Nr. 2(21) 2008 - EuroEconomica

N r. 2(21 ) 2008

EDITORIAL BOARD VIOREL ARITON, Professor, România GEORGE BLANAS, Associate Professor, Greece GILLES DAVID, Prof essor, France GEORGETA DRAGO MIR , Professor, România EMIL HOROMNEA, Professor, România GHISLAIN HOUBEN , Professor, Belgium CĂTĂLIN- ANGELO IOAN, Associate Prof essor, România ROMEO-VICTOR IO NESCU , Professor, România IOANNIS T. LAZARIDIS , Professor, Greece IAMANDI LUCA , Professor, România JEAN-LOUIS MALO , Professor, France STEVE O. MICHAEL , Professor, S.U.A. WILLI PAVALOAIA , Professor, România YVON PESQUEUX , Professor, France FLORIN PUŞCACIU , Professor, România BENONE PUŞCĂ, Pr ofessor, România GIANMARIO RAGGETTI , Professor, Italy ALBERT QARRI , Associate Professor, Albania SILVIA SCARAMUZZI, Professor , Italy JEANNE SCHREURS , Professor, Belgium NECULAI TABĂRĂ , Professor, România VITO TANZI, Professor, Italy FRANCESCO TIMPANO , Professor, Italy ADRIANA TIRON TUDOR , Professor, România PHILIP VERGAUWEN, Professor , Belgium GABRIELA VÎRLAN , Associate Pr ofessor, România

MANAGING EDITORS Editor in chief DOINIŢA ARITON, Professor

Assistant editor in chief ALINA CRISTINA NUŢĂ , Lecturer

Editors FLORIAN MARCEL NUŢĂ , Lecturer CORIOLAN PAUNESCU , Lecturer CARMEN GABRIELA SÎRBU , Lecturer

Editorial Secretaries GHEORGHE PANFILOIU, Lecturer FLORIN POSTOLACHE , Asistant Professor ALINA RAILEANU, Researcher

TABLE OF CONTENTS CUSTOMER RELATIONSHIP MANAGEMENT…………………………5 Ioan BORDEAN, Alina RĂILEANU FISCAL DECENTRALIZATION AND ECONOMIC DEVELOPMENT IN ALBANIA. CASE OF VLORA CITY HALL…………………………...15 Albert QARRI, Arqile MISHTAKU THE ANALYSIS OF THE ENTERPRISE SOCIAL MANAGEMENT BASED ON DASHBOARDS AND SOCIAL INDICATORS……………...26 Maria-Daniela BONDOC, Carmen Gabriela SÎRBU ENTREPRENEURSHIP EDUCATION: DO STUDENT-COMPANIES OFFER SUPERIOR VALUE?........................................................................38 Ghislain HOUBEN, Roger MERCKEN A SOLVING METHOD OF TWO ECONOMICAL PROBLEMS USING LINEAR PROGRAMMING IN INTEGER NUMBERS………………….49 Catalin Angelo IOAN LANGUAGES AND CULTURES: AN ECONOMIC AND EVOLUTIONARY ANALYSIS……………………………………………..54 Jing CHEN THE ENVIRONMENT POLICY IN THE POST-ADHERING COUNTRIES…………………………………………………………………64 Ionescu ROMEO THE CAPITAL STRUCTURE OF COMPANIES LISTED IN THE GREEK STOCK EXCHANGE……………………………………………...73 Maria K. MARKOPOULOU, Demetrios L. PAPADOPOULOS METHOD APPLICATION OF DISCOUNTED CASH FLOW IN AN EVALUATION OF AN ENTITY OF FURNITURE INDUSTRY IN ROMANIA……………………………………………………………………90 Neculina CHEBAC, Cristina Mihaela ONICA THE ROLE OF ALBANIAN FISCAL POLICIES TO THE IMPROVEMENT OF THE ECONOMY SITUATIONS………………...102 Matilda VELIU

CUSTOMER RELATIONSHIP MANAGEMENT Ioan BORDEAN “Danubius” University Galati, Romania Alina RAILEANU “Danubius” University Galati, Romania Abstract: In order to maintain in a market economy with the competition becoming increasingly tough, with consumer preferences and demands more sophisticated and diverse, a company must manage in the best possible way the relations with the existing and potential customers to know their preferences, attitudes, purchasing behaviour, motivations, in order to attract the proper clients for their company products. These goals may be achieved by implementing a strategy called “Customer Relationship Management”, which aims to identify the potential customers, observing their needs, attract them through a special offer and obtaining their enthusiasm. A key element of a CRM strategy is communication using as many possible ways with current and potential customers, in order to attract them and to become loyal.

Keywords: customer attraction, loyalty, CRM, strategy JEL Classification: R11, C44, M31 I

The need to study consumer behaviour

The evolution of structure and size of consumer demand in the recent decades requires knowledge and foreseeing the demand, not only from the quantitative point of view, but also qualitative, based on studying the behaviour of buyers. Study the behaviour of purchasers represents a logical necessity, an objective requirement in substantiation of marketing decisions driven by the need to explain the decision mechanism of purchasing and consumption. Marketing research must start from the rational actions of the buyer, from its needs, reaching to the discovery of its desires, of its representation and its ideas, which determine its attitudes, opinions and behaviour. The consumer behaviour means all acts, attitudes and decisions regarding the use of its revenues for purchasing goods and services or for savings. To study the consumer behaviour is needed an interdisciplinary approach, due to its complexity. Human behaviour from the economic point of view does not represent a succession of mechanical processes, but it reflects the outcome of the accumulation of life experiences, under the influence of elasticity and plasticity of their needs. The psycho-sociological processes that determine the acts of the consumer is much more difficult to observe and to measure than its effects. The study of consumer behaviour has developed in conjunction with motivational research that explains the mechanisms of deciding the purchase and consumption. The specialized literature analyses the problem of consumer behaviour in a systemic way, the consumer is the ―black box‖; based on the entrance from the system, composed of marketing and environment stimuli faced by the consumer, ―the black box‖(processor) has exits, that represent the reaction to these stimuli (Figure 1). All stimuli (entrances), of marketing or environment, passing through the ―black box‖ of consumer awareness, are intercepted and processed, resulting certain reactions (that exist from the system), specific to each individual, materialized in decisions to purchase (or not) a certain product of a particular brand, from a particular seller, a settled quantity at a certain time.

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The specialists task in marketing is that the entrance stimuli, marketing - product, price, distribution and promotion method, under certain environmental conditions, to induce decisions that will materialize in the purchase of the product.

Entrances Marketing Stimuli

Environment Stimuli

Product Price Distribution Promotion

Economical Technological Political Cultural

→

Black box of the buyer

Answer The decision of the consumer

The → process of Features making of the decisions buyer by the buyer

Choose a product Choose a brand Choose a saller Moment Purchasing The purchased quantity

Fig. 1 The systemic approach of consumer behaviour

II

Presenting the concept of customer relationship management (CRM)

Customer relationship management (CRM = Customer Relationship Management) was developed as a major element of business strategy of many companies and it is based on creating and developing some personalized relationships with customers in order to increase their profitability. A CRM strategy allows the companies to adapt quickly the organizational behaviour to the market changes; doing so, the company can better satisfy the requirements of its customers. Performing firm managers starting from the principle ―it is more difficult to gain a customer than to keep an existing one‖; sustaining this idea, researches were made regarding the costs involved with these two alternatives, those caused by the gaining a new customer are from 3 to 15 times higher, depending on the industry branch and the product, than those involved in retaining an existing customer. The premise of conducting business is to satisfy customer needs, but it has been observed that they move easily from one manufacturer to another. This fact has required different actions and loyalty programs, providing certain benefits such as promotional offers, discounts, loyalty points etc., generating customer loyalty and enthusiasm. The implementation of CRM strategy aims at identifying the potential customers, attracting them with special offers, observing and solving their needs so as they would be content. The most important element of a CRM strategy is communication using as many possible ways with the current and potential customers, in order to attract them and to become loyal. Customer relationship management can be defined as a process that takes place in 4 stages (Kaufman, 2001) and is based on developing relationships with customers (Figure 2):

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STAGE 1

STAGE 2

Collecting and processing the data customer behavior and the generated revenues in the past

The continuous update of the profile for the needs and demands of the customer

STAGE 4

STAGE 3

Assuring the connection of the staff’s activity in the 3 stages

Permanent adaptation and improvement of the services offered to customers

Fig. 2. The management process of customer relationship The link element in the development of good relations with customers is represented by internal and external information relating to customers.

III Communication strategy for fulfilling customer requirements Whether it is about recruiting new customers with minimal costs, the additional motivation for those who tend to move to competitors, the development of programs for receiving new customers, selling more to the existing customers due to the expansion of the offers or take advantage of the segments growth to broaden the portfolio of services addressed to customers; customer relationship management must provide an operationally effective answer, in the perspective of adjusting to the objectives of the organization. For the three types of CRM programs - attracting new customers, keeping the existing customers and increasing value to customers through additional and crossed sales - an operational objective of customer relationship management should ensure consistency of the creation chain of value, bringing the management of flows of contact with customers to effective operational tactics.

3.1 Attracting new customers The globalization of markets and communications development gives the consumers the opportunity to easily and quickly choose a product or another, a service or another. In this context, the commercial success requires speed and flexibility adapted to the increasingly large and sophisticated demand. One of the key factors that ensures the success of a company lies in its ability to broaden its base of customers. The failure of a policy of recruiting new customers is the means by which a company may enter into decline. The attraction principle of customers is as follows: ―To propose the best offer, the most representative targets, the best time and the best argument.‖ (Lacroix, 1996) Even if the above formula is easy to remember, it proves that it is often difficult to put it into practice. A successful attraction of new clients doesn‘t only summarize the values generated by a first sale. It is only a first step towards the retention of a client who, on the one hand, will resort to new purchases, and on the other hand, will provide additional sales opportunities, generating an increase in the future. In fact, the ratio of profit-earning capacity of a program of attracting customers is related to the total amount spent 7

during the lifecycle of each customer. The ratio of profit-earning capacity on a CRM program (ROI Return on Investment) represents the most important indicator in the CRM strategies and it is calculated by dividing the cumulative amount of revenue generated by a customer to attract the necessary investment for attracting and keeping a loyal customer. This indicator should have a binding value over 100%; a value over 200% demonstrates a high efficiency of the CRM program. The value scheme of a customer in this first stage demonstrates the lifecycle of the customer (Allard, 2003), it is shown in the diagram in Figure 3. The successful attracting of customers should be considered as a first strategic step of lifecycle management of customers; it is essential for any company to develop a mentality for attracting customers. At this stage, market segmentation and positioning the susceptible customers are likely to turn into loyal customers. Program of attracting new clients offers; targets; picking the right moment

Gross

Confirmed net

Additional

sales

sales

Sales

Initial Sales - the cost of product and services - the cost of attracting customers =the obtained result from the initial sales

Additional sales -the cost of product and services - the cost of service given to the client = the obtained result from the additional sales

Fig. 3. The value given by the customers in the first lifecycle The company must ensure, in this initial phase, quality offers in order to induce a positive image to customers. Customers who purchase for the first time a product or service are circumspect; in this case, their impression must be positive, a single error of the company at this stage, and it risks entailing irremediable loss of customers. Subsequently, in the next contacts with customers (e.g. in a service of technical assistance), the objective will be to build a relationship based on trust, and ensuring them that they have made the best choice. The effectiveness of management programs of customer‘s value is assessed after the impact upon the value of lifecycle and not just in terms of immediate benefits. The scheme to create the value within the lifecycle of clients (Faulkner, 2002) is depicted in the following (Figure 4):

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GRANTED SERVICES TO CLIENTS OBJECTIVES: ATTRACTING CLIENTS OBJECTIVE: Development of business

HOW? Attracting offers, the ratio between quality, proper price, promotions, etc.

ADDITIONAL SALES OBJECTIVE: turnover rise HOW? Best offer at the best time

Creating some affinity in client relations the rise of acquirements, becoming loyal clients HOW? Taking advantage of any contact, for sensitize the clients, for creating new sale opportunity.

Fig. 4. Creating the values during the first lifecycle of clients Because of the capacity of combining different environments and low cost generated by attracting new customers, customer-contact centres have become privileged networks of companies that wish to reach the objectives of widening the customer base. Among the advantages of these contact centers (Blumberg, 2002), we may specify: • high degree of penetration: the ability to contact a large number of actual and potential customers; • rapidity: the ability to quickly penetrate the market; • increased reactivity: the ability to assess the impact of any changes (at the level of the offer, target or contact timing) on the cost of attracting customers, so as to monitor the performance in real time and to quickly correct deficiencies; • profit-earning capacity: the ability to exploit cost models to attract customers in order to ensure a greater profit-earning capacity on the concerned segments; • personalization: the ability to adapt to the needs of your individual clients.

3.2 Keeping the loyalty of the existing customers If the programs of attracting customers and sales often attract very high budgets due to their ability to generate profits in short term, loyalty programs are distinguished by the incidence of long-term and often by its often spectacular effect, on increasing the profitability of a company. The movement of customers to competitors is a process that occurs in any market, a process that must be prevented through the design and implementation of complex loyalty programs. The relationship between a company and its customers must be maintained and developed. Any firm is seeking to minimize the loss of customers, knowing that there is a strong relationship between this indicator and its profitability. To guide loyalty policy towards an exceptional quality of service and a personalized offer individually created for loyal customers, the contact-customers centers provide differentiated solutions that integrate the following: • maintaining a genuine dialogue with customers in order to assess their needs and demands; • development of products and services in order to meet those needs; • combining the most effective medium for promoting products and services.

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IV Software Solutions Analyze for the best CRM approach Living in the Internet Era, it is obviously that any company will need a TIC solution for it‘s CRM approach. Behind every powerful man is a women. Behind any successful CRM story it is an appropriate dedicated software. And there are a lot of CRM software. The individual impact of CRM systems is strongly related to impact at the organizational level. Fit with the task of the user is key. CRM systems are successful in organizations that reward customer-centric behavior and that have an analytical decision style. Acceptance of a CRM system should be monitored over time. Whether your needs for CRM is marketing automation, customer self-service, call center solutions, or other needs, you should identify software vendors that provide the capabilities you need at the best price. Lets take a look together to the most important three of them: NetSuite CRM Software, Microsoft CRM Software, Maximizer CRM Software The most complete of them: NetSuite extends beyond traditional CRM to provide complete customer lifecycle management, giving a true 360 degree view of customers and all their interactions with company. Other web-based CRM solutions manage only one third of the full customer lifecycle. (http://www.netsuite.com)

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NetSuite is the only Web-based CRM system that: Provides a true 360 degree view of all customer data and customer interactions, including complete visibility into all financial transactions and website interactions without any integration required. Now a single view of customer information is available to everyone in your company who needs it. Allows you to sell to both prospects and current customers equally effectively. Other CRM solutions focus on managing prospects, and do not have enough integrated information or tools to manage and upsell existing customers. Automates the entire customer lifecycle, from a "suspect" browsing a business' Web site, to an interested lead, to a qualified prospect, to a customer who has actually placed an order, to servicing that customer and finally, to guiding that customer to re-purchase. Allows salespeople to take real orders from customers, with an integrated Order Management system. Shows full purchase histories for your customers without requiring complex integrations with your accounting/ERP system. Includes powerful, automatic upsell and cross-sell capabilities, helping you to help you sell more—and more effectively—to your existing customers. Includes complete Partner Relationship Management. Now you can treat your channel partners as an extension of your direct sales team—seamlessly. Tracks commissions automatically and accurately, without requiring you or your salespeople to use spreadsheets. Fully encompasses the Web and e-mail marketing into the CRM solution. NetSuite CRM+ incorporates your Web site into the selling process, by tracking all customer interactions on the Web and by providing a comprehensive self-service customer portal. Provides better, more accurate forecasts. Because booked orders can be finally seen in forecasts, your forecasts have greatly increased reliability, predictability and accuracy. And the "actuals" information in forecast vs. actual reports is now based on real sales data. Shows you true marketing effectiveness and ROI. Because other CRM systems do not capture the details of what a customer has purchased, they frequently provide incomplete and incorrect results for marketing and sales campaigns. With no record of what or how much has been ordered by each customer, marketing has no way to know if the leads generated are NetSuite enables companies to manage all key business operations in a single system, which includes accounting/Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and Ecommerce. This provides companies with a true 360 degree view of all customer data and customer interactions, including complete visibility into all financial transactions and website interactions without any integration required. NetSuite is delivered as an on-demand service, so there is no hardware to procure, no large, up-front license fee, and no complex set-ups. NetSuite's patent-pending "real-time dashboard" technology provides an easy-to-use, real-time view into role-specific business information that is always up-to-date. The system also can be easily customized through their SuiteFlex platform, so that users can extend and enhance the NetSuite application. NetSuite‘s strong all-in-one front- and back-office solutions span CRM, ERP, accounting, and eCommerce making this a one-stop package for SMBs. The company‘s software helps you to manage your key business operations in a single, integrated system. The company's patent-pending ―real-time dashboard‖ technology provides an easy-to-use view into rolespecific business information that is always up-to-date. At times, the comprehensive functionality adds to the product‘s complexity. Service thresholds and per-module pricing can increase your costs. NetSuite has thousands of customers globally ranging in industry, business size and software solutions. The most familiar look: From Customer Relationship Management (CRM) point of view, communication is key. The ideal CRM solution should streamline the way your people communicate with clients and collaborate with each other. The more comfortable they are with the tools, the more effective they will be at their jobs. The most comfortable is a look and feel that you already know. (http://www.microsoft.com) 11

Microsoft Dynamics CRM workflow automation and analytics let your Sales, Marketing and Service staff easily share information and route tasks to provide a seamless customer experience. Sales Establish a 360-degree view of customer interactions, sales opportunities and buying patterns to help your sales force cultivate more profitable relationships. Marketing Plan, implement and measure more-effective marketing campaigns by analyzing buyer trends, behaviors and offers that allow your marketing teams to track real time results and optimize Return-on-Investment (ROI). Service Deliver high-value Customer Service with integrated interaction and knowledge management enabling your service professionals to share answers and insight with customers with ease. Microsoft CRM Key Strengths Tight integration with the Microsoft Office® system and Office Outlook, allowing employees to easily pull information from Microsoft Dynamics® CRM into Office system applications such as Microsoft Office® Excel spreadsheet software and Microsoft Office® Word word processing software. Quick and easy access to your data through context-sensitive information for populating forms or taking next steps without changing screens. Customized workspaces that allow users to create, save, and reuse favorite views of customer data without the distraction of unneeded information. Great mobile support that helps enable field workers to get instant access to customer data from most popular portable devices including mobile phones with Web browsers, and laptops. Other Microsoft CRM Features are: Opportunity management Sales process management Quotes Order management Sales force management Email/Direct Marketing Case/Service management Email Response Management E-mail management Searchable knowledge base Marketing campaign management The most simple to use: Maximizer Software Inc. provides proven and affordable customer relationship management (CRM) and contact management solutions that help small to medium-sized businesses increase sales, streamline marketing, and enhance customer service and support. Maximizer has sold over one million licenses to more than 120,000 customers, ranging in size from entrepreneurs to multi-national organizations.(http://www.maximizer.com). Maximizer CRM adapts to the way you work, and grows as your business grows. You can choose from four editions, as well as several add-on modules and options for the solution that matches your business needs. The right solution will depend on your number of users, access, and feature requirements. Maximizer Key Strengths Simple and quick to deploy, learn, use and maintain. 12

Multiple Access options: web, Windows desktop, and BlackBerry®, Windows Mobile®, and Palm® devices. Best Value in its class for full-featured CRM. Maximizer Entrepreneur Edition Maximizer Entrepreneur Edition, the award-winning contact manager, is designed to help you maximize your time, improve customer satisfaction and increase sales. It‘s easy to configure right out of the box, so you can get up and running quickly and focus on your business. Entrepreneur Edition is ideal for small businesses, home offices, financial advisors, realtors, and sales professionals in virtually any industry. Maximizer Entrepreneur Features: Contact management Opportunity management Sale force automation Integration with Microsoft Office® Integration with QuickBooks® accounting software Mobile access through BlackBerry® or Windows Mobile® devices On-the-fly reporting with easy exporting to Excel Maximizer CRM (Group, Professional and Enterprise Editions) Designed for larger organizations, Maximizer CRM provides full-featured CRM functionality including marketing automation and customer service & support. Maximizer CRM provides multiple access options including desktop, Web and through the latest PDA devices. Maximizer CRM Features: Contact and account management Sales force automation Marketing automation Customer service and support Web and mobile device access (BlackBerry® or Windows Mobile®) Microsoft Office® integration Partner relationship management Workflow automation eCommerce and payment processing Microsoft Exchange Integration Integration with QuickBooks® Microsoft GP® accounting software Maximizer Software is a worldwide organization with business partners and offices in its three regions: Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific. Maximizer has sold over one million licenses to more than 120,000 customers, ranging in size from entrepreneurs to multi-national organizations, include leading companies such as Siemens, Ipsos, Nestlé Clinical, Ericsson, HSBC, Singapore Airlines, Cathay Pacific, William Mercer, and Bank of New York An essential element of achieving successful implementation is to ensure that their strategy is underpinned by viable and appropriate technology architecture. This involves the selection of vendors and partners based on issues of customisation capability and other appropriate commercial factors including both technological and commercial criteria. In the very near future, Customer Relation-ship Management will have advanced con-siderably and we will have reached much more sophisticated level of one-to-one marketing and data mining. There is now an enormous opportunity for organisations to improve their ‗customer ownership‘ by build-ing a coordinated and integrated set of ac-tivities which address all the key strategic elements of CRM.

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Conclusions Free market, diversification and globalization have led to a significant increase in the competition between the business needs and consumer demands that have become increasingly sophisticated and diverse. These market realities have forced companies to move from product-centered approach to a client-centered approach. By switching from the sellers market to buyers market when they can choose from a rich and varied offer, ultimately, customers are the ones who decide. Therefore, CRM has emerged and developed naturally in trying to optimize the relationship between suppliers and customers in the benefit of both parties. The emergence and development of the Internet business has provided to the world an indispensable tool that offers to organizations many possibilities and opportunities. For a modern company it is very important to have a system to shorten the response time to customer requests, thus providing support and quality of the provided services and this way it contributes to creating long lasting relationships and it achieves a greater competitiveness and profitability. Organisations‘ success in CRM will involve creating an appropriate strategic vision for the future, making the appropriate choice of applications, creatively using appropriate analytical techniques to exploit the data, and choosing the right ven-dor for supply of the technology solution. Bibliography: Allard, C. 2003, Management de la Valeur Client, Paris, Ed. Dunod; Blumberg, D. 2002, Managing High-Tech Services Using a CRM Strategy, CRC Press; Bordean, I. 2003, Elemente de marketing modern, Galaţi, Ed. Fundaţiei Academice "Danubius"; Bordean, I 2004., Management organizaţional, Oficiul de informare pentru industrie, cercetare, management, Bucureşti; Faulkner, M. 2002, Customer Management Excellence, Jon Wiley & Sons; Lacroix, H. 1996, Etes vous vraiment oriente client?, Paris, Ed. Dunod; Kaufman, M. 2001, Customer Relationship Management: The Ultimate Guide to the Efficient Use of CRM, Amacom; Zablah, A. R., Bellenger, D. N., & Johns-ton, W. J. (2004). An evaluation of divergent perspectives on customer relationship man-agement: towards a common understanding of an emerging phenomenon. Industrial Marketing Management (Vol. 33, Issue 6, pp. 475-489) www.softnet.ro/library/files/papers/CRM.pdf http://crm.cas-software.com/RO/ http://www.netsuite.com http://www.microsoft.com http://www.maximizer.com

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FISCAL DECENTRALIZATION AND ECONOMIC DEVELOPMENT IN ALBANIA. CASE OF VLORA CITY HALL Albert QARRI Faculty of Economic and Law, University of Vlora Arqile MISHTAKU Bashkia Vlore Abstract: The realization of the decentralization process has been and yet is the most contested one even nowadays, independently from the political consensus performance shown until now. The cause of it is not so simple as it might seem; it is deeper and more complex. The issues of this process in Albania are taken into account to initiate the analysis of the impact of the economic, political and social factors, in order to compose and plan a new strategy that would have positive impact on the public sector efficiency growth, on the stimulation of country economic development, on the improvement of the services distribution and on the diminuition of the poverty. The way this process is implemented in Vlora City Hall will be the main point in our paper.

Key words: Fiscal Decentralization, Taxability Politics, New Strategy JEL classiffication: H71, H72, H73, H74, H75, H76 I Common Features In The Process Of Decentralization In Countries That Are In Trasition The process of decentralization in countries that are in transition displays more or less the same features, especially as far as their deficiencies are concern. These deficiencies are obvious in the fiscal intergovernmental relations such as: inadequate local governmental structure, unclear transfer of responsibilities to local government, the lack of a total autonomy of the control of income and the intergovernmental problematic transfer systems. An in-depth analysis leads to the conclusion that such deficiencies can cause other more general problems such as: the lack of a clear and coherent strategy of the fiscal decentralization the lack or the inapropriateness of the mechanisms that coordinate the policies the overfragmentalizm of the structures in the local government the undervaluation of the importance, the policies have in the specific results of decentralization

1.1 The lack of a clear and coherent strategy of the fiscal decentralization Theoretically, there is a logical progressive action or a chain of action of the elements of the fiscal decentralization, in the themes of its development in its technical, fiscal aspect and its reforms. In technical terms, this chain of actions must respect the maxim‖ the finance must follow the function ‖ which means that the appropriate way would be to first define the structure of local government and then to define the people responsible for the expenditures. This phase will be followed by the definition of income resources, development of the transfer systems and the creation of the right situation for the local borrowings.The dynamic of reforms must stars with: the design of a strategic vision for decentralization the arrangement of legal base that is necessary for the realization of this vision the establishment of the same strategic vision and legal base between institutional central goverment and the regulator frame ( law regulator package) the establishment of a regulator and institucional frame for the local government the establishment and the implementation of the mechanisms of partnership necessary for the involvement of civil society and privat sector. 15

This does not mean that these sequences must be strictly followed, but if the reform processes suffer greater changes than those mentioned above it is sure that there will be problems. For example: the transfer of income resources significant for the local government before that the responsibility for spenditure is decided, might be a reason for intergovernment tension and fiscal destabilization. In the same way, the procedure with specific inisiations for decentralization without a clear strategic vision-or at least of a consensus between those who lead these policies-will probably degenerate in unsuccessful reforms. The reforms of fiscal decentralization must be designed and implemented in a consistent and comprehensible manner, because even a single element of decentralization can not be comprehended or implemented separeted from the other elements related to it. It is important to understand that different steps in the implementation of this process must refer to each other and be part of a decentralized strategy which must be consistent and comprehensible.

1.2 The lack or the inapropriateness of the mechanisms that coordinate the policies The design and the implementation of fiscal decentralization ask for a coordination between local government and central government as well as other govermental agensies. Without a central institution or a coordinated institution it is hard to achieve the coordination between different institutional actors. Many countries in transition have many inefficient mechanizmsm of central government responsible for the coordination of the fiscal decentralization. In some case an institution created to lead this process was absent.

1.3 The overfragmentalizm of the structures in the local government Many countries did a mistake at the very beginning of transtion by begening the reforms for fiscal decentralization for political reasons without taking into consideration the economic consequences that would follow. One of these results is the the establishment of small communas, which are really close to the citazens and can better reflect their needs and preferences, but they are smaller than the necessary efficient minimum to offer public services in an effective way. Unfortunately, fragmentarizm is not an easy matter to be solved politically. The governments usually prefer volenteering consolidated models to those imposed on them. Volunteering models may be successful but they often seek for incauragment through the giving of significant resources. Anyway, even the most successfu consolidated volenteering models need time. Other methods used to achieve this goal, consist on the the creation of a special unit of public service that can realize economies of degrees and the undersontact of services at privat company which can offer services for some of central government. On the other hand, some countries can decide to tolerate diseconomies of degrees on behaf of the representation and the responsibility of local government toward their electorate.

1.4 The undervaluation of the importance, the policies have in the specific results of decentralization The technical dimensions of fiscal decentralization do not change the fact that intergovernmental fiscal relations are political issues. The fiscal decentralization influence the relation within the vertical authority and the alocim of resources between central government and local ones. If central governments consider its influence in these relation as ― a vector with zero rezultant‖ they might not be in favour of it, or might even feel afraid of the fiscal decentralization. Because decentralization (as weell as the other reforms) in countries in trasition seek political support, a successful decentralization seek tought ―supporters‖ in high governmental levels. The decrease speed in the process of decentralization in some countries speak clearly about those problems.

1.5 The undervaluation of the importance, the policies have in the specific results of decentralization One of the defination of the local decentralization reinforces the importance of strong local communities through the empowerment of their local government. This defenition underline the potencial benefits of decentralization in efencency, the objectivity and the government of the public sector. These potencial benefits done well are large in number: decentralizaton can help the empowerment of states, can increase 16

the efficency of public sector, can urge the local economic development, can improve the destribution of services, and can decrease poverty. To achieve these results it is necessary to fulfil certain conditions for a successful decentralization, mentioned above. In order for the decentralization to work properly the iniciations or its reforms must be carefully designed, run parallel and adapted with the iniciation for politic and administrative decentralization and fiscal decentralization. The mechanisms of political decentralization must give the local communities the opportunity to send their preferences and priorities to the appropriate local government, to encaurage the local governments to be responsible toward these priorities and toward the citazens they represent. A well designed reform of fiscal decentralization will fail( as the consequence of this the forseen profits and the increase of efficency will not be the desired results) if the mechanisms of an appropriate government will fail in maintaining a optimal level of responsibility on the part of central government toward community. At the same time the local government need tools an appropriate administrative process (such as participation and trasparencies in the process of budget design, correct system of taxes administration and control over staff) in a way to be responsible toward the needs of community. One of the demands of decentralization is to give more autonomy to the local governments in the empoyment, firing or compensation o their staff. It is a fact that many of these countries in transition have failed, at least partially, in the realization of fiscal decentralization as it should be. Let‘s have a look at what can happen if these reforms will not be designed or will not be implemented as it should. Table-1: The posible consequences of fiscal decentralization. ―Not good‖ Problem

Possible consequences

Over-fragmentalism

Inefficient production of public local services; weak distribution of services; problems with local income administration;

The inappropriate transfer of responsibilities over the expenditure: the transfer of great responsibilities to irresponsible local governments

Risk evaluation

Relatively low risk for as long the right to do small expenditures is delegated to certain jurisdictions High risk compared to the relatively great mass of included resources and the difficulties to secure the correct financial Inefficient production and optimal management and the distribution of public services; potential responsibility to all possibilities for corruption jurisdictions

Can lead to vertical fiscal disequilibration ( in favor of local goveernment) andd in macroeconomik tension. Too much local control over Decentralisation or autonomy tarifs and taxes can lead to an over load over the income of taxes

Systems of trasfers designed not very The use of criteria to define the well can favour local unresponsible intergovernment transfers (for expenditure and to reduce fiscal exp. The transfer that fill the ) attempts

Fiscal, vertical disequilibration Security under the appropriate level of and nonfinancial zones local services 17

High risk because of the fiscal dis equilibration and the overload taxes can threaten the macro economic stability The level of risk depends on the degree of decentralization. The greater the decentralization the greater the negative consequences The risk depends on the level of decentralization and the nature of non financiated serveces or under financiated. The greater the level of

decentralization the higher the demage

High level of risk at an absence of a good financial management and reporting structures. Low level of risk in case when processes of The lack of appropriate designing, implementing, procedures in designing a local Deficiencies of local budget and local and monitoring the local budget and the restriction of debts should be paid from the central budget and borrowing local budget government processes do not work well. The impact of a ―deficiency‖ caused in the design of fiscal intergovernmental relations, depends on the fiscal system of every county. Potential risks can be identified since they are in proportion with the relative part of fiscal income that are decentralized, which became a responsibility of the public sector if decentralization is unsuccessful multiplaye this with the probability of failure. With this in mind fiscal decentralization that includes few budget resources bears less risks. In the same way decentralized iniciatives that face with difficulties the implementation (for example iniciative or reforms that look for important changes in the processes and procedures) have a great probability for failure and bear potentitally a higher fiscal risk. Of course, risks that accompany the fiscal decentralization can be reduced by redusing the forseen results from it, but this will bring the loss of potential profits that accompany it.

II Decentralization Reforms In Albania 2.1 Reforms history After a half century of centralization government, Albania joined the decentralization policy and in 1992 happened the first democratic election. Although the significance of this political movement toward the growth of democratic representation, the local administrative and fiscal autonomy remained undeveloped . During the years 1998-2000, Albania confirmed officially the European Card of local self –government, its principles took part in new Constitution and Albania approved the legal reforms of local government. The formal approval of local government principles consolidated the political decision for a centralized government structure, in compliance with Albania‘s laws. The new organic laws ―The organization and functioning of local government ‖ and ―The administrative & territorial division of local government units in Albania‖ marked the end of Administrative Division Councils, decreasing the direct indication of central government toward the local government. Obviously, it was created a resistant policy helping the functioning of decentralized administrative and fiscal structures which include local government, municipalities and communes. Since, the year 2000, there are made some important institutional arrangements, there are approved new regulations and sometimes are applied the first reforms of policy. This activities include: The creation of National Committee for Decentralization, supported by the Technical Group of Experts with international survey in decentralization process . The approval of decentralization strategies and the local autonomy from National Committee for Decentralization. The approval of the new law about the role of the Prefect and the relationship with local authorities. The approval of the law about the State Property, the Transfer process at local government and the creation of the Inventory Public Property Agency 18

The transfer of some particular functions in hand of local authority(including some second rank function in hand of regional district) as determinate in local government laws. The creation of a mechanism for a good distribution of unconditioned grants (which partly replace the conditioned transfers) The approval of an important fiscal reform packet during the year 2002(including the taxation of small business, the profit tax, the properties tax, the system of tax and tariffs) extending the autonomy of local government incomes. The approval of local tax law for small enterprises during the year 2006, which gives the right of encashment the incomes from local government. The approval of a new law about the taxation in Albania, giving the local government more rights and responsibilities during the registration, application and gathering of tax obligations. The public property transfer of local government level as water- supply, social services for retired persons, social services for boarder students of secondary schools. The new fiscal packet of 2002, offered to the local government an substantial fiscal autonomy, allowing the growth of local budget, the flexible coordination of interests between the business community and the local units, the right to compose the encouraging politics for development of municipality, communes and district. Based on the law in force, the local government independently decide about: The base level and the tax level up to +/- 30 %. The administration procedures and the way of gathering taxes and tariffs. The exception or the facility of some categories from local tax and tariff payment. The utilization of collected incomes from local taxes

2.2 The executing ability of local reforms. The improvement of executing ability, especially at local level, is an indispensable condition for a successful decentralization process. The quick decentralization reforms without the necessary ability and institutions (the cooperation between the government and donators) dangers the governing and interrupts the distribution of local public services. This conclusion interferes the object of decentralization process. So, it is necessary to say, during the application of decentralization, the government must have a good planned strategy. The strategy helps creating the ability and institutions needed for this process. One of the problems consists at the difficulty of small municipality and communes keeping and supporting the new talented professional people. These persons immigrate to look for a work , high wage and better life conditions. The immigration has been a big challenge from south and nor regions toward the center regions and abroad due to the lack of a national program helping the creation of ability and institutions at local government. The institutional weakness has been presented especially in budgeting field where the planning and the realized budget are different, where the control process isn‘t t regular, where the monitoring and the valuation don t exist. Besides this, not all the ministries have reacted in satisfactory way to the decentralization functions in according with the decentralization strategy. It is comprehensible, the new role of central ministries can imply the renouncing from some of their competences of local public services distribution and taking the proactive role related with planning, regulation, cooperation, compilation of policy, determination of rules, monitoring, controlling and valuation process. The following practice is realized at Vlore‘s municipality where we have on the role of the consultant. It is an evidence to valuate the executing ability.

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III Implementation of the new fiscal methodology in Vlora City Hall 3.1 The stability of local fiscal policy There are some factors influencing the performance of local government. One important factor is the presentation of local budget as a tool of managerial leadership in economic management. The compilation of budget from local government gives the authority to gather the incomes making expenses toward the needs of public costs. During the presentation of public budget, there are two important factors: The prediction of public costs. The stability of local fiscal policy. The stability of local fiscal policies is realized through a questionnaire composed from local administrate where the important questions were: Are really recognized the tax administrate by business trade and public? Are really recognized the types of local taxes and tariffs by the public sector? Does exist direct relationship between tax administration and businesses? does the tax office is professionally prepared? Which kind of tax procedures the local government use during the registration of subjects? Which is the hierarchy of job responsibilities? Is there delegated the fiscal authority? Do existing the ledgers? Which kind of tax we use: the application of tax is a priori or based on the records of tax office? does the administrate of tax office know the political instructions? have the business associations an active role in decision making process? Which kind of legal measures are applied during the compilation of taxes? does exist the fiscal financing? does exist the control over tax administrative? What measures you use for encashment of taxes? The above questionnaire which is applied in December 2003 brought out three important elements: The recognition and the application of fiscal legislation. The organization of tax office structure. The new fiscal methodology.

3.2 The fiscal legislation. The Municipality Committee has the fundamental role in approval process of taxes and tariffs system. It is the only decision-making authority. Taking in consideration this attributes the municipal administrate in Vlora`s region has compiled and approved these two decisions: The decision of municipal committee ‖About local taxes and tariffs‖ The decision of municipal committee ―The Administrative Contraventions‖ There are approved some types of taxes as below: Local tax of small enterprises. Annual tax of real estate The tax of hotel accommodation The tax of infrastructure influence. The tax of occupied public spaces Label tax The temporary local tax The tax of transfer the property right The annual registration tax of vehicles. 20

The urban sweeping tax. The annual tariff of veterinary service. The registration tax of economic activity. The tariffs of new building The service tariff from local government The city lighting tax The approval of ―administrative contraventions‖: Non payment of local tax within the due date. The classification of fiscal obligation. The fiscal obligation hiding. Non giving information to the tax office. Non informing about changing the address.

3.3 Administration of locative taxability For the implementation of the fiscal system according to the lawful norm and the decisions of the municipal council, is necessarily the foundation and organization of one taxability locative structure for the pickings and administration of the locative taxes. The organization structure of the taxes and tariffs in the end of 2003 came across in accordance of the scheme below: Director of tax duty (Not nominated)

Trades‘ Office (6-persons)

Documentation‘s Inspector (1-person)

Administrator (1-person)

Regional Inspectors (6 -persons)

Trade‘s guardian (2-persons)

Trade‘s Inspector (5-persons)

The analyse of the structure above mentioned shows the negative sides of this method. The structure above mentioned was incomplete with the respective persons The role of the director was made by the vice-chairman of the city hall The district was uncovered with taxability inspectors The register of identification of the taxability subjects was maintained by the taxability inspectors and not by the office of accounting taxability The announce taxability was applied only for one part of the locative taxes and without the elements of identification such as: the number of the announcement taxability, the address, NIPT, the taxability code of the tax payers The announce taxability was applied in one copy by the taxability inspector and in most of the cases it was began like an obligation for the subject and not in the office of taxes 21

The taxes for the parking of the vehicles and the services for allowance of the vehicles that was applied by the office of the services was not registered in the office of taxes. This made it impossible to calculate the pickings of taxes and the sector of taxes was sufficient only with the reconciliation act of the department of thesaurus The announce taxability was not accounted like an obligation begined in accounting ( the register of the taxability obligations), but like an announce receivable taxability (receivable register) The method of maintaining the register handful created lack of information in the right time to the superior organs of the city hall The lack of inside control created a real possibility for tax evasion The weakness management of the taxability section In the department of market was applied the daylong ticket, witch was hard to control, the merchant who operate in market are not identified with the respective names for those was created lack of information for the other sectors of the city hall (the sector of assistance and social support, the sector of employment) The application of the locative tax for the veterinary service was made by the veterinarian inspector. This thing was against the mission of the veterinary service For having a locative taxability system within the lawful norms its necessary the implementation of such a system, which makes possible the identification, accounting and administration of the locative tax. The administration of tax is direct liability of locative power and its his right to define the way of administrating the picking of tax and locative tariffs in accordance with the law and the decisions taken out from it. This administration asks: Hole organization of the locative structure Computerizing of the tax system Right definition of the kind of tax and tariffs and their level Identification and registration of the tax payers Calculation of the tax obligation Announce of the tax payers for the obligation Accounting of the tax obligation Analysis of clamour of tax payers for the applied tax toward them by the structure created by the chairman of the city hall Accounting cash of the tax payers Periodic emission of the debtor of the tax payers Fulfilment of the information for the superior organs of the city hall With the purpose of improving and administrating the tax, the organization of the taxability structure was created like the structure below: The analyze of this new situation defines the advantages of applying this scheme: Efficient in realizing the target Right and hole definition of the tax payers The division of the functions and liability Pellucidity in defining, accounting of tax Descent of the fiscal evasion The right of complaint of the tax payers Taking out the information fast Realization of the tax payers for the payment

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Firstly (2003)

Mayor/Vice-Mayor

Director of taxes and fares ( 1 person)

Fiscal Procedures‘ Sector ( 1 person) Accountability Sector ( 1 person)

Complains commission ( 4 persons)

Check and Sequestrum Sector ( 6 persons)

Trades Sector ( 1 person)

Trades Inspector ( 3 persons)

Finances Directory and Administered Cashbox ( 4 persons)

Tax payers

The locative administration was composed from 5 inspectors, according to the administrative separations of the city, 8 market inspectors and 1 sequestration inspector. Totally: 14 employments Actually (2008) The locative administration is directed or administrated by the director of the tax directory and is formed by the sectors: Sector of fiscal procedure ( 1 inspector) Sector of fiscal accounting ( 1 inspector) Sector of control ( 4 inspectors) Sector of fiscal market procedure ( 5 inspectors) Sector of picking the obligations with force Totally: 13 employments

3.4 New fiscal methodology. The analyze of the situation based even in the information taken from the study done, recommends the application of a new methodology for the application of the tax and tariffs, in difference from the previous periods that was as it follows: Registration of the tax payer from the tax inspectors. 23

Giving the tax obligation notice. Registration of the subject in the register for the obligation cash. Emission of the debtors list. This method to collect the taxes was applied only for the taxes (cleaning, area with no permit, , 1% of the turnover, service tax, hotel sleeping tax, advertisement and shop sign , residence tax ) . For the other taxes it was done only the coordination with the department of thesaurus for the cash deposit done by tax inspector. In the analyze of the above elements, implementation and reconciliation of one new method aims to improve the situation passing in much more stages as it follows, intending to rise the efficiency: Bringing out in areas the subject registration commissions Creating the subject‘s register Local fiscal codification Filling the subject‘s file and application of the Tax Order Accounting of the Tax Order Accounting of the tax incomes Periodic evidences emission List of debtors emission Compilation of the tax reminiscence for the debtor subjects Application of the fine for the debtor subject Emission of the Obstruction-Order of the activities of the debtor Emission of the accounting of the subjects that cashed liabilities after the emission of Obstruction-Order. Emission of the unblocking-Order for the subjects that cash the liabilities Emission of the Sequestration-Order for the subjects that continue to be debtors Accounting of the final list of debtor subjects. This fiscal package composed by the City Hall administration staff and approved by the City Hall Council, served to the Tax and Fares Directory to improve the cashbox of the taxes and local fares. Conclusion As a conclusion, it is important to recognize explicitly that it is easy to set forth the general arguments, both economic and political, in favor of substantial fiscal decentralization, the actual design and working of fiscal and regulatory system is an intensely individualized matter. There is no single blueprint that applies everywhere. On the contrary, the appropriate structure and functioning of a taxability system of finance must take place in the context of the existing culture, institutions, and history of each City Hall and Region. Each level of government should have its own source of tax revenues distinct from the sources at other levels. Where local government has its own tax base distinct from those of higher levels of government, local residents and firms can see clearly the local programs that their taxes finance and have a real sense of the cost of these programs. The implementation of well thought methodologies not only improve the performance of the public services, but also increase the income. Nevertheless, the corruption level goes in the contrary of the decentralization process. Bibliography Bahl, Roy L., and Johannes F. Linn, 1992. Urban Public Finance in Developing Countries, Oxford University Press Bardhan, Pranab , and Dilip Mookherjee, 2000. Capture and Governance at Local and National Levels, American Economic Review 90(2), 135-139 24

Bird, Richard M., 1992. Tax Policy and Economic Development, Baltimore, Johns Hopkins University Press Bruenckner, Jan, 1999. Fiscal Decentralization in LDCs: The Effects of Local Corruption and Tax Evasion, Department of Economics, University of Illinois at Champaign-Urbana, unpublished paper Bird Richard M. and Francois Vaillancourt, 1998. Fiscal Decentralization in Developing Countries: An Overview” Cambridge University Press, 1-48 Oates, Wallace E., On the Theory and Practice of Fiscal Decentralization, IFIR Working Paper No. 200605, May 2006 Weingast, Barry R., 1995. The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development” Journal of Economics, and Organization, 11, 1-31 United Nations Development Programme, Fiscal Decentralization in Transition Economies: Case Studies from the Balkans and Caucasus, Bratislava, 2005, www.undp.org/europeandcis www.minfin.gov.al of Finance Ministry of Albania. www.tatime.org.al of Tax Institution of Albania.

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THE ANALYSIS OF THE ENTERPRISE SOCIAL MANAGEMENT BASED ON DASHBOARDS AND SOCIAL INDICATORS Maria-Daniela BONDOC University of Pitesti Carmen Gabriela SÎRBU Danubius University of Galati Abstract: This paper proposes a focus upon the aspects related to social indicators found in the social dashboards which are necessary for a good social enterprise management. The formal recognition of the need for social information took place in France, once with the promulgation of the social balance sheet law. It can be considered a dashboard with annual frequency, containing a number of indicators which allow a precise diagnosis of human resources and social aspects. The law of 1977 stated the social balance sheet by identifying aspects of human resources, with emphasis on social indicators. The paper presents in detail the milestones of emergence and evolution of social balance sheet, but also its objectives as a dashboard. The develop of social dashboards can be a guarantee of a good "social health” of the organizations in which they are perceived as a management tool because they simplify the Human Resources reporting and analysis.

Key words: social management, social information, social indicators, social dashboards, social balance sheet JEL Classification: M12, M14, M54

I Foreword The financial statements of shareholders and other stakeholders should be completed with social data that can reveal the good or poor management of the company. Taking into account the social criteria along with the traditional profitability criteria for guidance concerning the investment option has become a necessity. At the microeconomic level, it is necessary to use social analysis tools as an expression of a real awareness concerning the role of human resources, due to the fact that the company management must necessarily take into account the human and social aspects, the main objective being the replacement of conflicts with cooperation, dialogue, negotiation. For an efficient management and an operative control of the whole activity of the company it is necessary to know the evolution of the parameters of each business segment, as well as to exercise control of the difference between the obtained outcomes and the expected ones. This goal can be achieved through the dashboard, one of the most modern company management tools.

II Social Management Dashboards 2.1 Definition and necessity of the dashboard The dashboard is a set of relevant information related to the results obtained in the managed field, presented in a synthetic, pre-established form, and submitted to the beneficiaries in an operative manner. (Nicolescu, Verboncu, 2001:161) The dashboard is a management tool that, by extrapolation, allows for short and medium-term forecasts made in order to ensure the achievement of a preset objective. It combines a set of indicators, and for each of these indicators a standard, a reference level deemed normal is determined. The underlined results 26

should be accompanied by the presentation of the causes that have led to some deviations (positive or negative deviations) from the preset objectives. Any deviation from the standard will need corrective actions. Thus, the fundamental role of the dashboard is to alert the responsible persons concerning the noticed deviations so that they could intervene to remedy the situation. Right from the first signs of deviation, this action is a ―pro-action‖ (Taïeb, 2001: 2), named as such because it appears before the final comparison between the expected objective and the assessed outcome, and the sooner it is applied, the more efficient it is; this ―pro-action‖ zone is decreased with the decrease of the time left until de achievement of the objective. The company should not bear the costs of a ―reactive‖ management, and that is why the indicators give signals of dysfunctions in advance. When a potential future abnormality is noticed, a ―pro-action‖ will follow. On the other hand, ―re-action‖ defines an action that is performed a posteriori, when has already been discovered that the objective has not been reached, i.e. it is an action taken too late. The dashboard has a substantial contribution to a solid substantiation of tactical decisions, and to the anticipation of potential situations that may occur in a certain period of time. It contains a set of indicators that allow the managers to know the status and evolution of the systems they manage, as well as to identify the trends of these systems. The dashboard allows for an operative confrontation with the immediate reality and for the initiation of the corrective actions necessary in order to keep within the preestablished framework. The dashboard should be elaborated both at the global level of the company (its content being based on the exchange of information from the dashboards elaborated at the level of the organizational subunits), as well as at the level of each subunit (the necessary information being collected from various financial, statistical, social, technical records, etc. belonging to these subunits). Dashboards are tools adapted to needs and evolving along with these needs. Four important functions a dashboard can be defined (Nicolescu, Verboncu, 2001 : 161): the function of informing the manager concerning the status of the managed segment; the function of signalling certain unfavourable situations, deviations from the normal situations; the function of assessing the obtained outcomes and the achievement of the set objectives and, consequently, assessing the quality of the decisions that were made and the actions that were performed in order to put such decisions into practice; the decision-making function, i.e. the relevant information, sent in an operative manner to managers on various hierarchic levels allows the managers to substantiate and make the adequate decisions. For the company management optimization, dashboards are all the more valuable, as they can answer the need to make comparisons with others, which is essential in a competitive economy. 2.1 The social dashboard– a management tool Being concerned with the social efficiency of the company and aware that they need to prevent labour conflicts, managers design social dashboards that include the main social indicators. These dashboards allow for the regular comparison of the outcomes against the objective, for the analysis of the deviations, and for the identification of the actions that must be taken. (Darbelet, Izard, Scaramuzza, 1993: 8-9) The main objectives within the human resources compartments of the companies can be defined as follows: recruiting and keeping competent, efficient, motivated, geographically adaptable staff, stable yet not too rigid, young, yet not too inexperienced, able to make progress (even if the direction of such progress is not known) in such a way as to decrease the wages fund, and yet to keep a peaceful social climate. In this ambiguous context in which it is difficult to ―navigate‖, there is an imperative need for social dashboards.

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Social dashboards allow for the measurement of various outcomes of a social policy, for the identification of deviations and for making the right decisions. The frequent economic and structural changes lead to a strict management of the manufacturing tools and people. This explains the fact that social objectives are currently part of the strategic objectives of the company. The means available for the human resources compartments are also evolving, countless tools being developed for wages fund planning, forecast management of jobs and competences, for the assessment of absenteeism, along with other types of dashboards. The sophisticated administrative data processing systems that are being developed provide for many social data extraction and conveyance possibilities. But the items of information expected by all the stakeholders of social management represent mere information that is limited in number and is selected based on its relevance. Consequently, the human resources compartments play an important role in the communication of the selected information, the content of which is enriched and the form of which is altered to increase its legibility. Beyond the specific features of their purposes and the peculiarities of their recipients, we can also define a typology of social dashboards, i.e. two main categories: Monthly dashboards; Annual dashboards. Even if the objective of annual dashboards may cover a period of 12 months, these dashboards are defined by a monthly draw-up and dissemination cycle; for example, the dashboards concerning the amounts budgeted for the payroll or training. The second category of dashboards is mainly used at the level of the general management or of the Human Resources Department; they have long-term purposes and the comparisons of the levels of the indicators for several years allow for the opportunity to highlight the trends of their evolution. An annual dashboard is Social Balance Sheet, which is the first dashboard ever required by law in France. With regard to the field of the human resources management, some examples, out of various social dashboards, are as follows: the absenteeism dashboard (the objective of which is the decrease the absenteeism and to reduce the related costs), the training and refreshment dashboard, the dashboard of industrial accidents, the employee performance assessment dashboard, etc. Drawing up these dashboards may represent the guarantee of a robust ―social health‖ of the businesses within which they are used as management tools.

2.2 Social Indicators – The Elements Of Social Dashboard The development and selection of social indicators represents an important aspect of the social dashboards building methodology. A social indicator accomplishes three functions within the company (Taïeb, 2001: 40-41): The function of supplying information: the most important role of any social indicator is to provide information, because it allows the company to measure the outcomes of the social policy applied by the company; The diagnosing function: a social indicator allows for a diagnostic, i.e. the highlighting of the difference between the level of the indicator and the value deemed normal; The forecast function: the alert indicators allow for the detection of the elements susceptible to cause dysfunctions, the specification of the means necessary in order to take corrective actions and the follow-up of the progress of such actions. There is no general rule for the choice of social indicators, due to the fact that they need to be adapted to the aimed objectives and to the recipients for whom the dashboards that include these indicators are made. In terms of quantity, their number should be limited to what is of the essence, and in point of quality, only those indicators that best define the aimed objectives should be kept. There are several categories of social information from which the social indicators necessary for dashboard can be selected: 28

the category of structure information: the structure or position indictors that include parameters individualizing the persons within the organization, allowing for the definition of their characteristic physical and social features. In this category there is information like: the age, the level of education, marital status, etc. These indicators are also named position indicators because they reflect a certain situation at a given moment. the category of competence information: i.e. the indicators related to the employees‘ training and competencies (initial and continuous training, as well as professional competences and their contribution to the outcomes). This category includes the obtained diplomas, the number, type and duration of the attended refresher courses; these competence indicators reflect the capacity of the company to adapt to the developments in the field. the category of behaviour information: includes the indicators related to the collective behaviour of the employees in direct relation to the analysis of the social climate of the company. This is social information related to the employees‘ degree of implication and motivation, for example the short-term absenteeism and the number of the employees taking part into sports and/or cultural activities organized by the company. the category of political information: it refers to the indicators that express the outcome of a supported social policy, for example, the method used for the determination of remunerations and their levels on categories. The main source of social information can be found within the company itself, i.e. the multitude of variables that individualize each employee. The information submitted by the hierarchical responsible persons is not only position data, i.e. static data (such as the age, gender, marital status, etc.), but also dynamic information related to the work rate and the movement of the employees. There is no general rule that can be applied for the selection of the social indicators included in dashboards, but rather social indicators should be fine-tuned to the set objectives and to their recipients.

III Social Balance Sheet – Dashboard And Tool For The Analysis Of The Human Resources Management 3.1 Definition of social accounting The traditional attitude towards the employees of a company consists in treating these employees as mere expenditure. However, while for all the other investments, the costs and profits associated to a project can generally be assessed and compared, in the case of personnel investments the process is different and more difficult, first of all due to the fact that only the expenses are clearly known, while the information related to the results or advantages of the human resources development programmes is not usually available. Consequently, in the specialized literature there are an ever increasing number of opinions according to which human capital should be subject to the same logic that implies a comparison between efforts and effects and that one of the traits of organizations in the new millennium is the fact that they show a trend towards social accounting, thus becoming aware of their identification as generators of moral effects (Manolescu, 2001: 18). If companies intend to obtain more and more information in more detail related to their employees, or if there is a need for the strategic management of the employees, the necessity for real human resources management tools is more acute than ever. The management of human resources needs reliable, accurate, simple and progressive observation and analysis tools. One of them can be social accounting, which has already become a legal human resources management tool in certain countries. A parallel seems to be drawn with the accounting balance sheet when social balance sheet is defined, but this attempt to compare them is deceptive. Despite the meaning that might be inferred from its designation, social accounting statements are not a two-column table in which the balance between the resources of a company and there usage at a certain moment in time may be presented. Social accounting 29

does not allow for the capacity to know whether the company makes profits or runs at a loss from the social point of view, because there is no unit of measurement, for the joint evaluation of the various aspects it takes into account. The term ―social accounting‖ must therefore be interpreted as an inventory, in the same way that we can speak about the balance of a legislative period or of that of somebody‘s health. The first country that a promulgated a law on the obligation to draw up such a document is France. As a matter of fact, on 12 July 1977, Law no. 77-769 on the social balance sheet of the company was adopted, this law and summarizes in a single document the main data that allows for the assessment of the status of the company in the social area. The first article of this law itself stipulates that the manager of the company draws up and submits to the committee of the company an annual social balance sheet when the labour force comprises at least 300 employees. 3.2

The context of the creation of the social balance sheet, its origin and sources of inspiration

The employees were recognized as a fundamental asset of the company, and in time, the tendency towards quantifying social aspects has developed as well, following the model of financial accounting. Historically, the United States of America seem to have originated the first researches in the field of the human resources accounting methods. In the late ′20s, there were certain American attempts to increase awareness concerning the ―social status‖ of the nation, to measure social changes and to search for means of assessing the effects of the social policy actions. At President Hoover‘s request, in 1929, a team of researchers was charged with drawing up a national report on social tendencies in the United States. This report contains a first definition of social accounting in the specification that the value of the respective report should be found in the effort made to join separate elements and factors of the social American life. In relation to the starting point of the French thinking concerning the national social accounting, Jacques Delors, who was the Chief of the Service of Social Affairs of the General Planning Agency, had an important theoretical contribution, by publishing in 1971 the study The Social Indicators, and understanding the need for developing some tools that could express the status of the nation in various fields of the economic and social activity. More concretely, J. Delors proposed that the social fields usually explored by the statisticians and economists should be exceeded, by the implementation of certain aspects that made the object of mere quality assessments: the behaviour related to the ones that were left out, the society‘s openness towards the outer world, woman‘s participation into the economic life, solidarity. Most of the originality of the project consists of the fact that certain social indicators proposed by J. Delors implied that types of behaviour rarely taken into account before should be taken into account. A survey of the Economic and Social Council on the establishment of the social accounting statement, proposed in a section dedicated to social activities in November 1973 was presented by Yves Chaigneau. This report aimed to be both ―descriptive and critic‖ and intended to cover a vast area included in the social policies: the employment situation and the education and training, work duration and conditions, medical actions, social services related to the education and health policies, third age and, more extensively, the living conditions, and the examples are not limited to the aforementioned. Another survey was presented on 19 November, 1975 and, although it was a continuation of Chaigneau‘s previous survey, the new project reflected a special perspective; in compliance with the intention of the Economic and Social Council, this new document was dedicated to the segment specializing in general economic aspects in order to be used as a basis for the report on the economic circumstances. This was an intermediary document the title of which, The Evolution of Social Status, no longer referred to any social accounting statement. The foreword of this survey mentioned the failure of the attempts related to the creation and usage of social indicators as generally accepted analysis tools, similar to those used in the financial analyses. The report laid claim to an empirical approach, and proposed to co-workers to only retain part of the topics mentioned in the previous survey. For example, the demographic data, that related to the 30

professional training and to social mobility, to the living conditions, was no longer in the centre of attention, five main areas being analysed instead: the employment status and the working conditions, labour relations, incomes, marital status, and health. One could question the ability to objectively assess those social facts that had traditionally been appreciated in terms of quality rather than quantity; by simply reading the report, various, even opposite interpretations could have been given; thus, the efforts towards an exhaustive approach associated to the notion of accounting report were no longer relevant. In the middle of the ‗70s, the most modern approach of social accounting was at a microeconomic level. In such a limited framework, perfecting the indicators that might have been able to supply objective information on the relations of the company with its environment and with various partners (employees, suppliers, subcontractors, etc.) seemed to be the main focus of attention. In the ‘70s, although France seemed to be the only Continental European country that expressed reflections and experimented with social accounting, it was not alone in this approach. The fact that it was the only country that promulgated laws in this area seems to have maintained the illusion that it is the only one. A few companies in the Netherlands published, in fact, social accounting statements for the first time ever (Sociaal Javerslag) either in the form of an internal log, or as part of the annual report to shareholders, or in the form of a separate report, published at the same time as the report to shareholders. In contrast with the rather reserved French labour unions, German labour unions expressed, at an earlier stage, their interest in the concept of social accounting and the experiments related to it. This is the case of the strongest one, IG-Metall who, after studying various projects and experiments, planned the implementation, within the company, of a minimum required ―standards‖ list that varied, however, function of the size and field of activity of the company. The originality of this framework lies in the fact that it proposed the coexistence of the internal and external relationships of the company in the field of application of the social accounting statement; the field of the internal relationships referred to steps taken for the professional training, the safety at work, continuous education, working conditions, the additional pension plan, while the field of the external relationships included information on the level of contamination and pollution due to the activity of the company, the Government‘s commitments concerning certain subsidies, infrastructure elements. Despite the efforts and insistencies of the IG-Metall labour union for the promotion to the federal authorities, this project did not result in the promulgation of any law in Germany. Ever since 1973, the movement of the employers‘ associations Entreprise et progrès (Enterprise and Progress) proposed two tools focused on the social relationships of the company and on the working conditions: the social dashboard and the social report. The social dashboard included a limited number of simple indicators. It was merely designed as a social management tool meant to be used at the internal level and to facilitate the responsibility decentralization. The Company named Roussel-Uclaf designed such a dashboard that covered the status of 9,600 employees and included 6 indicators. Being a management tool, it was decentralized at the level of units that included an average number of 50-60 employees (workshop, section, and compartment). The documents for the dashboard were filled in once a month by the responsible persons of each unit, and then summarized at the level of the company. This formula allowed for an easy and fast monitoring of the elements that were deemed important and was able to trigger an alarm signal in case of anomalies or significant changes (for example, in terms of absenteeism). In what the social report was concerned, its purpose was to inform the employees on the social evolution of the company. This report had to include data that would allow for the assessment of the position of the company within the general social context. The objective of the project was not so much to highlight the costs of the performed actions, but rather to express the effects of these actions on the situation of the persons in question. For example, a synthesis of the outcomes of the company‘s social policy was planned to be presented once a year and this social effort was planned to be reoriented depending on the economic situation. The social report of the movement Enterprise and Progress was, therefore marked by the 31

intention to eliminate the boundary between the economic and the social aspects. Being designed exclusively by managers, first of all for each employee, who was considered a separate entity, the report is, nevertheless defined as an internal communication tool, and as a basis for the dialogue between social partners. Alain Chevalier, the Administrator and General Manager of the group Moët-Hennessy-Dior began his research on the social balance sheet in the Enterprise Institute (Institut de l‘Entreprise), a research and thinking centre for managers, known as a place where new thinking trends related to economics and society are gathered and disseminated. Chevalier intended to create a report on the usage of ―social energies‖ owned by the companies (the employees and their potential, the infrastructure, the scientific and cultural resources), as it is a very well-known fact that these resources become degraded and obsolete if those who use them neglect to take into account the need to maintain or refresh them. The possible usages of these resources were described in a classified list with nine main sections referring to sets of problems such as the working hours, the working conditions, the wage policy, the company‘s stand towards the advocacy organizations, the external effects on the local or regional labour status, the aspects related to the environment, etc. For each section, the usage of the resources had to be measured, quantified with the help of social indicators that could take the form of mere numerical values, percentages, graphs, etc. The usage of social indicators had to allow for the emphasis of a number of highly sensitive aspects for the company at a given moment in time, aspects that were, therefore, susceptible to constitute the object of further investigation. This action was supposed to result in a synthesis able clearly define how the company used its social energies and contributed to their renewal. The method proposed by Alain Chevalier was meant to become the basis for a dialogue between the company management and the company‘s employees as well as the basis for planning social actions. Long before the initiation of bills on social accounting, some companies had created various projects implying the awareness of the fact that the image of their brand and the long-term success were not exclusively related to their financial results. Their concern with measuring social aspects and obtaining accurate figures in this respect represents a feature of most of these experiments and is a legacy of the previous methodological thinking concerning the creation of a general social accounting balance. But from other points of view, the projects related to a social accounting balance of the company were divergent: some wished to favour its quality of management tool, while others placed the accent on its role of a reconciliation and social dialogue tool; opinions also varied in terms of employees‘ and their representatives‘ association to the elaboration procedure and to the methods of evaluating and controlling the document. The field of application attributed to the social accounting balance was rather different. Some tended to limit this field to their companies and their employees, others tended to expand it to other partners as well: customers or clients, suppliers, shareholders, public authority, etc. Many years ago, professor Spiridon Iacobescu from the Academy of High Economic and Industrial Studies was the one to stress not only the need for social information that could be grouped in the form of quantifiable social indicators, but also the need for a social and legal document called social report: ―If we try to examine the social facts recorded during one year, placing the bad ones on one side and the good ones on the other, i.e. separating those that were detrimental to social life from those that were useful for it, we will come to draw up a non-economic balance, a balance of social facts … When we try to build a typical balance, we will have, on one side, i.e. the Liabilities, the general accrued Welfare and the moral Benefit recently achieved, and on the other, i.e. the Assets, the social Organism, individuals and social communities the duty of whom is to preserve their social capital: General Welfare‖ (Manolescu, 2001: 19). Therefore, this concern with social aspects has been present in the specialised Romanian literature for quite some time. In 1974, the new president of the French Republic of that time, Valéry Giscard d‘Estaing, transposed the society‘s wish for change into the establishment of a Research Committee for the Enterprise Reform. Subsequently, the committee established in 1975 and managed by Pierre Sudreau, after extended consultations with various social partners, submitted a survey and made proposals for the enterprise 32

reform. The committee admitted that there was a confidence crisis among social groups and that the enterprise was subject to conflict tensions that made it change. In this respect, Sudreau‘s report made 69 proposals that revealed the necessity to know objective social data, while it also indicated that, if there was an intention to include social management into the strategic concerns of the company, the moment had come to set dialogue among the social partners of the company on a numerical basis (evaluated in numbers) in order to allow for the measurement of the efforts made in the social area (Igalens, Peretti, 1982: 12). Sudreau‘s report aimed at reconciling the two dimensions of the company (the economic and the social ones) that is both the main source of welfare and jobs and, at the same time, the living environment of millions of employees. Among the numerous recommendations in the report there was also ―the creation of an annual social balance sheet at the level of each company, drawn up on the basis of the indicators that are representative for its social status and working conditions‖ (Igalens, Peretti, 1982: 13). In April 1976, an official statement of the Council of Ministers mentioned that the Ministry of Labour would select companies with various sizes within which, with the approval of managers and the employees‘ representatives, experiments with the purpose of adapting the bill to the dimensions of the companies would be conducted for two years. At the end of these two years, the Minister of Labour would propose to the Government methods for the generalization of social balance sheet based of the results of these experiments and after consulting the social partners. It may seem logical to experiment before promulgating the law, but in France this meant breaking new grounds, because, up to that moment, the main interventions of the Government in the operation of the companies, especially in the social field, had been made under the pressure of events or in secret, in the cabinets of the Government. However, only 7 months after the government statement, a pilot study for the bill, drafted within the Ministry of Labour, was already submitted and ended an original attempt of ―social experiment‖. The text was adopted on June 30, Law no. 77-769 was promulgated on July 12, and the related application decrees were signed on December 8, 1977. Consequently, the year 1978 became "year 1" of the application of the legal requirement to draw up social statements in France. Chapter VIII of the French Labour Code is dedicated to this law. For example, article L. 438-3 stipulates that ―the social statement summarizes, in a single document, the main figures that allow for the assessment of the status of the company in the social area, for the recording and measuring of the changes occurred in the previous year and in the two years before that. Consequently, the social balance sheet is focused on information concerning the status of the jobs, remuneration, and auxiliary obligations, hygiene and safety conditions, other working conditions, professional training, professional relationships and also the living conditions of the employees and their families insofar as they depend on the company‖ (Code du travail, 1995: 688). 3.3

Objectives and usage of the social balance sheet

The three purposes of the French social balance sheet stipulated the Law from July 12, 1977, were to improve the provision of information, to facilitate reconciliation as well as planning. Although it was not mentioned among the objectives stated by the legislator, the usage of the social balance sheet as a management tool constitutes a major preoccupation of the companies. The French Labour Code had stipulated, even before the Law from July 12, 1977, the submission to the company committee of almost 80% of the information included in the social accounting statement. Starting from this fact, one might be tempted to minimize the importance of this new document; however, this law represents a triple progress in terms of information: Informing the representatives of the employees: one annual document replaced scattered, heterogeneous data supplied at irregular periods of time; Informing the employees: any employee that applies for information included in the social balance sheet may receive access to it; before this law, supplying social information directly to employees had been discretionary; 33

The external informing process: the social balance sheet should be disseminated, in the case of public limited companies in the same conditions, as the financial statements. An employee or a representative of the employees will read a social balance sheet in a different manner as compared to a shareholder or an administrator. Reading a social balance sheet is determined both by the need for accuracy and by that of clarifying the information in order to allow for better reconciliation (Igalens, J.-M. Peretti, 1982: 51-52). The social balance sheet can be an internal, as well as external information tool in Romania, too. The internal supply of information refers to: Informing the representatives of the employees: each new law related to the social aspects is translated into new information supplied to the representatives of the employees, but these items of information are added one after the other, without a well-defined periodicity. The social balance sheet sets order in this mass of information and unifies it. The main recipient of this document is the Company Committee (composed of elected representatives of the employees); moreover, other recipients of the draft social balance sheet are also the trade union delegates, but the members of the company committees have a special place due to the fact that, after receiving the draft social accounting statement, they present it in a meeting dedicated to the examination and analysis of this draft, an endorsement; so discussing the draft social balance sheet is an opportunity to express and publish opinions concerning the social policy of the company; Informing the employees: from this point of view, the social balance sheet is completely innovative; the fact that employees have access to this document gives them the opportunity to have better knowledge concerning the company‘s social policies and performances on the basis of elements the vast majority of which they had previously ignored. In fact, the social balance sheet seemed to be a tedious document, the legibility of which was limited for most part of the employees. Effort was therefore needed from the management of the company, on one side, and the representatives of the employees, on the other side, to improve the recipients‘ readiness so that they could read and interpret part of the data in the social balance sheet on their own. In a first stage, there was the need to ask questions to the employees concerning their need for social information. This ―inventory of wishes‖ revealed a strong interest in aspects related to remuneration and safety-at-work. The company press played an important role in training the employees in analysing special data; companies‘ internal newspapers are the supports that allow for comments and analyses of the social accounting statement. The efforts to provide social information are addressed to the management staff, first of all, as their social management importance is acknowledged. The social balance sheet is thus a means of supplying information and even of training the management staff in order to increase their awareness of their social management responsibility at each hierarchic level. The external supply of information refers to: Shareholders: the French law on the social balance sheet also stipulates that shareholders should be informed using the same procedures as those related to financial information; these procedures apply to the social balance sheet filled in with the endorsement of the company committee. For the companies listed on the stock exchange, the complete text of the social balance sheet should be attached to the annual statement published by the company; if the social balance sheet is missing, it is advisable to clearly indicate the means by which information may be accessed in the annual statement. The shareholders are indeed interested in the social information, because an advanced social policy accompanied by positive economic results allows them to hope for better stability. Nevertheless, studies of the companies‘ social climate and opinion surveys have shown that a high level of average satisfaction does not avoid industrial disputes. The selection of social information that is relevant for investors is delicate; certain studies have revealed the relations between economic 34

and social performance, but the causal relations are not very clear. But a possible analysis of the social data and economic information available for several years could allow for finding the social indicators with a special impact on the development of economic performance; The administration (all the state services): when the representatives of the Ministry of Labour presented the bill, they insisted on the fact that the social balance sheet was not a tool to be used for supplying information to the public administration; certain indicators kept in the social balance sheet allow labour inspectors to check the fulfilment of certain requirements (for example, complying with the requirement to hold the meeting of the Hygiene and Safety Committee). However, there will be no centralization of social accounting statements coming from various companies and no comparison thereof; Business partners: although nothing was stipulated in this respect, certain companies believed it was appropriate to submit business information as well as their social accounting statements to their clients, customers or suppliers. Supplying social information to clients has developed especially in the form of including social topics in the advertising of the company to its partners. For example, we can find, in the ―codes of good conduct‖ adopted by some companies, the preoccupation to include social responsibility among the criteria used for the selection of suppliers. Consequently, a company that has many subcontractors for hazardous tasks will take into account the safety policy of the subcontractor. From this point of view, the usage of the social balance sheet is quite interesting; its analysis may possibly bring new elements necessary for the assessment of the ―social risk‖ of the supplier; The public: as it is a document of internal interest, the social balance sheet is not addressed to the public. Nevertheless, the methods used for its dissemination make it available to the public in most situations. Certain companies have made special efforts in this respect: press conferences, submitting the statements and other social reports to various documentation centres (for example, to universities and research institutes), and giving answers to questions asked by the public. It should be noted that the ―exploitation‖ of social accounting statements by the business press stresses the comparisons between companies rather their social diagnostic. Under the Law from July 12, 1977, the social balance sheet was not considered a preponderantly management tool. However, studies made in companies with some practice have shown that the ―management‖ function is essential. It would be interesting to assess, based on the experience of the companies, how, to what extent, and in what circumstances can the social balance sheet be a management tool. Two ideas can be inferred from the analysis of the studies focused on the social accounting statement: as a group of information, it is a management tool because it facilitates the identification and approach of social problems; for others, this document becomes a management instrument only if it is integrated into a social planning and management system ((Igalens, J.-M. Peretti, 1982: 64). The statement of the results summarized in a single document with standardized indicators allows for the detection of problems, of weaknesses. Company managers often trigger alarm systems, most frequently in relation to the employment structure (for example, the risk of imbalance due to the retirement of qualified personnel that is not followed by new employments), the lack of a procedure of integrating new employees, steps taken for the improvement of working conditions, the wage policy. The social balance sheet has often determined precise steps: the industrial medicine specialist‘s involvement into the technical commissions for the purchase of raw materials or equipments that could affect the working conditions, the establishment of an entity in charge with receiving newly-employed persons, neglected up to that moment, etc. Therefore, the social balance sheet is not only a descriptive document, a simple inventory. In three exact areas (safety, working conditions, professional training) it is used as a basis for the application of the company‘s annual programmes, thus contributing to more substantial debates in this field, in order that recognized clearly priorities should be highlighted (Collard , 1998: 12).

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The social balance sheet may also be considered a reconciliation tool, i.e. used to settle disputes because business relationships often become difficult in companies, and the lack of information or insufficient information slows the progress of negotiations. Among the objectives of the social balance sheet there is also the one of providing for an objective and useful basis to social partners; it can constitute a very important reference element during negotiations related to the priorities of the company‘s social policy. The social balance sheet has the objective of fulfilling the needs for social information in order to facilitate reconciliation, agreement, negotiation, especially in industrial disputes by providing to social partners a document meant to help them reach better reconciliation. The supplied information should be addressed both to the appointed representatives and to the elected ones. When this information is supplied, the objective is reconciliation, the debate concerning the social status in the company, the weaknesses but also the performance, the social accounting balance. The social balance sheet may become a social progress tool, provided that its recipients know how to use it in an appropriate manner. The social balance sheet is made available for any employee that applies for it. This rule expands the traditional circle of the recipients of social information and constitutes an urge to develop a form of social dialogue within the company. The statement is not automatically made available for the employees; those who are interested must express their wish to have access to this document in an explicit manner. Although it is widely used, the systematic dissemination of the social balance sheet is not an obligation. The document can be disseminated by various means: it can be published in the company‘s internal newspaper; it can be posted within the company or on the internet/intranet. Conclusions The human resources responsible people and the company management need dashboards appropriate to their positions, because the management decisions they make are based on certain social information the objective of which is to maintain a sufficient number of teams in good physical and moral health, in conditions that are proper for the development of their competences. From this perspective, social dashboards summarize the submitted information in the form of social indicators that, among others, allow for the monitoring of the changes in the number of employees, the control of the increase in the wages fund, the measurement of the increase in the employees competences, and for checking the company‘s social climate. A possible social balance sheet of the Romanian companies should take into account information concerning all the fields related to the living conditions of the employees, in their working process, to allow for the assessment of the company‘s social policy, to evaluate this policy over time; therefore, the social accounting statement, in its quality of dashboard, should be adapted to each company and should lay stress on the positive elements but also the deficiencies of the social policy. Bibliography Bondoc, M.-D. 2008. Analiza gestiunii resurselor umane (The analysis of Human resources management), Scrisul Românesc, Craiova Collard, F., 1998. Comprendre et élaborer un bilan social (To understand and to develop a social balance sheet), Liaisons, Paris Comhaire, P. , Dendauw, C., 1997. Du bilan social vers un tableau de bord social (From the social balance sheet to a social dashboard), Revue de gestion des ressources humaines (Human Resources Management Review), 24, 17-28 Darbelet, M., Izard, L. , Scaramuzza, M., 1993. Economie d’entreprise (Economy of the enterprise), Foucher, Paris D‘Arcimoles, C.-H., 1997. Information sociale, bilan social et évaluation financière de l’entreprise: pratiques et attentes des professionnels (Social information, social balance sheet and the financial 36

evaluation of the enterprise : practices and expectations of the Professionals) , Actes du congrès de l‘IAS, XX° anniversaire du Bilan Social (The IAS Congress Proceedings, XXth anniversary of the social balance sheet), LIRHE, Université Toulouse I, 193-203 Igalens, J., Peretti, J.-M., 1982. Le bilan social de l’entreprise (Social balance sheet of the enterprise), Presses Universitaires de France, Paris Martory, B., 1992. Les tableaux de bord sociaux (Social dashboards), Nathan, Paris Martory, B., Crozet, D., 2002. Gestion des ressources humaines. Pilotage social et performances (Human Resources Management. Social steering and performances), Dunod, Paris Manolescu, A., 2001. Managementul resurselor umane (Human Resources Management), Economică, Bucureşti Nicolescu, O.,Verboncu, I., 2001. Metodologii manageriale (Management methodologies), Tribuna Economică, Bucureşti Taïeb, J.-P., 2001. Les tableaux de bord de la gestion sociale (Social management dashboards), Dunod, Paris Weiss, D., 2000. Les ressources humaines (Human Resources), Éditions d‘Organisation, Paris Zardet V., 1997. Bilan social et pratiques de pilotage : points de vue de DRH (Social Balance Sheet and the steering practices, HRD viewpoints), Actes du congrès de l‘IAS, XX° anniversaire du Bilan Social (The IAS Congress Proceedings, XXth anniversary of the social balance sheet), LIRHE, Université Toulouse I, 3-40 *** Code du travail 1995 (Labour Code), Dalloz, Paris,

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ENTREPRENEURSHIP EDUCATION : DO STUDENT-COMPANIES OFFER SUPERIOR VALUE? Ghislain HOUBEN University of Hasselt Belgium Roger MERCKEN University of Hasselt Belgium Abstract: An entrepreneurship course for academic students is expected to be a vital stimulus to promote entrepreneurship and the setup of creative new businesses. But do the students learn the right things? A comparison is made between the more classic “business plan” course and the setup of an actual student company.

Key words: entrepreneurship, education, students JEL Classification: A 13, A 23

I Introduction: key issues for entrepreneurship courses Entrepreneurship courses are taught at most universities and other institutions of higher education, both for business students and other students. Since the first ‗entrepreneurship‘ course was offered to Harvard MBA students in 1947 (Katz, 2003), the popularity of this type of course has grown spectacularly. As the field of entrepreneurship is seen as being in its early stages of development within the larger domain of management (Shane & Venkataraman, 2000) the theoretical foundations and the best educational approach are still subject to considerable evolution and debate. A few principles are however more or less generally accepted, though differently filled in.

1.1 Hands on approach Most of the courses prefer a kind of ‗hands on‘ approach (Gorman et al., 1997): cases, the creation of a business plan, simulation, the setup and running of an actual company. ‗Learning by doing‘ is generally preferred. It is observed that much of what real entrepreneurs do is the product of tacit knowledge, that is most often acquired through learning by experience (Honig, 2004). To mimic this experience, simulations or real life student companies can be created. Often the business plan, to be prepared by a small group of students, is at the heart of the course. Depending on the kind of setting, the business plan may be the end product or the starting point of a dynamic learning process. All too often the basic and final objective of an entrepreneurship course seems to be to learn how to set up a good business plan. The touchstone of the quality of the learning process is whether the students succeeded either in translating a vague business idea into a concrete business plan that can be used to convince venture capitalists and earn credibility for the business project, or in convincingly demonstrating the fact that the business idea cannot be transformed into a viable business and thus should be abandoned. This raises a first problem: a successful demonstration is often preferred over a no-go advice. Often, the plan has to be defended before a jury of real managers or bankers/venture capital companies. This will obviously help to improve the real life features of the plan and can contribute to a real networking experience. Outstanding plans may be picked up by a member of the jury who will act as a promoter of a real setup of the business proposed, and help to provide the needed contacts. It is also possible that a member of the jury will act as a promoter of one the team members who has demonstrated real entrepreneurial skills but is in need of an enabling environment. It is fair to say though that in many cases the networking effect will not occur and that the business plan will be evaluated as a static product. A business plan resulting in the conclusion that the business idea cannot be translated into a viable business will be much harder to defend than a presumed success, though one of the major advantages of a business plan is the prevention of an unsuccessful start-up. If the entrepreneurship course is somehow linked to one 38

of the popular business plan competitions, success is even more important. Business plan competitions focus on the development of successful business plans and reward the ‗best‘ business plan. Though they generally take into account the quality of processes that lead to that result, the emphasis is on the quality of the business plan product. Beyond any doubt, students will learn a lot by creating, as a team, a good business plan. They learn to integrate knowledge acquired in many separate courses, to interact with each other and with the environment and to combine and translate lots of information into the format of a comprehensive business plan. But on the other hand, do they learn the right things to become a better entrepreneur? We have to take into account quit a number of limitations of the business plan approach and even a few conceptual flaws..

1.2 Dynamics, learning from mistakes and intuition The static use of the business plan obviously has a number of drawbacks. It suggests that the creation of the business plan is the end of a learning experience, while in fact it should only be the start of it. It is too static in a number of ways. Competition is of course included in the business plan (SWOT-analysis), but not in a dynamic way. Business games and simulations are better to improve the study of the dynamic influence of competition, as is a real life experience. The business plan is also too static in the learning effects. Creating a new business often is a process of learning by doing (tacit knowledge) and learning from failure and emotion. Just writing a business plan is not enough to create the dynamic environment of a real start. Rather than attempting to forecast the long-range effects of actions, successful entrepreneurs are superior in reacting creatively to changes in the circumstances. Furthermore, the focus on establishing a business plan is too rational. Though it is widely accepted that intuition is very important for solving ill-structured problems (and starting up a new business certainly is ill-structured), intuition is seldom included in the cook-book approaches to write a business plan. What also may be lacking is real commitment and fear. Creating a ‗paper‘ business is fundamentally different from taking real risks. Some students are excellent in creating outstanding business plans, but are too risk aversive to commit themselves to a real start-up. They have the profile of an outstanding analyst or consultant, but lack the real spirit of entrepreneurship. Allowing the students to setup and operate a real business may offer an ideal setting for in-depth learning and spark entrepreneurship.

1.3

Theory-application balance

The design of a course in entrepreneurship inevitably rises the eternal question of the balance between theory and application. In a study of the ‗theory-application balance‘ in management pedagogy, Wren et. al (2007), based on a survey of a sample of members of the Academy of Management, the balance between theory and applications was measured on a 7-point scale. The balance was most in favour of practice for ‗MIS‘ and ‗entrepreneurship‘ graduate courses (score 4,75) (range for all the courses considered: 3,49-4,89). This practice-oriented approach places ‗entrepreneurship‘ at the heart of continuing debate of the tension between what Clinebell & Clinebell (2008) call ‗academic rigor‘ and ‗real-world relevance‘. Clinebell & Clinebell (2008) argue that ‗business schools are walking a tightrope between the academic side of the business and the practitioner‘ and claim that ‗the pendulum has now moved in the direction toward greater inclusion of real-world experience‘. The first business schools (1881: Wharton School – University of Pennsylvania) were more like glorified trade schools, with lots of executive professors, and were increasingly criticised as being too vocational. Concerns about the academic rigor of business programs led to the application of a more traditional scientific model and the pendulum shifted to a position that by a growing group of observers was perceived as being too self-contained. Harrigan (1990) suggested that ‗business educators may no longer know (or teach in their classes) what managers must know‘. It is argued that business schools lack relevance (Bennis & O‘Toole, 2005) and that management research is lacking real influence on management practice. Some want business schools to move away from the scientific model to the professional or clinical model much like medical schools (Bennis & O‘Toole, 2005, Pfeffer & Fong, 2002). But this ‗professional model‘ is not easy to define. The definition of Wren et al. is too broad and lacks precision: ―business schools are expected to be ‗professional‘ in the sense that their mission is primarily to prepare people to practice their skills in the business world (Wren et al., 1994). As Clinebell & Clinebell (2008) rightfully state, a business school is different from other professional schools as law or medicine. With to some extent the possible exception of a specialised professional accounting 39

education, business schools are preparing students for a wide variety of careers in a very broad spectrum and not for a specific starter position. By definition, this is the case for entrepreneurship. There are no standard requirements for an educational program for entrepreneurs and there is no such thing as an ‗entrepreneurial expert‘.

1.4

An impossible dream?

Stimulating academic students to setup their own business and helping them to learn to develop their entrepreneurial skills in an academic context is a very difficult endeavour. Professors and students may be tempted to stick to safe and proven ‗academic‘ recipes, such as the creation of a well-founded business plan for a fictitious enterprise. We believe this is too easy. A course in entrepreneurship for business students has to take into account the problems we discussed above. Finding the right balance between scientific academic research and the real world, between providing a short term impulse to promote entrepreneurship and a lasting long term objective to improve entrepreneurial skills and between theory and practice is a challenging task indeed. First we discuss the place of the business plan and the creation of opportunities for intuition and learning from failure. Next the student company approach of Hasselt University is discussed.

II The business plan as an educational artefact 2.1 Concept In a study of leading entrepreneurship educators, the development of a business plan was identified as being the most important feature of entrepreneurship courses (Hills, 1988). The main emphasis seems to be the translation of a business idea into a business plan to convince stakeholders of the viability of the idea. Teaching and monitoring the creation of a business plan is a popular course format. This is confirmed by a study of the content of textbooks used for entrepreneurship courses (Edelman et al, 2008). Honig (2004) defines as business plan as ‗a written document that describes the current state and the presupposed future of an organization‘. The Small Business Administration (SBA) defines a business plan as ‗a comprehensive planning document which clearly describes the business developmental objective of an existing or proposed business. (…) The plan outlines what and how and from where the resources needed to accomplish the objective will be obtained and utilized‘. Business plans typically outline a proposed new product or service, discuss competition, marketing, strategy, corporate structure, management team and financial strategy and translate all these elements in a comprehensive forecasted financial plan for the next three years. Implicitly, the popularity of entrepreneurship courses is based on a few fundamental but somehow untested assumptions: Abramson, 1997); the launch of a new organization is the core of entrepreneurship (Low & encouragement and facilitation of start-up new ventures should be a major public concern to promote economic growth, job creation and innovation; entrepreneurship courses are intended to encourage and stimulate the creation of new ventures (Vesper & Gartner, 1997); strategic planning and the translation of a strategic plan into a set of operational plans is the core of the entrepreneurial start-up; ‗learning-by-doing‘ is the best way to teach the necessary skills to future entrepreneurs.

2.2

Launch of a new business as the core of entrepreneurship

The influence of the first assumption is clear. Compared to other business courses that focus on management of, and innovation in, an existing business, entrepreneurship courses focus on the development of a business plan for the creation of a new independent business. Although taking over an existing company can be a topic, the core clearly is the creation of a new business. Re-developing or redirecting an existing company is also less frequently discussed.

40

2.3

Launch of a new business as a driver of economic growth and innovation

The second assumption explains the rapid growth of entrepreneurial courses and the institution of endowed chairs. As start-ups are a basic driver of innovation and rejuvenation of the economy, entrepreneurship is vital for the economy. Small and medium-sized businesses (SME) account for the majority of the employment. Some successful new start-ups can grow incredibly fast and compensate for the demise of big companies that were the victim of the ‗creative destruction‘ process of innovation. This emphasises the need to stimulate students to think about setting up a new company and to help them to translate the business idea into an actual start-up.

2.4

Entrepreneurship courses as a driver of new business launches

The third assumption is very important for the stakeholders. It is assumed that students who took a course in entrepreneurship will have a higher propensity to actually start-up a new business. There are some research findings indicating that exposure to entrepreneurship education is positively linked to individual self-reported intentions to begin a business, through increased perceived desirability and feasibility of setting up a new business (Peterman & Kennedy, 2003; Honig, 2004). This would especially be the case for practical courses providing real-world experience. ‗The more course content corresponds to the reality of behaviours leading to the probability of start-up, the more likely that entrepreneurship courses will be perceived as relevant‘ (Edelman et al., 2008). The link with actually starting a business and the success of the enterprise started has not been systematically tested.

2.5 The business plan is at the heart of new business launches and entrepreneurship courses The fourth assumption is vital for the content of courses. As discussed above, most entrepreneurial courses centre around the creation of a business plan. But Edelman et al. (2008) state that there is little evidence to indicate that we are actually teaching the skills most important for future entrepreneurs. They studied the correspondence between practices of nascent entrepreneurs and the practices discussed in major entrepreneurship textbooks and came to the conclusion that it was far from a perfect match. The overall message seems to be that topics such as the business plan, venture capital and applying for patents are stressed too much in textbooks at the cost of a considerable lack in the treatment of operational items, such as purchasing raw materials and logistics. They also draw the attention to the fact many nascent entrepreneurs say their business idea occurred spontaneously, while textbooks seem to discuss the search for a business idea as a structured process. Business plans are assumed to help the entrepreneur to take better decisions and to improve business performance. Business plan research though has yielded mixed results. Some very successful new firms did not plan at all, while some prestigious award winning planners failed… Some studies found a positive relationship between planning and survival/profitability (e.g. Schwenk & Schroeder, 1993), others a negative relationship (‗planners don‘t do‘) , e.g. Boyd (1991) or no relationship at all (Honig & Karlsson, 2004). This seems to suggest a successful use of the business plan is conditional on an array of other factors, and that a contingency model is appropriate. It is not our purpose to discuss the features of such a contingency model in this paper, but the fact that the relationship is not straightforward definitely has implications for business plan education. In fact, the business plan is just a special case of strategic planning in general. The origins of the business plan can be traced back to the long-term planning literature. Drucker (1959), who defined long-range planning as the organized process of making entrepreneurial decisions, created the basis for the sudden popularity of the entrepreneurial business plan for SMEs in 1980‘s. In a few years time many books were written and software developed to sustain the creation of a business plan. In the mid-eighties the first business plan competitions appeared and rapidly gained popularity. SMEs have to be much more flexible and need a lean way to adopt to the environment. But even for very big companies, empirical research yields mixed results for the benefits of the The transfer of long range planning ideas for large companies to SMEs is not straightforward. use of long range planning. Some studies find a positive relationship with long term business results, others fail to identify positive outcomes or suggest a conditional success. It is stated that long range planning is more successful in a stable 41

environment (Honig, 2004). As setting up a new business is seldom related to a stable environment, it can be expected that the relationship between the business plan and success is not obvious at all. Of course, there is much more to success than just planning. The entrepreneurial features of the entrepreneur are more important than the planning result. In the business planning literature it is widely accepted that the planning process is more important than the planning product. Coercive planning (plan developed to meet the requirements of business angels, venture capitalists or government regulations) has a negative influence on the real relationship between planning and success. If the plan if only created to please an interested party and is afterwards locked up in a closet, it can hardly be expected to have a positive influence on company performance. So a business plan is not a necessary nor a sufficient condition for a successful business launch. It is obvious that long before the idea of the business plan was developed, successful ventures were set up, and that an excellent business plan is no guarantee at all for a successful start. From an educational point of view, one of the main problems with the business plan approach is that it focuses on a rational, linear, deductive and mechanical solutions. Concepts are more important than actions. Real entrepreneurs though often seem to act irrational, unstructured, inductive and organic. Action is more important than concept. Learning-by-doing, tacit knowledge, is inductive; creating a business plan, enumerating a number of alternatives and analyzing the long run expectations is deductive. Entrepreneurs constantly observe and re-evaluate the activities and the environment. Entrepreneurs like to act fast and make use of the opportunities that may only be available during a very small time window. Unless this opportunity has been incorporated in the business plan, a plan, once it is written, may limit the mental option framework. Using a plan as a straight-jacket to lead the company, without due consideration of the constantly changing environment and the changes in the internal setting of the company will fail to deliver positive results. Entrepreneurship courses therefore should not overemphasise the production and evaluation of detailed plans, but focus on the development of skills to observe and flexible adopt to changes in the environment. Students need to be prepared for novelty, surprises, deceptions and failures… For educational purposes, the lack of a clear-cut relationship between business planning and business success, implies a clear message. On the positive side, the business plan offers a unique opportunity to deal with a real business. Creating a business plan is a very good exercise in collecting, analysing, summarizing and presenting information. Every book dealing with the business plan stresses that not the plan as such, but the learning experience is the key to success. The creation of a business plan is a way to structure a basically unstructured learning process called ―setting up an enterprise‖ and to materialize the learning process in a concrete product. What instructors need is a clear structure to give direction to the project en to define the desired output. Students rightfully expect clear requirements and transparent evaluation criteria. The business plan is a product that can be the object of a transparent evaluation. Are all the required elements of the business plan filled in, is it realistic, have the data been collected in a reliable way and checked with key parties, have the business plan methodologies that were taught been used by the students, did they adequately respond to reviews of the staff, how original is the plan, is it clear and convincing,… The process will typically be evaluated on such elements as meeting the deadlines, intra-group conflict resolution, participation in classroom discussions, etc. On the negative side, a latent problem with this kind of project organization is that it may transmit the wrong message. The students may get the impression that the business plan is regarded as the final and definitive recipe to start up the business. It also seems to suggest that starting a business is a well defined deterministic task that starts with learning how to create a business plan, then create the business plan on the basis of the acquired methodology and finally, start and operate the business on the basis of the plan. In reality, both the development and the implementation of the business plan are highly interactive and open-ended tasks in constant communication with the environment and drawing heavily on dynamic interdisciplinary learning. The conventional view of business planning stresses analytical capabilities (cognitive factors) and favours solutions based on convergent thinking, while creativity (divergent thinking), emotion, intuition and failure are largely ignored.

42

2.6

Learning by doing: divergent thinking, emotion, intuition and failure

The fifth assumption is important for the pedagogy to be used. Experiential learning and simulation help to expose students to the complexity surrounding start-ups. As discussed above, there is a superior value in including real learning experiences in the creation of a business plan. Sarasvathy states that entrepreneurial activities may best be described ―as having an experimental focus that utilizes environmental feedback‖ (Sarasvathy, 2001). Experimental learning therefore is a better support for nascent entrepreneurs than a rather static creation of a business plan. In spite of the fact that in recent years the role of intuition has become much discussed in business and management (Sadler-Smith & Shefy, 2007), there is no obvious way to train the use of intuition, though a few experimental approaches are available. Learning from failure is another important aspect of real life. Learning from failure is a complex process, with a lot of emotional difficulties and cultural differences. As is well known, in Europe a business failure is a long lasting stigma for the entrepreneur, while in the USA e.g. it is much more widely accepted that it can be a learning process: ‗in order to succeed one first has to experience failure‘(Timmons, 1999). Shepperd (2004) discusses a number of ways to help students manage the emotions of learning from failure: lectures, guest speakers, case studies, role play, simulation, but we think the learning effect of a real experience is greater. Offering the students the opportunity to really operate a company is a better solution than just setting up a business plan. They will be able to experience the real risks of entrepreneurship, as they can learn from failure and learn to adopt to the changing environment and to the constraints of their company and of the management team. The popular ―mini-company‖ project in many secondary schools is based on this learning-by-doing idea, but as such is too simple to be used for academic business education. Setting up a more complex company is a challenge. It will take much more of the student‘s energy and commitment, and therefore the potential reward has to be bigger than just good marks for a curriculum subject… Yielding the students the opportunity to continue their company after graduation, and operate it in an unprotected environment is an enrichment of the learning experience.

III Entrepreneurship Talent Ltd 3.1 Description Entrepreneurship Talent Ltd Almost a year ago Hasselt University decided to start up their own venture capital firm ‗Entrepreneurship Talent Ltd‘ in order to promote academic entrepreneurship initiatives of students. Research results indicated that less than one percent of the graduating master students start an own company at the moment of leaving the university. An analysis of a sample of alumni (after a period of 20 years) shows that this number grows to 4,6 %. This number is still very low in comparison to other non-academic student groups. Many reasons can be found for this, such as more career opportunities offered by large companies at the moment of graduation, high risk aversion, lack of practical experience … The biggest wave of startups of academic students occurs after a period of 6 till 10 years after graduation. Some of them build up enough experience to start-up a company or get the opportunity to take over an existing company. After this period the start-up rate decreases significantly. Three partners took part in the initiative to found ―The Entrepreneurship Talent Ltd‖: Hasselt University, Dexia-bank and L.R.M. (a regional venture capital firm of the province of Limburg). The share capital of the company was € 70.000 in the first stage. The board of directors of the company has 4 members. Two of them come from Hasselt University and two of them come from the other partners. In this way a balance between educational and commercial objectives is guaranteed.

43

Figure 1 : Structure of Entrepreneurship Talent Ltd

ENTREPRENEURSHIP TALENT Ltd Board of Directors UH-Dexia-LRM

Coordinator UH

Advisory board UNIZO VKW VOKA

Student company 1

Student company 2

Student company 3

Student company 4

Since three years every student of Hasselt University can select an entrepreneurship course as part of his curriculum. In this course the students learn to develop a business plan in small groups. This business plan can be the first step in the creation of the own student company as part of the Entrepreneurship Talent Ltd. In that case the student has to present his business plan to the board of directors in order to get the financial support to realise the plan. This financial support can be up to € 25.000. In case of acceptance a new company (student company) will be established. In the student company the Entrepreneurship Talent Ltd. can take up a maximum of 99 % of the share capital. Other external shareholders are also allowed. After establishing the student company, the student can run his company autonomous. Support is provided on three levels : everyday questions and problems can be discussed with one coordinating person of the university. He is very close to the students and is very easily available; every student company is linked to one real-life entrepreneur. They regularly meet on the initiative of the student in order to discuss more strategic items of the student company. The employers organizations like Unizo, VKW and Voka are responsible for the recruitment of the real-life entrepreneurs. the student is reporting on a quarterly basis to the board of directors of Entrepreneurship Talent Ltd. In this reporting session there is also an exchange taking place of experiences. Every student can run his company until the moment of graduation. For most students this period covers 2 till 3 years. At that moment a very important decision has to be taken. If the student company offers the student a long term economic viable perspective, he takes over all the shares of the Entrepreneurship Talent Ltd. The price he has to pay for this is the initial capital increased by a fixed interest rate. If the student company does not offer the student an economic viable perspective, the company will be stopped. In case of a liquidation profit, 75 % belongs to the student and 25 % belongs to Entrepreneurship Talent Ltd. In case of a liquidation loss, the full loss will be born by Entrepreneurship Talent Ltd. In running his own company the student can earn some credits. In this way the initiative is part of the curriculum of the student on three levels: 44

the development of the business plan is rewarded by 6 credits; the quarterly reporting activities are rewarded by 6 credits; the student can use his student company as a case study in his master thesis. The master thesis has a weight of 21 or 24 credits. The item of integration of the initiative as a part of the curriculum is very important in order to offer the student the possibility to spend enough time to operate the student company. Last but not least the student companies receive a full accommodation from the university. This means that they have their own equipped office and conference room. This is visible to all the other students and gives some extra attraction and publicity for the project within the university.

3.2

Results after the first year of activities

In April 2007 the Board of Directors of Entrepreneurship Talent Ltd started to study the first business plans. Because students from different faculties take part in entrepreneurship courses during an academic year, this becomes a continuous flow. Students preparing a business plan and indicating to use it for fund raising, receive a supplementary coaching session in order to prepare for a venture capitalist presentation. Up till now ten business plans were fully presented at the board of directors. Seven of these plans received funding, one was rejected and two got the advice to rethink the plan. The table below gives some extra information concerning the accepted projects. Table 1 : Accepted projects first year Activity Number of students Company 1 Production of 1 student + 1 race cars in external person miniature Company 2 Market research 3 students

Company 3

Company 4 Company 5 Company 6

Company 7

Kind partnership minority shareholder majority shareholder

Organizing in- 1 student + 1 subordinated company external person loan training courses Web-design 1 student minority shareholder Software 2 students minority development shareholder Selling hot tubs 1 student minority and sauna‘s shareholder Consulting concerning environmental care

3 students

majority shareholder

45

of Special remarks World business

wide

Coöperation with student company in HEC Liege

One full time employee

Using licence of foreign company Using licence of foreign company

3.3

Some interesting findings

Students who participated in entrepreneurship projects on the level of the secondary school are more open to take part in entrepreneurship courses on an academic level. These school projects surely open the mind of students towards entrepreneurial initiatives. In the entrepreneurship course students prepare a business plan in small groups of 3 to 5 students. Students put all their energy and their creativity to come up with a very original idea, not really thinking about the possibility to turn this idea into a business. The proposed and accepted business plans did not cover the most creative ideas. The rather short realisation time (2 years) and a rather limited starting capital (€ 25.000), puts a burden on the possible ideas. Students try to find a solution for this by choosing for a service company with rather low capital intensity. The founders of Entrepreneurship Talent Ltd tried to develop a kind of standard company structure and financial offer for the student companies, thinking this would satisfy the students needs. But even here we can see that every company is different and needs its own structure and financial conditions. The most self confident starting student entrepreneurs search other financial means than the ones of Entrepreneurship Talent Ltd. The acceptance rate of the Board of Directors is rather high. Students prepare very well before taking the decision to try to turn the business plan into business. This decision has very important consequences concerning their student life and student career. Students with a rejected business plan are very motivated to find another idea or to restructure their business plan in order to succeed. They certainly do not give up after one attempt. Up till now most of the projects are realised by students in applied economics and industrial engineering due to the limited number of faculties of Hasselt University. The business ideas of the newly created companies are not necessarily linked to the kind of study of the starting entrepreneur. This conclusion offers opportunities for introducing the concept in nonentrepreneurial oriented faculties. Students prefer to start up with a small team (2 or 3 people). The members of the team do not always belong to the same faculty or even to the same university. Also students from other schools on the campus site spontaneously join the project. The fact of belonging to a team encourages the students to take the step to start their own company. The two projects with a sole entrepreneur were well sustained by their family background with a long entrepreneurial tradition. The profile of start-up problems of the student entrepreneurs is very similar to the ones described in the literature. The existence of Entrepreneurship Talent Ltd helps them very well in tackling the financial problem of the necessary funding. Most of the effort is invested in finding customers. Once they succeed in finding the first customer, the company start-up is launched very well. In their promotion activities the students make use of their existing link to the university and their link to Entrepreneurship Talent Ltd. This gives confidence to new customers. The fact that the student companies share the same office accommodation can be seen of great value. It results in a large ―learning by doing‖- effect. Students of different student companies motivate each other to go on in trying to find customers. At the same time they also share good practices and they come up with joined efforts for some customers. Although these students are very familiar with the business plan, they loose track very quickly after the moment they start up. They almost automatically change to a more intuitive kind of management. By obliging them to report quarterly, focused on the layout of their original business plan, we try to learn them from the beginning to keep a balance between planning and intuition. In this way they take the advantages of both ways of managing the starting company. Time will show if this results in a more prospering development of the start-up company. 46

Conclusion Student companies within the framework of an academic entrepreneurship course are the next step to be taken by universities in order to develop the entrepreneurial skills of their students. More than only writing a business plan for a fictitious enterprise, this confronts the students with the real business world of starting-up their own company. It gives them the opportunity to develop their own entrepreneurial skills with a good balance between intuitive management and formal planning behaviour. References Béchard, J.P., Grégoire, D., 2005. Entrepreneurship education research revisited : the case of higher education, Academy of Management Learning & Education, 4(1), 22-43. Bennis, W.G, O‘Toole, J., 2005. How business schools lost their way, Harvard Business Review, 83(5), 96-104. Cheit, E.F., 1985. Business schools and their critics, California Management Review, 27, 43-62. Clinebell, S.K., Clinebell, J.M., 2008. The tension in business education between academic rigor and realworld relevance: the role of executive professors, Academy of Management Learning & Education, 7(1), 99-107. Edelman, L.F., Manolova, T.S., Brush, C.G., 2008. Entrepreneurship Education: correspondence between practices of nascent entrepreneurs and textbook prescriptions for success, Academy of Management Learning & Education, 7(1), 56-70. Gorman, G., Hanlon, D., King, W., 1997, Some research perspectives on entrepreneurship education: enterprise education and education for small business management: A ten-year literature review, International Small Business Journal, 15, 56-77. Harrigan, K.R., 1990. Professionalism in management education: is the Emperor naked in the 1990’s?, Academy of Management Review, 15(4), 696-698. Hills, G., 1988. Variations in university entrepreneurship education: A empirical study of an evolving field, Journal of Business Venturing, 3, 109-122. Honig, B., 2004. Academy of Management Learning and Education, 3(3), 258-273. Katz, J., 2003. The chronology and intellectual trajectory of American entrepreneurship education 18761999, Journal of Business Venturing, 18(2), 283-300. Low, M., Abramson, M, 1987. Movements, bandwagons, and clones: Industry evolution and the entrepreneurial process, Journal of Business Venturing, 12(6), 435-458. Peterman, N., Kennedy, J., 2003. Enterprise education: influencing students perceptions od entrepreneurship, Entrepreneurship, Theory and Practice, 28, 129-144. Pfeffer, J., Fong, C.T., 2002. The end of business schools? Less success than meets the eye, Academy of Management Learning & Education, 1, 78-95. Sadler-Smith, E., Shefy, E., 2007. Developing intuitive awareness in management education, Academy of Management Learning and Education, 6(2), 186-205. Shane, S. A., Venkataraman, S., 2000. The promise of entrepreneurship as a field of research, Academy of Management Review, 25(1), 217-226. 47

Timmons, J.A., 1999. New venture creation; entrepreneurship for the 21st first century, Boston, Irwin McGraw-Hill. Vesper K.H., Gartner, W., 1997. Measuring progress in entrepreneurship education, Journal of Business Venturing, 12(4), 403-421. Wren, D.A., Buckley, M.R., Michaelsen, L.K., 1994. The theory/applications balance in management pedagogy: where do we stand?, Journal of Management, 20(1), 141-157. Wren, D.A., Halbesleben, J. R. B., Buckley, M. R., 2007. The theory-application balance in management pedagogy: a longitudinal update, Academy of Management Learning & Education, 8(4), 484-492.

48

A SOLVING METHOD OF TWO ECONOMICAL PROBLEMS USING LINEAR PROGRAMMING IN INTEGER NUMBERS Catalin Angelo IOAN Danubius University, Galati, Romania Abstract: In this paper we shall give a new solution for the optimal assignation of workers on jobs from the point of view of execution total time minimization using the Simplex algorithm which can solve the problem using computers instead the known Little’s solution. In the second section, we shall give a new solution for the optimal assignation of workers on jobs from the point of view of maximize the number of allocates workers, using the Simplex algorithm which can solve the problem using computers instead the known graphical solution.

Keywords Simplex, assignation, minimization Classification codes and keywords: C70

I The Optimal Assignation Of Workers From The Point Of View Of Execution Total Time Minimization The problems of assignation appear usual in the process of targets allocation in an institution. Let consider A= A1,...,An the set of workers in an institution and L= L1,...,Lm the set of jobs which must be executed at a specific moment. In the execution of Lj, the worker Ai spends a time equal with tij units (hours, minutes, seconds etc.). Supposing that it exists workers which can execute a lot of jobs we put the problem of allocation on jobs such that the total time spending in the execution to be minimum. We shall assign an infinite value to tij if Ai is not able to execute the job Lj. Also, we shall understand that the number of workers is equal with those of jobs, in the opposite case introducing fictional workers or jobs with infinite times of execution to prevent the allocation of them. The method of Little suggests the following steps: Step 1 It is build the table of times (with workers on columns and jobs on rows) and after we shall compute the minimum on each row. After this we subtract these values from those of rows, compute the minimum on each column and after also, we shall subtract these from the values on the columns. After this step, on each row or column is at least one value equal with 0. Step 2 We shall compute the sum of all elements subtracted from rows and columns and noted with S1. Step 3 For each element equal with 0 in the last table, we shall compute the quantities ij=min tik k j +min tpj p i or, in other words, the sum of the elements on the row and column corresponding to the null quantity. After this, we shall determine the maximum of that values and the appropriate allocation (s,r). We shall build a tree graph where the initial knot comes with the value S1. We shall build after a bend where we shall put the activities (s,r) and non(s,r) who will come with the values sr and sr=S1+ sr respectively. Step 4 We shall erase the row s and the column r and we shall act like in the first step. Step 5 We shall compute S2 like sum of the elements of minimum of rows and columns and we shall modify the indicator sr=S1+S2. Step 6 If the simplified table will has only one row and column the algorithm will close. If not it will be choose the minimum between sr and sr. If both values will be equal we shall choose the value sr appropriate to an allocation and not to a reject of allocation. 49

Step 7 If the choice value was sr we shall return at the step 3. Step 8 If the choice value was sr then we shall consider in the table previously of step 1: tsr= and we shall compute the minimum of row s and column r, subtract these from the appropriate row and column and return at the third step. We can see that the algorithm is a little hard therefore we shall propose in what follows a new method based on the Simplex algorithm.

II The New Method For Optimal Assignation Of Workers From The Point Of View Of Execution Total Time Minimization Let consider A‘= A1,...,An‘ the set of workers in an institution and L‘= L1,...,Lm‘ the set of jobs which must be executed at a specific moment. L ,..., L i L ,..., L i Let therefore f:A‘ P(L‘), f(Ai)= i i=1,...,n‘ the function who assign to Ai the jobs: i which he can realize if he has the necessary qualification for at least one job and f(Ai)= in opposite cases. 1

k

1

k

We shall restrict the set A' and we shall consider, from the beginning, the subset of those workers for which f(Ai) Ai A. We shall note therefore A= A1,...,An with n n‘ (after a possible renotation of n

workers). Let now (again after a possible renotation of workers):

 f (A i ) = L1,...,Lm

with m m‘. If

i 1

m m‘ we have that the jobs Lm+1,...,Lm‘ cannot be executed from any workers, therefore will be excludes. Finally, let consider: L= L1,...,Lm and the new allocation function: f:A P(L). We shall define a matrix: L1 ... L m a 11 ... a 1m A1 ... ... ... ... a n1 ... a nm A n where aij=1 if the worker Ai can execute the job Lj and 0 in the other cases.

M=

Let now consider the matrix A=( ij) where: ij=

1 if the worker A i will nominate in the execution of L j 0 if the worker A i will not nominate in the execution of L j

We shall, like in the previous section, build the matrix T=(tij) of execution times, assigning tij= cannot execute Lj.

if Ai

In a distinction with Little‘s method we shall not enjoin restrictions to the number of workers or jobs. Let now the matrix B=( ijaij) who‘s elements belong to the set 0,1 and who has the following meaning: ijaij=1 if Ai will nominate to execute Lj and is also qualified for this thing and ijaij=0 in the other cases.

50

m

a ij

Because no one can execute two jobs simultaneously, we have therefore the condition:

ij

1

j 1

i= 1, n .. Also, because any job cannot be execute simultaneously by two different workers we have that: n

a ij

ij

1 j= 1, m .

i 1

j= 1, m .

From the above conditions it follows that: aij ij 1 i= 1, n The allocation problem will become: n

m

min(

t ij

ij

)

i 1 j 1 m

a ij

ij

1

a ij

ij

1

j 1 n

n

i 1 m

a ij

ij

M

i 1 j 1 ij

0

where M is the number of workers proposed for the execution. Before solving the problem, let remark first that if it isn‘t a maximal allocation the problem will not have a solution and in other case if it has at the final we shall obtain effective the allocation. The value of minimum will be the searched total time. The problem will be solved in the following manner: we start with the value M=n. If it has not a solution we diminish M with a unit and we begin again to solve the new problem. Because M is a free term in the upper problem we shall reoptimize the older. The process is obviously finite because the problem has always a solution at least for M=0: ij=0. III The Optimal Assignation Of Workers On Jobs Let consider now A‘= A1,...,An‘ the set of workers in an institution and L‘= L1,...,Lm‘ the set of jobs which must be executed at a specific moment. Because each worker can has a multiple qualification, but not all necessary for the entire set of jobs we put the problem of allocation on jobs such that they realize too much if it is possible of them. L ,..., L i L ,..., L i Let therefore f:A‘ P(L‘), f(Ai)= i i=1,...,n‘ the function who assign to Ai the jobs: i which he can realize if he has the necessary qualification for at least one job and f(Ai)= in opposite cases. 1

k

1

k

We shall restrict the set A' and we shall consider, from the beginning, the subset of those workers for which f(Ai) Ai A. We shall note therefore A= A1,...,An with n n‘ (after a possible renotation of n

workers). Let now (again after a possible renotation of workers):

 f (A i ) = L1,...,Lm

with m m‘. If

i 1

m m‘ we have that the jobs Lm+1,...,Lm‘ cannot be executed from any workers, therefore will be excludes. Finally, let consider: L= L1,...,Lm and the new allocation function: f:A P(L). 51

We shall define a matrix: L1 ... L m a 11 ... a 1m A1 ... ... ... ... a n1 ... a nm A n where aij=1 if the worker Ai can execute the job Lj and 0 in the other cases.

M=

The graphical method presented in 2 proposes a construction of a simple graph (a decomposition of nodes in two disjoint subsets: workers and jobs) and after an initial allocation a succession of improvements based on graphical observations. This method is good but cannot be easily implemented on computers. We shall propose in what follows a new method based on the Simplex algorithm. Let now, the matrix A=( ij) where: ij=

1 if the worker A i will execute the job L j 0 if the worker A i will not execute the job L j

and the matrix B=( ijaij) with elements in the set 0,1 . We have that ijaij=1 if the worker Ai will execute the job Lj and if he is qualified for this thing and ijaij=0 if the worker Ai will not execute the job Lj or he is not qualified to do this. How any worker cannot execute two jobs in the same time, we have the m

a ij

condition:

1 i= 1, n .

ij

j 1

n

a ij

Because a job cannot be executed in the same time by two workers we have also that:

ij

1

i 1

j= 1, m . From these conditions we have now that: aij ij 1 i= 1, n

j= 1, m .

The problem becomes now the following linear programming: n

m

max(

a ij

ij

)

i 1 j 1 m

a ij

ij

1

a ij

ij

1

j 1 n i 1 ij

0

Because ij=0 verify the restrictions we have that the problem has always a solution. One problem can appear after sloving: what is happened if the solutions will not be entire? It is possible, for example, on the i-th row to be a lot of elements equal with 1 (appropriate to the fact that one worker can execute a few 1 ... ij ij ij k jobs), say k elements, and the optimal solution to contains the variables: . Because 1

n

for example:

ijp

1

k

m

a ij

the objective function is

2

i 1 j 1

ij

it follows that it will not modify if we replace all the cited values with,

for a 1 p k.

52

Example Let the workers A1,A2,A3 and the jobs L1,L2,L3 which posibility of execution is in the following table: Worker Jobs A1 L1,L3 A2 L1,L2 A3 L2 L1 L 2 L 3 Considering the matrix M=

1 0 1 A1 and A= 1 1 0 A2 0 1 0 A3

11

12

13

21

22

23

31

32

33

we have the following linear

programming problem: max(

11

13

21

11

13

21

22 32

11

,

13

21

22

32

,

21

,

32

)

1 1

1

11

13

22

1 1

1 22

,

32

0

with the solution: 13=1, 32=1, 21=1. We have therefore that A1 will execute the job L3, A2 – L1 and A3 – L2. Bibliography Ioan C.A., 2008. Mathematics II, Ed. Sinteze, Galati Stancu-Minasian I.M., 1970. The study of the simulation problem using the graph theory‖, Studies and researches of economical calculus and cibernetics, nr.5. Teodorescu N. (coord.), 1972. Methods of operational researchs‖, Ed. tehnica, Bucharest.

53

LANGUAGES AND CULTURES: AN ECONOMIC AND EVOLUTIONARY ANALYSIS Jing CHEN School of Business University of Northern British Columbia Prince George, BC, CANADA Abstract: Languages and cultures are mediums of transmitting information. Their value rests on their ability to lower variable costs in communication. Lower variable cost systems in general entail higher fixed costs. Each culture or language has evolved to adapt to the local environment. As environment changes, however, different cultural systems may fare differently under new conditions. An analytical economic theory is applied to study the co-evolution of languages, cultures and social systems. Many problems about the evolution and diffusion of cultures and languages and how they co-evolve with the social and economic systems can be understood in a very consistent way.

Key Words: culture, language, information, fixed and variable cost, thermodynamic theory of economics JEL Classification: A14 I. Introduction There is a long debate about the impact of differences in languages on human societies. (Whorf, 1956; Pinker, 1994; Devitt and Sterelny, 1999) The ability to acquire languages is innate and universal (Chomsky, 1988). Written languages, however, appeared very late in the history of human evolution and independently originated only in very few places (Diamond, 1997). Our discussion will be confined to how the differences in written languages are related to other aspects of human societies. Words in English, an alphabetic language, are linear combinations of twenty-six letters. Characters in Chinese, a logographic language, are two-dimensional pictures. Several thousand of these complex characters need to be memorised before one can read articles reasonably well. Therefore Chinese is much more difficult to learn than English (Hanley, Tzeng and Huang, 1999). For the same reason, Chinese is more spatially compact and visually distinct than English. A Chinese document is much shorter than an English document of the same content. The speed of reading in Chinese is higher than in English (Lu and Zhang, 1999). From an economic point of view, the fixed cost (learning a language) of Chinese, a logographic language, is high and the variable cost (using a language) of Chinese is low. The opposite is true for English, an alphabetic language. Its fixed cost is low and its variable cost is high. The classification of cultures by context is analogous to the classification of languages by fixed cost. “In general, high context communication, in contrast to low context, is economical, fast, efficient and satisfying; however, time must be devoted to programming.” (Hall, 1977, p. 88) This means that high context cultures are of high fixed costs and low variable costs. The opposite is true for low context cultures. The lowest-context cultures are probably Northern European and North American cultures, while “China, Japan, and Korea are extremely high-context cultures.” (Anderson, 2000, p. 266, 267) It is easy to note the link between the context of a culture and the fixed cost of learning a written language. Chinese language is a logographic language. Japanese and Korean languages are mixture of alphabetic and logographic languages. The logographic composition of these languages makes them more difficult to learn than alphabetic languages. Since learning and using written languages are such important parts of our lives, and since written languages are relatively stable and written records accumulate over time, they have a strong influence on many aspects of cultures. Cultures and languages are mediums of transmitting information, which is the reduction of entropy (Shannon, 1948; Bennett, 1988). The value of cultures (and languages) rests on their ability to lower

54

variable costs in communication. Lower variable cost systems entail higher fixed costs. In a homogeneous and densely populated society, people share common background and engage in communications frequently. It pays to spend more time to build up the context of the culture to reduce the variable cost of communication. In a sparsely populated society or a society with members of diverse background, it is more economical to keep the fixed cost of a culture low. Each culture has evolved to adapt to the local environment. As environment changes, however, different cultural systems may fare differently under the new conditions. The performance of an economic system with respect to its fixed cost and variable cost has been studied with an analytical framework based on the thermodynamic theory (Chen, 2005, 2006). From this framework, it can be derived that as fixed costs increase, variable costs decrease rapidly in a low uncertainty environment and decrease slowly in a high uncertainty environment. The main insight from this theory is the trade-off between efficiency of high fixed cost systems in a stable environment and flexibility of low fixed cost systems in a fast changing environment. One of the major purposes of the researches on culture is to find out the relation between culture factors and economic development. However, the mixed statistical results often puzzle cultural researchers. One type of culture that is linked to high economic growth in one period often performs badly in another period (Hofstede, 1980). With this analytic framework, it can be analyzed in a straightforward way. Lower context cultures have advantages in fast changing environments and higher context cultures have advantage in stable environments. Cultures are often called multidimensional phenomena. Some of the primary dimensions of cultures are context, individuality, power distance and uncertainty avoidance (Hall, 1977; Hofstede, 1980). From the analytic framework proposed in this paper, it can be derived that all these dimensions are linked to one single factor, the fixed cost or context of a culture. Although cultures are often expressed in colorful ways, at core, they display highly consistent patterns. This is not surprising, for the function of culture is the same across different cultures, to reduce the cost of communication. This analytical framework helps understand some of the long standing puzzles in linguistics and many problems in the evolution of language and societies. Why the ancient Egyptian language didn’t take the “natural” step to evolve into an alphabetic language? (Diamond, 1997, p. 226) Was the logographic Chinese writing created independently or diffused from somewhere else? (Diamond, 1997, p. 231) Why are there so many low fixed cost alphabetic languages, but so few high fixed cost logographic languages, although all the earliest written languages were logographic? Is it a coincidence that Chinese, a logographic language, has the most native users? Why are most of the original Chinese characters, used three thousand years ago, still used today, with many of these characters having retained their original meaning, whilst over the same period of time, most alphabetic languages have changed considerably? Why was China the wealthiest country in the world during the long period of the stable agricultural society? Why could it not initiate industrial revolution despite its immense wealth? Why do democratic systems have a long tradition in the environment where alphabetic languages are used, while they rarely developed in regions that use logographic languages? Many of these questions have been answered by many people in many different ways with various level of confidence. However, this theory will answer all the questions in a very simple and consistent way. The simplicity of the answers is not accidental. This is because the language, cultural and economic activities, which are thermodynamic processes, are directly modeled with an analytical thermodynamic theory. For any language, cultural or economic system, if it can help its hosts to extract more low entropy resources from the environment than the amount that dissipates, it will expand. Otherwise, it will contract. This paper is organised as follows. Section II adapts the analytical framework developed in Chen (2005) for the completeness of exposition. Then we apply it to give a unifying analysis of different dimensions of cultures. In Section III, we make a detailed analysis of the evolution of written languages and how they affect cultural and economic development. Section IV concludes.

55

II. Basic theory and its application to cultural analysis Living systems need to extract low entropy from the environment to compensate for continuous dissipation (Schrodinger, 1944; Prigogine, 1980). This process can be modeled by lognormal process, which contains a growth term and a dissipation term. Suppose S is the amount of low entropy or information of a social system, r, the rate of extracting low entropy or receiving information from external environment and , the rate of dissipation. The value of S follows the lognormal process

dS S

rdt

dz .

(1 )

Solving (1) for S yields

S

S0e

(r

1 2

2

)t

zt

(2)

in which S0 is the initial value of S. From (2), the average growth rate of S is

r

1 2

2

.

(3)

This shows that the growth of a social system depends on the increase of r and decrease of . Cultures and written languages facilitate the transmission of information and reduce the noises associated with the information transmission, which increases r and reduces in a social system. The production, transaction and transmission of goods, including cultural and information goods, involves fixed cost and variable cost. The variable cost is affected by the properties of this good. For example, if the demand for this good becomes highly uncertain, the variable cost will increase. So variable costs are functions of the value of the product. From Feynman-Kac formula, (Øksendal, 1998) the variable cost, as a function of S, satisfies the following equation

C t

rS

C S

2

1 2

2

S2

C S2

rC

(4)

Since the thermodynamic equations is of first order in temporal dimension, economic, cultural and language systems as thermodynamic systems are intrinsically evolutionary. Solving the equation (4) with proper initial condition yields the following solution

C

SN (d 1 )

Ke

rT

N (d 2 )

(5)

where

d1 d2

ln( S / K )

(r

ln( S / K )

T (r T

2

/ 2)T

2

/ 2)T

d1

T

The function N(x) is the cumulative probability distribution function for a standardized normal random variable. Formula (5) takes the same form as the well-known Black-Scholes (1973) formula for European call options. (Chen (2005) provides the details of derivation.)

56

In general, the value of a fixed asset rests on the ability to reduce the variable cost in production or information transmission. From (5), it can be derived that variable costs decrease when fixed costs are increased. However, the rate of decrease is a function of uncertainty. As fixed cost increases, variable costs, calculated from (5), decrease rapidly in a low uncertainty environment and decrease slowly in a high uncertainty environment. (Figure 1) So the payoff of building up the context of a culture is high in a stable environment. In a fast changing environment, low context culture, being more flexible and innovative, have more advantages. Suppose the fixed cost of understanding a culture is X, the variable cost is C from (5). The volume of information transmission is Q. For simplicity, assume the value of each transmission is 1. Then the total cost of information transmission is

C ( X , )Q

X.

while the total value of the information transmitted is Q. The rate of return of the information transmission is

ln(

Q C ( X , )Q

X

) -ln(C(X, )

X ) Q

(6)

Figure 2 is the graphic representation of (6) for different levels of fixed costs or contexts of cultures. Two properties can be observed from Figure 2. First, it takes higher volume of communication for the high context culture to break even. So it is more economical to keep the fixed cost of a culture low in a sparsely populated society. Second, higher context cultures have lower variable costs. In a densely populated and stable society, the volume of communication is high and people engaged in communication are relatively stable. The return of a high context culture is higher than a low context culture. Cultures are often called multidimensional phenomena. Some of the primary dimensions of culture are context, individuality, power distance and uncertainty avoidance (Hall, 1977; Hofstede, 1980). We will discuss the relationships between these dimensions with the above framework. “In general, high context communication, in contrast to low context, is economical, fast, efficient and satisfying; however, time must be devoted to programming.” (Hall, 1977, p. 88) This means that high context cultures share large amount of common fixed assets among their members. Because of this, members in a high context culture will value collectivism more than those in a low context culture, who will value individualism more. From Figure 2, the return curve is steeper in a high context culture than in a low context culture. Power and wealth is more unevenly distributed in a high context culture than in a low context culture, which means high context cultures have higher power distances. From Figure 1, high fixed assets systems perform better in low uncertainty environment. So high context cultures entail a higher level of uncertainty avoidance than low context cultures. Hofstede (1980) and Hall’s (1977) works indicated that the values of these four dimensions of culture variation are positively correlated. Their correlation may even be higher than the statistical results because some formulas that calculated the indices may not adequately represent the defined meanings. For example, Singaporeans are generally considered very cautious. However, Singapore scored lowest on the Uncertainty Avoidance Index (Hofstede, 1980, p. 165). This is because this index is derived partly from employment stability and Singapore has a high job turnover rate. In a small and densely populated city state such as Singapore, changing jobs cause very little uncertainty. First, changing jobs rarely requires changing homes. Second, there are many firms crowded in a small place. It is often easy to find similar jobs nearby This analytic framework also makes it easy to analyze the relation between cultural factors and economic growth. For example, Hofstede (1980, p. 205) found that the Uncertainty Avoidance Index is negatively correlated with economic growth in the volatile period from 1925 to 1950 while it is positively correlated with economic growth in the stable period from 1960 to 1970. From Figure 1, a system high in fixed

57

assets, (and hence a high need for uncertainty avoidance) performs well in a stable environment and performs poorly in a volatile environment. Most cultural and economic indicators are highly correlated with latitude (Hall, 1977; Hofstede, 1980; Parker, 2000). High latitude areas receive less solar energy. So bio-densities in general and human population densities in particular are lower in the cold high latitude areas than in low latitude areas, where there is abundant solar energy. In high density areas, people interact more. Therefore it is more efficient to develop high fixed cost communication systems that have lower variable costs. People in the warmer low latitude areas, such as Southern Europe, generally develop high context cultures. In low density areas, people interact less. It is more economical to keep the fixed cost associated with communication small. People in the cold high latitude areas, such as Northern Europe, generally develop low context cultures. III. The evolutionary patterns of languages It is more intuitive to map what we see into pictures than into alphabets. All the independently created written systems, from Sumer, China and Mesoamerica, are logographic languages. “The first Sumerian writing signs were recognizable pictures of the object referred to. … The earliest Sumerian writing consisted of nonphonetic logograms.” Gradually, phonetic representation was introduced to write an abstract noun “by means of a sign for a depictable noun that had the same phonetic pronunciation”. (Diamond, 1997, P. 220) The first solution to a problem is often very complex. When a problem is known to be solvable, later solutions tend to be much simpler. As a writing system diffused to other regions, many logograms were gradually simplified to easy to write alphabets, especially the abstract nouns and grammatical items that are best represented phonetically instead of logographically. The earliest alphabets can be tracked to ancient Egyptian languages, which is probably influenced by the Sumerian language. But they kept the logograms in their language. This has puzzled some people. “The Egyptians never took the logical (to us) next step of discarding all their logograms …” (Diamond, 1997, p. 226) However, if we look at the patterns of innovation, the puzzle can be easily resolved. Logograms, which are difficult to learn, contain high information content. They are of high fixed cost and low variable cost. To the people who already learned the logographic languages and hence already invested on the fixed cost, there is no incentive to convert the logograms into alphabets. It is for the similar reason that Japanese language, which is influenced by logographic Chinese language, retain many of the logograms. Only when the writing systems diffused further into new environments, the low fixed cost alphabetic system were gradually established. Semites familiar with Egyptian languages discarded all logograms and transformed the language into a pure alphabetical language. (Diamond, 1997, p. 226-227) This pattern is very similar to the innovation of new products. Many of the new ideas are initiated inside established large companies. However, it is often the new and small companies that implement the novel ideas. The spread of writing systems is also an evolutionary process from logographic to alphabetic systems. This observation helps us resolves the puzzle whether the logographic Chinese writing was created independently or was diffused from Sumerian writing. (Diamond, 1997, p. 231) If the Chinese writing was diffused from Sumer, it would have been evolved into an alphabetical language over such a long distance and over such a long time. Next we will apply this analytical framework to understand several properties of languages. First, since alphabetic languages are of low fixed costs, they are very easy to spread out. That is why there are many more people using alphabetic languages instead of logographic languages. Because of the simple structure of alphabetic languages, it is easy for them to mutate into new forms to adapt to local dialects. That is why there are many more alphabetic languages than logographic languages and most of the alphabetic languages have a relatively small number of users. Because of the high fixed cost, a logographic language is difficult to get established and to sustain itself. That is why there are few logographic languages left today although all the earliest written systems were logographic.

58

Why has the Chinese language survived while all other logographic languages were eventually replaced by alphabetic languages? “China’s long east-west rivers ... facilitated diffusion of crops and technology between the coast and inland, while its broad east-west expanse and relatively gentle terrain, ... facilitate north-south exchanges. All these geographic factors contributed to the early cultural and political unification of China.” (Diamond, 1997, p. 331) The same geographic factors also help the Chinese language to spread out quickly and gain large number of users. A logographic language has to be used by many people so that the low variable cost can offset its formidable high fixed cost. Chinese, a logographic language, has more than one billion native users, which is the highest among all languages. Second, alphabetic languages, with low fixed costs and simple structures, can create new words easily and absorb words directly from other languages. Logographic languages, with high fixed costs, are more conservative and change less. Most of the characters Chinese used three thousand years ago are still used today, and many of these characters retain their original meanings. Over the same period of time, most alphabetic languages have changed considerably. New words in Chinese are formed by new combinations of existing characters. Since each Chinese character carries distinct meanings that are very stable, it is often difficult to create proper words to represent really novel ideas, which delays the understanding and adoption of new ideas. When the Japanese language absorbs a new word from other sources, the sound will first be represented by the alphabetic part of the language. If the word becomes popular, people will gradually create a logographic word with a distinct meaning to represent it for easier communication. (Harigaya, 2001) Since societies using logographic languages are more stable, people there will value past experiences and are more conservative. Since societies using alphabetic languages change fast, a forward looking perspective is more valuable. People using an alphabetic language spend less time learning the language, their common property. So they value individualism more. People using a logographic language spend far more time learning the language, their common property. So they value collectivism more. Hofstede (1980) found that those Chinese-majority regions “Taiwan, Hong Kong, and Singapore score considerably lower on individualism than the countries of the western world.” He attributed it to a particular Chinese philosophy. (p. 215, p. 231) We find that language, by itself, offers a clearer explanation. Third, economically, regions using logographic languages will do well in a stable environment because of the low variable cost in communication. During the stable agricultural society, which occupied most of the past two thousand years, China was the wealthiest country in the world. However, the high fixed cost Chinese language makes it difficult to initiate new changes. Instead, changes are initiated in the regions of diversified alphabetic languages. An alphabetic language, with low fixed costs, is more flexible and more innovative, which enjoys advantages in a fast changing environment. Regions using alphabetic languages have been leading the innovative changes since the beginning of industrial revolution several hundred years ago. The difference in performance is not only reflected in world history but also in industries at different stages of maturity. Regions using alphabetic languages, such as USA, are dominant in new technologies. Regions using a mixture of alphabetic and logographic languages, such as Japan, absorb and perfect the advanced technologies. China, the region using logographic languages, is the main manufacturer in the mature industries. Fourth, in a logographic language environment, if one manages to learn this language, one can acquire a huge amount of information at high speed. But the process of learning this language is difficult. Those who fail to master it may be left behind. The difference in payoff is drastic. In an alphabetic language environment, the result is not that drastic because of the low fixed cost, or low barriers of entry. (Figure 2) So one would expect the logographic language environment to be more elitism oriented and the alphabetic language environment to be more pluralism oriented. Indeed, democratic institutions have a long tradition in the environment where alphabetic languages are used, while they rarely developed in regions that use logographic languages.

59

IV. Concluding remarks In this work, an analytical thermodynamic theory of economics is applied to languages and cultures to offer a unified understanding of the co-evolution of languages, cultures and social systems. Written languages and cultures, which are created by human beings, in turn, exert great influence on the path of human development. V. Acknowledgement The author thanks Masatomo Harigaya, Marco Janssen, Jens Joerg Lauschke, Lisa Meyer, Ronald Rodgers, Jasmindar Singh, Jie Xu, Xiaokai Yang and many other readers for helpful comments that greatly improve the quality of this work.

Selective bibliography: Anderson, P. 2000. Cues of Culture: The basis of Intercultural Differences in Nonverbal Communication. in Intercultural Communication; A Reader, Edited by Larry Samovar and Richard Porter. Belmont, CA : Wadsworth Pub. Co. Bennett, C. H. 1988. Notes on the History of Reversible Computation. IBM Journal of Research and Development, 32: 16-23. Black, F., and M. Scholes. 1973. The Pricing of Options and Corporate Liabilities, Journal of Political Economy, 81, 637-659. Chen, J. 2005. The physical foundation of economics: An analytical thermodynamic theory, World Scientific, Hackensack, NJ Chen, J. 2006 An Analytical Theory of Project Investment: A Comparison with Real Option Theory, International Journal of Managerial Finance, 2 (2006) No. 4, 354-363 Chomsky, N. 1988. Language and problems of knowledge: the Managua lecture. Cambridge, Mass. : MIT Press. Devitt, M. and K. Sterelny. 1999. Language and reality : an introduction to the philosophy of language. Cambridge, Mass. : MIT Press. Diamond, J. 1997. Guns, Germs, and Steel, The Fates of Human Societies. W.W. Norton, New York. Hall, E. T. 1977. Beyond culture. Garden City, N.Y. : Anchor Press. Hanley, R., O. Tzeng and H.S. Huang. 1999. Learning to read Chinese, in Learning to Read and Write, Edited by M. Harris and G. Hatano, Cambridge University Press. Harigaya, M. 2001. Private communication. Hofstede, G. 1980. Culture's consequences : international differences in work-related value. Beverly Hills, Calif. : Sage Publications. Lu, X. and J. Zhang. 1999. Reading efficiency: A comparative study of English and Chinese orthographies. Reading Research And Instruction, 38 (4): 301-317.

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Øksendal, B., 1998. Stochastic differential equations : an introduction with applications, 5 th edition. Springer , Berlin ; New York Parker, P. 2000. Physioeconomics : the basis for long-run economic growth. Cambridge, Mass. : MIT Press. Pinker, S. 1994. The language instinct. New York: W. Morrow. Prigogine, I. 1980. From being to becoming : time and complexity in the physical sciences. W. H. Freeman, San Francisco. Schrodinger, E., 1944. What is Life? Cambridge University Press, Cambridge Shannon, C. 1948. A mathematical theory of communication, The Bell System Technical Journal, 27: 379-423, 623-656. Whorf, B.L. 1956. Language, thought, and reality; selected writings. Cambridge, Mass.: Technology Press of Massachusetts Institute of Technology.

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Figure captions

Figure 1. Uncertainty and variable cost Figure 2. Output and return with different levels of fixed costs

62

1.2

Variable cost

1 0.8 High volatility Low volatility

0.6 0.4 0.2 0 1

2

3

4

5

6

7

8

9 10 11 12 13

Level of fixed cost

63

THE ENVIRONMENT POLICY IN THE POST-ADHERING COUNTRIES Romeo IONESCU Dunarea de Jos University, Galaţi, Romania Abstract: The paper deals with the impact of the European environment policy on the Member States. For the beginning, we analysed this policy as a horizontal one under the sustainable development. The next step was to present the new approach for the European environment policy including the 6 th Environment Action Program. Some specific institutional actors support the synergetic character of the environment policy and insure the achieving of its objectives under the European Commission and the Environment General Direction. The European environment policy is use as a success example. The latest enlargements of the E.U. represent an example of good environment management, as well. Nowadays, the environment protection becomes one of the most important challenges to the world.

Key Words: Environment Action Program, environment policy’s instruments, environment strategy

JEL Classification: Q53, Q56

I. Introduction The environment problem appeared on the European agenda at the beginning of the ’70. The next step was to create a distinctive environment policy as a response to the Rome Club signal connected to the decrease of the natural resources and to the water, air and land pollution. In 1972, the European Environment Policy was implemented and it became one of the most important European policies, nowadays. The importance of the European Environment Policy is not dimensioned by its specific funds (which are less that those of the regional or agricultural policies). It became a European horizontal policy in which the environment protection represents a compulsory aspect for other European policies, as well. The main element of the European environment policy is its sustainable development strategy which allows this policy to connect to the global environment protection tendencies, according to Rio and Johannesburg summits and to Kyoto Protocol. More, this implication in the international environment progresses transforms the E.U. into a global promoter of the sustainable development. The sustainable development represents the need of responsibility and education under environment protection. As a result, the European Environment Policy passed from a policy based on restrictions and penalties to a most flexible policy based on incentives. It is the way to a voluntary action in order to support and to apply new environment management systems. The environment policy isn’t independent; it reflects the civil society interest which is support by a lot of environment movements and organisations. More, some countries have green political parties which have a real success on the political arena, as well. On the other hand, there are some voices which consider that the environment objectives limit the industrial efficiency and the economic growth. These are the reason for a common environment policy and for a European active and integrate environment policy which has to be able to face to the economic and other challenges, as well.

64

II. A new approach for the European environment policy 2.1. Key moments In 1973, was elaborated the 1st Environment Action Program (1973-1977) as a mix of average term programs and a strategically approach which emphasized the need of water and air protection and which contained a sector approach for the pollution elimination. In 1978, was adopted the 2nd Environment Action Program (1978-1982), which was structured on the same priorities like EAP 1 and which was a renewing of that EAP 1. The European Commission created the General Direction for Environment Policy in 1981. It was responsible for managing and insurance the environment policies implementation and for specific legislative documents’ initiation. As a result, the environment policy became complex and correlated to other common policies. In 1982, was adopted the 3rd Environment Action Program (1982-1986) which reflected the influence of the internal market development in order to equilibrate its objectives with market objectives, as well. More, this action program marked the pass from a qualitative approach of the environment standards to one based on the pollutant emissions. The European Single Act (1986) gave a legal basis to the environment protection under the Rome Treaty. The 4th Environment Action Programme (1987-1992) was adopted next year. It prepared the framework for a sustainable development strategy using promotion of the preservation of the environment and the natural resources, as well. The 5th Environment Action Program (1993-1999) was adopted in 1992. It marked the pass from a framework based on command and control to another one based on fiscal and economic instruments and on partners’ consulting. More, this action programme transformed the sustainable development into an environment strategy. The Maastricht Treaty extended the role of the European Parliament in environment policy’s development. Under Amsterdam Treaty (1997) the environment policy became European horizontal policy. As a result, the environment problems had to be analysing in all sector policies, as well. The 6th Environment Action Program (2001-2010) identifies four priority areas of the environment policy for the next 10 years: the climate change and global warming; the nature protection and biodiversity; the health connected to the environment; the natural resources’ preservation and the offalls’ management. The Gothenburg Conference (2001) adopted the sustainable development as a long term European strategy which concentrates the economic, social and environment sustainable development policies. An important progress was the European Environment and Health Strategy (SCALE-2003) which is based on the complex and direct connection between pollution, environment changes and human health, The new aspect of this strategy is its focus on the children’ health. 2.2. Present situation The legal framework of the European environment policy is based on the Articles no. 6, 95 and 174-176 of the Treaty. The article no. 174 presents the objectives of the environment policy and its aim: the insurance of a high environment protection according to the different situations across the E.U. The article no. 175

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identifies the legislative procedures and establishes the manner of adopting decisions about the environment policy. The article no. 176 allows Member States to adopt more sever standards. The article no. 95 implies the legislation harmonization connected of health, environment protection and consumer protection in the Member States. At least, the article no. 6 promotes the sustainable development as a European transversal policy and supports the environment protection into the European sector policies. More, there are 200 of adopted directives, regulations and decisions which form the horizontal and sector legislation about the environment protection. The horizontal legislation covers those regulations which are focused on the information transparency and circulation, decisional process’ facility and a greater implication of the civil society in the environment protection (for example, Directive 90/313/CEE about the free access to the environment information or the Regulation 1210/90/CEE about the implementation of the European Environment Agency). On the other hand, the sector legislation covers the sectors of the environment policy: the offals’ management, phonic pollution, water pollution, air pollution, nature and biodiversity preservation, land protection and civil protection, as well. The European environment policy is support by specific institutional actors which are able to prepare, to define and to implement this policy and which are consult to the Member States’ governments, different industrial organisations, nongovernmental organisations and think tanks. They support the synergetic character of the environment policy and insure the achieving of its objectives under the European Commission and the Environment General Direction. This direction was created in 1981 and covers the elaboration and the implementation of the environment policy. Its role is to initiate and to finish new specific legislative acts and to monitory their implementation in the Member States, as well. More, the Environment Council of Ministries represents a part of the European Council and it meets sever times a year in order to coordinate the environment policies in the Member States. In 1973, the European Parliament implemented the Environment Committee in order to initiate new regulations of environment and consumer’s protection. The Economic and Social Committee has a consultative role in making decision process and it relieves the generality of the environment protection policy. The Regions Committee has a consultative role and covers the implying of the regional and local authorities in making decision process. The environment problems are object of the 4th Commission, together with the spatial planning and the urban and energy policies. The European Environment Agency from Copenhagen is focuses on the collecting, managing and supplying environment information to the resolvers and the public. They imply the environment monitoring and the discovering all problems which can appear. The European Environment Agency is focus on: supplying environment information in order to adopt the political decisions; promoting of the best practices connected of new technologies and the environment protection; supporting the European Commission to disseminate the environment researches’ results. Connected to the European Environment Agency, was created the Environment Information and Observation Network (EIONET) which connect the national information networks from the Member States. The decisions about the environment protection are adopt according to the article no. 175 from the Treaty, which means: the vote of a qualified majority in the European Council and in co-decision with the European Parliament; the unanimity vote in the European Council and with the consulting of the European Parliament about the fiscal problems and the measures connected to the territorial planning, land uses, water resources’ management and the measures which affect the energetic policy.

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The objectives of the present European Environment Policy are the following: environment quality’s preservation, protection and improvement; human health protection; natural resources prudent and rational use; promoting measures on the international plan in order to resolve regional environment policy. The principles of this policy are: polluter pays: the polluter has to cover the expenditures connected to the pollution control establish by the public authorities. As a result, the costs of these measures will be find into the production cost of the goods and services which cause the pollution; preventive action: it is better to prevent than to combat; prudence: adopting of prudence measures when an activity can affect the environment or human health, even that isn’t a scientific proved cause-effect relationship; high environment protection: the European environment policy is focuses on a high level of protection; integration: the needs of the environment protection have to be present in other common policies’ defining and implementing; proximity: encouraging the local communities to assume responsibilities for the offals and done pollution. 2.3. The present action programs The present Environment Action Program (2001-2010), named “Our choice, our future”, is focuses on specific objectives, like the following: decreasing of the gases emissions with 8% comparing with 1990, in order to attenuate the hot house effect; elimination of the threats for species and life environments across the Europe; insurance of a environment which hasn’t a negative impact for the human health; growing the offals’ recycling degree and the prevent of their production. These specific objectives are complete with measures set connected of: the effective applying of the common environment legislation in the Member States, the obligatorily of the impact analysis for all common policies on the environment, the contribution of the producers and consumers in finding solutions to the environmental problems, the general access to environmental information in order to support its protection and decreasing the urban pollution and an adequate uses of the land. More, the 6th Environment Action Program develops seven thematically strategies connected of: the land protection, the maritime environment protection and preservation, the pesticides’ utilisation under the sustainable development, the air pollution, the urban environment, the offals’ recycling and the resources’ management under the sustainable development. The approach for these strategies is a gradual one and it is structure on two phases: the first is the description of the present situation and the finding of specific problems, and the second is the measures proposed to resolve these problems. The air quality strategy was initiated under Clean Air for Europe (CAFE) program in 2001. It contains strategic and integrate recommendations in order to eliminate the negative effects of the air pollution on the environment and the human health. The soil protection is based on the European Commission’s document “Towards a Thematic Strategy for Soil Protection” from April 2002. It was for the first time when the soil protection was independently treated.

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The pesticides use under a sustainable development was initiated by the European Commission’s document “Towards a Thematic Strategy on the Sustainable Use of Pesticides” from June 2002. Nowadays, this strategy is focuses on: the risks’ minimisation of using pesticides on health and environment, the control improvement of the pesticides’ use and distribution, the decreasing of the active harmful substances and replacing them with more secure other, supporting for crops without pesticides and establishing of a transparent report and monitoring system. The maritime environment protection and preservation is a strategy which was initiated in 2002, in order to promote seas’ use under sustainable and maritime ecosystems’ preservation, including oceans dept, estuaries, and costal areas with high biodiversity degree. The offal’s recycling and preventing strategy was implemented in 2003 in order to treat the problems of recycling and offal’s’ production prevention. The urban environment represents a strategy with four main themes under the sustainable development: the urban transport, the sustainable urban management, the buildings and urbanism and urban architecture. An innovator aspect of the 6th Environment Action Program consists in adopting the Integrated Product Policy (IPP) in order to decrease the environment degradation and to develop markets for ecologic goods. 2.4. The instruments of the environment policy Nowadays, we can observe three categories of the environment policy’s instruments: legislative, technical and economic-financial. More, there are helpful instruments according to the environment protection new trends and strategies. The legislative instruments create the legal framework of the common environment protection and they consist of 200 directive, regulations and decisions under the acquis. The technical instruments cover the environment quality standards and the use of the Best Available Technologies (BAT). The technical instruments are: the emissions’ standards and limits, the BAT, the eco-labelling and the criteria for the environment inspections in the Member States. The emissions’ standards and limits are part of the specific legislation and follow to limit the environment pollution level and to identify the great polluters. The BATs are part of the specific legislation which prevent and control the industrial pollution. The specialised institutions create BAT Guides for energy, metallurgy and chemistry which are compulsory for every Member States. The eco-labelling presents the European goods which have a low environment impact and it offers information about goods to the consumers. The ecolabelling is monitoring by the European Union Eco-Labelling Board (EUEB), as well. The criteria for the environment inspections in the Member States were created in order to ensure the conformity to the European environment legislation and to its uniformed applying. These imply the minimum criteria of management and spreading for the results of the environment inspections in all Member States. Other two instruments are the measure and control marks for air, soil and water pollution and the databases connected of the pollution, alert limits and the pollution emissions inventory. The main financial instruments of the environment policy are the LIFE program and the Cohesion Fund. While many other E.U. funding programs have environmental components, LIFE has been the only programme devoted entirely to supporting the development and implementation of environmental policy in the Member States of the European Union, in candidate countries who are associated to LIFE and in certain third countries bordering on the Mediterranean and the Baltic Seas. LIFE consisted of three thematic components: LIFE-Environment, LIFE-Nature and LIFE-Third Countries. LIFE contributed to the implementation, development and enhancement of the Community environmental policy and legislation and worked to integrate environmental concerns into other E.U. policies. Employing a practical approach, LIFE supported the development of new solutions to environmental problems facing the E.U. and aimed for the full implementation of Community policy defined by the Sixth Action Programme for the Environment.

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For the first phase, which lasted from 1992 to 1995, some 400 million Euros were allocated. In the second phase (1996-1999), approximately 450 million Euros were allocated. The third and last phase, LIFE III (2000-2004), had a budget of 640 million Euros. LIFE III was subsequently extended from 2005 to 2006 with a budget of 317 million Euros by Regulation (EC) No 1682/2004 in September 2004. LIFE was open to all 'legal persons', and projects financed by LIFE had to meet the following general criteria: they had to correspond to the priorities established at Community level and contribute to the objectives defined above; they had to be submitted by technically and financially sound participants; they had to be feasible in terms of technical content, timetable and budget - and offer good value for money. In total, LIFE supported 2751 projects from 1992 to 2006, including: 970 LIFE-Nature projects, 1552 LIFE-Environment projects and 227 LIFE-Third Countries projects. The new financial instrument for the environment, LIFE+, will provide future opportunities for funding. LIFE+ was proposed by the Commission in September 2004 and agreement was reached by the E.U. Environment Council meeting in Luxembourg on 27 June 2006. The LIFE+ Regulation entered into force by September 2007. With a budget of 2143 billion Euros (for the period 2007-2013), LIFE+ is a limited but focused funding instrument providing specific support for the development and implementation of Community environmental policy and legislation, in particular the objectives of the 6th EAP (Decision 1600/2002/EC) and resulting thematic strategies. It comprises three components: LIFE+ Nature & Biodiversity, LIFE+ Environment Policy & Governance and LIFE+ Information & Communication. At least 78% of LIFE+ will be for the co-financing of project action grants, of which at least 50% will be for nature and biodiversity projects. The European Commission will use the remaining sum for operational expenses. Only expenditure in E.U.27 countries is eligible at present, although the future participation of certain third countries is possible if supplementary appropriations are received (see Article 8 of the LIFE+ Regulation). The LIFE III and LIFE+ programs are designed to complement other EU funding programmes which target investment in the environment. The INTERREG IVC Program is financed through the European Regional Development Fund (ERDF). It promotes interregional co-operation, which amongst others funds the exchange and transfer of experience and knowledge between regions in the E.U. (+ Norway and Switzerland). This is interesting for LIFE beneficiaries who have experiences and knowledge to share - and proposals on the exchange of environmental best practice and knowledge are particularly welcomed. Priority 2 of the programme includes the following sub-themes: natural and technological risks (including climate change); water management; waste management; biodiversity and preservation of natural heritage (including air quality); energy and sustainable transport; cultural heritage and landscape. Priority 1 includes as a sub-theme innovation, research and technological development. The "Financing Natura 2000" Guidance Handbook, presents the E.U. funding options for Natura 2000 sites in the period 2007-2013. Many LIFE projects are located within the Natura 2000 areas. An interactive IT financing tool, which was piloted in Austria, Italy and Latvia, provides information on sources of funding for Natura 2000 sites. The FP7 supports specific environmental projects predominately in the co-operation (collaborative research) programme. Relevant thematic areas include: food, agriculture and fisheries and biotechnology (theme 2) and environment, including climate change (theme 6). Over the 2007-2013 periods, pilot eco-innovation projects may be eligible for funding under the Entrepreneurship and Innovation Programme (EIP), a sub-programme of the Competitiveness and Innovation Framework Programme (CIP). This year's funding priorities are materials recycling, buildings, food & drink, greening business, and smart purchasing. 28 million Euros worth of funding will be available covering up to 60% of the eligible costs. A European Info Day will take place in Brussels on 8 May 2008.

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Renewable energy proposals will funded through the Intelligent Energy - Europe program (IEE), another sub-program of CIP. The Executive Agency for Competitiveness and Innovation (EACI) is currently implementing the IEE. Some 45 million Euros were available to fund projects for the promotion of energy efficiency and renewable, and the setting up of local or regional energy agencies in 2008. The E.U. funding supports up to 75% of eligible project costs. Any public or private organisation from the E.U., Iceland, Norway, Liechtenstein and Croatia can apply. The Structural Funds are designed to reduce disparities in the development of regions, and to promote economic and social cohesion within the European Union. They are intended to be used to support projects which will directly address locally identified needs (e.g. to help train people with new skills, or help set-up new businesses). These projects can link in with environmental topics. The programmes are managed and the projects selected at national and/or regional level.

III. The environment strategies The environment strategy is applying under the subsidiary principle which means the commissioning of the responsibilities to the Member States. The European Commission adopted in 2003 an EU Strategy on Environment and Health, with the overall aim to reduce diseases caused by environmental factors in Europe. This was followed up by the European Environment and Health Action Plan 2004-2010, which proposes an Integrated Information System on Environment and Health as well as an coordinated approach to Human Biomonitoring between Member States to render the assessment of the environmental impact on human health more efficient. Today, there is evidence that factors such as particulate matter in the air, noise and ground-level ozone damage the health of thousands of people every year. Environmental pollutants, including pesticides, endocrine disruptors, dioxins and PCBs persist in the environment, accumulating over time and we do not know enough about their long-term effect on our health. A range of specific policy actions are being taken to address the issues, and many acute environment and health related problems have been solved. However, there are areas which require more investigation, in particular with respect to the health implication of chronic exposures, as reported by organisations such as the European Environmental Agency (EEA), the World Health Organization (WHO) and a number of national organisations. The effect of the environment on health is a major concern of the European public: in a recent survey, some 89% are worried about the potential impact of the environment on their health. Furthermore, new technologies, changing lifestyles, work and life patterns, present new and sometimes unexpected impacts on the environment and its influence on health. The Action Plan’s aim is to generate the information based needed to analyse all the potential impacts; to asses whether current action is sufficent; and to identify areas where new action is needed. The European Environment and Health Strategy was jointly published by the Directorates-General of Environment, Health and Research and the Joint Research Centre. It has a long-term vision seeking to address the links between poor health and environmental problems, and to "reduce diseases linked to environmental factors". It builds upon the aims of the Commission's Sixth Environment Action Programme. A specific target of this plan is that levels of pollution in Europe should not give rise to deleterious effects on human or environmental health. In order to achieve this goal, we need to understand and identify health problems related to the environmental degradation, which will allow us to prevent new health threats linked to environmental pollution. Special emphasis is given to the most vulnerable groups in society. Implementation of the strategy will occur in successive cycles, with the first period, 2004-2010, concentrating on building the reserves of environment and health information, and on developing a European approach to human biomonitoring.

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In accordance with the requirements of the Environment and Health Strategy, the European Commission developed a Environment and Health Action Plan 2004-2010 which was presented at the Fourth Ministerial Conference on Environment & Health in Budapest in June 2004. This action plan follows up of the Commission’s European Environment and Health Strategy launched in June 2003 and it has been prepared based on extensive consultations with experts and stakeholders from the environment, health and research field across the enlarged Europe and builds on an assessment of the current baseline knowledge in the areas of: integrated monitoring of dioxins & PCBs, heavy metals, endocrine disrupters; childhood cancer, neurodevelopmental disorders, respiratory health; human biomonitoring, environment and health indicators, research needs. The Action Plan proposes an integrated approach involving closer co-operation between the health, environment and research areas. Its added value is the development of a Community System integrating information on the state of the environment, the ecosystem and human health to render the assessment of the environmental impact on human health more efficient. To this end, the Action Plan also proposes to launch a coordinated approach to Human Biomonitoring between the Member States. The Action Plan identifies 13 actions with a focus on: improving the information chain by developing integrated environment and health information; filling the knowledge gap by strengthening research on environment and health and identifying emerging issues; reviewing and adjusting risk reduction policy and improving communication. This Action Plan is being implemented in close co-operation with experts from all the Member States and representatives of the main stakeholders. In December 2004 the Dutch Presidency and the Commission co-organised an International Conference which specified further the implementation measures to be developed. Progress on implementation is being reported to a Consultative Forum set up by the Commission since the beginning of the consultation process on Environment and Health in 2003. The first step in designing any new system is to review the systems in place at the moment as well as current and past research projects. This will allow us to highlight research and development needs for making the information accessible in a more harmonised way in the future. Implementation is organised around the specific exposure routes highlighted on the right, together with two more cross-cutting issues: Physical stressors, such as noise and radiation; and experience with Environmental Public Health Tracking Systems so far, and in particular in the USA. Draft documents have already been produced for those areas for which links are provided. Armed with the above analysis of health impacts via individual exposure routes, we can then proceed to identify crosscutting issues. These are of three main kinds: most diseases have several causes (multicausality); for example, cardiovascular disease has been linked to both noise and particulate matter; exposure to those causes can be through a range of exposure routes (cross-route exposure); for example, exposure to particulate matter occurs from indoor air and outdoor air; economic sectors often act as drivers of more than one cause (multiple emissions); for example, the transport sector is a major driver of both particulates and noise. The aim was to produce an implementation plan for the information system covering the years 2006-2010, by Spring 2006. This was then be opened to full stakeholder consultation. Human Biomonitoring is an effective tool to assess human exposure to environmental pollutants and potential health effects of such pollutants and it is an essential element in a strategy aiming to integrate health and environment. Biomarker data are considered more relevant for risk assessment than are extrapolations from chemical concentrations in soil, water, air or food.

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Human Biomonitoring has been defined in the preparation of the Environment and Health Action Plan as "monitoring activities in human beings, using biomarkers, that focus on environmental exposures, diseases and/or disorders and genetic susceptibility, and their potential relationships". In the framework of Action 3 of the European Environment and Health Action Plan 2004-2010, the European Commission committed “to develop in close cooperation with the Member States a coherent approach to Human Biomonitoring in Europe and to launch a EU Pilot Project to test out the feasibility of such a coordinated approach”. The European Commission, supported by a multidisciplinary working group of Member States representatives (Implementation Group on Human Biomonitoring) and by an Expert team to Support BIOmonitoring (ESBIO) is preparing an EU Pilot Project, which was launched by the end of 2006. IV. Conclusions The European environment policy is use as a success example. Maybe, it is the effect of more than 100 regulations about environment adopted still 1986. Moreover, there were adopted systems of information harmonization and monitoring environment actions. On the other hand, some specialists consider that the effects of the environment policy are just a few. They argued that the decreases of the smog and the sulphur dioxide emissions were accompanied by increasing of the emissions of dioxide of carbon and nitrogen. Moreover, the improvement of the quality of water across the E.U. was done in the same time with the increase of the pollution of seas waters, too. The latest enlargements of the E.U. represent an example of good environment management, as well. Nowadays, the environment protection becomes one of the most important challenges to the world.

Selective bibliography: Jehlicka, P. 2002. Environmental Implications of Eastern Enlargement of the EU: The End of Progressive Environmental Policy?, Robert Schuman Centre for Advanced Studies, European University Institute, Florence. Ionescu R, 2008. Dezvoltare regională, Ed. Didiactică și Pedagogică, București. McDonald F., Dearden S., 2005. European Economic Integration, Prentice Hall, Harlow. Accessing European Funding. A reference guide to finance nature conservation projects (Pdf - IUCN Regional Office for Pan-Europe, October 2008) IEEP guide to European Funding for Nature Conservation (zipfile - IEEP, September 2007) Handbook for Environmental Project Funding (Pdf - European Commission, September 2005) EU Funding for the Environment: A handbook for the 2007-2013 programming period (Pdf - WWF, April 2005) European Union Support Programmes for SMEs - An overview of the main funding opportunities available to European SMEs (Pdf - European Commission, November 2006) www.eugris.info/displayresource.asp?ResourceID=6271&Cat=document http://ec.europa.eu/environment/health/strategy.htm http://ec.europa.eu/environment/health/action_plan.htm http://europa.eu.int/scadplus/leg/en/lvb/128066.htm [Accessed 28.01.20]

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THE CAPITAL STRUCTURE OF COMPANIES LISTED IN THE GREEK STOCK EXCHANGE Maria K. MARKOPOULOU University of Macedonia Thessaloniki, GREECE Demetrios L. PAPADOPOULOS University of Macedonia Thessaloniki, GREECE Abstract: The paper’s aim is to review the capital structure theories, and especially signalling theory. It investigates whether the capital structure signalling theory is reliable in cases of companies listed at the Athens Stock Exchange. The companies used in the sample, raised new equity from 2004 until 2006, and the paper examines their stock price reaction to the announcement.

Key Words: Capital structure, signalling theory JEL Classification: G32 I. Introductory notes and aim of the paper The paper aims at finding new empirical results about signalling theory of the capital structure of companies listed at the Athens Stock Exchange. The paper is divided in three parts. The first part includes a short description of the capital structure theories and an introduction to the signalling theory. The second part consists of the empirical findings of the investigation and their analysis. The third part includes the conclusions of the empirical investigation and some topics for further research.

II. Capital structure theories, signalling theory and the findings of previous empirical investigations 2.1

Capital structure theories

Capital structure shows the percentage of debt and equity in the balance sheet of a company and it is different from firm to firm. Other companies prefer to finance their activities with equity, while others with debt. The question is whether some capital structures are better than others. A capital structure is considered to be good, when it has as a consequence a fall in the cost of capitals. The weighted average cost of capital is the weighted sum of the costs of all sources of finance. The company’s value is equal to the present value of the expected, future free cash flows, using the Weighted Average Cost of Capital. When the Weighted Average Cost of Capital is minimized, keeping the free cash flows stable, the value if the firm is maximized. Debt has two main advantages. First, it contains less risk for the investors than equity. Second, interests have a tax advantage. But, on the other hand, debt has two disadvantages as well. First, it increases the variance of earnings. The greater variance of earnings, provokes the investors to ask for greater returns. So, the increase of leverage may cause an increase in the cost of equity, decreasing the advantages of the low cost of debt. The second disadvantage is that it increases the cost of financial distress, which may be considerable, if the company uses debt often. Academics have been arguing about the significance of the capital structure for the last 40 years, and we still don’t have straight answers. Following the Modigliani and Miller proposals, researchers of the decades of 60s and 70s paid attention to the market’s imperfections, which can make the value of the firm to depend on its capital structure. The main imperfections are: taxation, which encourages the undertaking of debt, but not the dividends and the expected costs of financial distress, which increase with the undertaking of debt.

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At the end of the 70s, a new subject appeared. This new subject on capital structure was signaling. For example, there is a fall in the stock price, when the company announces an equity raise, and a rise in the stock price when the company announces a stock repurchase. These results seemed to confirm the existence of great costs of information, which could affect the choices of finance. Capital structure is an important decision for every company. It is important, not because of the need to maximize the investments’ returns, but due to its effect in the company’s capability to face the competition’s challenges. The best-known capital structure theory is Modigliani and Miller’s (1958, 1963). In their first article they came to the conclusion that capital structure does not affect the company’s value. So, there would be no optimal capital structure, nor minimal weighted average cost of capital (W.A.C.C.). In their second article, they included taxation, and found that a company should use as much debt as it can, to take advantage of the tax reduction and maximize their value. The Modigliani – Miller theory was criticized, mostly for its hypotheses, and less for its content. Its most important flaw is the fact that presupposes the existence of perfect financial markets. In their second article, the writers import the notion of taxation, leaving all the other hypotheses the same. In this case, the optimal capital structure, is the one where the company was financed almost exclusively with debt, something that is not usual in reality, because the cost of debt increases, when leverage increases. The increase of a firm’s leverage seems to be a solution, but in fact it is a short – term solution, since a company cannot constantly increase its debt. J.M. Gordon (1989) suggests, the Modigliani and Miller theory is true, under a number of conditions. These conditions are referred to as perfect markets. In perfect markets there is no taxation, no transaction costs and information is available to everyone with costs. Trade – off theory suggests as an optimal capital structure, that mix of equity and debt where present value of tax advantages equals to the present value of costs related to debt. Its main advantage is the fact that it suggests mediocre leverage and that it is easy to understand. Its disadvantage is the fact that it is a general, descriptive theory that does not explain which exactly is the right level of leverage. According to Berens and Cuny (1995), another problem of the trade-off theory is the fact that it predicts debt ratios which are greater than the real ones. Myers and Majluf (1984), and Myers (1984) developed the pecking order hypothesis. According to this theory, companies prefer to be financed by internal funds, then by debt, and finally by raising new equity. Their results are strengthened by Krasker (1986). There are two main approaches explaining pecking order (Halov, Heider, 2005). The first refers to transaction costs of external financing, while the second one is based to asymmetric information theory. According to the approach of transaction costs, the type of funds that will be preferred depends on the costs of the issue. According the asymmetric information theory, debt is preferred to equity, because taking a loan is a positive sign for investors who are not as well informed as the management. If a company undertakes a loan, investors will assume that the management believes that the company’s common stock is undervalued. Pecking order hypothesis is better supported by empirical investigations, in comparison to trade – off theory. A disadvantage of pecking order hypothesis (Myers, 2001) is the fact that managers act in favor of the current shareholders, maximizing the value of existing stocks. But it does not refer motivation of the managers. Benito (2003) examined the capital structure decisions, and more specifically trade-off theory and pecking order hypothesis. He used data from two different economies, the Spanish and the English one. The results support pecking order hypothesis, as debt ratios are negatively related to cash flows and earnings, and positively with investments. This negative relation with the earnings of the company does not agree with trade off theory. But, in general, equity issues seem to be more common than the strict description that the pecking order would propose. Dittmar (2004) examined the way firms choose the initial capital structure of their subsidiaries. The positive feature of subsidiaries is that through them, we can analyze the capital structure of the whole corporation. When the subsidiary is no longer financed by the corporation, the corporation chooses the capital structure of the new firm. The new firm initially had neither external debt, nor the control over its capital structure. The sample used consisted of 155 corporations between 1983 and 1995. The results of this research seem to agree with trade off theory. More specifically, growth is related negatively, while the value of the mortgages is related positively with the choice of debt.

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The free cash flow theory suggests that too high levels of debt will increase the value, despite the increased possibility of bankruptcy, when the cash flows of the firm are more than the chances of positive investments. The free cash flow theory was mainly developed for mature firms that often proceed to overinvestments. Managerial opportunism hypothesis states that capital structure is the cumulative result of the managers’ actions (Baker, Wurgler, 2001). Managers issue stocks when the company’s stock is overvalued, and repurchase them, when the stocks are undervalued. Managers’ aim is to be synchronized with the market, so as to take profits for the current investors. This theory has common points with pecking order hypothesis, as they both act for the current investors’ benefit, and with signaling theory, as they both believe that the company issues stocks when their price is overvalued. According to Graham and Harvey (2001), managers of the firms are affected by the stock price when they intend to raise equity. The approach of timing with the market suggests that capital structure is the result of former actions in order to synchronize with the market. According to this approach, there is no optimal capital structure. The theory of timing itself seems to be the explanation. According to Leland E. Hayne (1998), two main theories determined the development of capital structure theories, the Modigliani and Miller theory (1958, 1963) and Jensen and Meckling theory (1976). A great number of theoretical and empirical papers were based on these two theories. But prior research seemed to have two disadvantages. It was not complete and it did not give quantitative answers. Leland (1998) is trying to have element from both Modigliani and Miller theory and Jensen and Meckling theory about the optimal capital structure. Ronald W. Masulis (1983) examined the effect of a change in the levels of debt in the firm value. He used two types of change, issuer exchange offers and recapitalizations. The results showed that the stock prices and the values of the firms’ were positively related to these capital structure changes. Odean (1998) examined the psychology of investors and how it affects their actions. His research concludes that the volume of transactions increases when internal users seem to be very confident. Hovakimian Armen, Opler Tim and Titman Sheridan (2001) found that although pecking order hypothesis affects debt ratios in the short-term period of time, but companies tend to try to reach ratios – targets, which is in agreement with trade-off theory. The findings also agree with agency theory and asymmetric information, as managers are unwilling to issue stocks in low prices or to increase their leverage when the stock prices are too low. In general, we can conclude that Modigliani and Miller theory agrees with the trade off theory, while pecking order hypothesis is consistent with the asymmetric information theory and signaling theory. Despite the research, there is no thorough explanation for the optimal capital structure of firms (Haris, Raviv, 1991). Myers (2001), in his article for trade off, pecking order and free cash flow theory, states that none of these theories gives general explanations for financial strategies, as they were not designed to be general. These capital structure theories are valid under conditions. Each one emphasizes in certain costs and advantages of different financing strategies. Every researcher can find statistical results that agree with more than one theory, because each theory is valid for parts of the sample. 2.2

Signaling theory

At the end of the 70’s, Ross (1977), and other writers developed the capital structure signalling theory based upon the problems of the asymmetrical information between managers and investors. These models are based upon the idea that the top executives of the firm that have inner information, have a motive to transfer this knowledge to the external investors, so that the stock price will rise. However, managers cannot simply announce the good news to the investors, since they will face it with suspicion. One solution to this problem (for the underestimated firms) is to send to the investors a signal containing this information, by adopting a financial policy. This strategy is forbidden from the aspect of cost for a firm of less value. The signal is a costly action for the firm, in order to convince the investors and other external users that it contains reliable information. To the external users what makes the signal credible is its cost. Bhattacharya and Dittmar (2004) argued about costless and costly signals. Managers would not announce the good news that they have, because all companies could do this without being valid. Instead of this, the administration increases the leverage of the firm. This capital structure is a commitment for the firm, which, a firm of mediocre prospects would not dare to undertake. The firms that want to send the

75

signal that they have good prospects, increase their leverage. In contrast, the overestimated firms are not willing to undertake the burden of lending because in this way they face the risk of bankruptcy. Furthermore, the precision of the signal is significant as well (Veronesi, 2000). Thus, finally, managers many times use the changes in capital structure, in order to transfer some information for the profitability and the risk of the firm, to the external users. Signaling theory is founded upon the idea that the internal users know more things than the external users. Moreover, the wages and the privileges that managers have, are sometimes dependent on the market value of the company. This gives the firm the motive to provide the information to the investors that the firm is underestimated. The increased leverage indicates greater possibilities of bankruptcy. It signals positive evolutions, since the request for a loan means that the administration believes that the good progress of the firm will allow it pay off. The information will be credible only if the cost of the false revelation is high enough to force the firm to reveal the truth. The leverage increase is an effective signal. The loan contracts force the firm to have stable cash flows during the loan period and if the firm does not have it, it will face serious consequences, such as bankruptcy. On the contrary, in the case of equities, things are more flexible. Stockholders wait typically for, some cash payments, but in this case the administration has the aptitude to reduce or omit them during financial recessions. For this reason, taking a new loan is a credible signal for the future cash flows to fulfil its obligations. The economist who first dealed with the asymmetric information was Akerlof with his Lemons Problem, which concerned the car market. Michael Spence continues Akerlof’s idea, in his article (1973), in which he introduces the notion of the signaling theory in the labor market. In 2001, Akerlof, Spence and Stiglitz were nominated with the Nobel Prize for their research on the asymmetrical information during the 70’s. This is a sign of the importance of the financial asymmetric information. According to a group of theories, for example Ross (1977) and Leland and Pyle (1977), the choice of the capital structure of the firm is a signal for the external users. According to Noe, the quality of the firms that raise loans tends to be better than this of the firms that issue stocks. Thus, Noe’s model predicts a negative reaction of the stock price in the announcement of the stocks’ issue. Ross believes that capital structure functions as a signaling mechanism in the market. One of the bestknown signals is the undertaking of debt. This action increases the possibilities and the costs of financial distress for a firm. The investors know that, and when they notice that a firm increases its debt they interpret it as a sign that the managers await in the future such cash flows that will avoid recession. Other financial signals are: Dividends Leverage Stock repurchase Announcement of a merger or acquisition Announcement of a tender offer Announcement of a spin off Announcement of poison pill The changes in capital structure can alter the conception of the market for the firm’s value. The above writers argue that stock issue affects negatively the stock price. To sum up, we see that Ross (1977), Noe (1988) and Narayanan (1988) predict a positive reaction of the stock price to the debt increase, while Myers and Majluf predict that the stock price will not be affected by the undertaking of a risk free loan. Lucas and McDonald (1990) find that the stock price falls after the announcement of an equity raise, but after a small period of time it rises. According to Krasker (1986), the stock price is negatively correlated with the issue size. Finally, according to Barclay, Smith and Watts (1995) the empirical support to signalling theory is statistically significant, but economically insignificant. The companies of high quality use more debt, but the differences in leverage are very small. 2.3

Results of other empirical researches

The importance of signaling theory has been the object of many researches. Suggestively, the following will be mentioned. Johnson’s (1988) research indicates that signaling theory is in force in the USA during 1970-1988. The excessive returns of the common stocks were negatively connected with the reductions of the loan’s pay-

76

off and the flexibility of the dividends’ distribution. The refunding of the debts can alter the common stocks’ prices, if the exchange offer reveals new information about the firm’s prospects. Thirty occasions of exchange offers were examined. The research of Pugh and Jahera (1990) ends up in accordance with signaling theory in the USA, although it examines the theory from the aspect of the stocks’ repurchase, while it adds that the stock prices of the firms of greater capitalization are less affected. The excessive returns related with the repurchase announcements, are usually considered reaction to the statement of the managers that the firm’s stock is underestimated. This signal from the behalf of the administration provides new information that improves the market value of the firm. Two dependent variables were used, the adjusted to risk excessive returns for the days before and after the announcement and the premium offered by the administration. One of the independent variables is the debt ratio before and after the repurchase. The method used in this research was the least squares method, and the periods of time of 40 days and 10 days. Signaling theory seems to be valid to the Middle East enterprises as well, according to a research that took place in 1994-1996 (Du, Dai, 2005). The sample comprised of enterprises of nine Asian economies, while the time period stops before the Asian crisis, which would alter the result. Dependent variables were the leverage in historical prices and leverage in market prices. Finally, the research of Antoniou, Gunay and Paudyal (2006) in France, Germany and the United Kingdom supports signaling theory, examining the debts’ maturity from 1983, 1987 and 1969 for each country, to 2000. The debts’ maturity is used as the dependent variable, while among the assumptions checked is the validity of signaling theory, which is expressed with the use of four factors, leverage, liquidity, variability and the quality of the firm. In Egypt, the theory does not seem to be in effect, it is valid only for high risk enterprises (Eldomiaty, 2004). This research examines the dynamic relations between the changes in the capital structure of the enterprises and their effect on the market price, under different levels of systematic risk. The market price, or capitalization, of the firm is used as the dependent variable, while the debt ratio is used as the independent variable. The enterprises included in the sample are divided in 3 categories with high, medium and low beta ratio respectively. The results confirm to some degree the signaling theory, especially for the high-risk enterprises. III. Empirical research of signalling theory for the greek stock market firms 3.1 General information The alterations caused to the capital structure of a firm from the administration, are expected to have as a consequence some variations to the stock price of the firm. Thus, according to signaling theory, the equity raise of a firm, should have as an effect a fall of its stock price. This statement is the core of empirical research of the Greek stock market. We should mention that the Greek Stock Exchange had a great rise at the end of the 90s due to the entrance of the Greek economy in the European Monetary Union. But under the pressure of speculatory forces, there was a fall in 2000. This financial crisis affected the whole Greek society. We tried to see how investors reacted to the announcement of equity raises, a few years after the crisis. Moreover, very few researches concern the Greek Stock Exchange, the same period of time the Greek economy was trying to become a mature financial market. The case of the Greek Stock Exchange is not a usual one, as at the period we examine, the Greek economy was trying to come out of a financial crisis, and at the same time become a full member of the European Monetary Union. The research begins with an introductory reference to the notion of the equity raise and how this can be achieved, and the procedure followed. Next, we refer to the choice of the sample used, the methodology followed and the statistic analysis. The third unit ends with the conclusions of this statistic analysis. 3.2 Equity raise The stock markets are known as capital markets, since they are the fundamental way for the enterprises to find capitals. The enterprises either issue new stocks, or, if they have already issued stocks, they move to equity raise. The equity raise can be achieved in two ways, either with capitalization of the retained earnings or with extra cash payment. In the first case, the firm moves to financial inscriptions that transfer the retained

77

earnings to the equity. Analogous to the capitalized earnings, new stocks are issued with equal name value, as the existing ones and are distributed free of charge to the investors. There might also occur a capitalization of the obligations or capitalization of the result coming from the readjustment of the financial assets, according to which, the book value of the assets is adjusted with their approximate market value. In the second case of the cash payment, the equity raise leads to new capitals for the enterprise. This actually means that the firm wants to find new capitals from the investors, either the old ones, or new. But if new investors buy the new stocks, the old stockholders will have to face a reduction of their ownership percentage. In order for this not to happen, there is a preference right for the old investors – in fact with better conditions than the official price of the stocks’ issue. The procedure followed for an equity raise consists of: 1. the Stockholders General Assembly for an equity raise 2. the approval of the Informative Report by the Greek Capital Market Committee 3. the publication of the Informative Report 4. issue of the Preference Rights 5. negotiation and use of the Preference Rights 6. end of negotiation of the Preference Rights 7. end of use of the Preference Rights 8. announcement concerning the coverage of the issue and the disposal of the rest of the stocks 9. start of negotiation of the negotiation of the new stocks that come from the equity raise The equity raises are sometimes faced with suspicion. Especially after the financial crisis in 2000, many enterprises faced serious problems, and the equity raise was the only solution to improve their financial situation. Some of them, however, did not manage to cover the equity raise. The failure of an equity raise causes nasty comments to the market, having as a result a negative effect upon the stock. Therefore, it is a common practice, for the basic investors, who may either have to cover the part that is not disposed. This fact also changes in many cases the, after the equity raise, stockholders composition. It is worth mentioning here that the announcement of an equity raise has a direct effect on the stock of the firm, besides the fact that from the moment the General Assembly decides its materialization until it is approved by the stock market, a long period of time intermediates. So, we realize that the investors are reluctant to participate to the capital increases of firms, since some of them do not have adequate liquidity. Moreover, some of the firms do not have investing interest with long-term prospects, while, at the same time, include the risk for devaluation of the titles. Systematic abstinence of the investors is noticed mainly in the equity raises of small companies, something that points out the reduced trust of the investors to these companies. On the other hand, companies of great capitalization do not face this problem. 3.3 Sample We investigate cases of equity raise that occurred in the Greek Stock Exchange between 2004 and 2006. This period of time was chosen, because investors needed some time after the financial crisis of 2000 in order to start acting normally again. Under these circumstances, the results may not be correct, because investors are still suspicious against any announcement of firms. We have chosen companies that proceeded in equity raise, but not as a consequence of a merger or acquisition. The third factor that we took into consideration was the availability of the data. Finally, the sample consists of 13 cases of equity raise that are shown in the following table (TABLE 1). TABLE- 1:Sample of the research

Company LANNET ETE

Issue of new stocks with preference right 14.761.076 135.707.764

Ratio of issue of new to old stocks Total capital 4:10 15.351.519,04 4:10 3.000.498.662,04

78

Publication date Percentage of the Informative of coverage Report 8-11-2005 100,00 9-6-2006

LAZARIDIS MARFIN ATE EMPORIKI GENIKI LESVOS DIAS PLIAS ALPHA BANK FORTHNET

1.436.800 25.000.000 624.444.444 26.478.294 14.857.143 25.110.000 63.908.001 97.271,00 21.411.490

1:10

KERANIS

11.459.490

1:03

3.448.320,00 400.000.000 1.248.888.888,00 397.174.410 89.142.858,00 -

20:09 5:20 1:01 1,9:1

18.238.997 437.709,77 119.904.344 6.548.282,50

5:04

100,00 190,00 100,00 100,00 100,00

100,00

20-2-2004 19-12-2005 27-5-2005 10-11-2005 27-2-2004 16-11-2005 26-5-2006 19-6-2006 24-11-2004 25-4-2006

100,00

21-10-2004

-

We should note that the firm PLIAS was by that time under surveillance, something that may have affected its price and the investors’ reactions to its announcements. The sample is quite small, due to the fact that the firms at that period tended to raise their equity only when they proceeded to a merger or acquisition. But the announcement of a merger or acquisition is a positive signal for the investors, so the results if we included these cases of equity raises, would be confused, as we would use a positive signal and a negative signal at the same time. 3.4 Methodology The data used in this paper is extracted from many sources. The data related to the stock prices are from the site of the Greek Stock Exchange. The details for each equity raise were extracted from the annual reports of the firms, the press, and the Internet. The data covers three years 2004-2006. The statistical analysis was done, with the use of the stock prices of the firms two months before and two months after the announcement of the equity raise. As announcement day, we consider the day when the Informative Report was published. We assume that, in order for signaling theory to be valid, the equity raise should have a negative effect on the stock price, in comparison with the time before the announcement. 3.5 Statistical analysis The software that was used is SPSS. In the first case, we examine the returns of the stock 30 days before and 30 days after the publication of the Informative Report. We examine the logarithmic returns in two periods. The first period of time ends the day before the announcement, while the second one, contains all the rest. The names of the stocks of the first period have the abbreviation “_b(efore)” , while the ones of the second period have the abbreviation “_a(fter)”. 1st test We test whether the average returns of the two periods equal to zero. This actually means that we test whether the returns belong to a distribution, which has average equal to zero, something that we theoretically expect to happen. Test hypotheses: H0: the average equals to zero (μ=0) H1: the average is not equal to zero The results are shown in the Table below (Table 2): TABLE- 2: One Sample Test Test Value = 0 95% Confidence Interval of the Difference

Lannet_b ETE_b

T ,342 -1,497

df 29 29

Sig. (2-tailed) ,735 ,145

79

Mean Difference ,0023167 -,0090667

Lower -,011538 -,021457

Upper ,016171 ,003324

Laz_b Marfin_b ATE_b Emporiki_b Geniki_b Lesvos_b Dias_b Plias_b Alpha_b Forth_b Keranis_b Lannet_a ETE_a Laz_a Marfin_a ATE_a Emporiki_a Geniki_a Lesvos_a Dias_a Plias_a Alpha_a Forth_a Keranis_a

29 29 29 29 29 29 29 29 29 29 29 38 38 38 38 38 38 38 38 38 38 38 38 38

-1,688 ,683 -1,090 ,871 1,129 -,427 -,799 -,352 ,306 1,653 -,323 ,715 ,493 ,781 1,390 -,703 2,077 ,796 1,506 -,591 ,630 1,711 -,766 ,286

-,0056233 ,0021200 -,0074300 ,0023700 ,0054933 -,0021533 -,0035400 -,0041767 ,0010733 ,0114200 -,0014167 ,00524 ,00242 ,00259 ,00639 -,00839 ,00543 ,00252 ,01983 -,00178 ,00468 ,00321 -,00568 ,00179

,102 ,500 ,285 ,391 ,268 ,673 ,431 ,728 ,762 ,109 ,749 ,479 ,625 ,440 ,173 ,487 ,045 ,431 ,140 ,558 ,532 ,095 ,448 ,776

-,012439 -,004232 -,021368 -,003193 -,004462 -,012476 -,012599 -,028460 -,006112 -,002714 -,010388 -,0096 -,0075 -,0041 -,0029 -,0326 ,0001 -,0039 -,0068 -,0079 -,0103 -,0006 -,0207 -,0109

,001192 ,008472 ,006508 ,007933 ,015449 ,008169 ,005519 ,020107 ,008259 ,025554 ,007554 ,0201 ,0123 ,0093 ,0157 ,0158 ,0107 ,0089 ,0465 ,0043 ,0197 ,0070 ,0093 ,0145

With the use of One-Sample Test, we accept the H0 for all the companies, because the possibility that appears in column Sig is greater than 0.05. Moreover, the level of significance is 95% (columns lower/upper). Within it, there is price zero (the smallest price is negative, while the biggest price is positive). As an exception, we should mention Emporiki after the announcement of the equity raise, for which the expected price is greater than zero. 2nd test: We test whether the prices follow the Normal Distribution. Test hypotheses: H0: the returns follow the Normal Distribution H1: the returns do not follow the Normal Distribution In this case, we use One Sample Kolmogorof Test, which is used in quantitative variables and examines whether the cumulative frequency of a variable in the sample looks like the the one that would theoretically appear if it followed the Normal Distribution. In order to accept the H0 hypothesis, the possibility in line Asymp.Sig. should be greater than the level of significance that is chosen (Table 3 & Table 4). TABLE- 3: One-Sample Kolmogorov-Smirnov Test

N Normal Parame ters(a,b )

Me an

La nn et _b 30 ,0 02 31 7

ET E_b 30

Laz _b 30

Mar fin_ b 30

,009 067

,005 623

,002 ,007 120 430

AT E_b 30

Em pori ki_b 30

Gen iki_ b 30

,002 ,005 370 493

80

Les vos _b 30

Dia s_b 30

,002 153

,003 ,004 540 177

Plia s_b 30

Alp ha_ b 30

Fort h_b 30

,001 ,011 073 420

Ker anis _b 30 ,001 417

St d. D e vi at io n Most A Extreme b Differenc s es ol ut e P o si ti v e N e g at iv e KolmogorovSmirnov Z Asymp. Sig. (2-tailed)

,0 37 10 36

,033 182 7

,018 251 6

,017 ,037 010 326 2 3

,014 ,026 898 661 2 3

,027 644 6

,024 ,065 260 031 1 6

,019 ,037 242 850 3 8

,024 025 1

,1 25

,122

,179

,111 ,193

,122 ,166

,236

,194 ,157

,076 ,304

,243

,1 25

,097

,179

,111 ,143

,122 ,166

,236

,175 ,157

,076 ,304

,243

,1 12

,122

,138

,093 ,193

,097 ,160

,231

,194 ,130

,067 ,187

,190

,668

,980

,610

1,05 5

,667 ,910

1,29 1

1,06 ,861 2

,419

1,66 5

1,33 2

,764

,292

,850 ,216

,765 ,379

,072

,209 ,449

,995 ,008

,058

,6 84 ,7 38

TABLE – 4: One-Sample Kolmogorov-Smirnov Test

N Normal Parameters( a,b)

Most Extreme Differences

Lann et_a 39

ETE _a 39

Marf in_a 39

ATE _a 39

,0052 ,0024 ,0026

,006 4

,001 ,0054 ,0025 ,0198 ,0047 ,0032 ,0084 ,0018 ,0057 8

,0458 ,0305 ,0207 ,028 3 9 3 71

,0745 ,0163 ,0198 ,0822 ,0188 ,0463 ,0117 ,0462 ,039 7 2 0 0 5 3 2 7 09

,158

,122

,119

,175

,162

,103

,124

,185

,146

,207

,063

,143

,160

,158

,122

,080

,175

,139

,103

,124

,185

,146

,207

,062

,143

,160

-,097

-,049

-,119

-,112

-,162

-,060

-,063

-,087

-,138

-,178

-,063

-,092

-,126

,988

,760

,746

1,011 ,641

,774

1,156 ,913

1,292 ,391

,896

,997

,283

,611

,634

,258

,586

,138

,071

,398

,273

Mean

Std. Deviati on Absolut e

Positive Negativ e Kolmogorov-Smirnov Z Asymp. Sig. (2-tailed)

Emp oriki _a 39

Laz_ a 39

1,09 0 ,185

,806

Geni ki_a 39

Lesv os_a 39

Dias _a 39

,375

Plias _a 39

Alph a_a 39

,998

Forth _a 39

For the two periods of time, we accept the basic hypothesis, that the variables follow the Normal Distribution. Forthnet is an exception before the announcement, as the price of Sig is 0,008, which is less than 0,05. 3rd test:

81

Kera nis_a 39

We examined whether there is a difference between the averages of the two periods for each company. This test is used in dependent samples in two different periods of time. The test hypotheses that we made are the following: H0: the averages are equal (μ1-μ2=0) Η1:the averages are different The results are shown in the Table below (Table 5) TABLE- 5: Paired Samples Test t

df

Sig. (2tailed)

95% Confidence Interval of the Difference

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

Lannet_b Lannet_a ETE_b - ETE_a Laz_b - Laz_a Marfin_b Marfin_a ATE_b - ATE_a Emporiki_b Emporiki_a Geniki_b Geniki_a Lesvos_b Lesvos_a Dias_b - Dias_a Plias_b - Plias_a Alpha_b Alpha_a Forth_b - Forth_a Keranis_b Keranis_a

Lower

Upper

-,0144922

,0185655

,252

29

,803

-,0296508 -,0150050

,0100508 ,0040250

-1,010 -1,180

29 29

,321 ,248

-,0169565

,0075299

-,787

29

,437

-,0216434

,0432901

,682

29

,501

-,0076267

,0049267

-,440

29

,663

-,0084905

,0118772

,340

29

,736

-,0614780

,0026113

-1,879

29

,070

-,0099922 -,0387386

,0075522 ,0201052

-,284 -,648

29 29

,778 ,522

-,0127356

,0055823

-,799

29

,431

-,0024441

,0411907

1,816

29

,080

-,0186437

,0197970

,061

29

,951

We used the Paired Samples Test, where u=0. In the columns Lower/upper, zero is included, so, with the fault possibility of 0,05, there is no difference in the average returns before and after the announcement. We also see that, in a significance level of 10%, the stock of LESVOS has a negative t=-1,879, which means that the average returns of the stock were lower than the ones after the equity raise. This result is in contrary with the signaling theory that predicts a fall in the stock price after the announcement. On the other hand, the stock of FORTHNET has a positive statistic t=1,816, so its average returns are lower after the announcement, confirming signaling theory. 4th test The last test is about the variances before and after the equity raise. H0: the variances before and after the announcement are equal H1: the variances are different We can see the results of this test in Table 6. TABLE- 6: Test of Homogeneity of Variances

Lannet ETE Laz Marfin ATE

Levene Statistic ,185 ,062 1,601 1,153 4,883

df1 1 1 1 1 1

df2 67 67 67 67 67

Sig. ,668 ,804 ,210 ,287 ,031

82

Emporiki Geniki Lesvos Dias Plias Alpha Forth Keranis

,887 1,481 22,466 ,095 4,226 7,291 1,739 3,475

1 1 1 1 1 1 1 1

67 67 67 67 67 67 67 67

,350 ,228 ,000 ,758 ,044 ,009 ,192 ,067

Using the Test of Homogeneity of Variances, we found that the variances remained the same. In order to accept the basic hypothesis, the possibility in column Sig should be greater than the significance level. Exceptions are the prices of the companies ATE, LESVOS, PLIAS, ALPHA and KERANIS. In all these cases, the variance of the second period is greater. Finally, using the Paired Samples Correlations, we find that in all the companies (except for DIAS and GENIKI that have a significant positive correlation) do not have a strong linear correlation between the prices of the two periods (Table 7). TABLE- 7: Paired Samples Correlations Pair 1 Pair 2 Pair 3 Pair 4 Pair 5 Pair 6 Pair 7 Pair 8 Pair 9 Pair 10 Pair 11 Pair 12 Pair 13

Lannet_b & Lannet_a ETE_b & ETE_a Laz_b & Laz_a Marfin_b & Marfin_a ATE_b & ATE_a Emporiki_b & Emporiki_a Geniki_b & Geniki_a Lesvos_b & Lesvos_a Dias_b & Dias_a Plias_b & Plias_a Alpha_b & Alpha_a Forth_b & Forth_a Keranis_b & Keranis_a

N

Correlation

Sig.

30

,298

,110

30 30

-,239 ,157

,204 ,408

30

,123

,519

30

,033

,862

30

,347

,060

30

,374

,042

30

,133

,483

30 30

,441 -,059

,015 ,756

30

-,216

,251

30

,101

,597

30

-,121

,526

Second round of tests for a period of time 14 days before and 14 days after the announcement In this second round of tests, we used the same tests, altering the periods of time. We created a period comprising of the 15 days before the announcement and 14 days after the announcement. The names of the variables are followed by _p (before the announcement) and _k (after the announcement). We present the results of the second round of tests. 1st test TABLE- 8: One-Sample Test Test Value = 0 95% Confidence Interval of the Difference

Lannet_k

T ,565

df 38

Sig. (2-tailed) ,575

83

Mean Difference ,0040615

Lower -,010491

Upper ,018614

ETE_k Laz_k Marfin_k ATE_k Emporiki_k Geniki_k Lesvos_k Dias_k Plias_k Alpha_k Forth_k Keranis_k Lannet_p ETE_p Laz_p Marfin_p ATE_p Emporiki_p Geniki_p Lesvos_p Dias_p Plias_p Alpha_p Forth_p Keranis_p

38 38 38 38 38 38 38 38 38 38 38 38 29 29 29 29 29 29 29 29 29 29 29 29 29

-,207 ,996 1,652 -,115 1,689 1,305 1,252 -,327 ,433 ,830 -1,724 ,149 ,546 -,655 -1,867 ,875 -1,187 1,347 ,488 ,414 -,992 -,289 ,914 1,532 ,000

-,0007590 ,0032000 ,0039795 -,0007359 ,0046128 ,0056154 ,0158000 -,0008769 ,0037615 ,0015744 -,0084205 ,0007026 ,0038533 -,0049400 -,0064133 ,0052567 -,0173800 ,0034300 ,0014733 ,0030800 -,0047200 -,0029867 ,0032000 ,0149867 ,0000000

,837 ,326 ,107 ,909 ,099 ,200 ,218 ,746 ,668 ,411 ,093 ,882 ,589 ,518 ,072 ,389 ,245 ,188 ,629 ,682 ,329 ,774 ,368 ,136 1,000

-,008172 -,003305 -,000897 -,013661 -,000916 -,003097 -,009752 -,006313 -,013835 -,002263 -,018308 -,008839 -,010575 -,020375 -,013440 -,007032 -,047333 -,001777 -,004700 -,012148 -,014450 -,024108 -,003960 -,005015 -,014216

,006655 ,009705 ,008856 ,012189 ,010141 ,014328 ,041352 ,004559 ,021358 ,005412 ,001467 ,010245 ,018282 ,010495 ,000613 ,017545 ,012573 ,008637 ,007646 ,018308 ,005010 ,018135 ,010360 ,034988 ,014216

The 1st test (Table 8) shows again that the average price equals to zero. But, in the significance level of 10%, the average price of EMPORIKI and FORTHNET before the announcement, and LAZARIDIS after the announcement, are smaller than zero. 2nd test TABLE- 9: One-Sample Kolmogorov-Smirnov Test

N Normal Paramete rs(a,b)

Most Extreme Differenc es

Mean

Std. Deviati on Absolut e

Positive Negativ e KolmogorovSmirnov Z Asymp. Sig. (2tailed)

Lannet ETE_p

Laz_ k 39

,020 0672

,0150 ,0398 ,0170 ,026 434 732 544 8780

,0788 ,0167 ,0542 ,011 253 705 831 8392

,0305 ,0294 016 359

,171

,108

,153

,106

,120

,113

,155

,144

,142

,169

,094

,188

,253

,171

,108 ,071

,153

,074

,108

,113

,155

,144

,142

,169

,047

,136

,253

-,103

-,106

-,120

-,086

-,088

-,092

-,128

-,154

-,094

-,188

-,165

1,068

,676

,956

,664

,752

,708

,966

,896

,889

1,053 ,588

1,173 1,581

,204

,750

,320

,769

,624

,698

,309

,398

,408

,217

,880

,128

Marfin_ ATE

Emp

Geni

Lesv

Dias

Plias

Alph

Forth

Keranis

-,077

Laz_

,003 200

Marf in_k 39

ATE _k 39 ,0039 ,0007 79 36

Emp oriki _k 39

Lanne ETE t_k _k 39 39 ,0040 ,000 62 759 ,022 ,0448 869 913 7

84

Geni ki_k 39

,0046 ,005 13 615

Lesv os_k 39

Dias _k 39 ,0158 ,0008 00 77

Plias _k 39

Alph a_k 39

,0037 ,001 62 574

Forth _k 39 ,0084 21

Kera nis_k 39 ,0007 03

,014

_p

p

p 30

,03864 ,041335 03 7 ,140 ,085

30 ,0064 13 ,0188 165 ,113

,140

,085

,072

,151

-,091

-,048

-,113

,765

,467

,622

30

30

,00385 3 ,004940

_p

_p

a_p

_p

_p

30 ,0034 ,0014 ,0030 ,0047 30 73 80 20 ,0139 ,0165 ,0407 ,0260 439 315 807 574 ,118 ,123 ,330 ,228

30 ,0029 87 ,0565 638 ,146

30

30

30

,167

,099

,123

,330

,228

-,122

-,199

-,118

-,080

-,170

-,190

,828

1,088 ,645

,672

1,808 1,250 ,798

,543

,188

,757

,003

,930

30 ,005257 ,0173 80 ,032908 ,0802 5 146 ,151 ,199

,602 ,981 ,834 ,499 a Test distribution is Normal. b Calculated from data

oriki _p 30

,800

ki_p

os_p

30

30

_p

,088

,0032 ,014 00 987

,000000

,0191 ,053 746 5654 ,099 ,210

,038071 9 ,173

,146

,099

,210

,173

-,105

-,075

-,167 1,15 1 ,141

-,136

,548

,950 ,328

In the 2nd test (Table 9), most of the companies keep following the Normal Distribution. Exceptions in this case are, KERANIS before the announcement, and NAYTILIAKI LESVOU, after the announcement. 3rd test TABLE- 10: Paired Samples Test t

Df

Sig. (2tailed)

95% Confidence Interval of the Difference

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

Lannet_k Lannet_p ETE_k ETE_p Laz_k - Laz_p Marfin_k Marfin_p ATE_k ATE_p Emporiki_k Emporiki_p Geniki_k Geniki_p Lesvos_k Lesvos_p Dias_k Dias_p Plias_k Plias_p Alpha_k Alpha_p Forth_k Forth_p Keranis_k Keranis_p

Lower

Upper

-,0274151

,0171951

-,469

29

,643

-,0153516

,0184450

,187

29

,853

-,0012083

,0153483

1,747

29

,091

-,0160576

,0129376

-,220

29

,827

-,0243758

,0425291

,555

29

,583

-,0099037

,0083637

-,172

29

,864

-,0079702

,0206635

,907

29

,372

-,0151426

,0530760

1,137

29

,265

-,0086839

,0158439

,597

29

,555

-,0234777

,0373510

,466

29

,644

-,0096286

,0082752

-,155

29

,878

-,0491950

-,0038183

-2,389

29

,024

-,0224623

,0156423

-,366

29

,717

In the 3rd test (Table 10), all companies have the same average returns before and after the announcement, apart from LAZARIDIS and FORTHNET. FORTHNET has a statistic t=-2,389, so we conclude that the average returns after the announcement is higher, opposing to the signaling theory. This result is also in

85

contrast with the first round of tests, when the same company confirmed signaling theory. LAZARIDIS confirms signaling theory, with a statistic t=1,747. 4th test TABLE- 11: Test of Homogeneity of Variances

Lannet ETE Laz Marfin ATE Emporiki Geniki Lesvos Dias Plias Alpha Forth Keranis

Levene Statistic 1,346 7,085 ,228 8,144 3,052 1,948 ,782 5,772 ,122 ,030 1,598 10,987 1,874

df1 1 1 1 1 1 1 1 1 1 1 1 1 1

df2 67 67 67 67 67 67 67 67 67 67 67 67 67

Sig. ,250 ,010 ,635 ,006 ,085 ,167 ,380 ,019 ,728 ,863 ,211 ,001 ,176

In the 4th test, we see that ETE, MARFIN, ATE, LESVOS and FORTHNET have a diversification in variances before and after the announcement. Furthermore, all the companies, in this 28-day period, have higher variances than in the first case. Finally, in the test about the correlation coefficients, only MARFIN and EMPORIKI have a significant negative correlation of their returns before and after the announcement. Finally, about the correlation coefficients, we found in Table 12: TABLE- 12: Paired Samples Correlations Pair 1 Pair 2 Pair 3 Pair 4 Pair 5 Pair 6 Pair 7 Pair 8 Pair 9 Pair 10 Pair 11 Pair 12 Pair 13

Lannet_k & Lannet_p ETE_k & ETE_p Laz_k & Laz_p Marfin_k & Marfin_p ATE_k & ATE_p Emporiki_k & Emporiki_p Geniki_k & Geniki_p Lesvos_k & Lesvos_p Dias_k & Dias_p Plias_k & Plias_p Alpha_k & Alpha_p Forth_k & Forth_p Keranis_k & Keranis_p

N

Correlation

Sig.

30

-,284

,128

30 30

,137 ,353

,470 ,056

30

-,397

,030

30

-,043

,823

30

-,382

,037

30

-,323

,082

30

-,014

,942

30 30

-,131 -,122

,491 ,520

30

-,138

,468

30

-,027

,889

30

-,088

,642

We see that only in the cases of MARFIN and EMPORIKI, their returns have a strong negative correlation before and after the announcement.

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IV. Conclusions The results of the empirical analysis do not confirm signalling theory in the Greek Stock Exchange. Among the 13 cases of equity raise of the sample, only FORTHNET and LAZARIDIS had a fall in the stock returns after the publication of the Informative Report, while in 5 cases we had a raise in their variance after the publication. In the first round of tests, we examined the stock prices 30 days before and 30 days after the announcement of the equity raise, while in the second round of tests we used a period of time of 14 days before and 14 days after the announcement. The fact that signalling theory does not seem to be valid in this sample could be due to a number of factors: The Greek Stock Exchange, during the period of time we examined, was coming out of a crisis, so the results may not be representative. Moreover, the Greek Stock Market is in effort to become one of the mature markets. The result could also be affected by the fact that some of the companies may have a small number of investors holding their stocks. The data was for a small number of companies and for a small period of time. In the sample was also a company under surveillance. Furthermore, many of the companies were banks and, in general, companies of great capitalization, so the investors have significant trust in them. The announcement of the equity raise was not viewed as a bad signal, as signaling theory predicted, because the investor did not worry about the quality of the companies and the reasons they proceeded in the equity raise. V. Final thoughts and suggestions for further discussion Capital structure is one of the most argued subjects in finance. A great number of theories have tried to explain the difference between the debt ratios of companies. These theories suggest that companies determine their capital structure, depending on the costs and advantages that relate to each type of finance. This paper examines signaling theory and whether it is valid in the Greek Stock Exchange. According to signaling theory, investors view the equity raise as a signal of risk, so we would expect a price fall after the announcement of the equity raise. But this does not seem to happen, according to the investigation. From the 13 firms of the sample, only two had a fall of their stock price. The same investigation could be done using a larger and more representative sample, or using another signal, like for example the announcement of a merger or acquisition or the announcement of a stock repurchase. Selective bibliography: Antoniou Antonios, Guney Yilmaz, Paudyal, 2006. The determinants of debt maturity structure: evidence from France, Germany and the UK, European Financial Management, 12(2). Baker Malcolm, Wurgler Jeffrey, 2001. Market timing and capital structure, Yale International center for finance, 18 April. Benito Andrew, 2003. The capital structure decisions of firms: is there a pecking order?, Documento de Trabajo no. 0310, Banco de Espana, Madrid. Berens James L., Cuny Charles L.,1995. The capital structure puzzle revisited, The Review of Financial Studies, 8(4). Bhattacharya Utpal, Dittmar Amy, 2004. Costless versus costly signaling: Theory and evidence, Dittmar Amy, 2004. Capital structure in corporate spin - offs, Journal of business,77(1). Du Julan, Dai Yi, 2005. Ultimate corporate ownership structures: evidence from East Asian economies, Corporate Governance, 13(1). Easley David, O’ Hara Maureen, 2004. Information and the cost of capital, Journal of Finance,59(4).

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Eldomiaty Tarek I, 2004. Dynamics of financial signaling theory and systematic risk classes in transitional economies: Egyptian economy in perspective, Journal of Financial management and analysis,17(2). Fried Jesse M., 2001. Open market repurchases: signaling or managerial opportunism, Boalt working papers in public law, paper 46, Berkeley University of California. Gordon M.J., 1989. Corporate finance under the MM theorems, Financial Management,18(2). Halov Nikolay, Heider Florian, 2005. Capital structure, risk and asymmetric information, Haris Milton, Raviv Artur, 1991. The theory of capital structure, Journal of Finance, 46(1). Hovakimian Armen, Opler Tim, Titman Sheridan, 2001. The debt – equity choice, Journal of financial and quantitative analysis, 36(1). Jaffe Jeffrey, Ross Stephen A., Westerfield Randolph W., 2002. Corporate finance, sixth edition, McGraw Hill Irwin. Jensen Michael C., Meckling William H., 1976. Theory of the firm: managerial behaviour, agency costs and ownership structure, Journal of Financial economics, 3. Johnson Bruce W., 1988. Debt refunding and shareholder wealth: the price effects of debt-for-debt exchange offer announcements, The Financial Review,23(1). Krasker S. William, 1986. Stock price movements in response to stock issues under asymmetric information, Journal of finance,41(1). Lazaridis Ioannis, Papadopoulos L. Demetrios, 2005. Financial Management, Part III, Thessaloniki. Leland E. Hayne, Pyle H. David, 1977. Informational asymmetries, financial structure and financial intermediation, Journal of finance,32(2). Leland E. Hayne, 1998. Agency costs, risk management and capital structure, April 18. Levinsohn Alan, 2006. Modigliani and Miller live on, Strategic Finance,85(6). Lucas Deborah J., McDonald L. Robert, 1990. Equity issues and stock price dynamics, Journal of finance,45(4). Masulis Ronald W., 1983. The impact of capital structure change on firm value: some estimates, Journal of finance,38(1). Miller Merton H., 1988. The Modigliani – Miller propositions after thirty years, Journal of economic perspectives. Miller Merton H., Modigliani Franco, 1958. The cost of capital, corporation finance and the theory of investment, The American Economic Review, 48(3). Miller Merton H., Modigliani Franco, 1963. Corporate taxes and the cost of capital: a correction, The American Economic Review,53(3). Modigliani Franco, 1988. MM – Past, present, future, The journal pf economics perspectives,2(4). Myers C. Stewart, Majluf S. Nickolas, 1984. Corporate financing and investment decisions when firms have information that investors do not have, Journal of financial economics, 13. Myers C. Stewart, 1984. The capital structure puzzle, Journal of finance,39(3).

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Myers Stewart, 2001. Capital structure, The Journal of economic Perspectives, 15(2). Narayanan M.P. 1988. Debt versus equity under asymmetric information, Journal of financial and quantitative analysis, 23(1). Noe Thomas H., 1988. Capital structure and signaling game equilibria, The review of financial studies,1(4). Odean Terrance, 1998. Volume, volatility, price and profit when all traders are above average, Journal of finance, 56(6). Pugh William, Jahera John s., 1990. Stock repurchase and excess returns: an empirical investigation, The Financial Review,25(1). Ross A. Stephen, 1977. The determination of financial structure: the incentive – signaling approach, The Bell journal of economics,8(1). Spence M, 1973. Job market Signaling, Quarterly Journal of economics, 87, 296-332. Veronesi Pietro, 2000. How does information quality affect stock returns?, Journal of finance, 55(2).

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METHOD APPLICATION OF DISCOUNTED CASH FLOW IN AN EVALUATION OF AN ENTITY OF FURNITURE INDUSTRY IN ROMANIA Neculina CHEBAC Danubius University, Galaţi, Romania Cristina Mihaela ONICA Dunarea de Jos University, Galaţi, Romania Abstract: Production of furniture is the most complex activity in the wood industry in Romania, is also recognized as the best performing form of exploitation of the wood in terms of value added to the size of a cubic meter of raw wood. Requirements imposed on the furniture products in terms of accuracy and finish processing have led in recent years had a profound restructuring of the management of furniture factories, supported by a remarkable progress of the whole system of machinery involved in manufacturing technologies. In order to ensure opportunities for internal and external markets through a harmonious development, furniture industry in Romania, to take account of priority trends are manifested in European and world economy in the use and recovery of wood as a primary resource materials premium, being a renewable resource. Here are some reasons why we chose to analyze and evaluate it by the method mentioned in the title, an entity in the furniture industry in Romania, evaluated from the perspective of getting the cash flow in a forecast horizon of its activity.

Key Words: cash flow, production of furniture, furniture industry, International Standards for Assessment, the cost of borrowed capital JEL Classification: M41, C52, C41 I. Introduction Wood processing and furniture production each have a share of about 3.0% in industrial production, and pulp and paper industry 1.2%. Can appreciated that the industries based on wood, although is a traditional sector like light industry, have in terms of demand and capacity of modernity, prospects for expansion. The only restriction comes from the requirement of sustainable development, namely to protect the forest resource. This restriction may be replaced by brandtypodimensional changing structure of production and increase the share of production of furniture against the semi finished (timber, veneers). The major role of activities based on forest resource in industrial development is argued that the growth rates were higher than those of the whole manufacturing industry, and that production growth in the last 6 years has placed the sector on the place between 3 industries after industry, vehicles and machinery and electrical appliances. II. Characterization of wood industry in Romania At present production of the 3 industries that form the industrial sector based on wood is 47% over that of 2000, which meant an average of annual increase of 6.6%. For comparison, another branch of tradition, respective light industry, barely managed to maintain the level of 2000. Average rate recorded in the period 2001-2006 is 8.1% for industrial wood and 9.2% for the furniture industry, compared with 6.1% in manufacturing and 5.0% on the total industry as resulting in the following table:

Table 1: Average growth for wood processing

Industry-total Manufacturing industry The wood processing industry

10 months 2007/2000 percentage change 34,3 42,7 59,2

90

RMA 2001-2007

RMA 2007-2010

5,0 6,1 8,1

5,1 5,7 6,5

Pulp industry, paper and cardboard Furniture industry Total wood processing activities Industry means of road transport Industrial machinery and apparatus Light industry Source: processing CNP data INS

33,9

5,0

4,8

69,3 46,8

9,2 7,9

7,9 7,0

142,0

15,9

9,1

72,2

9,5

7,4

-0,1

0

0,3

Developments in recent years the two main branches based on wood resources - wood processing and furniture - was often contradictory, which shows, first, relatively low degree of interdependence between them. Years were pronounced reductions in the production of wood processing (-14.7% in 2001 and 8.6% in 2002), but with substantial increases, over the media industry, where production of furniture. In 2004 the situation was deeply reversed: the industrial production of wood has increased by 42% and the furniture was reduced by 10.3%. Since 2005, the correlation of evolutionary improved, both types of activities had significant over’s. A possible explanation is that wood processing has a production capacity over the mobile industry needs and targeted especially to foreign demand. Thus, only 20% of the production of semi-finished wood is used in furniture industry. Suggestive is that the main product of industrial wood, respective timberwith a share of production delivered to the branch about 21% - has in recent years one of the important export products (70% -90% of the production of timber was exported).

Fig. 1: Development activities of wood reprocessing industry

Export orientation is a feature of tasks, 70% of industry production of wood reprocessing industry with the destination and almost 75% of furniture production industry. The two branches contribute positively to the balance of foreign trade. Trade surplus of foreign trade related to wood products (including furniture) was 1.1 billion Euros in 2005 and almost 1 billion Euros in the first 10 months of this year. If it is added that exports increased its share of furniture exports in the two branches, which is oriented mainly to EU countries, it can be concluded that this industry is competitive and has a perspective of long-term development. The share of furniture exports in total exports of wood products increased from 51.5% in 2003 and 2004 to 54% in 2006 and 2007. In production of furniture, products with a higher degree of processing (one cubic meter of round wood may be obtained by multiplying the processing of furniture in the amount of up to 6 times), the single

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European market and our country has gained an important role, being the third supplier of extra-European mobile market. For a global vision should be noted that a good part of the surplus produced commercially by the two industrial activities are canceled due to shortage of important imports of paper and cardboard. For example, the first 10 months of 2006 the industry "of pulp, paper and cardboard", a record deficit of 510.7 million Euros, representing 53% of trade surplus resulted from export of wood products (963.7 million). In 2007 wood products imports continued expansion. Level recorded during the first 10 months, 688 million, is already higher value on imported whole year 2006. It is however noted that a source of growth of imports has been an expansion of active processing (lohn), particularly in the production of furniture. Integration into the EU may open new perspectives for the furniture industry in our country taking into account that the EU still holds supremacy in world production of furniture, but quickly lose competitiveness in the face of a serious offensive to Asian countries. Our country will integrate with the EU big competitive advantage for a furniture production mainly oriented towards export and provide other countries (large furniture manufacturers such as Germany, Italy, and France) ample opportunities for cooperation to improve competitive prices. It should be noted however that we have a big disadvantage on the apparent labor productivity (as turnover per employee); this index is 9 times greater in the EU (2003) against our country. Specific for branch such as high employment per unit of product, labor productivity growth will be the main parameter reflecting the efficiency and competitiveness in this activity. If the dynamics of production compared with the turnover, however, apparent that in 2007 this sector has been difficulties that may be risks in the future. These difficulties relate primarily to the sales market and as one of causes that improve the efficiency and competitiveness could not fully offset the price and currency appreciation. Since 2006 average annual growth in real terms of turnover - both in wood processing and the manufacture of furniture - is well below the volume of production, which implicitly means increased stock of finished goods from producers. For example in the furniture industry in turnover growth was in the first 10 months of this year by 9.3 percentage points below the dynamics of industrial production. In the European context, the furniture industry in Romania is known as a medium-sized industry, which in 2004 exported furniture markets in Germany, France, Netherlands, Italy, Austria, and Great Britain and is appreciated for the competitiveness of the products they achieved. According to an international ranking includes data from 66 countries producing furniture, our country ranks 35 place as the value of production, instead of 22 ranks as the value of exports and 40 places by value of imports. Furniture as product for long use, gathers in its construction, a high complexity and diversity of shapes, sizes, combinations of materials, accessories, giving it the durability, aesthetic quality, functionality, comfort and harmony in habitats. Specific furniture industry in Romania, characterized by a prolonged production cycle, requires both processing equipment and appropriate finishing and storage areas for raw materials, materials technology and other auxiliary materials needed to manufacture finished products. In these circumstances the need of fixed assets and the circulating assets, requires a relatively high capital, whose amount is determined by size category of each establishment. III. Critical success factors which influences the international competitiveness Products quality are conditioned mainly by: continued research on the opportunities existing in each country; increasing demands in the supply of raw materials and materials; accurate execution of all processing; permanent training of staff to ensure customer satisfaction requirements. There are companies that still have areas of repair and retouch some of the production process due to obsolete, others because of inadequate supply of raw materials and materials, inefficient organization of production and the lack of an effective system of quality control of manufacture;

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Price is determined by product design complexity, size, type and combination of materials, functionality and processing technology adopted. Product design means that a large part of the furniture manufacturers in Romania is worked after client demand and not on the market by promoting its competitive models, although there are schools of design for furniture. It also is sluggishness in adapting more rapidly to market requirements. The functionality of the products must satisfy the conditions in your destination of a successful combination to ensure comfort with elegance and appropriate aesthetic ; Innovation contributes to increasing the competitiveness of products through innovative designs and functions; Materials ,used decisively influence the appearance of products, particularly those of superficies; Punctuality in delivery of products and speed of honor commands are essential in a commercial relationship involving the management company, giving it the credibility and prestige. Services related to marketing, design, trade, financial advice, training helps to improve trade development and business success; Compliance with standards and regulations in force, in line with European directives; Training of staff at the technical equipment serving technology and quality requirements of products; IV. Opportunities "key" to improve export performance and competitiveness of the sector Effects relevant to the business more competitive exporters of furniture can be obtained by improving the supply of components and method of manufacturing existing products. This includes: developing new capacities for the realization of components for furniture; Supply of furniture factories with components for specialize furniture manufacturers ; Capitalization in excess of the premises of existing, for the semi fabricated making - necessary components for furniture construction ; Investment in advanced technologies and equipment; Expanding implementation of quality certification; Supporting and bracing skills development of related services; Updated cash flow analysis (DCF) This represents a financial modeling technique based on explicit assumptions about forecasted income and expenses related to properties or businesses. Such assumptions relate to the quantity, quality, variability, timing and duration of entries and exits that are discounted to present value. DCF evaluations, and other assessments based on income, are based on analysis of historical data and assumptions about future market conditions affecting demand, supply, income, expenses and risk potential. The aim of this method is to prescribe the best practice that evaluators should give, in the analysis DCF, based on assessments and markets ungrounded, and make the distinction between the applications of DCF analysis in these two different types of assessment tasks. Assessor must to: indicate the actual annual rate at which interest is calculated regularly, where debt financing or debt service (interest payment and the rate of capital) is a component of periodic cash flow forecast; to specify rates (rates) tax used, where appropriate; explain the reasoning that stayed on the basis for grant of subsidy on rent, where applicable; explain the use of any capital expenditure incurred in purchasing or arranging the land and buildings attached or trades assets; explain the basis for terminal capitalization adopted and for the update adopted rate; to describe the methods and assumptions inherent to the model; Specify the dates on which the model was developed and used. According to international standards for the trade assessment, the eighth edition, 2007, the essence of the two methods included in the approach based on income is: In NCFupd method, the net cash flow is estimated for each year of explicit forecast period (5-10 years). This cash flow is converted into capital, by applying techniques updated with an update rate; The income capitalization method, a representative level of this is divided by a capitalization rate or multiplied by a multiplier coefficient to convert the value of property.

93

Similarity between the two methods is that, if applied correctly, the results should be close. The difference between the two methods relate to the two different situations in which they apply, namely: NCF method act shall apply where the assessed trade will result in an explicit forecast period (5-10 years), a net cash-flow annual unequal size (even negative in a year or several years) ; capitalization of income method applies only where the assessed reached the stage (phase) of economic stability, characterized by: rate of return of capital invested reach the average rate of return achieved in this field of activity; A rate constant allocation of net profits for investments, and annual capital investment is equal to annual depreciation and net cash flow is of the net profits legally. Reproducible annual income, subject to capitalization will be a constant annual flow (constant annuity) or increases by a constant annual rate indefinitely (symbolized by g) The life of an enterprise Refers to two distinct periods: explicit forecast period or the discrete in which NCF is calculated separately for each year of this period, in general, the length of this period is between 5 and 10 years; no explicit forecast period, which is the end of last year of the first period to infinity, in this period no longer necessary to calculate the annual NCF, but necessary to calculate the market value of the company at the end of last year of explicit forecast as the terminals value. Explicit forecast duration of the method in DCF Reflects the uneven development of NCF, the annual size of this indicator will be uneven because of the evolution of profits, investments, annual changes and FRN and debt service (the last item only in CFNA case); length of this term is not default to 5.7 or 10 years or that contained in the software used, can be 3,4,5 or more years, and until the company reaches the stage evaluated economic and financial stability, when rate of return of capital invested is equal to the cost of capital; development of indicators on which to calculate NCF may fall in a single stage or two stages, included in the explicit forecast period; if the assessment of enterprises in the merger aim, the duration of the forecast should cover the time needed for integration and manifestation of the synergistic effect of the merger; if the assessment of Romanian enterprises, a possible criterion for determining the length of prediction might be time to reach the level of capital cost of similar activities in EU countries; In case of new companies, the duration of the forecast includes the time to be extinguished production capacity designed. Method net cash-flow updated– CFNupd The essence of the method is explained in Recommendation No. 10 DCF analysis of the composition of the International Standards for Assessment, 2003: "Cash-flow models of the net are updated structured according to the duration of their (usually range from 5-10 years) and frequency (monthly, quarterly, annual) production of a reasonable cash flow, and a terminal value based on generally obtainable annual net income in the first year after the end of the forecast”. Under standard for assessment of the undertaking, NCFupd method, cash flow is the net estimated for each year of explicit forecast period (5-10 years). This cash flow is converted into capital, by applying techniques updated with an update rate. This method applies only where the undertaking will generate assessed over a period of explicit forecast a net cash flow annually unequal size, because the subject assessment is entity during development and economic stability. In summary form, the trade value (V0) calculated by the method NCFupd is: p n

CFNI /(1 k ) p

V0 p 1

Where,

94

Vtermin n /(1 k ) n

V0 = trade value(amount of capital invested) P = number of years of explicit forecast period NCFI= Net cash flow available for investors Vterminn = the terminal value at the end of the year. k= update rate Special Assumptions Company has no ownership of assets which are not necessary operation (active redundancy), so there is no net cash flow out of operation: type of cash flow used is NCFI; explicit duration is 7 years (2008 - 2013); net turnover (T.O.) in 2007 (base) is 8.986.239.7 ron; estimates are in nominal terms; the 30% funded by equity and 70% through financial leasing (2008); cost of capital to shareholders is 20% and the nominal interest rate for financial leasing contracts is 15% (their average); nominal cost of capital was set at 20%; perpetual growth hoped of NCFI of 2013 annual at infinite: g = 5%; rate of income tax = 16%; assumptions for calculations are presented below. Forecast Turnover It will use the T.O. forecast stages of evolution where the entity assessed: in the seven years of explicit forecast period (2008 - 2013), T.O. will be a decrease in annual growth (development stage) until end of explicit forecast. during the forecast un explicit (from end 2013 to infinite), T.O. will grow by 4% per year, in constant (from 2013 to infinite); Forecast capital expenditure (investment). purposes of capital expenditure is the investment in tangible assets and intangible neededs to achieve forecasted to; capital expenditure is determined by quantifying the volume of capital investment (if the company reviewed by financial leasing) based on a percentage of their to: debt to be paid over a period > 1 year (financial leasing) / to (%) (2008) = 105.103,2 /8,986,239.7 x 100 = 1.16% Forecast the annual change FRN. Method is calculated directly on a normal share of the FRN in net TO, this share, selected as the assumption of forecasting is the usual fulcum share FRN in TO similar businesses. Terminal value of the company: is called the residual value, value or final value continues. accordance with IAS 16 "residual value represents the net value on a company estimated that it will obtain for an asset at the end of useful life thereof, after deducting prior forecasted transaction costs." a possible definition for the terminal value of an enterprise is: "Terminal value represents the type of capital invested in the enterprise at the end of last year of explicit forecast period.'' terminal value assumption is the continuity of normal business operation after the determination of the period of explicit forecast. method for estimating of terminal the value is Capitalization method of the net cash flow , the appropriate method of analized trade which matures at the end of the explicit forecast (2013). formula to estimate the terminal value is Gordon Shapiro formula:

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Vtermin = NCFp+1 / (k - g) Where, NCFp+1 = net cash flow of the first year after the explicit forecast period; k= update rate; g= forecasted annual growth for the perpetual NCF in the un explicit forecast. Setting the g rate : Factors considered are: general economic conditions, which are good in 2013 to infinite; forecasted growth of the scope of the company: trade and services; management forecast on future revenues (revenues are increasing); GDP growth per branch in the past (3%); inflation rate in 2013 is expected to 2%. Formula for g calculation is: gn = gr + f where: gn= g rate in nominal terms; gr = g rate in real terms; f = inflation rate. In trades case: gn = 3% + 2% = 5% = g Set the update rate (k) or cost of capital to shareholders: The cost of capital is named by the update rate. Used for updating net cash flow available to shareholders (NCFS), Kc reflects the profitability achieved in the recent past. In concept point of view, the nominal upgrade (kcn) is determined as follows: kcn = real rate risk free basis (related to loans from the issue of government bonds (10%); + forecasted annual rate of inflation (7%); + risk (between 1-5%) (if the company is an average risck of 3% to a level strong enough) kcn = 10% + 7% + 3% = 20% represents the update rate of equity capital. The cost of borrowed capital (kd) : Borrowed capital represents the lending business for a longer period of time with a fixed rate of interest set in the contract and entitled to preferential payment of reward to shareholders, which means that kd< kcn. The entity has assessed the financial leasing contracts with an interest rate of d '= 15% (their average). Should be considered and the economy from tax on interest, which is a deductible expense: kd = d’ x (1 – s) = 15% x (1 – 25%) = 11,25% < kcn = 15%, where: d’= interest rate on loans contracted (in company financial leasing contracts case) s = assessment tax on profit of enterprise Calculating the wacc - the weighted average cost of capital wacc= kcn x Equity capital share / permanent capital + d’x (1-s) x share of Long-term Debt and Medium / Permanent Capital wacc=20% x 30% + 15% x (1-25%) x 70% wacc= 13,87% ≈ 14%

96

Table 2: Assumptions for the forecast of net cash flow for shareholders ( NCFS) (%)

Index increased of TO Operating expenses / TO (%) Depreciation / TO (%) Investments / TO (%) (FRN / TO) FRN/TO (%) Tax level / Profit (%) Update rate - reflected in wacc (%)

Actual 2007 1

2008

2009

2010

2011

2012

2013

1.5

1.5

1.5

1.4

1.4

1.3

96

96

95

94

94

94

94

0.4

0.4

0.4

0.4

0.4

0.4

0.4

13

13

13

13

13

13

13

13 16

10 16

7 16

6 16

5 16

4 16

4 16

14

14

14

14

14

14

14

Table 3: Forecast of the profit and loss account of operating (ron) Actual 2007 Normalized net TO 8.986,3 Operating expenses 8.638,8 Depreciation 31,4 Gross operating profit 319,4 Tax on profit 73,5 Operating net profit 245,8

2008

2009

13.479,4 12.940,3 51,7 487,4 77,9 409,4

2010

20.219,2 19.208,2 80,8 930,0 144,8 785,2

30.328,8 28.509,1 121,3 1.698,4 271,7 1.426,6

2011

2012

42.460,4 39.912,7 169,8 2.377,7 380,4 1.997,3

59.444,5 55.877,8 237,8 3.328,9 532,6 2.796,3

2013 77.277,9 72.641,2 309,1 4.327,6 692,4 3.635,2

Gross operating profits increase by the same growth rate of turnover Table 4: Calculation of annual growth of FRN (ron)

Net TO FRN/TO FRN FRN Growth

Actual 2007 8.986,3 0.13 590,8

2008

2009

2010

2011

2012

2013

13.479,4 0.10 1.347,9

20.219,2 0.07 1.415,3

30.328,8 0.06 1.819,7

42.460,4 0.05 2.123,0

59.444,5 0.04 2.377,8

77.277,9 0.04 3091,1

179,7

674

404,4

303,3

254,8

713,3

NCFS= CFg – Ic(FRN) – FRNGrowth V terminal= NCFS2011 / (k - g) = 1685,5 ron / (0.14-0.03 = 12.965,3 ron V0= VCI = ∑CFNI present + V terminal + CFN outside operation = 15.007,1 ron VCA= VCI - Long-term credits (leasing)=14.902,0 ron Method based on income -the net cash flow method updated its assessed value is: 15007.1 and ron is the amount of capital invested and the amount of capital to shareholders is 8213.4 ron.

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Table 5: NCFS forecast and calculating the amount of capital and shareholders' equity (ron)

Operating net profit Depreciation Gross Cash-flow (CFg)

Pne +Am

Capital investments (Ic =FRN) FRN Growth NCFS* Update factor @ = 14% Discounted NCFS Amount NCFS act Terminal value Present factor - terminal value Present terminal value outside exploitation NCF Amount of invested capital (V0) Long-term credits (leasing) Amount of capital to shareholders Number of social parties The value of a social party

Actual 2007

2008

409,4

785,2

51,7

80,8

121,3

4.611

8.660

179,7

2009

2010

2011

2012

2.796,3

3.635,2

169,8

237,8

309,1

15.479

21.671

30.341

39.443

404,3

606,5

849,2

1,188,8

1,545,5

179,7 101,7

67,4 394,3

404,4 537,0

303,3 1.014,6

254,8 1.590,5

713,3 1.685,5

0.862

0.743

0.641

0.552

0.476

87,7 2.041,8

292,9

344,2

560,0

757,0

1.426,6 1.997,3

12.965,3 0,476 6.171,6 0 15.007,1 105,1 8.213,4 100 8.213,4

V. Conclusion Assessment in keeping the condition of the International Standards involves Harmonization of accountancy in the world that involves a system of international rules governing the accounting of business evaluation, each adapted to specific country and companies from each country in which it applies. Normalization accounts, as shows M. Capron in his paper "Accounting perspective", there is today in most countries. Each of them has a terminology and rules that lead to a similar review of sysnthesis documents for all businesses. Technical interest is obvious: the homogeneity of the information provided facilitates comparisons over time and between enterprises and allow national accountants to conduct assemblies and macroeconomic mesoeconomic. Normalization leads to a third party guarantee users on consistency and rigor with which it was held accountancy. Principles, terminology, rules for rating, what concerns the authorization accounts are defined in different ways depending on the country ". The internationalization process of the accounting normalization occurred initially at the regional level, such as member countries of the European Union, however, opening unprecedented Member economies to a world market and increased global mobility of capital in the global economy, have led to a new dimension of normalization accounting,the international one.

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Need to harmonize international accounting relates particularly, the credibility of accounting. To be credible, "products" of accounting should be measured, evaluated on a organic base. Application of different accounting rules lead to different results, with implications for the comparability and credibility of financial information. Thus, economic environment, financial, political, legal, social and cultural variety of operating accounting systems, and causes a variety of accounting practices. This generates difficulties in communication of financial enterprises are often faced with the problem of interpretation of financial statements prepared on the basis of rules applicable in another country. An American investor who wants to buy shares in a European company will have financial information, credible, relevant and comparable to decide whether to invest in the company or others? Can be compared the financial statements of an european company with those of an American company, given the existence of different accounting practice? Against this background the need to harmonize international accounting, "a political process which aims to reduce differences in accounting practices that apply in the world so as to increase their consistency and comparability". Anglo-Saxon inspiration is found and given to qualitative purpose of the annual financial statements, on rules base for getting up and evaluation. Historical cost becomes the main basis of valuation, and other, alternative bases of evaluation. Anglo-Saxon accounting culture starts to outline victory. Need to inform investors, supported by British and Dutch tradition of keeping physical production capacity of the company, predicts the emergence of another body involved in international accounting consistency. Arguments that makes the assessment activities to be harmonized with the global standards of accounting practices and the use of unique exercise , are the following: market needs are global and require credibility given by of the international standards; use of international standards is positive for everyone, because that decreases the cost of preparing the financial statements, investors obtain financial information that have credibility; financial auditors certifying the financial unit, the companies have more access quickly and easily to the capital markets; countries who wish to join the European Union meet all the requirements of the single market, therefore it must aseessthe implementation of Directives IV, VII and VIII of the European Union; for the development of financial audit to be effective, you need an open dialogue between financial auditors and users of financial audit services in the world; adoption and use of international accounting standards worldwide,determins increasing investment, and businesses have such access to cheaper funding. Stock exchange is not the main funder of capital (financing business is done mainly from bank loans) and show an inclination for secret affairs,which is contributing to a policy of communication rather weak. The basic objective of the enterprise is not the obtaining the image of the most reliable financial position reflected in the annual accounts but the result rating of which, distributed to shareholders does not affect the interests of other parties, particularly creditors. For countries on-lined of the Anglo-Saxon perimeter, the rate outcome is not an aim in itself; target U.S. firms is to provide the most realistic picture possible of the economic situation of their own, while the British enterprises, is to provide a true and fair picture. To achieve this objective, it is necessary for accounting information to have qualities as: comprehensible, relevant, comparable reliable and application of the principle of permanent methods exercise a strong influence on evaluations. In continental European countries (the case of Germany, Austria, Italy), in which accountancy is dependent on tax and tax on benefits is directly related to the accounting result, tax exercises a significant influence on the accountancy objective and the approaches adopted in the field of evaluation. In most cases, these countries tend to undervalue their profits in order to minimize tax, unlike the Anglo-Saxon countries, where tax accounting unbundling leads to focusing on their financial communications, in particular to meet the needs investor capital. Contrary to these previously mentioned differences between countries there are many inter-cultural and economic relations, which allowed their classification into two accounting systems: the accounting system of the continental countries (continental Europe model) and the accounting system of the Anglo-Saxon countries (the Anglo saxon). At present, a dilemma that is troubling the professionals world: what accounting standards are better, European international standards or U.S. standards? Comparing european with American standards detaches the idea that the EU had an important qualitative leap through the basic principles aproach of cases drawn from practice, while the remaining quarter American standards on rigid rules based on rules.

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This dilemma has been the subject of live debate in the European Convention of the International Financial Reporting Standards. Financial Reporting Standards are global language of financial reporting and for Romania, an important even higher had a recommendation from the European Commission regarding the need for all companies listed in the European Union to draw up, by 2005, consolidated financial statements using provisions of Financial Reporting Standards. This is the most important changes to financial reporting in Europe since the adoption of European Directives in '70 years and a clear way forward for those countries, and Romania, aiming at integration into the European Union. Application in our country of International Financial Reporting Standards (IFRS) will have the following consequences: the rationale is the basis of accounting professional; switching accounts on the basis of fair value involve obtaining more frequent information on the fair value of assets; specialist staff should be informed of the substance of the economic activities of companies for a proper application of the standards (there are fewer detailed instructions Ministry of Finance), it is possible that tax regulations do not keep up with the accounting, tax implications of certain transactions may be unclear and therefore may conflict with tax authorities. This detaches the idea that the application of different standards, leading to different results, with implications for the interpretation of data, calculate economic and financial indicators and distorting "the accountant truth". The analysis outlined above suggests that, at least at European level, making a financial audit of how to evaluate companies in accordance with Financial Reporting Standards and IVSC would create an international market that would ensure international recognition specialists in this field. Applying IFRS in Romanian accountancy has several implications, among which we mention: application of inflation accounting (IAS 29), the application will depend on inflation level in coming years, IFRS 1 Application for the first time International Financial Reporting Standards "in this regard by providing certain advantages; application of certain International Accounting Standards which have not previously been applied in practice; application of new IFRS standards; auditing the accounts; consolidation of accounts becomes mandatory from 2005. In the opinion of experts, International Financial Reporting Standards (IFRS) should be applied as such in romanian law, on the contrary, differences arising can generate confusion, ambiguity, lack of transparency and, therefore, a distorted picture of the financial situation of the company. For example, the profit determined under accounting rules used so far will not be equivalent to that calculated under IFRS. The main differences between IFRS and OMFP 1752/2005 refers to the standard financial reporting hyperinflationary economies, it sets the financial data should be read in conjunction with inflation, to present a real situation. Romanian legislation in the field, do not forcasts, mandatory standards on the use of inflation. Therefore, companies should prepare for tax users a set of financial statements without excluding inflation, leading to reporting of results that do not properly reflect the financial situation of companies. In our opinion, in Romania, adoption of a system of uniform financial reporting and internationally recognized (IFRS) for Romanians companies is the only way to ensure that their financial statements are reliable, and on this basis, users can take the most good decisions. Emphasize that all actions and regulatory harmonization in accordance with Financial Reporting Standards, represents the cornerstone for assessment and romanian financial audit to be recognized at both European and worldwide. To achieve this goal, I express the idea that it is appropriate that the national authorities, but first Romanian Chamber of Auditors, ANEVAR continue to show concern and needs in collaboration with specialists from the European Union and the world, and in terms of improving ongoing operational and regulatory framework for assessing the activity of our country.

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Selective bibliography: Bogdan V., 2005. Harmonization of international accounting, „Economical Publishing House”, Bucharest, Manate D., 2003. Diagnosis and evaluation of businesses listed and unlisted, IROVAL, Manolescu M. and Colective, 2001. Practical Guide for the application of International Accounting Standards, „Economical Publishing House”, Bucharest, Morosan I., 2002. Economic and Financial Analysis, "Romania of Tomorrow Foundation" Publushing House, Bucharest, Munteanu M., 2006. Analysis of economic-financial balance of commercial enterprises, „EduSoft Publishing House”, Bacau, Stan S., 2006. Coherence and correlation in the companies evaluation, IROVAL, Bucharest, *** 2007.International Financial Reporting Standards, including International Accounting Standards (IASsTM) and Their Interpretations from 1 January 2007, Body of Expert Accountants and Authorized Accountants, *** 2007. International Standards Assessment, Eighth Edition, electronic version, ANEVAR, Bucharest,

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THE ROLE OF ALBANIAN FISCAL POLICIES TO THE IMPROVEMENT OF THE ECONOMY SITUATIONS Matilda VELIU Vlora University, Economic and Law Faculty, ALBANIA Abstract: It’s clearly to say that, fiscal policies are one of the most keys in the hand of government that has many impacts in the growth of the country economy. Discussing about the tax evasion of the business and the informal economy like a product of it, I must say that is an current issue not only for my country, but also for all those countries in transition. All of us argue that in any country exists a business pressure to make fiscal evasion in order to achieve more their objective that is the maximization of profits. This seems to be aftermaths by many reasons especially by the economic environment of the country; meanwhile, by the other hand the government has another aim: how to get more and more revenues from taxation which is the main recourse of the financial budget. But , why are necessary the taxes? , Which are the criteria for tax design? Which is the relationship between policies and optimal taxation? How much is the growth of informal economy in Albania and which are the necessary strategies in order to reduce the tax evasion made by business? etc are some of the most important questions to made about the topics .Answering the questions, results an clearly picture about the economic environment of Albania and the things that must to do in order to resolve perhaps a bit the problem.

Key Words: Informal economy, tax evasion, tax design, fiscal policies JEL Classification: H 21, H 30, H 26 I. The consequences of a certain fiscal policy in economy Discussing about the fiscal policies , immediately some questions focused in the informal economy and tax evasion gives up to mind , because these topics are as results of an good or bad drawing and implemented policies in reality. Sometimes, in order to stimulate the growth of economy, the government reduced taxes but the achievement of the aim is conditioned by the size of tax evasion and informal economy, making so the process very difficult, with high economic cost and also time. Informal economy seems to be a grate problem, especially for the country which is in transition like Albania. Measuring it is not easy, because, not all activities within the economy are always observed by the peoples which have to draw up the national accounts (in Albania is the duty of INSTAT) .Is not a small work because the activities are illegal, underground,in the informal sector, undertaken by households for their own final use or missed because of deficiencies in the basic data collection programme. Some of the actions that reflect what is to say above are: Avoidance of payment’s income, value added or other taxes Avoidance of social security payment contributions Avoidance in accomplishment of certain legal standards such as minimum wages, maximum hours, safety or health standards etc. Avoidance of procedures like completing statistical questionnaires or other administrative forms. According many studies about informal economy, is important to say that parts of non-observed economy are entirely formal but yet observed due to deficiencies in data collection, or don’t have to be reported to tax or other authorities for legal reasons(e.g. too small in scale).So, not all the underground economy “belong to” the activities under exhaustiveness and vice versa. Kazemier (2003) provided the following relationship between different categories.

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Figure-1.The relationship between underground economy, the illegal economy, the informal economy and exhaustiveness.

It is clear the categories cover partly the same sphere of the economy, partly others. Which definition is most appropriate depends on the point of view of the problem or on the perspective one chooses. From a tax perspective, the underground production-description suits best. This point of view will be the focused of the article, giving in this manner, the real economy of Albania. Is clearly that a number of factors have caused informal activities to grow significantly in Albania since the beginning of the transition process. Previous studies have pointed at the high intensity of legal and administrative regulations (FIAS,2003;OECD-EBRD,2003),allied to a lack of trust in official institutions and administrative corruption. A decline in civic virtue and loyalty towards public institutions, combined with declining tax morale, a broad acceptance of illicit work and corruptible public officials, also a systematic non-payment of utility bills have contributed to generate an environment that promotes and accepts the presence of a significant informal economy. In Albania these factors played an important role in promoting the first phase of the transition process, who ended with the political and economic crisis sparked by the collapse of pyramid schemes in 1996/1997.The aftermath of the crisis included the introduction of a series reforms and confidence building measures which expound the basis for a new cycle of economic growth. Figure .2 Real GDP-growth in Albania over the years në % in percent

Rritja reale e PBB-Real GDP growth

15

10

5

0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-5

-10

-15

Source : Bank of Albania

This is show and by the study of the graphic above, which also show the difficulties of the policies undertaken by the government (as a part of the factor) to the reduction of the real GDP growth from 2004 years and on. As Albania moved towards greater political and economic stability, and the economy entered into a phase of sustained growth, other factors started to play a leading role in sustaining the informal economy. The relatively high overall tax and social security burden ,in combination with a very strong competition in the

103

market of goods and services, has been a potent mix fuelling to an expansion of informal economy. Factors explaining the informal economy and tax evasion may be subdivided into three major groups: 1) socio-economic market, 2) institutional and 3) “societal”, which include cultural traditions and the relationship between individuals, society and state. Is to say that, are the institutional factors that define the short-term developments of the informal economy, meanwhile historical factors connected with cultural traditions are the most stable long-term factors. The stability of informal economy in Albania to a large extent depends upon the weight of societal (cultural) factors and the strength of the state and other democratic institutions. All the system seems to operate under a relatively stable equilibrium. The enterprises re-capitalised the revenues gained by the fiscal evasion for the development of their activities, proved by the high norm of the new firms especially of the small and medium enterprises. The price competitions provide that a part of revenues from fiscal evasion is to be accumulating to the owners or the stakeholders of the firms, and the state provide a minimum revenues from taxes, increased with the growth of the economy. De Soto suggest that the informal economy is an rational response of the state’s incapacity to fulfil the base needs of peoples and as a result many people are forced to make those actions since the costs conviction to the law surplus the benefits. This depends by the phase of the country economy ,and seems to be true for my country in which the informal economy is approximately 20-25% of GDP (OECD 2005).Despite this, must said that the Albanian government has made actions plans for reducing the informal economy. Some of them are: Reducing the cash payments among the agents by using the banking sector, this is increased strongly in Albania. Improvements of the fiscal laws. More efficiency public administration, especially employing the right peoples for the professional duties. The business now can pay the taxes electronically -this reduces the time for the process making it also more transparent. All the information regards the update law taxes can take by the site of the state institution using the internet. For the creation of the new firm exist an organisation that make the things more easily, by reducing time and money. Drawing a fiscal policy more efficient. Improving the behaviour of the agents in the labour markets. After all, the Albanian government has a lot to do regards this, because some of those actions are in the beginning phase. The macroeconomic situation in Albania throughout 2005 and in continued is characterised by strong GDP growth and subdued inflation. Nevertheless, the repercussions of the energy crisis at the end of 2005, combined with weakening economic activity in the construction sector, decelerated GDP growth to an estimated 5.5% in 2005 and 5% in 2006.Economic growth continued to be led mainly by domestic demand fed by booming credit and significant remittances inflows.

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Figure. 3.The Fiscal Accounts over the Years in Albania Llogaritë fiskale (në % të PBB) Fiscal Accounts (as of % of GDP) 40

35

30

25

20

15

10

5

0 1993

1994

1995

1996

1997

1998

1999

2000

2001

Financimi i brendshëm-Domestic Financing Të ardhurat - Revenues

2002

2003

2004

2005

2006

Financimi i jashtëm- Foreign Financing Shpenzimet- Expenditures

However, as is shows by the figure fiscal account are more broadly financed by the domestic Financing which confirm what I say above. Average annual inflation remained moderate and stood at 2.4% up to 2006, meanwhile in the recent year has increased over the inflation target range decided by the Bank of Albania. The financing of the trade deficit remained largely dependent on significant remittances and other current transfers estimated at 12% of GDP in 2005 and 13.5% of GDP in 2006.As a result, the current account deficit reached 8.6% of GDP in 2006. Figure-4. Macroeconomic developments 2005 Real GDP(% change)

2006

2007

2008

5.0

6.0

6.0

Contributions: -Final domestic demand -Extrenal balance of goods

1.1

4.8

4.5

5.1

n.a

0.2

1.5

0.9

GDP deflator(% change)

n.a

1.21

1.25

1.29

CPI inflation(%)

n.a

3.0

3.0

4.6

n.a

-8.6

-7.9

-7.4

Current account balance (%) Source :EFP 2006

The macroeconomic situation stressed more over the importance of the action plans above-mentioned and the things must done just in the right time and in the right place, operating in this manner with efficiency. II. The impact of tax policies to the fiscal evasion 2.1 Why are so important the tax policies? Focusing in taxes is important because, taxes are the main contributors of the state revenues. An efficient tax policies can discouraged the payment with free volition by the side of pay-taxes agents. Naturally, this reduce the tax revenues increased the desire for public corruption also increased the non-transparent practices by the enterprises. Development countries have a lots to do regards this, because tax evasion is in broadly extension. Over the time, was experimented with the change of the tax norms by the government in order to achieve their objectives ,but the competition with taxes introduce opportunity- also risks.

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Lower taxes can stimulated business ,and when the circumstances are favourably, can increased the budget revenues. However, if go down more- can be dangerous for budget revenues making the public goods and services like health system and education system not in the favourable level. Actually ,tax system applied in the modern world is composed by a diversity taxes related with each others according the kind, weight and the importance in order to be allocated efficiency among the contributors. It must be structured in the right manner, according the tax laws, oriented by an efficient public administration ,in order to achieved the objectives. If not, in some circumstance could be verified negative effects like fiscal evasion in different aspects by the opportunity of hiding taxes by contributors. Surely, fiscal system is the primary source of the state’s revenues and concretely thereabout 50% of public revenues -much needed for running a good democratic state Actually by the government of Albania is applied an smoothly tax norm about 10% in the wages which in this manner reduced the bureaucratic processes, and also time in the calculation of the revenues from taxes. But regards this, the Albanian citizens are not satisfied because , is created an opinion that the poor stratum social disburse more than rich and medium stratum. I mean , the fiscal burden of taxes is much more in poor stratum than others. The Global Financial Crisis is another topics that stressed the fact in the economic sphere to reorganised the fiscal policies , but I agree with the opinion of ex-governor of the Bank of Albania (Cani, Shkelqim) that: “Our country for many years is in coma , so the global economic crisis is an easily flu.” 2.2 Some opinion about the lower taxes applied by the government To the end of ’70 years, was predicated the political course “The Economists of Supply Hands” based in the lower norms of taxes which will increased the initiative of enterprises, leading an high employment and so production. According to this course, an contraction into taxes will results to an increased revenues and so will doesn’t influenced the increased budget deficit( by the Laffer curve). The following figure shows the meaning of the Laffer Curve. Figure- 5:The relationship of tax norm and the revenues from taxes. Laffer Curve.

Tax norm (%)

100%

t

0

Max

Revenues

According to the figure- the revenues from taxes is in positive correlation with the tax norm up to an certain level and on- the relationship becomes negative. The advocates argue that taxes discourage the work as reduce the revenues from the work, and so the savings and investments. They argue that the encouraging effect of lower taxes will be much greater producing increased revenues due to the increased in the taxes bases. Theoretic argumentations still are not proved in practice. The practice indicate that the application of these ideas into the political programs results with the increased of budget deficit because, despite the minimal increased in the work supply-the effect of private saving was throw out by the reduction in public saving (increasing the budget deficit).The Laffer hypothesis failed. So, an important issue is for the policy-makers is to find the optimal size of taxes and the right number of those both in national level and local level. It’s not simple to decide because it various from one country

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to another and also depends on the current level of economy and the social and political norms of the country. Clearly, the choice of tax and subsidy system should take account of administrative and compliance costs. Unfortunately, in many cases, administrative problems receive insufficient attention. No tax system is costless to administer; the trick is to think carefully about whether or not the administrative costs are worth that benefits. If the government levies more taxes ,the smaller the excess burden of collection of a given amount will be. Intuitively, excess burden decreases because the tax burden is “spread over” more commodities. The optimal size of tax administration is the number of tax instruments for which the total costs of tax collection-excess burden plus administrative costs-is at minimum. Is important to take in consideration one face of tax administration: cheating. First of all, have to distinguish between tax avoidance and tax evasion. Tax avoidance is changing the behaviour of the agent in such a way as to reduce your legal tax liability. There is nothing illegal-and the agents which have a big dimension of this are to be successful, but in contrast, tax evasion is the absent desire to pay the legally due. This is more obviously in development country -like my country, Albania. Enterprises systematically under-declare wage levels, and so, under-pay social security contributions., abusing the provisions of the minimum wage. This is done largely in collusion with employees-forced by the economic conditions-who prefer immediate direct cash payments to future social benefits .For many reasons this behaviour, for both agents ,is excused( update information proved this). Some of them are : Too low current level of state pension Poor state of national health system The labour market is highly distorted and non-transparent because according to the Social Administration Department ,officially registered enterprises under-report their labour force by approximately 30%. An high level of unemployment in report with the number of the population and the investment in the human capital-causing a bad moral of the point of view of things especially to the young peoples. An high level of remittances by the emigrants , indicating the unemployment and the level of the economy. Private sector development has been vigorous in the recent past in Albania. The growth of GDP has been fairly steady at 6 % per annum (IMF,2004),fuelled by expansion in sectors such as constructions, transportation and services. As a results, the share of private sector activity is among the highest in the SEE region, at 75 % of GDP (EBRD,2005).The most mainly sector that contributes in the Albanian GDP is shown as follows: Figure.6.The Contribution of the different sectors of Albanian Economy into the GDP në % in percent 70

Kontibuti në PBB- Contribution to GDP

60

50

40

30

20

10

0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Industri-Industry

Bujqësia , gjuetia , pyjet-Agriculture, hunting ,forestry

Ndërtimi-Construction

Transporti-Transport

Shërbime - Services

Tregtia,hotele,restorante-Trade , hotels , restaurants

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Despite this, such sectors in the recent year has been in bad situation by the high inflations about 4.6% in 2008( Bank of Albania) caused by the increased price of electricity and gasoline ( Statistic Institute) making the life more expensive. It’s to say that Albania has subscribed with the foreign international organizations like IMF and World Bank, the EFP 2006 program which will contributed to the reduction of fiscal evasion and to the economic growth of all the countries that subscribe the programme, especially Balkan Region countries. According the Government Programme, tax policies must be changed and for the period of time 20062009 it will be concern in: Continuous descent of fiscal burden Making the tax system more simply in order to be easy for management. Over the time the system must be smoothly taxes-actually de facto in Albania. Arbitrage’ avoidance among the taxes. To decreased the informality. To decreased the fiscal evasion and to increased the competition among the enterprises. To increased the norm of employment and, To increased the budget revenues. With the supposition that the policy will be practiced by a good fiscal administration ,the results will be determine by a change in tax norm of social contribute, in VAT, in tax norm of personal revenues, on tax cigarette etc. To the end of the programme is to prognosticate a growth of economy with an reduction in the norm of unemployment. It’s not to forget that many factors like the subjective factors of the contributors, affects the final result of any fiscal programme. Those varied differently in many countries, and are based in their core culture. III. The impact of social norms and subjective factors on tax evasions In the relationship of the desire to pay or not the taxes, also have their impact many subjective factors, not a little important in the model. According to them exist many institutional theories which distinguish two kind of institutions: formal and informal. Formal institutions include laws, tax regimes, and the explicit operating rules of organizations, while informal institutions comprise (cultural) norms and established conventions. When informal and formal institutions clash, non-compliant behaviours proliferate, forming various underground economies (Feige,1997:22). The Feige conjecture is based on three building blocks : Individuals’ attitudes towards formal and informal institutions; and the determinants thereof. Individual tax evasion, as determined by their attitudes towards institutions. Individual tax evasion and determinants thereof. The third might be considered to be result of the first and second, but there may also be determinants of tax evasion not related to institutions. This is summarized in the following diagram: Figure- 7 : Feige’s conjectural triangle

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According the studies of Gerxhani (2002) who proved the Feige’s conjectural triangle in Albania was perceived detailed regression results that estimate the three tips of this triangle. Gender affects attitudes: males are more optimistic about formal institutions, but they are characterized by negative trend with respect to informal institutions than female. This shows that male tend to generated more evasion in economy .It’s a fact that in Albania mass of business are holding by mans, but in recent years the things are going to change in favour to women, making the situation more optimistic in this point of view. Differently from the developed country, in development country the motivation of peoples to avoid the taxes is much grater than “the desire” to pay .Those differences depends on “the social norm” factor to pay the taxes. If the peoples believed that the necessity of payment is a social norm, then they will pay regularly it. That means, the existence of social norms of taxes still depends on public judgment. On the other hands, if non-payment becomes dominant, social norms of payment disappear. Social norms of tax obedience varied among different countries. Societies in many countries, especially in transition in fact don’t considered fiscal evasion like an economic crime. In Albania, this judgment still exist but in small reports according to the previous years. That’s because to the actions that the government has take, by the influence of the foreign international organization focused in this camp, and also by the grate desire of the agents to used the services of internet (the payment of taxes through the internet-applied this year) The problem how to encourage the peoples to pay taxes, is not only our problem, but to all economic policymakers around the world, but especially for that in development countries. It’s clearly that the payment is a complex issue of individual’s behaviour interlaced with the socio-economic factors. It is said that there isn’t place in the world that people are happy to pay taxes, but they still pay by the motive of their fiscal culture. In many countries when the informal economy and fiscal evasion is a big problem, the people are stimulated with the fiscal culture ever since they are in school-discussing later and in home in this manner. This can reduce a bit the problem, but is to accumulate the forces in all the dimensions of the problem in order to reduce a bit it. Conclusion The experience shows that there is not a magic formula or a solution for transforming the informal economy to formal economy. This depends on the circumstances and resources that country has for resolving the problem. However is possible to implement a set of political doings that could dislodge the economic balance from informal sector to formal sector. Must keep in mind that, action plans doesn’t be isolated with each others, and seeks an efficient dialog process among the interest groups like government, public administration, civil society, business sector and employee’s syndicate for being successfully. In principle, tax moral depends from the efficient allocation and uniform of taxation among the contributors in society. Fiscal liberties and fiscal an equality weakness the tax discipline and stimulate the fiscal resistance via hiding of taxes. In the creation of the tax moral is important the organization of fiscal administration and its well-being.

Selective bibliography: Tamas k. Papp and Elod Takats , Tax rate cuts and tax Compliance-The Laffer Curve Rivisited, IMF Working Paper , January 2008. Jaime Guajardo, Bussiness Cycles in Small Developed Economies: The role of terms of trade and Foreign Interest Rate shocks, IMF Working Paper, April 2008. OECD 2004. The informal Economy in Albania- Analysis and Policies Recommendations Howell H.Zee,Bristow John,Simard Dominique , Albania: Selected Issues in Tax Design, IMF, December 2004. European Economy, 2006 Economic and Fiscal Programmes of potential countries, by Directorate General for Economic and Financial Affairs, February 2007.

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Gerxhani Klarita, Schram Arthur , Tax Evasion and Source of Income : An Experimental Study in Albania and Netherlands, October 2001. Aspen Institute, 2004. The Informal Economy-making it in Rural America, “Differently” Newspaper, section of “Economy”,Wensday, 09 April 2008. Aida Gugu LL.M, Competition and State Aid in Albania, September 2004. RINVEST, Kultura Fiskale dhe Qendrueshmeria Buxhetore, Raport Hulumtues, Dhjetor 2005. Development Alternatives, Inc,USAID, Albania Enterprise Development & Export Market Services, June 2006. Garbis Iradian, Rapid Growth in Transition Economies : Panel Regression Approach, IMF Working Paper, July 2007. www.minfin.gov.al of Finance Ministry of Albania. www.tatime.org.al of Tax Institution of Albania. www.bankofalbania.gov.al

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