analyze the Council votes that took place during 2007, 2008 andthe first two months of 2009, after the accession of the two c ountries. I have also included the datafrom 2006 in order to increase the sample size and improve the realiability of the results, at least inwhat regards the dimensions of conflict and the relative positions of the other 25 member states.

The rest of the paper is divided in four sections. In the first section I will present the dataused in the analysis. In the second section I will present the four different unfolding methodsapplied. In the third section I will present the main results of the analysis. In the final sections I willpresent some conclusions.

THE SAMPLE

One of the main difficulties when one wants to study the Council is its lack of transparency.Until recently, even the most important legislative decisions were taken behind closed doors.Recently there has been a numer of steps aiming at increasing the transparency of the institutionwhen it acts in a legislative capacity.

[email protected]


The Council's rules of procedure as amended following the Seville European Council ofJune 2002 state that the Council's deliberations on acts to be adopted in accordance with thecodecision procedure shall be open to the public. Council sessions are also public when theCommission presents its most important legislative proposals and during the ensuing debate in theCouncil. In addition, it is laid down that the vote on legislative acts adopted by codecision shall beopen to the public. In such cases, Council deliberations are made public through transmission ofthe Council meeting by audiovisual means, notably in an ov erflow room. The outcome of voting isindicated by visual means in real time in the Council's meeting room and on a television screenwhich relays the voting to the Press Centre. The results of voting in Council deliberations on actsadopted by codecision since 2006 may be found on the Council’s website .

Table 1. Public votes on codecision acts from 2006 to February 20092006 2007 2008 2009 (2

months)2006-09

Votes 81 86 150 22 339Contested votes 18 26 26 8 78

Table 1 presents the distribution of the sample. From the total of 339 votes, the greatmajority were taken unanimously, and only 78 were contested by at least one member state. Thisreduces the sample size considerably.

THE TREATMENT OF ABSTENTI ONS AND NON PARTICIPATION

The scaling methods applied in this paper need a binary input (yes or no) whereas memberstates also have two other options (abstaining or being absent from the vote). It is common toassume that abstentions are purposeful acts, and yet in applied analysis of roll -call votes theinformation provided by the mere fact of not seeing a vote is commonly thrown away, by codingabstentions as missing variables. Thus, the failure to model the process that leads to abstentionsdeprives scholars of information that they could use to improve inferences about ideal points (Rosasand Shomer, 2008).

In this paper I have coded abstention and absence from the votes differently depending onthe voting rule applicable. When the rule was qualified ma jority both abstentions and absences werecoded as negative votes, because they do not contribute to the number of votes required foradopting the decision (see Hix, 2001: 669). Conversely, I have coded both abstentions and absencesas positive votes when the voting rule was unanimity, because this rule just requires that no memberstates votes against the decision. Curiously enough, it is easier sometimes to adopt a decision byunanimuty than by qualified majority (Nugent). Only the absences of Romania and Bulgaria during2006 were coded as a missing votes.

FOUR MULTIDIMENSIONAL SCALING METHODS

In this paper I apply four different unfolding techniques in order to summarize theinformation from 339 votes into a simple ideological map of the member states. The unfoldingmodel is a geometric model for preference and choice. It locates individuals and alternatives aspoints in a joint space, and it says that an individual will pick the alternative in the choice set closestto its ideal point. Unfolding originated in the work of Coombs (1964) and his students. It is perhapsthe dominant model in both scaling of preferential choice and attitude scaling (Everitt and Howell,2005).

The four alternative unfolding techniques that I have applied are metric scaling, W -NOMINATE, Heckman-Snyder, and optimal classification. All of these routines estimate idealpoints within a multi-dimensional policy space to predict legislators’ votes. I have estimated themember state coordinates for two dimensions because they are easil y represented into an


ideological map and because that is common practice among models of voting both in the EuropeanParliament and the Council of the EU.

The first simple metric scaling method is described in Poole (1984; 1990; Poole andRosenthal, 1997). The procedure is very robust and converges very rapidly to a minimum from arandom or non random starting configuration. It is particularly useful for the analysis of large datasets with missing entries (in our case , the voting records for Romania and Bulgaria during 2006).

The second method is NOMINATE, Poole and Rosenthal’s (1997) multidimensional metricunfolding technique. I use the static version of this algorithm, W -NOMINATE, which is designedto run in personal computers. It differs from the dynamic version D -NOMINATE in that it uses aslightly different deterministic utility function and that it constrains legislators and roll callmidpoins to an n-dimensional hypersphere of radius one.

W-NOMINATE is a scaling procedure that performs parametric unfolding of binary choicedata. Given a matrix of binary choices by individuals (for example, Yes or No) over a series ofParliamentary votes, W-NOMINATE produces a configuration of legislators and outcome pointsfor the Yea and Nay alternatives for each roll call using a probabilistic model of choice. It isdiscussed in detail in Poole (2005), Poole and Rosenthal (1997; 1991; 1985).

The third measure comes from Heckman and Snyder (1997) who analyze roll call data usinga statistical method similar to NOMINATE. The main differences between Heckman -Snyder andNOMINATE are the parameterizations of the error terms and the utility functions of the legislators.NOMINATE assumes that error terms follow a logistic function while Heckman and Snyderassume a uniform distribution. NOMINATE uses normally distributed utility functions whileHeckman and Snyder employ quadratic utility functions.

The fourth technique is optimal classification, developed by Poole (2000b). OptimalClassification (OC) is a scaling procedure that performs non -parametric unfolding of binary choicedata. Given a matrix of binary choices by individuals (for example, Yes or No) over a series ofParliamentary votes, OC produces a configuration of legislators and cutting lines/planes thatmaximize the correct classification of the choices. It is discussed in detail in Poole (Poole, 2000b).The geometry of the roll call voting problem upon which Optimal Classification is based is coveredin the first three chapters of Poole (2005).

This is a non-parametric methodology similar in structure to NOMINATE. The scalingmethod employs the same spatial model used by Poole and Rosenthal (1997) in their NOMINATEprocedure and the scaling method is “NOMINATE -like” in structure. However, rather thanmaximizing the likelihood of the legislators’ choices, the scaling method developed belowmaximizes correct classification of the legislators’ choices. The scaling method is nonparametricbecause no assumptions are made about the probability distribution of the legislators’ errors inmaking choices. The only assumptions made are that the choice space is Euclidean and thatindividuals making choices behave as if they utilize symmetric, single -peaked preferences.

RESULTS

The ideological coordinates of the 27 member states are shown inTable 2 in the appendix. They have been calculated using the W -NOMINATE and the

Optimal Classification computer programmes available at http://voteview.ucsd.edu/dwnl.htm. Themetric scaling and the Heckman-Snider coordinates are automatically rotated to best match the W -NOMINATE coordinates. The election of two -dimensional model is also common in the analysis ofcoalition formation in the European Parliament (Hix and Lord, 1997; Hix, 1999; Noury, 2002;Gabel and Hix, 2002; Gabel and Hix, 2002; Hix et al., 2006).

http://voteview.ucsd.edu/dwnl.htm


BG

DE

FR

IT

RO

UK

-1

-0.8

-0.6

-0.4

-0.2

0

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-0.4 -0.2 0 0.2 0.4 0.6 0.8 1

Dimension 1

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BEBGCZDKDEEEIEGRESFRITCYLVLTLUHUMTNEATPLPTROSISKFISEUK

Figure 1. Two-dimensional ideological map of the Council, 2006 -09 (Metric scaling)

Figure 1 shows the two-dimensional ideological map of the 27 member states of the EUapplying a metric scaling procedure to the codecision votes taken between January 2006 andFebruary 2009. Romania and Bulgaria are clearly at the centre of the political spectrum, which is inline with the fact that both countries have generally voted with the majority. In fact, Bulgariaalways voted with the majority and Romania voted against only in a single occasion, in 2008,related to pesticides. The positions of other major member states have also been highlighted, withthe UK and Germany on opposed extremes and France and Italy in more central positions.


BG

DE FR

IT

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UK

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Dimension 1

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BEBGCZDKDEEEIEGRESFRITCYLVLTLUHUMTNEATPLROPTSISKFISEUK

Figure 2. Two-dimensional ideological map of the Counci l, 2006-09 (W-NOMINATE

Figure 2 presents the same ideological map calculated usin the W -NOMINATE scalingtechnique. The results are not so clear in this case because many member states have coordinates onthe extremes of the first dimension. Recall one of the simplifications of W -NOMINATE withrespect to the dynamic version D -NOMINATE is that the former constrains the coordinates to fallbetween -1 and 1. The innacuracy of the resulting coordinates is probably due to the scarcity ofcontested votes in the dataset (78) and the lopsided nature of the majority of those votes (even incontested decisions, very few member states vote against the majority).


BG

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Figure 3. Two-dimensional ideological map of the Council, 2006-09 (Heckman-Snyder)

Figure 3 shows the ideological map of the Council when we apply the Heckman -Snydermodel. The results are clearer than in the case of W -NOMINATE because this method is morecompatible with lopsided votes. In fact, it has been applied to a subsample of lopsided votes in theUS Congress in order to control for party power, under the assumption that voting on lopsided voteswill be less influenced by political parties, which are less likely to spend their resourc es on thosekinds of votes (Snyder Jr and Groseclose, 2000). Again, both Romania and Bulgaria appear at thecentre of the political spectrum.


DE

RO

BG, FR, IT

UK

-0.4

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Figure 4. Two-dimensional ideological map of the Council, 2006 -09 (Optimal classification)

Finally, Figure 4 shows the result of applying the non -parametric optimal classificationmethod to the same sample of codecision votes. The results are rather clear, showing that thismethod is rather robust even when there is a high proportion of lopsided votes. Again, Romania andBulgaria appear at the centre of the political spectrum and Germany and the UK on opposingextremes. France and Italy are also rather centrist, sharing preferences with Bulgaria.

CONCLUSIONS

Scaling method techniques such as NOMINATE and optimal classification have becomeincreasingly popular for estimating legislators’ ideal points and, subsequently, for makinginferences about the policy space of a given legislative body (Poole and Rosenthal, 1997;Morgenstern, 2004; Rosenthal and Voeten, 2004; Hix et al., 2007) . However, at the same time thatthese methods are being applied to more and more empirical data sets, it is also becomingincreasingly apparent that these methods suffer from both statistica l and theoretical deficiencies(Clinton et al., 2004; Lewis and Poole, 2004) .

The main criticism is that standard errors are not reported when generating ideal pointestimates in either NOMINATE or optimal classification, which makes it impossible to drawconclusions about the variance around the estimates (Hagemann, 2007). Consequently, a concernarises regarding whether the estimates are really consistent and fully reliable (Poole and Rosenthal,1997; Lewis and Poole, 2004; Jackman, 2001). Thus, s trictly speaking, optimal classification is nota statistical model, although standard errors can be estimated via bootstrapping for the legislatorcoordinates (Lewis and Poole, 2004; Poole, 2000a) . However, a recently developed Bayesian model


seems more attractive because it includes not only estimates for both actors’ ideal points, but alsothe standard errors around the estimates (Hagemann, 2007).

In this case, given the reduced size of the dataset (only 78 contested codecision votesbetween 2006 and February 2009), it would be virtually impossible to obtain significant differencesin the coordinates that would allow us to make inferences. Still, the scaling method techniquespresented in this paper can provide important insights into the underlying structures and into actors’preferences in the Council, such as the centrist nature of Romania and Bulgaria during their firsttwo years of membership in the EU.We should treat the results in this paper are merely descriptive. But it is not just a matter of time toobtain more meaningful results. The reason is that explicit votes in the EU understate the extent ofreal conflict of intrerest among EU member states. The reason is that most real negotiations anddecisions in the Council are taken informally behind closed doors, just to be rubberstamped by theCouncil in public session at a later date. In the explicit votes, governments on the minority sideoften prefer to vote with the majority and avoid the shame of being outvoted. Thus, if we want toobtain a really meaningful dataset, Council transparency shoud go deeper than formal voting. Untiltransparency extends to earlier stages of the procedure, EU scholars will suffer from scarcity ofmeaningful data vis-a-vis their American counterparts.

APPENDIX

Table 2. Member state metric scaling, W -NOMINATE, Heckman Snyder and optimalclassification coordinates, 2006-2009

Metric scaling W-Nominate Heckman-Snyder Optimal classification

Belgium-0.098 0.654 -1.000 0.016 -0.030 0.212 -0.140 0.141

Bulgaria-0.103 0.076 0.123 -0.090 -0.105 0.090 0.054 0.005

Czech Rep.-0.065 -0.210 -1.000 0.000 -0.164 -0.197 -0.084 -0.205

Denmark0.802 -0.597 1.000 0.000 0.929 -0.370 0.312 -0.066

Germany-0.246 -0.510 -1.000 -0.023 -0.224 -0.368 -0.154 -0.245

Estonia0.008 -0.081 0.998 0.036 -0.067 0.009 0.120 -0.056

Ireland0.385 0.267 1.000 0.000 0.534 0.021 0.268 0.116

Greece0.013 0.108 0.576 -0.066 -0.097 0.088 -0.108 0.207

Spain-0.003 0.217 0.180 0.082 -0.089 0.116 -0.108 0.207

France-0.039 -0.020 0.763 -0.024 -0.096 -0.005 0.054 0.005

Italy-0.111 -0.246 -0.997 0.075 -0.091 0.033 0.054 0.005

Cyprus-0.022 0.123 0.372 -0.053 -0.088 0.107 -0.108 0.207

Latvia0.007 -0.079 0.998 0.040 -0.067 0.009 0.120 -0.056

Lithuania-0.237 0.408 -1.000 0.020 -0.112 0.134 -0.160 0.235

Luxembourg0.044 -0.765 -1.000 0.024 -0.109 -0.369 -0.066 -0.277

Hungary-0.026 0.342 0.208 0.003 -0.048 0.195 -0.110 0.231


Malta-0.272 0.186 -0.911 -0.004 -0.188 0.013 -0.184 0.000

Netherlands0.102 -0.430 1.000 0.000 -0.019 0.097 0.054 0.005

Austria-0.266 -0.175 1.000 0.000 -0.234 -0.272 -0.162 -0.238

Poland-0.134 0.046 -0.997 0.073 -0.135 0.016 0.054 0.005

Portugal-0.130 0.478 -0.611 -0.002 -0.059 0.303 -0.147 0.251

Romania-0.083 0.107 0.648 0.091 -0.057 0.072 0.042 0.124

Slovenia-0.036 0.000 0.998 0.003 -0.082 0.027 0.042 0.000

Slovakia-0.100 0.035 0.208 0.056 -0.132 -0.005 0.054 0.005

Finland0.036 -0.019 1.000 0.000 -0.047 0.018 0.054 0.005

Sweden-0.031 -0.686 0.181 -0.016 0.005 0.158 0.054 0.005

UK0.605 0.770 1.000 0.000 0.875 -0.133 0.558 0.445

REFERENCES

1. Clinton, Joshua, Simon Jackman and Douglas Rivers (2004) 'The statistical analysis ofroll call data', American Political Science Review 98(02): 355-70.

2. Coombs, Clyde H. (1964) A Theory of Data. New York: Wiley.

3. Everitt, Brian and David C. Howell (2005) Encyclopedia of statistics in behavioralscience. John Wiley & Sons.

4. Gabel, Matthew J. and Simon Hix (2002) 'Defining the EU political space: an empiricalstudy of the European elections manifestos, 1979 -1999', Comparative Political Studies35(8): 934-64.

5. Hagemann, Sara (2007) 'Applying Ideal Point Estimation Methods to the Council ofMinisters', European Union Politics 8(2): 279-96.

6. Hayes-Renshaw, Fiona, Wim Aken Van and Helen Wallace (2006) 'When and why theEU Council of Ministers votes explicitly' , Journal of Common Market Studies 44(1):161--21.

7. Heckman, James J. and James M. Snyder (1997) 'Linear Probability Models of theDemand for Attributes with an Empirical Application to Estimating the Preferences ofLegislators', Rand Journal of Economics 28(0): 142-89.

8. Hix, Simon (1999) 'Dimensions and alignments in European Union politics: cognitiveconstraints and partisan responses' , European Journal of Political Research 35(1): 69-106.

9. Hix, Simon (2001) 'Legislat ive behaviour and party competition in the EP: Anapplication of Nominate to the EU' , Journal of Common Market Studies 39(4): 663-88.

10. Hix, Simon and Christopher Lord (1997) Political parties in the European Union .Basingstoke: Macmillan.

11. Hix, Simon, Abdul Noury and Gerard Roland (2006) 'Dimensions of politics in theEuropean Parliament', American Journal of Political Science 50(2): 494-511.


12. Hix, Simon, Abdul Noury and Gérard Roland (2007) Democratic politics in theEuropean Parliament. Cambridge: Cambridge University Press.

13. Jackman, Simon (2001) 'Multidimensional analysis of roll call data via Bayesiansimulation: identification, estimation, inference and model checking' , Political Analysis9(3): 227-41.

14. Lewis, Jeffrey B. and Keith T. Poole (2004) 'Measuring bias and uncertainty in idealpoint estimates via the parametric bootstrap' , Political Analysis 12(2): 105-27.

15. Mattila, Mikko and Jan-Erik Lane (2001) 'Why unanimity in the council? A roll callanalysis of council voting' , European Union Politics 2(1): 31-52.

16. Morgenstern, Scott (2004) Patterns of legislative politics: Roll -call voting in LatinAmerica and the United States . Cambridge: Cambridge University Press.

17. Noury, Abdul G. (2002) 'Ideology, nationality and Euro -parliamentarians', EuropeanUnion Politics 3(1): 33-58.

18. Poole, Keith T. and Howard Rosenthal (1985) 'A spatial model for legislative roll callanalysis', American Journal of Political Science 29(2): 357-84.

19. Poole, Keith T. and Howard Rosenthal (1991) 'Patterns of congressional voting' ,American Journal of Political Science 35(1): 228-78.

20. Poole, Keith T. (1984) 'Least squares metric, unidimensional unfolding' , Psychometrika49(3): 311-23.

21. Poole, Keith T. (1990) 'Least squares metric, unidimensional scaling of multivariatelinear models', Psychometrika 55(1): 123-49.

22. Poole, Keith T. (2000a) 'The geometry of multidimensional quadratic utility in modelsof parliamentary roll call voting' , Graduate School of Industrial Administration,Carnegie Mellon University (24 April).

23. Poole, Keith T. (2000b) 'Nonparametric Unfolding of Binary Choice Data' , PoliticalAnalysis 8(2): 211-37.

24. Poole, Keith T. (2005) Spatial Models of Parliamentary Voting . Cambridge: CambridgeUniversity Press.

25. Poole, Keith T. and Howard Rosenthal (1997) Congress: A Political-Economic Historyof Roll Call Voting. Oxford: Oxford University Press.

26. Rosas, Guillermo and Yael Shomer (2008) 'Non -ignorable abstentions in roll -call dataanalysis', Paper Presented at the Annual Meeting of the MPSA Annual NationalConference, Palmer House Hotel, Hi lton, Chicago, IL, Apr 03 .

27. Rosenthal, Howard and Erik Voeten (2004) 'Analyzing Roll Calls with Perfect SpatialVoting: France 1946-1958', American Journal of Political Science 48(3): 620-32.

28. Snyder Jr, James M. and Tim Groseclose (2000) 'Estimating party i nfluence incongressional roll-call voting', American Journal of Political Science 44(2): 193-211.

29. Thomson, Robert, Jovanka Boerefijn and Frans Stokman (2004) 'Actor alignments inEuropean Union decision making' , European Journal of Political Research 43(2): 237-62.


CONSIDERATIONS ON PRE-EMPLOYMENT STAGE SPECIFICPERSONNEL ADMINISTRATION

Lecturer Ph.D. Alunica MORARIU“Stefan cel Mare” University of Suceava, Romania

Faculty of Economic Sciences and Public [email protected]

Professor Ph.D. Grigore BELOSTECINICAcademy of Economic Studies of Moldova , Chisinau

[email protected] Ph.D. Ionel BOSTAN

“Stefan cel Mare” Univers ity of Suceava, RomaniaFaculty of Economic Sciences and Public Administration

[email protected]

Abstract:Even if we assist to a decrease of the activity volume regarding the recruitment, its importanc e and the staff

selection, stage specific to the MRU, coming immediately after the recruitment, will increase, so much the more as, theobtaining of organizational performance in crisis times requires human resources which are capable to integratethemselves in the strategic activity meant to put an end to the crisis. We are experiencing a period in which, sometimes,the experience is preferred rather than the diploma or the honesty instead of competence even if the systematicapplication of the scientific knowledge to the production of goods enhanced very much the value of the education, of theeconomic and technical education, as well as of the training at the workplace because the knowledge increase has beenembodied in people – in scientists, university teachers, technicians, administrators and other persons who contribute tothe production.

Key-words: Human resources; recruitment; selection; education; economic crisis; unemployment

Journal of Economic Literature Classification System: E24 - Employment; Unemployment; Wages;Intergenerational Income Distribution; Aggregate Human Capital ; J24 - Human Capital; Skills; Occupational Choice;Labor Productivity; R23 - Regional Migration; Regional Labor Markets.

1. INTRODUCTION

The development in the manage ment of human resources in the recent years in Romania, inconcordance with the international practices was inevitable both by the national human resourcedevelopment and from the perspective of the organizational performances, especially since thenumber companies with foreign capital and know -how increased on the Romanian market. At thesame time with the increasing competition, for achieving sustained organizational performance andaccessing or maintaining the market leadership status is directly requir ed the existence of a teamwell managed by a department of human resources both creatively and strategically.

There were remarkable changes in Romania in the recent years, particularly in relation to thepractices and procedures of human resource managemen t (HRM). Progress has been made and theyare important even at the organizational culture level.

The great international companies brought in Romania key concepts for managing andimproving the human resources. The domestic companies are now more open to t he practicesalready established in developed countries, thus making to a large extent the shift from personnelmanagement to human resources management (1).

The place of human resources in an organization depends on the specialty, managementexperience, perception and perspective of the organization leader regarding the importance of HRfunctions (2). Nowadays, we use very often the term strategic partnership between the company andthe human resources function. This phrase is used not to highlight the ind ependent identity of thedivision of HR but to highlight the changing role or the increasing importance of the humanresources function in the organization.

The installation of the economic crisis, however, is the opportunity for the specializedcompartments in human resources management and their experts to prove their major role, the level

[email protected]

[email protected]

[email protected]


of development in the field but also their creativity and strategic value. From another perspective,we can see that in this period, the HR department is the victim or the bearer of bad news crisis, asthese attributes are plastically conferred to it.

It could be a victim because it is the first on the list among the departments in which weoperate expense reductions, with direct impact on both staff and on the organizat ion, being alreadyenshrined as the department with the highest costs. Bearer of bad news because it is the one thatinforms the staff on cost reduction as it concerns: wage cuts, elimination of premiums, indemnities,not paying overtime, reducing or elimi nating spending on staff training and until the unfortunateand inevitable layoffs of the organizational crisis period, this time, under the impact of the globaleconomic crisis.

2. PREMISES OF THE INCREASE OF THE ROLE IN CURRENT LABOURMARKET RECRUITMENT

According to statistics of the National Agency for Employment (NAE) (3), because of thecrisis, the private companies in Romania have fired approximately 200,000 people from September2008 so far (4) and the state has reduced the staff number by about 2 ,300 budgetaries, of almost 100times less, giving rise to a great controversy between public and private. In the same period, theprivate sector was marked by reductions in salaries.

On one hand, the private companies have operated in staff restructuring only after theyreduced various company-wide material costs and on the other hand, the existence of sources offunding in the state, accessible by various means at hand, (5) allowed it to defer and not startrestructuring the state sector. If by mid -2009, personnel costs in the budgetary sector registered anincrease of 12%, in the private sector, the number of unemployed has increased alarminglycompared to the previous year end when one in three unemployed came from the state (6).

The growing of the unemployment index leads to reduced supply of jobs in the first half of2009, with up to 50%.

All this contributes to the reduction of the level of activity regarding the recruitment of 40 -50% over the same period last year. (7)

While witnessing the lower volum e of recruitment activity, its importance and the staffselection, stage specific to HRM, immediately consecutive to the recruitment, will increase,especially since the obtaining of the organizational performance during crisis requires humanresources capable to integrate themselves into business strategy to exit from the impasse.

3. RECRUITMENT AND SELECTION, "KING AND QUEEN" ON THE CHESSBOARD OF THE LABOUR MARKET IN 2009

The human resources constitute a decisive category of organizational resources, t heir qualityand giving added value through the effective use of other types of resources: financial, technical,commercial, etc.

Among the objectives of human resource management also lies the forecast and preparationof quantitative and qualitative devel opments affecting the human resources on the medium and longterm, so that they can be tailored to the needs of the organization (8).

Among the recruitment and selection procedures, the organizations can attract, select andretain the valuable candidates b y managing talent, optimizing the multitude of information andrelationships that make up complex recruitment projects, leading these processes effectively andaccurately controlling time planning offered to these activities.

The diminish of the number of vacancies on the Romanian labour market (9) in the contextof market instability and companies efforts to reduce costs, results in the increase of approximately50 percent of online registration for jobs, according to representatives of the major recruitin g sitesin Romania. A good tender points, usually between 100 and 700 resumes, while job competitionrecords surpasses 1,000 applicants (10).


Most viewed jobs during the crisis are in the areas of sales, trading and customer service,according to the statistics of the most visited sites of careers in the local online (11). Jobs are alsosought in areas such as finance, accounting, management, consulting or engineering. Mostapplications are recorded for bids that do not require experience, education or spec ific skills,according to a source of Myjob.ro (12).

"Most companies have frozen hiring, for prudential reasons but also for economic reasons.Firms resort to internal promotion, streamlining and reducing costs for this process. This does notmean, however, that in this period there are no longer hiring. (13)"

According to a recent study of Myjob.ro, 15.09% of the respondents had recently accepted ajob below their level of training, because of the economic crisis. Moreover, according to eJobs.ro,the situation on the job market brings among the requirements of candidates, the stability of thatposition which is to be occupied, the possibility of the organization to provide a permanent jobcontract. (14)

As for recruitment and selection of staff, the recomm endation plays a major role. Efficiencyis given precisely by the grounds that the employer who makes a recommendation, knowing thatperson, guarantees for the recommended one. The more so because, for most employers, whointeract in the labor market today , there is the dilemma: "What do we employ in time of crisis: thecompetence or the honesty?". In developed countries, for a candidate there is a strong emphasis onwhat experience and competences he has. In Romania, one of the main concerns of the recruit ing, inview of applying the personalized selection procedures is to find honest people. Thus, in practice,often are dropped out of the skills expected of candidates, in favor of honesty (15).

Other specialist practitioners see the situation similarly or differently (16):a) in the recruitment and selection, stays the job description. Criteria for which the selection

is made are: personality, technical skills, competence, professional experience. The most importantrole in the final selection decision is occupied by the skills. The main task of the interviewers is toensure that they are talking with a professional, whose expertise has been recognized.

b) The job for which the recruitment is organized is in the spotlight of these specificprocedures. For some jobs the experience or a certain training are very necessary, and for others thepotential and the ability to develop the candidate are more important. Whatever the type of job,”soft skills "and compatibility with values, the organizational culture is considered from the verybeginning.

c) At the basis of selection and recruitment is a system of key -competences specific to eachjob. Competence requires, in the opinion of human resource specialists, both theoretical knowledgeand practical skills of the candidate and behaviors that lead to performance: ability and interest inlifelong learning, initiative, commitment, dynamism, along with team spirit.

From the perspective of employees or potential employees, the applicants at a job, almost85% of Romanians, in a sampling of myjob.ro, do not think that a diploma of a state university canhelp them get a job easier.

At the European level, race, ethnic origin, physical disability, sexual orientation, but alsoage, dress and appearance may constitute "weak po ints" in the CVs of employees, on the oldcontinent.

According to the latest European Union survey, 63% of employers in the EU Member Statesare further influenced by physical appearance of the candidates and over 50% put a great emphasison the age of the future employee.

Race, ethnicity and physical disability may be " real problems "for 46% of managers in theEU. Furthermore, over 20% of employers discriminate when it comes to employment, on gender orsexual orientation.

In Romania, only 57% of Romanian employers are considering to give minorities equalopportunities, while other countries such as Cyprus, Greece and Denmark have achieved scoresabove 70 percent. (17)


In a short case study we present a company which launches a recruitment ad for the posi tionof Assistant Manager. A recent graduate from a university with an economic profile and a womanaged 47 years, with experience in a similar position depose their application for this job.

Note that the recruitment ad did not contain any indication on t he gender or age. Howeverspecialists of Human Resources Department fully agreed on the fact that these two persons are notsuitable to the vacant job (not communicating it directly to the two „ not suitable” candidates ).

The general opinion of the compa ny is that for the position of Assistant Manager only "fits"a female person aged less than 35 years. Thus, the commitment is made more according tostereotypes of the company, than on the candidates' actual skills (18).

4. CONCLUSIONS

The increase, in some cases by over 50% of the number of applicants for the same jobconfers to the recruitment and selection an increased role in the labor market or in Romanianorganizations with direct impact on the organizational staff and indirectly on the results of p ublic orprivate entities that have effects on the Romanian community, in all or in part. Although leaded bythe desire to make savings, by the desire to produce maximum efficiency and performance,companies prefer to be guided by internal recruitment, emp loyment based on external recruitmentare continuating.

If according to applicants to a job, almost 85% of the Romanian people do not think that adiploma of a state university can help them get a job easier, it means that the facility to get a job isconferred by a diploma which is alternative to state university, by life experience, practical workexperience, technical skills, competence, „soft skills” competences, potential, capacity ofdevelopment, compatibility with the organizational culture, etc.?

On the whole, all these can help achieve the objective of getting the best job that someonemay want. You must remember, however, that any further increase in personal income in the lasthundred years and more, is determined by the prosperity of the country, by the increase in physicalcapital per worker, by the expansion of scientific and technical knowledge which contribute to theincrease of labour productivity and of other contributions to production. The systematic applicationof scientific knowledge in the production of goods has greatly increased the value of education,economic and technical school -style and the occupational training because the knowledge increaseembodied in people – in scientists, academics, technicians, administrators and other cont ributors tothe production (19) - (20).

It is desirable to achieve good performance by sizing human resources so that, regardless ofthe state of economic environment (which may be normal, slightly inflationary or of gallopinginflation), in the earnings report (earnings + offset) / debt -"total debt" the former to be higher or thespeed of growth rate of return to be higher than the rhythm of the growth rate of total costs (21).

NOTES

(1) The controversy among experts about the differences between personnel management and human resourcemanagement is not a novelty.

(2) Human Resources(3) http://www.zf.ro/eveniment/unde-a-lovit-criza-firmele-private-au-dat-afara-200-000-de-oameni-statul-doar-2-

300-4726368/ - the 7th of August 2009(4) We have in view the moment August 2009.(5) 1We refer to: international and national loans, adding fees and taxes or reducing or eliminating some

expenses(6) According to the same source, the wage costs of the 1.4 million budgetaries raises to an average net salary of

350 euros, about 11 billion euros.(7) http://business.rol.ro/content/view/84435/2/ - the 6th of August 2009.(8) Gavrilă Tatiana, Lefter Viorel – Managementul general al firmei, Editura Economică, Ediţia a II -a, Bucureşti,

2004, p. 190.(9) There are areas where the number of notices published in the latest period fell by over 50%, especially in: real

estate, banking, finance / accounting, engineering, automotive industry, which are the most affected areasduring this period, according eJobs.ro.

http://www.zf.ro/eveniment/unde-a-lovit-criza-firmele-private-au-dat-afara-200-000-de-oameni-statul-doar-2-

http://business.rol.ro/content/view/84435/2/


(10) According to Myjob.ro and eJobs.ro. the biggest increase was recorded on BestJobs.ro site, where the numberof applications increased by more than 278.5% in the first three months of the year, compared to the sameperiod of the previous year.

(11) eJobs.ro, BestJobs.ro, Myjob.ro, etc.(12) http://www.capital.ro/articol/sute -de-concurenti-pe-un-job-pe-site-urile-de-recrutare-118897.html - the 24th

of April 2009(13) According to one of the largest specialist recruitment companies on the market ,Lugera & Makler.(14) http://www.capital.ro/articol/stabilitatea-jobului-a-devenit-un-criteriu-esential-118913.html - the 15th of June

2009(15) http://www.bloombiz.ro/cariere/ce -angajam-pe-timp-de-criza-competenta-sau-onestitatea - the 1st of August

2009(16) http://www.capital.ro/articol/experienta -bate-diploma-la-recrutarea-candidatilor-123057.html - the 8th of

August 2009(17) http://www.evz.ro/articole/detalii -articol/861059/Managerii -europeni-fac-discriminari-la-angajare/ - the 28th

of July 2009(18) Human Resources Magazine - electronic newsletter published by Rentrop & Straton - Group Publishing and

Business Consulting - July 30, 2009.(19) Relatively low or declining production in Romania in 2009, according to statistical indicators INSSE,

www.insse.ro.(20) Becker S. Gary, Capitalul uman – o analiză teoretică şi empirică cu referire specială la educaţie, Editura All,

Bucureşti, 1997, p. 25.(21) Radu Ioan & colectiv, Simulări manageriale – Teorie şi practică. Editura Universitară, Bucureşti, 2005, p.

152-153.

BIBLIOGRAPHY

1. Becker S. Gary (1997). Capitalul uman – o analiză teoretică şi empirică cu referire specialăla educaţie, Editura All, Bucureşti.

2. Bostan Ionel (2006). Managementul recompensei , Editura Universităţii, Suceava.3. Gavrilă Tatiana, Lefter V iorel (2004). Managementul general al firmei , Editura Economică,

Ediţia a II-a, Bucureşti.4. Radu Ioan & colectiv (2005). Simulări manageriale – Teorie şi practică. Editura

Universitară, Bucureşti,.5. Revista de Resurse Umane (30 iulie 2009). newsletter electr onic editat de Rentrop & Straton

- Grup de Editură şi Consultanţă în Afaceri.6. http://www.BestJobs.ro7. http://www.bloombiz.ro/cariere/ce -angajam-pe-timp-de-criza-competenta-sau-onestitatea8. http://business.rol.ro/content/view/84435/2/9. http://www.capital.ro/articol/sute -de-concurenti-pe-un-job-pe-site-urile-de-recrutare-

118897.html10. http://www.capital.ro/articol/stabilitatea -jobului-a-devenit-un-criteriu-esential-118913.html11. http://www.capital.ro/articol/experienta -bate-diploma-la-recrutarea-candidatilor-

123057.html12. http://www.evz.ro/articole/detalii -articol/861059/Managerii -europeni-fac-discriminari-la-

angajare/13. http://www.insse.ro14. http://www.eJobs.ro15. http://www.Myjob.ro16. http://www.zf.ro/eveniment/unde -a-lovit-criza-firmele-private-au-dat-afara-200-000-de-

oameni-statul-doar-2-300-4726368/

http://www.capital.ro/articol/sute-de-concurenti-pe-un-job-pe-site-urile-de-recrutare-118897.html

http://www.capital.ro/articol/stabilitatea-jobului-a-devenit-un-criteriu-esential-118913.html

http://www.bloombiz.ro/cariere/ce-angajam-pe-timp-de-criza-competenta-sau-onestitatea

http://www.capital.ro/articol/experienta-bate-diploma-la-recrutarea-candidatilor-123057.html

http://www.evz.ro/articole/detalii-articol/861059/Managerii-europeni-fac-discriminari-la-angajare/

www.insse.ro

http://www.BestJobs.ro

http://www.bloombiz.ro/cariere/ce-angajam-pe-timp-de-criza-competenta-sau-onestitatea

http://business.rol.ro/content/view/84435/2/

http://www.capital.ro/articol/sute-de-concurenti-pe-un-job-pe-site-urile-de-recrutare-

http://www.capital.ro/articol/stabilitatea-jobului-a-devenit-un-criteriu-esential-118913.html

http://www.capital.ro/articol/experienta-bate-diploma-la-recrutarea-candidatilor-

http://www.evz.ro/articole/detalii-articol/861059/Managerii-europeni-fac-discriminari-la-

http://www.insse.ro

http://www.eJobs.ro

http://www.Myjob.ro

http://www.zf.ro/eveniment/unde-a-lovit-criza-firmele-private-au-dat-afara-200-000-de-


THE DISTINCTION BETWEEN DECENTRALIZATION AND DECONCENTRATION OFPUBLIC SERVICES

Lecturer Ph.D. Student Irina BILOUSEAC,,Ştefan cel Mare” University of Suceava , RomaniaFaculty of Economics and Public Administration

[email protected] Assistant Petronela ZAHARIA

,,Ştefan cel Mare” University of Suceava , RomaniaFaculty of Economics and Public Administration

[email protected]

Abstract:Given the variety and diversity of social needs coming fro m the whole human community, public administration

aims to ensure the achievement of these needs and requirements of general interest by providing direct public services.Seen as a way of meeting the practical needs of the public, we can appreciate that p ublic service is the foundation ofgovernment activity, in fact the rationale of the organization and functioning of administrative authorities and publicinstitutions. Moreover, as the degree of satisfaction of the needs of public interest is reflected in the quality of servicesavailable to the community, it is undoubtedly necessary to give special attention to the way in which public services areorganized either decentralized or deconcentrated.

Therefore, starting from the purpose of organizing publi c services namely meeting the general interests of thecommunity, this paper aims to analyze the main elements which are at the base of the distinction between decentralizationand deconcentration, as ways of organizing public services, given that in the absence of clear demarcations of differencesbetween these two principles, not few times there are many confusions in their implementation.

Keywords: public administration, decentralization, deconcentration, public service, general interest, social needs

JEL Classification: H83

INTRODUCTION

Being called upon to satisfy the needs of society, which suffers frequent changes in time andspace, public administration has created structures which would act concretely to fulfill thismission. This is about public services that have a unique role in the daily lives of each of us, giventhat their organization and functioning decisively influence the living standards of people. Theimportance of public services is greater for society as long as the state, as well as its components,villages, cities and counties appear as indispensable tools [5, p. 358], designed to ensure its citizensan adequate level of living, to ensure the public good.

The important issue which is of interest for the substance of the problem is the distinctionbetween decentralization and deconcentration of public services, which are two distinct legalrealities.

Being a very new topic, which leads to extensive discussion, the issue of decentralizationand deconcentration of public service s should be subject of debate especially in the context ofwhich the implementation of these two principles regards the needs of a community , be it nationalor local, the fulfillment of their needs being the quintessence of public administration.

The correct understanding and accurate delineation between decentralization anddeconcentration of public services is of special importance especially from a practical point of view,often appearing uncertainties in applying these two basic principles of public administration in ourcountry.

In such context, the discussion of the issue of decentralization and deconcentration of publicservices allows us to highlight the fact that some public services are the responsibility of the state,and others are the responsibility of public authorities or local councils, to meet the needs andgeneral necessities of the administrative-territorial units.

[email protected]

[email protected]


CONSTITUTIONAL PROVISIONS APPLICABLE TO PUBLIC SERVICES

Before proceeding to identify the constitutional rules applicabl e in this matter, it isnecessary to present the content and the importance of the concept of public service as a centralelement of public administration.

Seen as a way of achieving human needs of public policy, the concept of public service is ofrecent date, the analysis of its content and significance being of actuality in the field ofadministrative science, the more so as it is considered as the foundation of public administrationactivity, the reason for organizing and functioning of public institut ions and administrativeauthorities [1, p. 127].

Examining the literature, we note that, in an attempt to define the notion of public service,two meanings are obvious: a material (functional) one and an organic one.

In a material or functional sense, by the concept of public service we understand anyactivity of general interest performed by the administration . Therefore we keep in mind that in thisfirst sense, the mission of the public service is to satisfy the general interest, common to the entirecommunity, this being precisely the purpose of public administration.

In the organic sense, public service is a set of agents and means, that a public person or aprivate agent authorized by a public person use them to meet the needs of the public . [10, p. 226]

Seeking a unified definition of public service, we can keep in mind that it represents theactivity organized or authorized by an administrative body, which aims to meet the needs andnecessities of the public .

Once the concept of public service is clarified, in the following pages we intend to identifythe constitutional provisions applicable to public services [10, p. 227].

Thus, we distinguish the provisions governing the general principles, which the Basic Lawsituates at the basis of the functioning of all public authorities, and hence at the base of thoseproviding public services. By way of example, we can mention the principle of equality before thelaw and public authorities, without privileges a nd discrimination (art. 16 paragraph 1).

Then, we can identify provisions enshrining the principles underlying the organization andfunctioning of public administration and general public services, specifically. In this respect, theRomanian Constitution states in art. 120 the basic principles in the field, showing that theadministration of the territorial -administrative units is based on the principles of decentralization,local autonomy, and deconcentration of public services.

In the same order of ideas, there are constitutional provisions which mention the publicauthorities which have competence in providing public services or exercising certain reports withthe authorities providing public services. For example, according to art. 122 para graph 1 of theConstitution, the county council is the a uthority of public administration for coordinatinggovernment activity at municipal and town level in order to meet the public needs of the county, or,according to art. 123 paragraph 1, the prefect is the representative of local government and leads thedeconcentrated public services of ministries and other bodies of central public administration interritorial-administrative units.

Another category of provisions is contained in Title II, Chapter II of the Constitution whichdeals with the fundamental rights and freedoms of citizens, mentioning at the same time the publicservices involved. Thus, for example, the right to information, regulated by art. 31, is provided bythe media, public and private, or the right to health, regulated by art. 34, which is provided bypublic services of social assistance, etc . We can notice therefore that the implementation of anyright or fundamental freedom is achieved through a n appropriate public service.


CONCEPTUAL DEMARCATIONS ON DECENTRALIZATION ANDDECONCENTRATION - WAYS OF ORGANIZING PUBLIC ADMINISTRATION

Principles of constitutional order - decentralization and deconcentration - are at the basis ofthe organization and functioning of public administration in Romania as a whole and, specifically,of public services.

Decentralization in public administration is the basis for solving problems which is not doneby officials appointed by the center, but by those elected by the electoral body. More specifically, inthe decentralized administrative system, the admin istration of the interests of local administration(municipal, town or county) is conducted by freely elected authorities from and by the mass ofcitizens of that community, which have, according to constitutional rules, their financial andautonomous decision-making power.

In the case of decentralization, the state does not assume the burden of administration alone,but splits it in certain levels, with other categories of persons such as local communities.

According to legal provisions (art. 2 letter 1 from the framework Law on decentralization195/2006), decentralization is the transfer of administrative and financial powers from the centralgovernment to the local government or private sector req uired to meet local interests.

It is necessary to retain that decentralization is a principle of organization and managementof the state based on broad autonomy of the local management of the administrative -territorial units.According to this principle a limited transfer of power of decision from the central government tolocal ones takes place. [11, p. 241]

Today, the literature in the field imposed two forms of decentralization:- territorial decentralization , which implies that the state is divided into administrative -

territorial units, which enjoy independence from the central authority. The leadership of theadministrative-territorial units thus created belongs to the local government authorities, which enjoygeneral physical competence.

In this sense, Paul Negulescu defined the principle of decentrali zation as an administrativescheme which recognizes "... the care of local interests or specific to be entrusted to the authoritieswhose owners elected by local electoral body may establish rules applicable to the residents of thetown ... " [6, p. 610]

But decentralization does not imply territorial absolute independence of local versus thestate in which they are organized. Consequently, taking into account the dependence to the state, thecentral authorities exercise over the activities of local community the right to control calledadministrative guardianship control.

The administrative guardianship presupposes both administrative control over people whoare holding positions in local authorities (expressed by the opportunity to dismiss or suspend fro moffice), and control over the documents adopted or issued by those authorities, which consist ofapproval, but in cancellation, suspension or amendment as well. [5, p. 145]

- technical decentralization (in services), whereby one or more public services are removedfrom the jurisdiction of central or local authorities and organized autonomously. [12, p. 59]Therefore, technical decentralization means granting certain autonomy of a publicly determinedservice, which is given legal personality.

In other words, the principle of decentralization of public services lies in the transfer ofpowers from the center to the local communities, in order to meet the general needs.Decentralization allows public services to administer themselves, under state control, wh ich confersthem legal personality, enabling the establishment of their own authorities and providing them withthe necessary resources. [3, p. 124]

The decentralization of public services ensure s the retrieving of administrative and financialpowers of certain activities by the local government (county councils, local councils) and is one ofthe objectives that public administrations have to do in the next period.

Deconcentration is the division of powers and administrative and financial responsibilitiesbetween different levels of central administration.


Decentralization law defines deconcentration as redistribution of administrative andfinancial powers of the ministries and other bodies of central public administration structures totheir own specialty structures in the territory (art. 2, letter j).

We appreciate that in the deconcentrated administrative system the central power gives up toa part of its powers, distributing them to the public authorities located at the territorial level. Inother words, the principle of deconcentration may be viewed as a move in the territory of powers,responsibilities and competences of the central public administration.

Administrative deconcentration is regarded as an intermediary between the centralized anddecentralized organization, being characterized by some independence of the local bodies in theforefront of which there are local officials who are appointed by the central bodies.

Practically, however, centralization in public administration exists at any time, because onthe one hand, the agents are hierarchically subordinate d to the central administrative power, and onthe other hand, their decisions are solely attribut able to the state. [4, p. 118]

The close relation between deconcentration and can be noticed from the appointment oflocal power holders by the center, as they are not elected by the local electorate. What drives itcloser to decentralization is the fact that the local power holders have the power to solve localproblems themselves without passing them forward to their hierarchic superior from the cent re. [7,p. 345] The decisions are within the jurisdiction of local bodies which have decision-making power,but remain subject to centralization.

Deconcentration takes in turn two forms: horizontal and vertical. The first form involves thepassing of responsibility of deconcentrated services delivery of various ministries to the solerepresentative of the state, namely the prefect, unlike vertical deconcentration which puts theseservices in a direct hierarchy in which the head of the service depends only on the ministerconcerned. [3, p. 122]

DEFINING GUIDING MARKS IN THE DISTINCTION BETWEENDECENTRALIZATION AND DECONCENTRATION OF PUBLIC SERVICES

There are a number of public services which can be organized exclusively or predominantlyonly locally (e.g., the transport of people and goods within the towns; streets repairing; citycleaning) or at county level (e.g., maintenance of communication routes between localities, a supplyof water which may interest the municipalities in the county, etc.). In the case of these services wecan speak of their decentralized organization .

There is another category of public service s that can be organized only at the national level,expressing an interest exclusively national and statal , for example the country's defense againstaggression by a foreign army, national security or for eign policy and others that can not betransferred to local and county councils and even though they are undoubtedly concerne d to defendagainst an external armed aggression. They can only be "deconcentrate d" locally, but remainingwithin the structure, hierarchy and subordination of the "centre." [7, p. 454]

As far as public services are concerned , we must make it clear that it is not aboutdecentralization, i.e. transfer, in whole or in part, of competences from the central level to the locallevel. We are in the presence of an administrative deconcentration [8, p. 574], which defines asystem in which the agents and local bodies, being on the spot and subject to centralization, havedecision power. Therefore local authorities are not only vested with exclusive powers of execution,these having also a certain decisional power transferred by the central authority.

Administrative deconcentration is identified by the fact that between the central power andthe one in territory there is a report of hierarchical subordination, the deconcentrated authority beingunder the dependence of an hierarchic superior who is entitled to cancel decisions.

Therefore, the deconcentration of public services involves the transfer of competencies heldat the central level to the subordinated entities operating in the territory, because of a reduced formof administrative centralization.


The purpose for which these public services are organized is the implementation of thestrategy of the state in various sectors of activity.

We can say that the kind of services which are organized at national level can be no morethan "deconcentrated” at county level, deconcentration ensuring unity of purp ose and action, andthe problem of “decentralization” of public services is raised only in relation to those activitieswhich can be made at the local level or county, as appropriate, and whether such activities are, at acertain time, organized as public services at central level. Deconcentration of public services is aform of centralization and is opposed to technical decentralization.

Examining the views expressed in the doctrine , in an opinion it is claimed that a publicservice of national interest , due to its importance for the entire society, cannot be decentralized.What can and should be decentralized would have been a public service of local interest, hence theconclusion that the correct wording should be “the decentralization of public services of localinterest.” [2, p. 122]

On the other hand, a critical vision in this matter is expressed by the Apostol Tofan [9, p.222], who considers that such a point of view shows a lack of understanding of t he principle ofdecentralization and ignorance towards the principle of administrative deconcentration.

The decentralization in services does not refer to a group of local services, given to thejurisdiction of local authorities, but to a single public se rvice, which is removed from the central orlocal jurisdiction, and being given an autonomous organization. The decentralization in servicessignifies a diminution of executive power concentration, giving legal personality to the legalservice, having a heritage and their own bodies somewhat independent from the administrativejurisdiction of which they were removed.

Deconcentrated public services have, regarding the affirmation of local autonomy, a morereduced effect and significance than decentralizat ion, this being highlighted by p rofessor MirceaPreda in the following:

- from an organizational point of view , these services are embedded in the structure oforganic ministries, therefore in the state administration, and they activate not in the centre (as othersections of the establishment ministry), but in an administrative -territorial unit, therefore"deconcentratedly";

- the financial means and the material basi s of the deconcentrated services are provided bythe ministry of resort (thus not autono mously, decentralized), unlike the decentralization ofservices, which is followed by a decentralization of resources, thus ensuring the competence oflocal authorities to provide quality to citizens as well as their actual ability to responsibly managetheir public tasks they have undertaken. Moreover, the organizational structure of thedeconcentrated public service, the criteria for the formation of compartments that form it and thefunctions of leadership are approved by the order of the minister of resort;

- deconcentrated public services leaders are appointed and dismissed by the ministers andthe documents issued by them may be waived by all ministers who m they are hierarchicallysubordinated to. [13, p. 4-5]

CONCLUSIONS

At the end of our scientific work, it is necessary to emphasize that the decentralization doesnot regard all public services; the problem of decentralization is only in relation to those that can beorganized locally, as there are public services (such as defense, national secu rity, external relations )which can be organized only at the national level.

In light of the above, it is necessary to emphasize that the principle of decentralization ofpublic services does not consist in the transfer of all and any activities from the central level to thecounty or local level. Central ministries, departmental , will always exist at this level, because theyexpress the interest of the state in the field. Thus, the role of central ministries is to design and toensure the state strategy in that activity sector, which concrete practical activities are subordinatedto, carried out at lower levels – county, town.


In order to satisfy the interests of a community, the public service should be conductedcontinuously to ensure the access of all beneficiaries to public services, all persons who are in thesame situation being able to claim the same benefits. Therefore the public service is designed tosolve the needs of society, determining in a good measure the quality of the life of citizens. In thissense, local public services are regarded as the most concrete ways of expression of the localautonomy, and, at the same time, one of the strong means by which the admini strative authoritiesact for the general interest.

Therefore, taking into account the extended nature of decentralization, administrativedeconcentration seeks the creation of an interlocutor for local authorities, strong enough to makedecisions that require the services to operate under its responsibility.

BIBLIOGRAPHY:

1. Emil Bălan, Instituţiii administrative, Editura E.H. Beck, Bucureşti, 20082. Dumitru Brezoianu, Drept administrativ. Partea generală, Editura Universităţii Titu

Maiorescu, Bucureşti, 20033. Dragoş Dincă, Servicii publice şi dezvoltare locală, Editura Lumina Lex, B ucureşti, 20084. Filip Gheorghe, M. Onofrei, Elemente de Ştiinţa administraţiei, Editura Junimea, Iaşi, 20045. Corneliu Manda, Drept administativ, Tratat elementar, Ediţia a V -a, revăzută şi adăugită,

Editura Universul Juridic, Bucureşti, 20086. Paul Negulescu, Tratat de drept administrativ, vol. I, Bucureşti, 19347. Mircea Preda, Drept administrativ, Partea generală, Editura Lumina Lex, Bucureşti, 20048. Valentin I. Prisăcaru, Tratat de drept administrativ român, Ediţia a III -a, Editura Lumina

Lex, Bucureşti, 20029. Apostol Tofan, Drept administrativ, vol. I, Editura C.H. Beck, Bucureşti, 200810. Verginia Vedinaş, Drept administrativ, Ediţia a III -a, revăzută şi actualizată, Editura

Universul Juridic, Bucureşti, 200711. *** Vitalie Cuşnir, ,,Unele aspecte ale reformei admini strative-teritoriale şi administrării

locale”, în Probleme ale edificării statului de drept în Republica Moldova, Chişinău,Tipografia centrală, 2004

12. *** Gerard Marcou, ,,Experienţa franceză în regionalizare: descentralizarea regională înstatul unitar”, Revista Altera „Regionalism şi regionalizare”, nr. 9, Târgu - Mureş, 1998

13. *** Mircea Preda, ,,Deconcentrarea serviciilor publice, un concept constituţional noupentru administraţia publică”, Buletin de informare legislativã nr. 1/2004


BOOK REVIEW


BOOK REVIEW FORMACROECONOMICS: FUNDAMENTAL CONCEPTS

Carmen NĂSTASE, Mihai POPESCU, Carmen BOGHEAN, Adrian Liviu SCUTARIU

Professor PhD. Gheorghe CÂRSTEADean of the Faculty of Management, ASE Bucharest , Romania

Macroeconomie: concepte fundamentale

The book appeared at the Publishing House “EdituraDidactică şi Pedagogică” from Bucharest; year of publishing:2008; Field: Macroeconomics; number of pages: 284; Format:

210x170 mm; ISBN: 978-973-30-2437-8

The book „Macroeconomics: Fundamental concepts” approaches a complex subject withmultiple economical implications. Macroeconomics studies the "sum total of economic activity,dealing with the issues of growth, inflation, and unemployment and with national economic policiesrelating to these issues" and the effects of government actions (e.g., changing taxation levels) onthem. Macroeconomics will pretty much be dependent on the regional government which will differfrom one country to another and in some cases even one state to an other. This is due to differentforms of government and policies in different parts of the world. Hence this will be a main area offocus for the smooth running of a global organization.

The main points of debate proposed by the authors in this paper, star t from themacroeconomics bases which have been settled by the famous Britannic economist J. M. Keynes,who, in his work, ”The General Theory of Employment, Interest and Money ” (1936), presented thenecessity of studying all the correlations among the econ omic phenomena and processes at themicroeconomic level, as well as at the macroeconomic one. In the period 1950 – 1960, in literature,a rupture between microeconomics and macroeconomics occurred, these being considered twodifferent disciplines. In contemporary economy, for all the theorists it clearly appears the existenceof some close links between the two levels, a thing that makes the study of these disciplines to beeven more elaborated, having an integrated character. The authors of this book subs cribe to thisopinion as well. Macroeconomics is not perceptible directly to the individuals. Separatingmacroeconomics of microeconomics is a difficult thing, as they are in a close interdependence:macroeconomics influences microeconomics, and sometimes starting from a microeconomicdecision, a concatenation of macroeconomic mechanisms, affecting greater aggregates, follows. Anessential characteristic of the contemporary world is represented by the growing interdependencesbetween the economic activities of the various individual economic agents.

This work was achieved, step by step, as a result of the collective of professors’ team work,professors that have their major in Economy, Microeconomics, Macroeconomics, Macroeconomicspolicies, General Economy, at The Faculty of Economics and P ublic Administration, Ştefan celMare University of Suceava, Romania. The signatories have developed this work volume, duringseveral years, while they were graduate students and then doctors of the ASE Bucharest, University


Alexandru Ioan Cuza Iaşi or Uni veristy from Craiova, which consolidate the knowledge and viewsfrom several prestigious universities in the country. It should be noted that the authors havebeneficiated from multiple stages of documentation from universities or institutions / researchcenters in countries like: Austria, France, Italy, Finland, Norway, Slovak, Hungary, leading to thecompletion of some comparative research and of some models of good governance andimplementing some European policies at national level, results which are hi ghlighted in this paper.

The book is structured on ten chapters that analyze fundamental macroeconomic aspectsbased on the multiple relations between the aggregates and the categories of functional institutionalunits.

In the authors’ conception, the mac ro-economy and the macroeconomic policies allow theobservation of these phenomena on the level of groups, of economic subjects, individuals or firms,reunited in homogenous categories and out of their individual behavior.

Among the significant macroeconom ic problems, we mention:- The assurance of the equilibrium between global offer and demand , in the material shape

(the state of relative balance between the volume, structure and quality of production, on the onehand, and the need of production and the f inal consumption, on the other hand), value (relativebalance between the various value structures of the economic results, between these and theefforts) and in work units (relative balance between the amount, structure and the quality of thehuman factor and the economic necessities of work resources).

- The macroeconomic policy by the consciously action of the public power, through whichtends to influence the global results of the economy. The government charges taxes, engagesexpenditures, adjusts the monetary amount, the interest rate, the exchange course, establishesobjectives for the production of the state units, etc.

- The economic growth through the increase of the national economy capacity of supplyincreasingly the various economic goods nece ssary for the population and the economic agents. Theresults obtained can be measured through some synthetic indicators, significant for the economicdynamics appreciation of a country.

- The inflation, as a shape of general economic imbalance, which cons ists of the oversaturation of monetary circulation channels with an amount of paper and credit money, that is overthe real needs of the merchandise and services circulation. It reflects both in the money depreciation(the decrease of their purchase power ), as well as in the generalized and uncontrolled pricesincrease.

- The unemployment, as a result of work resources underemployment, respectively, personswithout jobs and looking for them, became an ordinary fact today, although with different levelsand evolution senses in different countries and periods.

- The economic ciclicity, in the sense that the evolution of the main economic phenomenatakes place in a corrugated shape, passing through some phases, each of them with distinctcharacteristics, but which reciprocally inter-condition each other, and by their unity, they assure thepremises of activity flow.

- The knowledge economy, which is considered the main characteristic of the worldeconomy, the one in which the information means power in the most general sense – whether if wetalk about the political one, the economic one, the financial one - obtaining, owning and superiorcapitalization of information, being in this way the key to this society.

Along the last two decades, a series of radical chan ges occurred in the world economy,generated intense comments, held many times on the edge the explosive increase of unemployment,of uncontrolled rhythms of the inflation, of exaggerate interests, extern debt crisis, contradictoryevolution of the economic integration process, budgetary deficits, competition intensification,natural environment damage, etc., all of them, creating a massive pack of problems whose solvingwas not always considered satisfactory. The economists (and not only them) tried variou s answersolutions by creating some adequate macroeconomics policies.

Highly recommend this book primarily for students and masters, because this material isdesigned as a university manual. The theoretical -methodological and applicative foundations


achieved within Macroeconomics are the premises for the high education of students being a basefor the others economic disciplines from the faculties’ educational plans. In this way, one can assurethe formation of some economists with a large profile, with a c reative-prospective thinking, able tooccupy with professionalism future jobs and to contribute to the economic problems solving. Thepaper also addresses to the specialists from the real economy, economists, lawyers, governmentofficials, policy makers, on the principle that "any practice is based on theory" (Drucker, 2005). Inthis context, one focuses on understanding the opportunities that the individual economic units canbeneficiate from, and their report to the national economy, as well as the economi c growth,economic stability, investment supporting measures and policies.

The review done to the present material allows me to appreciate that we face a valuableresearch work, which meets all the requirements to be provided both students and masters and alsoprofessionals.


INSTRUCTIUNI UTILE PENTRU AUTORI / AUTHOR GUIDELINES

RORevista The Annals of the Stefan cel Mare University of Suceava. Fascicle of The Faculty ofEconomics and Public Administration primeste articole, din toate domeniile economi ce, pe cele 5sectiuni: Economie, comert, servicii Management si administrarea afacerilor Contabilitate-finante Statistica, informatica si matematica Drept si administratie publicaEste recomandabil ca lucrarile sa fie bine structurate astfel încât sa asigure claritatea continutului precumsi esenta temei tratate. Toate articolele trebuie sa prezinte cercetari originale care nu au mai fostpublicate sau trimise spre publicare în alta parte. Lucrarile prezen tate la conferinte sunt acceptate cuconditia ca ele sa nu fi fost publicate în întregime in volumul conferintei. Lucrarile vor fi redactate înîntregime în limba engleza. Lucrarile vor fi recenzate in sistem blind review.Titlul lucrarii

Se va scrie cu Times New Roman, caracter 12, bold, centrat în partea de sus a paginii, si se va scrie cumajuscule.

Autorii lucrariiNumele lor se va scrie la un rând după titlul lucrării, centrat, precizându -se: titlul stiintific,universitatea/instituţia, localitatea, ţa ra si e-mailul. Se va folosi Times New Roman, caracter 10, cu literemici.Rezumatul lucrariiRezumatul se va scrie după autori, lăsând un rând liber înainte; trebuie sa cuprinda informatii suficientepentru ca cititorii sa poata aprecia natura si semnifi catia subiectului, caracterul adecvat al metodei decercetare, rezultatele si concluziile lucrarii. Rezumatul nu este o introducere, acesta prezinta în sintezarezultatele esentiale ale cercetarii. Rezumatul se va scrie cu Times New Roman, caracter 10, ita lic,justify. Este necesar ca el sa aiba un numar de 200 -250 de cuvinte, spatiate la un rând.Cuvinte cheieSelectati 5-6 cuvinte cheie (cuvinte sau expresii) care surprind esenta lucrarii. Enumerati acesti termeniîn ordinea descrescatoare a importantei lor. Acestia se vor scrie cu Times New Roman, caracter 10, la unrând liber după rezumat.Clasificare JELSe va trece unul sau mai multe coduri JEL, in care lucrarea poate fi inclusa din perspectiva subiectuluiabordat. Lista cu coduri o gasiti la adresa: http://www.aeaweb.org/journal/jel_class_system.htmlIntroducereaPentru introducere, formulati scopul lucrarii, motivatia temei alese si explicati pe scurt modul de abordaresi argumentele necesare. Înainte de introducere se lasă 2 rânduri libere.Continutul lucrariiOrganizati corpul lucrarii utilizând titluri si subtitluri pentru a accentua atât continutul cât si claritateaacesteia. Titlurile şi subtitlurile se vor scrie cu litere mari, 12, bold, a liniate la stânga. Se va lăsa un rândliber înainte şi unul după. Trebuie avute în vedere urmatoarele:

terminologia recunoscuta a domeniului pentru a descrie orice subiecte sau proceduriexperimentale folosite pentru colectarea si analiza datelor;

includerea metodelor detaliate, astfel încât cititorii sa poata urmari prezentarea materialului; formularea rezultatelor în mod clar si succint; evidentierea rezultatelor cercetarii si impactul acestora, atât global cât si specific.

Textul lucrarii se va scrie cu Times New Roman, caracter 12, spatiat la un rând. Tabelele si figurile sa fiedimensionate si plasate în corpul lucrarii asa cum doresc autorii sa apara în revista. Trebuie avut grija caacestea sa se încadreze pe o singura pagina. Continutul lor se v a scrie cu Times New Roman, caracter 10,iar titlul coloanelor tabelelor se va scrie cu Times New Roman, caracter 10, bold.Titlul si numarul tabelelor vor fi pozitionate deasupra acestora, iar titlul si numarul figurilor, sub acestea.Atunci când este cazul se va mentiona si sursa. Numarul tabelelor si figurilor va fi amplasat în corpul textului,într-o paranteza, acolo unde se fac referiri la ele, de exemplu: (fig. nr. 1); (tabel nr. 1)Graficele trebuie sa fie clar executate astfel încât sa ofere copii a lb-negru cât mai lizibile. Numerotati toateecuatiile si formulele folosite plasând numerele lor în paranteze, în dreapta acestora.Explicati abrevierile si acronimele prima data când apar în corpul textului, chiar daca au fost definite înrezumat.Nu folositi note de subsol, dar sunt permise note la finalul lucrarii (endnotes), situate înaintea bibliografiei.Ele se vor scrie cu Times New Roman, caracter 10, italic.

http://www.aeaweb.org/journal/jel_class_system.html


ConcluziiConcluziile pot recapitula punctele principale ale lucrarii, dar nu trebuie sa reproduca rezumatul. Ele potcuprinde aspecte legate de importanta lucrarii sau pot oferi sugestii referitoare la aplicatii ale acesteia saudirectii de extindere a cercetarilor.BibliografieReferintele bibliografice, din introducere sau corpul lucrarii , se fac prezentându-se, într-o paranteza, înordine, numele autorului si anul aparitiei lucrarii, de exemplu: (James, 1984); (Collins si Fermont, 1977 -când sunt doi autori).); (Collins si altii, 1988 - când sunt trei sau mai multi autori).De asemenea, trimiterile bibliografice, din textul lucrarii se numeroteaza cu cifre arabe [1], iar când suntmai multe trimiteri se va scrie [1] - [2].Lista bibliografica, de la sfârsitul lucrarii, se va scrie în ordine alfabetica, dupa numele autorului,numerotându-se. Când anumite studii, lucrari, articole sunt publicate în volum, atunci se va mentionanumarul acestuia si paginile.Precizari importante

Articolele trebuie sa aiba 6-10 pagini, pe formatul A4, marginile stanga, dreapta, sus, jos: 2 cm. Lucrarile trimise trebuie sa fie formatate în Word cu extensia doc. Articolele care nu respecta aceste instructiuni vor fi respinse inainte de a fi date la peer review.

Vă rugăm manifestaţi foarte mare grijă pentru corectitudinea traducerii în limba engleză.Vă rugăm să trimiteţi şi varianta în limba română a art icolului, necesară pentru controlul ştiinţific. Veţiprimi un răspuns în urma procesului de recenzare.Lucrarile se vor trimite pe adresa: [email protected] , menţionând la subject secţiunea pentru careoptaţi (ECS, MAF, CF, SIM, APD); exemplu: “articol ECS”. Termenele limită vor fi afişate pe site.Pentru alte detalii sau noutăţi vă rugam urmăriţi site-ul revistei: www.seap.usv.ro/annals .

ENThe Annals of the Stefan cel Mare University of Suceava. Fascicle of The Faculty of Economicsand Public Administration , welcomes theoretical and empirical articles, from all economic fields,according to the 5 sections: Economy, trade, services Management and business administration Accounting-finance Statisitics, data processing (informatics) and mathematics Law and public administrationIt is expected that manuscripts will be organized in such a manner that maximiz e both the substance andclarity of the document. All articles should report original research that has not been published orsubmitted for publication elsewhere. Papers presented at conferences are accepted, provided that theyhave not been published in full in Conference Proceedings. The papers will be all written in English. Thepapers will be checked in blind review system.Paper TitleMust be in 12-point bold type, Times New Roman, centered across the top of the page and will be writenin uppercase.Paper AuthorsAuthor’s names will be written under the paper title after a blank line, centered across the page, singlespaced specifing: title, university/institution affiliation, country and e -mail address. It must be written in 10point type, Times New Roman in lowercase.Paper AbstractIt will be written after authors leaving a blank line before. The abstract must include sufficient informationfor readers to judge the nature and significance of the topic, the adequacy of the investigative strategy,the nature of the results and the conclusions. An abstract is not an introduction, it summarizes thesubstantive results of the work. The abstract will be written in 10 point type italic, Times New Roman,justify. It must have 200 to 250 words, single spaced ty pe.KeywordsSelect 5 to 6 keywords (words or expresions) that capture the essence of your paper. List the words indecreasing order of importance. All the key terms must be translated in English and attached to yourabstract. It will be written in 10 po int type, Times New Roman, after abstract leaving a blank line before.JEL ClassificationPlease put one or several JEL codes, according to the subject of your paper. The codes can be foundhere: http://www.aeaweb.org/journal/jel_class_system.htmlIntroductionFor introduction, state the purpose of the work, the motivation of the chosen theme and, briefly explainyour approach and the necessary arguments.Before introduction pl ease let 2 blank lines.

[email protected]

http://www.aeaweb.org/journal/jel_class_system.html


Paper ContentOrganize the body of the paper using titles and subtitles to emphasize both content and clarity. The titlesand subtitles will be written in caps, 12, bold, left aligned. Please let a blank line before and one after.Consider the following:

the accepted terminology of the field to describe any subjects or experimental procedures usedto gather and analyze data;

include detailed methods, so readers could be able to follow the investigation; state the results clearly and succinctly; the implications of the findings and minutely discuss the impact of the results, both globally and

specifically.Typeface must be 12-point Times New Roman type single spaced. Tables and figures should be sizedand placed in the body of the paper just as the authors want them printed in the journal. Care should betaken so that tables and figures could be on one page. The tables contents will be written in 10 point type,Times New Roman and the heading of the tables will be in 10 point type bold, Times New Roman.The titles and numbers will be positioned above the table and the title and number of the figures bellow.When it is needed, the source will be mentioned. The number of the tables and figures are to bepositioned in the body of the text, in a paranthesis, wherever they are mentioned, for example: (fig. nr.1),(table nr. 1).The graphs must be executed clearly so as to give clear black and white copies. Number all theequations and formulas used positioning the numbers in paranthesis on their right side.Define abbreviations and acronyms the first time they are used in the text, even after they had alreadybeen defined in the abstract.Avoid the use of footnotes, but endnotes are encouraged at the end of the paper before the referen ces.Endnotes must be in 10 point, Times New Roman, bold type.ConclusionsConclusions may review the main points of the paper, do not replicate the abstract as the conclusion. Aconclusion might elaborate on the importance of the work or suggest applicat ions and extensions andextensions of the research.ReferencesRelated to in-text referencing cite the name of the author(s) and year of publication (James, 1984),(Collins and Fremont, 1977 – for two authors) and (Collins et al., 1988 – for three authors). Also,references in the articles will be numbered with [1] and if there are more than one reference with, [1] – [2].Sources should be in alphabetical order by author’s last name, the list being numbered. When certainstudies, research, articles are publ ished in a volume, the volume numbers and pages will be specified.Important Specifications

The articles must be at least 6 to 10 pages long in the style A4 sheet, margins left, right, top,bottom: 2 cm.

Submitted documents must be in PC -formatted Word (.doc) file. The articles that don't respect specified guidelines will be rejected before they are sent to peer

review.The manuscripts should be submitted to: [email protected] , mentioning at subject the section thatyour paper fits (ECS, MAF, CF, SIM, APD) ; example: “article ECS”. The deadlines will be posted on ourwebsite . For other details or news, please visit: www.seap.usv.ro/annals .For other details or news, please check our site: www.seap.usv.ro/annals .

PENTRU COMENZI VA RUGAM SA NE CONTACTATI PE ADRESA DE E -MAIL A REVISTEIMENTIONATA ANTERIOR.

FOR ORDERS, PLEASE CONTACT US BY E -MAIL AT THE ADDRESS MENTIONED BEFORE.

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HOW TO UNDERSTAND THE NEW ECONOMY

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