Book of Proceedings EsdAveiro2021 Online

Varazdin Development and Entrepreneurship Agency and University North
in cooperation with
University of Aveiro
Faculty of Management University of Warsaw
Faculty of Law, Economics and Social Sciences Sale - Mohammed V University in Rabat
Polytechnic of Medimurje in Cakovec
Economic and Social Development

68th International Scientific Conference on Economic and Social Development Development
Book of Proceedings
Editors:
Marco Andre da Silva Costa, Abdelhamid Nedzhad, Danijela Lucic
Aveiro, 24-25 May, 2021

Varazdin Development and Entrepreneurship Agency and University North
in cooperation with
University of Aveiro
Faculty of Management University of Warsaw
Faculty of Law, Economics and Social Sciences Sale - Mohammed V University in Rabat
Polytechnic of Medimurje in Cakovec
Editors:
Marco Andre da Silva Costa, University of Aveiro, Portugal
Abdelhamid Nedzhad, National School of Business and Management, Tangier, Morocco
Danijela Lucic, Faculty of Humanities and Social Sciences, Zagreb, Croatia
Economic and Social Development

68th International Scientific Conference on Economic and Social Development Development
Book of Proceedings
Due to the Covid-19 restrictions and epidemiological measures, the Program of the Conference has
been scheduled online. All Sessions and Presentations have been presented via Discord platform.
Aveiro, 24-25 May, 2021

Title ◼ Economic and Social Development (Book of Proceedings), 68th International Scientific Conference on Economic and Social Development Development
Editors ◼ Marco Andre da Silva Costa, Abdelhamid Nedzhad, Danijela Lucic
Scientific Committee / Programski Odbor ◼ Marijan Cingula (President), University of Zagreb, Croatia; Humberto Nuno Rito Ribeiro (Vice-President),
University of Aveiro, Portugal; Sannur Aliyev, Azerbaijan State University of Economics, Azerbaijan; Sandra Raquel Pinto Alves, Polytechnic of Leiria, Portugal;
Ayuba A. Aminu, University of Maiduguri, Nigeria; Marlene Paula Castro Amorim, University of Aveiro, Portugal; Anona Armstrong, Victoria University,
Australia; Gouri Sankar Bandyopadhyay, The University of Burdwan, India; Haimanti Banerji, Indian Institute of Technology, India; Victor Beker, University of
Buenos Aires, Argentina; Asmae Benthami, Mohammed V University, Morocco; Alla Bobyleva, The Lomonosov Moscow State University, Russia; Leonid K.
Bobrov, State University of Economics and Management, Russian Federation; Rado Bohinc, University of Ljubljana, Slovenia; Elisabeth de Jesus Oliveira Brito,
University of Aveiro, Portugal; Adnan Celik, Selcuk University, Turkey; Angelo Maia Cister, Federal University of Rio de Janeiro, Brasil; Luis Miguel Serra
Coelho, University of Algarve, Portugal; Ana Alexandra Vilela Marta Rio Costa, University of Tras-Os-Montes and Alto Douro, Portugal; Antonio Augusto
Costa, Lusofona University, Portugal; Marco Andre da Silva Costa, University of Aveiro, Portugal; Mirela Cristea, University of Craiova, Romania; Taoufik
Daghri, Mohammed V University, Morocco; Oguz Demir, Istanbul Commerce University, Turkey; T.S. Devaraja, University of Mysore, India; Marta Alexandra
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Fontes, Polytechnic of Viana do Castelo, Portugal; Galina Pavlovna Gagarinskaya, Samara State University, Russia; Mirjana Gligoric, Faculty of Economics -
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of Siberian Branch of Russian Academy of Science, Russian Federation; Marina Klacmer Calopa, University of Zagreb, Croatia; Igor Klopotan, Medjimursko
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Raquel Lucas, University of Evora, Portugal; Robert Lewis, Les Roches Gruyere University of Applied Sciences, Switzerland; Ladislav Lukas, Univ. of West
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Aveiro, Portugal; Liliane Cristina Segura Mackenzie, Presbyterian University, Brasil; Daniel Margaca Magueta, University of Aveiro, Portugal; Joao Jose
Lourenco Marques, University of Aveiro, Portugal; Pascal Marty, University of La Rochelle, France; Vaidotas Matutis, Vilnius University, Lithuania; Carlos
Alberto da Silva Menezes, University of Minho, Portugal; Daniel Francois Meyer, North West University, South Africa; Marin Milkovic, University North,
Croatia; Raquel Filipa do Amaral Chambre de Meneses Soares Bastos Moutinho, University of Porto, Portugal; Abdelhamid Nechad, Abdelmalek Essaadi
University, Morocco; Gratiela Georgiana Noja, West University of Timisoara, Romania; Zsuzsanna Novak, Corvinus University of Budapest, Hungary; Tomasz
Ochinowski, University of Warsaw, Poland; Barbara Herceg Paksic, University of Osijek, Croatia; Vera Palea, Universita degli Studi di Torino, Italy; Dusko
Pavlovic, Libertas International University, Croatia; Jose Manuel Teixeira Pereira, Polytechnic Institute of Cavado and Ave, Portugal; Igor Pihir, University of
Zagreb, Croatia; Dmitri Pletnev, Chelyabinsk State University, Russian Federation; Miroslaw Przygoda, University of Warsaw, Poland; Karlis Purmalis,
University of Latvia, Latvia; Nicholas Recker, Metropolitan State University of Denver, USA; Kerry Redican, Virginia Tech, Blacksburg, USA; David Nunes
Resende, University of Aveiro, Portugal; Robert Rybnicek, University of Graz, Austria; Joao Carvalho Santos, Polytechnic of Leiria, Portugal; Amelia Cristina
Ferreira da Silva, Polytechnic of Porto, Portugal; Ana Lorga da Silva, Lusofona University, Portugal; Aurea Sandra Toledo de Sousa, University of the Azores,
Portugal; Joanna Stawska, University of Lodz, Poland; Elzbieta Szymanska, Bialystok University of Technology, Poland; Katarzyna Szymanska, The State Higher
School of Vocational Education in Ciechanow, Poland; Ilaria Tutore, University of Naples Parthenope, Italy; Rui Jose Oliveira Vieira, IE Business School, Spain;
Ilko Vrankic, University of Zagreb, Croatia; Stanislaw Walukiewicz, Bialystok University of Technology, Poland; Thomas Will, Agnes Scott College, USA; Li
Yongqiang, Victoria University, Australia; Peter Zabielskis, University of Macau, China; Silvija Zeman, Medjimursko Veleuciliste u Cakovcu, Croatia; Tao
Zeng, Wilfrid Laurier University, Canada; Snezana Zivkovic, University of Nis, Serbia.
Review Committee / Recenzentski Odbor ◼ Marina Klacmer Calopa (President); Humberto Nuno Rito Ribeiro (Vice-President); Ana Aleksic; Sandra Raquel
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CONTENTS
THE EFFECT OF CORPORATE INCOME TAXATION ON COMPANIES

FINANCIAL PERFORMANCE - LISTED COMPANIES ON EUROZONE STOCK
MARKETS ................................................................................................................................ 1
Andreia Baptista, Fernanda Alberto, Alcina Nunes, Jose Carlos Lopes
A REVIEW OF TIME DRIVEN ACTIVITY BASED COST IN SERVICES AND

FREIGHT FORWARDING BUSINESS ............................................................................. 12
Bruno Pacheco, Amelia Silva, Albertina Monteiro, Sandra Raquel Alves
CLUSTER DYNAMICS’ FRAMEWORK .......................................................................... 21

Svitlana Magalhaes de Sousa Ostapenko, Ana Paula Africano, Raquel Meneses
WHAT LEADS TO BRAND HATE? ANTECEDENTS AND OUTCOMES OF BRAND

HATE....................................................................................................................................... 31
Samar Rahi, Mehwish Ishtiaq, Hafiz Fawad Ali, Mazuri Abd Ghani
A PROPOSAL TO USE BLOCKCHAIN TECHNOLOGY IN INNOVATION

ECOSYSTEMS FOR SUSTAINABLE PURCHASES THROUGH THE PERCEPTION
OF PUBLIC MANAGERS .................................................................................................... 42
Victor Andrade da Silveira, Stella Regina Reis da Costa, David Resende
ARE FEMALE-HEADED HOUSEHOLDS IN POORER LIVING CONDITIONS THAN

MALE-HEADED HOUSEHOLDS? (DETERMINANTS OF HOUSEHOLD POVERTY
IN 4 DISTRICTS OF TIMOR-LESTE - EVIDENCE FROM 4 DISTRICTS OF TIMOR-
LESTE) .................................................................................................................................... 52
Pedro Henriques, Carlos de Deus, Vanda Narciso, Maria Raquel Lucas, Fernanda Peixe
FAMILY OWNED BUSINESSES AND THEIR INNOVATIVE BEHAVIOR: AN

THEORETICAL BACKGROUND ...................................................................................... 67
Rafael Castro, Joana Costa
THE BULGARIAN MODEL OF THE PROSECUTOR’S OFFICE AND THE

POSITION OF THE PROSECUTOR GENERAL ............................................................. 75
Venelin Terziev, Marin Georgiev, Stefаn Bankov, Ivan Ivanov
STRATEGIC CHALLENGES OF TRANSNATIONAL CORPORATIONS FROM

EMERGING ECONOMIES ................................................................................................. 85
Najla Podrug
ACCOUNTANTS IN THE DIGITAL AGE, FROM PRIVATE TO PUBLIC SECTOR:

A LITERATURE REVIEW .................................................................................................. 93
Carina Ferreira, Pedro Miranda, Amelia Ferreira da Silva, Maria Jose Angelico Goncalves
PARTICIPATION OF AZERBAIJAN IN THE WTO: PROBLEMS AND PROSPECTS

................................................................................................................................................ 104
Zahid Farrux Mamedov, Khalide Bayramova
THE IMPORTANCE OF NON-FINANCIAL INFORMATION QUALITY FOR THE
PERFORMANCE OF PORTUGUESE COMPANIES .................................................... 110
Albertina Paula Monteiro, Joana Vale Porto, Eduardo Manuel de Almeida Leite, Humberto
Nuno Rito Ribeiro, Sandra Raquel Pinto Alves
WINE WITH GRAVITY: SPARKLING VS STILL WINE ........................................... 120

Vinko Zaninovic, Jana Katunar, Nenad Vretenar
THE IMPACT OF THE COVID 19 PANDEMIC ON THE BUSINESS OF THE EBAY

PLATFORM ......................................................................................................................... 127
Josko Lozic
COMMUNITY PARTICIPATION IN LOCAL ECONOMIC DEVELOPMENT ....... 136

Kristina Afric Rakitovac, Alen Belullo, Moris Ivancic
BLOCKCHAIN AND IMPACT INVESTMENT - CASE STUDY OF THE

BLOCKCHAIN FOR ZERO HUNGER INITIATIVE AND ITS CONTRIBUTION TO
THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS ....................... 146
Luis Barbosa
TOURISM ENTREPRENEURS AND THEIR VISION FOR REOPENING WITH

COVID-19 ............................................................................................................................. 154
Elvio Camacho, Luis Mota
THE POSSIBILITIES OF REFORMING TOURIST BOARDS INTO NEW

DESTINATION MANAGEMENT ORGANIZATIONS ................................................. 163
Nikolina Seric Honovic, Manuela Klapan
IS MASS CUSTOMISATION THE PATH FOR SMALL AND MEDIUM

ENTREPRIISES TO GROW INTERNATIONALLY? CASE STUDY OF THE
PORTUGUESE FOOTWEAR INDUSTRY ...................................................................... 169
Maria Monteiro, Raquel Meneses
SUSTAINABILITY DIMENSIONS ASSESSMENT: AN ESSAY FOR DOURO

REGION VITICULTURE .................................................................................................. 179
Ana Marta-Costa, Catia Santos
ECONOMETRIC ASSESSMENT OF THE ASSOCIATIVE ACTIVITY OF THE

REPUBLIC OF AZERBAIJAN WITH THE COUNTRIES OF THE WORLD........... 187
Tabriz Yadigarov
GROWING IMPORTANCE OF CREATIVE THINKING IN HIGHER EDUCATION

IN THE 21ST CENTURY ................................................................................................... 197
Vilmos Vass, Arpad Papp-Vary, Melanie Smith
COCOA MARKETS AND VALUE CHAINS: IMPLICATIONS FOR SÃO TOMÉ AND
PRINCIPE ORGANIC SMALLHOLDERS ..................................................................... 204
Ibrahim Prazeres, Maria Raquel Lucas, Ana Marta-Costa
DESIGNING A DIGITAL EDUCATION ECOSYSTEM ............................................... 218

Venelin Terziev, Vladimir Klimuk
INTERNATIONALIZATION STRATEGIES IN FAMILY BUSINESSES: MAIN
TRENDS AND GUIDELINES FOR FUTURE AVENUES OF RESEARCH ............... 226
Rafael Castro, Joana Costa
HEALTH DIPLOMACY AS A SOFT POWER TOOL OF THE PR CHINA DURING

THE COVID 19 PANDEMIC ............................................................................................. 237
Petar Kurecic, Vesna Haluga
SUICIDE REPORTING IN CROATIA (A CASE STUDY: BJELOVARSKI LIST, 2009-

2015)....................................................................................................................................... 244
Iva Rosanda Zigo, Marija Brajkovic
TESTING FOR COMPETITION IN BULGARIA BANKING INDUSTRY: THE

PANZAR-ROSSE APPROACH – NEW EVIDENCE ..................................................... 255
Evgeni Genchev
CAUSALITY BETWEEN GOVERNMENT EXPENDITURE AND ECONOMIC

GROWTH IN BULGARIA, ROMANIA, SLOVENIA, CROATIA AND GREECE .... 270
Velichka Nikolova, Angel Angelov
HUMAN RESOURCES MANAGEMENT UNDER THE INFLUANCE OF COVID 19

PANDEMIC .......................................................................................................................... 279
Viera Sukalova
THE DETERMINANTS OF COMPULSIVE BUYING: A BALKANS CASE ............. 288

Edmond Cera, Humberto Nuno Rito Ribeiro, Sandra Raquel Pinto Alves, Gentjan Cera
68th International Scientific Conference on Economic and Social Development – Aveiro, 24-25 May, 2021
THE EFFECT OF CORPORATE INCOME TAXATION ON

COMPANIES FINANCIAL PERFORMANCE - LISTED COMPANIES
ON EUROZONE STOCK MARKETS
Andreia Baptista
Coimbra Business School (ISCAC), Portugal
[email protected]
Fernanda Alberto
Coimbra Business School (ISCAC), Portugal
[email protected]
Alcina Nunes
UNIAG and Instituto Politécnico de Bragança, Portugal
[email protected]
Jose Carlos Lopes

Instituto Politécnico de Bragança and CICF (IPCA), Portugal
[email protected]
ABSTRACT
The performance evaluation of a company might be based on financial and non-financial
factors. However, on top of the main key performance indicators is always profitability. The
return on assets and the return on equity are the most used ratios/indicators used to determine
financial performance. Therefore, taxation is always a factor that influences the profitability of
any business. The tax burden, measured by the tax effect or by the effective tax rate, is an
important factor determining the financial performance of companies listed on stock markets.
The higher the tax burden (i.e., the lower the tax effect or, the higher the effective tax rate), the
lower the profitability and, consequently, the financial performance. Therefore, the differences
in the tax law might have an impact on profits taxation. This study aims to analyse the effect of
corporate income taxation (tax effect) on return on equity (ROE) of listed companies of
eurozone stock markets. The data was collected from listed companies' financial statements in
the Eurozone during 2018 (Orbis database). The final sample is based on 750 listed companies
from several activity sectors and located in different Eurozone countries. The research results
were obtained using the Ordinary Least Square (OLS) regression method. The return on equity
average is approximately 12,7%. The tax effect average is approximately 71,4% (i.e., 28,6% in
terms of effective tax rate). Therefore, the influence of the tax effect is significant. The results
suggest that for the companies listed in the Eurozone stock market, a variation of 1% in the
fiscal effect generates a 1,243% variation in the same direction of the ROE. The relationship is
positive, as was expected.
Keywords: DuPont model, regression analysis, ratio analysis, return on equity, tax effect
1. INTRODUCTION
The performance evaluation of a company might be based on financial and non-financial
information. The financial analysis adopts financial data to assess a company's performance
and make projections of how the company will perform in the future. It allows recognising
changes in financial trends, knowing the performance of a company and understanding its
evolution. Profitability is the key when performing financial statement analysis. Profitability is
the company's ability to generate profit within a certain period and show how attractive the
economics of the business are.
1
In practice, financial performance and profitability are measures of the results of a company's
policies and operations in monetary terms (Sultan, 2014). The return on equity (ROE) and the
return on assets (ROA) are the most used indicators/ratios to determine financial performance.
Both ratios are based on net income. Therefore, taxation is always a factor that influences the
profitability of any business. The tax burden, measured by the effective tax rate (ETR) or by
the tax effect (inverse of ETR), is an important factor that determines the financial performance
of companies listed on stock markets. The higher the tax burden measured by the ETR, the
lower the profitability and, consequently, the financial performance; the higher the tax burden
measured by the tax effect (i.e., lower values), the lower the profitability and, thus, the financial
performance. This study aims to analyse the tax effect of corporate income taxation on listed
companies of eurozone stock markets. For this purpose, we use the DuPont model as a starting
point to identify the main factors that have an influence on profitability (return on equity). One
of the main factors is the tax burden, measured by the tax effect. Thus, in this study, we analyse
the impact of the tax effect on ROE. The data was collected from listed companies' financial
statements in the Eurozone during 2018 (Orbis database), and the final sample is based on 750
listed companies from several activity sectors and located in different eurozone countries. The
research results were obtained using the Ordinary Least Square (OLS) regression method. The
paper is organised as follows: after this introduction, in point two, we present a brief and
relevant literature review; in point 3, we describe the research method, explain the data and
sample selection, and describe the empirical study; point four, is dedicated to the results
discussion; Finally, the main conclusions and the implications of our findings are presented.
2. LITERATURE REVIEW
A company's performance evaluation is an inseparable part of the management role, essential
to define the impact of management decisions, the direction of the activity results and the
decisions that must be taken to improve the results (Narkunienė & Ulbinaitė, 2018). This
evaluation consists of measuring what had been achieved by a company in a certain period to
obtain useful information related to flow of fund, the use of fund, effectiveness and efficiency,
and it helps the managers make the best decisions. Performance evaluation has been mainly
conducted based on financial information by analysing indicators of profitability, liquidity,
solvency, and other financial ratios/indicators.
2.1. Profitability and return on equity

Profitability is one of the main objectives of all companies, to allow its survival and growth in
the current competitive market economy and indicates whether the company has good prospects
in the future; thus, each company intends to improve profitability. Several studies analyse the
profitability of companies in different countries and industries using financial indicators such
as return on total assets (ROA), financial return and invested capital (ROIC), where the
elements considered express working capital. Still, other studies evaluate the performance
considering profit before interests and taxes (EBIT), economic value added (EVA), return on
equity (ROE) and operating profit margin (Popa & Ciobanu, 2014). The relationship between
profitability and internal and external factors was also very studied (Xianyu, 2011; Chaddad &
Mondelli, 2013), but, in some cases, the results were inconclusive (Al-Jafari & Samman, 2015).
In this way, Popa and Ciobanu (2014) quantified the performance of the Romanian SMEs
companies using ROE and ROIC. They adopted the OLS model to analyse whether some
factors can influence the profitability and the results were significant for most of them. Hence,
ROE is one of the major indicators adopted in the financial analysis of the companies that
measure the ability of shareholders' equity to generate a financial return. It is calculated by
dividing net income by shareholders' equity and analysing the profitability on the equity
investor's perspective on its net profits (net profit after tax and interest expenses) relatively to
2
the book value of equity investments. It is relevant for investors, knowing about the creation of
additional value (Eiteman, Stonehill, & Moffet, 2002) and for entrepreneurs and managers,
helping them in the decision-making process (Burja, 2011; Chandrapala & Guneratne, 2012;
Chandrapala & Knapkova, 2013; Charles et al., 2018). Investors and entrepreneurs can assess
if their investment is profitable or not, analysing the global efficiency rate (Popa & Ciobanu,
2014).
2.2. Tax burden and profitability

One important factor that influences the profitability of any business is taxation, particularly
income taxation. Clausing (2007) studied variation among OECD countries in the size of
corporate income tax revenues relative to GDP over 1979-2002 and observed a parabolic
relationship between tax rates and revenues, implying a revenue-maximising corporate income
tax rate of 33% for the whole sample. The author also concluded that this revenue-maximising
rate decrease as economies are smaller and more integrated with the world economy. In another
cross-country study, Devereux, Lockwood and Redoano (2008) analysed 21 OECD countries
between 1982 and 1999 and found evidence that countries compete over the statutory tax rate
to attract mobile profit. Overesch (2005) studied the effective tax burden of companies in EU
member states in 2005 and observed remarkable differences between countries. He concludes
that, from the point of view of each country, cutting the statutory profit tax rate seems to be a
favourable strategy because it improves the position in the international tax competition on both
real investments and mobile taxable profits. Alyeksyeyev et al. (2018) analysed the income tax
rates in different countries and concluded that companies' taxation negatively affects the
companies; the most effective optimisation of the tax burden can only be achieved with
comprehensive carrying out on the local and macro-economic measures of influence. Also, at
the macroeconomic level, other studies observed a negative relation between the level of
companies' taxation and the economic activity (Koester & Kormendi, 1989) and the GDP
growth (Plosser, 1992). Baker (2018) studied the influence of the corporate tax rate in the less
developed countries, using data of 14 countries over the period between 1980 and 2006. The
analysis showed that although the corporate tax rate has decreased, corporate tax revenues have
been increasing. The corporate tax rate is increasing in the personal tax rate. Constantin (2012)
studied the influence of financial indicators, such as the assets' structure, the degree of
indebtedness, the company size and the rates of return on the ETR, using data of 90 Romania
companies for the year 2012. He concluded that financial profitability indirectly influences the
effective income tax rate and negatively links the ETR and leverage. An interesting approach
to income tax is the influence on financial performance. Ngobo and Stefani (2001) validated
that financial performance is correlated to the activity sector, diversity and heterogeneity of
economic entities using a model that includes ROA, ROI, and q Tobin indicators. Stefanescu et
al. (2018) analysed the possible influence of income tax over a company's performance in a
sample of 20 companies listed on the Bucharest Stock Exchange for the period 2013-2015.
They demonstrated that ETR influences a company's financial performance negatively. They
found the ETR negatively affects both dependent variables (ROE and net profit's margin rate).
An increase of tax rate by 1% determines a decrease of ROE in 0.3135 percentage points, and
when the effective tax rate increases by 1%, the net profit's margin rate decreases by 0.2868
percentage points. In the sector service, Fang et al. (2019) investigated the impact of the tax
burden and regulations on the development of this sector and concluded a significant and
negative effect. However, the effect varies by economic development level, economic cycle,
and industry categories. Xianyu (2011) adopted a multiple regression model with a sample data
from 2000 to 2009 of listed companies in China. He found that the tax burden on the macro and
micro-operating performance significantly negatively impacted these companies. Different
studies analysed the effect of corporate income tax on financial performance and the results
3
differ according to the country and the industry. A negative relationship between corporate
income tax and financial performance/profitability was revealed in Ghana (Gatsi et al., 2013),
Tunisia (Assidi et al., 2016) and Romania (Pitulice et al., 2016). In listed consumer goods
companies in Nigeria, from 2006-2016, Junaidu and Hauwa (2018) found an insignificant
negative relationship between corporate tax and financial performance using the ROA as a
measure. Otwani et al. (2017) studied listed companies in Kenya and obtained different results.
They found a positive relationship between corporate income tax and the financial performance
of these companies. Vržina and Dimitrijeviæ (2020) studied a particular sector – the agricultural
companies in Vojvodina – and their results revealed that nearly 69% of observations have a
current effective tax rate and cash effective tax rate of 0%. These results indicate that agriculture
is an industry with an exceptionally low corporate income tax burden. Abiahu et al. (2020)
examined the effect of corporate tax on the sustainable financial performance of 10
manufacturing listed companies in Nigeria in 2013-2017. The results revealed that corporate
tax payment has no significant effect on the ROE. Still, it has a positive and significant effect
on the debt-to-equity ratio.
2.3. The DuPont Model

The DuPont model was created in the early 1900s, but it is still a model valid for assessing
profitability (Sheela & Karthikeyan, 2012). The model was first introduced by F. Donaldson
Brown in the General Motors Corp. when he was given the task of cleaning up the finances in
this giant company. The DuPont model is credited to Brown as he attempted to find a
mathematical relationship between two commonly computed ratios, namely net profit margin
and total asset turnover. The original DuPont model was firstly used in the internal efficiency
report, which was the product of two often-computed ratios, net profit margin (a measure of
profitability) and total asset turnover (a measure of efficiency). With ROA being affected by a
profitability measure and an efficiency measure, the DuPont model became a widely used tool
of financial analysis (Liesz, 2002). The formula of the original DuPont model is illustrated
below in equation 1 (Liesz, 2002; Soares and Galdi, 2011; Mubin et al., 2014).
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑠𝑎𝑙𝑒𝑠 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝑅𝑂𝐴 = × = [1]
𝑠𝑎𝑙𝑒𝑠 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Later, in the 1970s, emphasis on financial analysis shifted from ROA to ROE, and the DuPont
model was modified to include the ratio of total assets to equity (Little et al., 2011). To obtain
deep information about the factors that have an influence on ROE, the DuPont model states that
ROE depends on three factors: "net profit margin", "assets turnover", and "leverage" (Ferreira
et al., 2019). A new modification was introduced by Hawawini and Viallet (1999) to add two
more factors, consisting of a total of five ratios combined to form the ROE. The equation
suggested by the previous authors has been stated as follows (equation 2):
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑅𝑂𝐸 = × × × × [2]
𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝑒𝑞𝑢𝑖𝑡𝑦
In this formula, EBIT is the earnings before interest and taxes, EBT is the earnings before taxes,
and the ROE is equal to (𝑡𝑎𝑥 𝑏𝑢𝑟𝑑𝑒𝑛 × 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑢𝑟𝑑𝑒𝑛 × 𝐸𝐵𝐼𝑇 × 𝐸𝐵𝐼𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 ×
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒). The tax burden (perspective of tax effect) measures the
effect of taxes on ROE, the interest burden measures the interest burden on ROE, the EBIT
margin measures the operating profitability on ROE, the assets turnover measures how
effectively the entity uses the assets to generate revenue, and the financial leverage measures
the relationship between the equity and total assets (Ferreira et al., 2019).
4
During this long period, three distinct versions of the DuPont model were created and used to
help discover the underlying drivers of profitability and return over time (Little et al., 2011).
The last modified version of this model is more complete. It includes the following five factors:
tax burden effect, interest burden effect, earnings before interest and taxes (EBIT) margin,
assets turnover and financial leverage.
3. METHODOLOGY
The main goal of this research work is to analyse the relationship between the tax effect and the
Return on Equity (ROE) of companies located in Eurozone countries. As previously mentioned,
ROE is one of the most important ratios/indicators used to determine financial performance.
According to the DuPont model, the tax burden, measured by the tax effect or the effective tax
rate, influences ROE. Thus, this variable is an important factor determining the financial
performance of companies listed on the stock market. For achieving such a goal, financial
information from the ORBIS/AMADEUS database was used to conduct the research. The data
collected is based on the financial statements of listed companies in the Eurozone in the
economic period of 2018. During the data processing arose the need to remove some
observations contained in the initial database. Namely, those concerning: (i) companies whose
net profit for the period was shown to be higher than the profit before tax, a situation that
possibly reflects the accounting treatment of deferred taxes established in financial accounting
standards; (ii) companies with "tax effect" and "financial charges" ratios higher than one, for
the reason previously mentioned, where there is a significant positive effect on results before
tax; (iii) companies whose variables are not defined or do not present a value. For obtaining
viable and coherent analysis results, it is worth mentioning that the database does not present
unrelated data, data falling into the criteria abovementioned, or non-existent data. In these cases,
observations were eliminated so that there would be no bias in the results. After data processing,
a final sample consisting of 750 companies was obtained. Regarding their absolute and relative
distribution by country, the following should be highlighted. France (22.8%), Germany (21.6%)
and Italy (15,9%) are the economies where most companies in the sample are located (60.3%
of all companies in the sample). For each remaining Eurozone country, the number of
companies considered in the sample ranges from 5,9% in Spain, Belgium, or the Netherlands
and 0.5% in Latvia or Slovakia. In Portugal are located 2.7% of the total sample companies. In
the sense of the proposed analysis, to study the relationship between the Return on Equity and
the tax effect will be applied the linear regression methodology, known as the Ordinary Least
Squares (OLS) method. The method is intuitively applicable and mathematically simple. Its
name comes from its purpose. With the use of the OLS method, the objective is to adjust a set
of estimated values to the real values of the variable under study, minimising the sum of squares
of the residuals (differences between estimated and actual values). The estimation is performed
through a linear regression to identify and quantify which variables explain (the explanatory or
independent variables) another variable, which is the object of study (dependent or explained
variable) (Gujarati, 2003). In the specific case of this study, by applying the OLS method, the
aim is to understand if the tax effect influences the Return on Equity and, if it influences,
quantify the influence of changes on the tax burden on the Return to Equity. The model to
estimate is given by the following equation (equation 3):
𝑅𝑂𝐸𝑖 = 𝛼 + 𝛽𝑖 𝑇𝑎𝑥 𝐸𝑓𝑓𝑒𝑐𝑡𝑖 + 𝜀 [3]
Where ROE is the dependent variable, Tax Effect is the explanatory variable, 𝛼 is the model
constant, 𝛽𝑖 is the estimated coefficient and 𝜀 the error term. Note, 𝑖 = 1, 2, . . . 𝑛 represent the
observations in the model since the database is cross-sectional. An additional mathematical
transformation is done.
5
The variables will be present in a logarithmic form. The conversion allows the estimated
coefficient to be read as a percentage. On the other hand, it will enable the range of values used
in the regression to be reduced. The accuracy of the model fit may be evaluated using a set of
indicators and tests. The coefficient of determination (R2 ) indicates the percentage in which the
variations in the explained variable are explained by variations occurring in the explanatory
variable. A larger value indicates a better accuracy of fit, i.e., a better model. The Student's t-
test allows verifying that the estimated coefficient is statistically significant and should be
considered as correctly predicting changes in the explained variable. It should be noted that the
OLS method is one of the traditional methods of inferential analysis most used in economic
research (Wooldridge, 2012). In the specific case of applying the DuPont model, several articles
have been published in recent years that use this method, which validates and justifies its use
in this study (Warrad & Nassar, 2017; Gaweda & Sajnóg, 2020).
4. RESULTS AND DISCUSSION

For preparing the inferential analysis and make the data under study known, a descriptive
analysis of the data and Pearson's linear correlation analysis are first performed. The statistical
distribution of data is presented in Table 1. The distribution presents the main indicators of
centrality (mean) and variability of the distribution (standard deviation and the minimum and
maximum distribution values). In addition, the number of observations for each variable and
the respective unit of measurement is presented. It should be noted that, for a more simplified
analysis of the data obtained, the values of the return on equity and the tax effect ratios are
multiplied by 100 to show values in percentage.
Table 1: Statistical distribution

Standard
Unit of Mínimum Maximum Mean
Nº Deviation
measurement (%) (%) (%)
(%)
Return on Equity 750 Rácio 0.1 103.4 12.7 11.3
Tax Effect 750 Rácio 2.6 100.0 71.4 17.1
(Source: Author's elaboration)
On the Eurozone listed companies, the Return on Equity varies between 0.1% and 103.4%, with
an average value of 12.7%. The Return on Equity indicates the percentage of profit for each
euro invested, so for each euro invested, the companies under study receive an average profit
of 12.70% (i.e., 0,127€). The standard deviation is 11.30%, which shows the values are widely
dispersed from the average value. The tax effect variable varies between a minimum value of
2.6% and a maximum value of 100%. The tax effect variable is calculated by the difference
between 1 and the effective tax return, i.e., tax effect = 1 – effective tax rate (tax/profit before
tax). Therefore, the relationship between the variables is inverse since the higher the tax effect
value, the lower the tax burden, and vice versa. Companies with a zero value of tax effect
present the maximum tax burden of this variable (income before tax = income tax). A minimum
value of 2.6% tax effect indicates the existence of firms for which the effective tax rate effect
reaches approximately 97.4%. The average value of the variable, 71.4%, indicates that the
average effective tax rate for the sample is 28.6%. The standard deviation has a value of 17.3%,
which reveals a perception that each company deviates, on average, either positively or
negatively, from the average value by 17.3%. The distribution of the ROE (above) and the tax
effect (below), ranging from 0 to 1, for each one of the 750 companies listed in the Eurozone
stock market can also be observed in Figure 1.
6
Figure 1: Distribution of the observation by variable on a 0 to 1 scale.

0 .5 1
1
Return
on
Equity .5
(ROE)
0
1
.5 Tax
Effect
0
0 .5 1
In the following table (Table 2), in addition to the values obtained in Pearson's correlation
between the pair of variables, considering both the original values and the logarithmic values,
the level of statistical significance of the correlation is presented.
Table 2: Pearson correlation between variables

Original values Logarithmic values
Return on Equity Tax effect Return on Equity Tax effect
Return on Equity 1 1 1 0,487**
Tax Effect 0,245*** 0,245*** 0,487** 1
Note: *** indicates statistical significance at 1% level of significance, ** indicates statistical
significance at 5% level of significance.
From the observation of the correlation matrix presented above, it is possible to conclude the
ROE shows a statistically positive relationship with the tax effect (the higher the tax effect
value, the greater the return on equity). The relationship is a moderate one (Mâroco, 2011) and
smaller for the original values than for the logarithmic values. After performing the descriptive
and correlation analysis of the study sample, it was found that the values are not evenly
distributed. It can be deduced that the observations are heterogeneous. Considering the pattern
of the variables under study, the OLS is sensible to heterogeneity, and the estimated results of
the OLS method may be subject to biases. In order to minimise and limit this problem, the
logarithms corresponding to each of the variables analysed were calculated. The logarithm of
the data of the study variables has several advantages such as: (i) a greater homogeneity of the
values; (ii) a greater levelling of the value of the observations, so that variations are not
reflected; and (iii) an analysis of results in terms of growth. From the literature review and the
descriptive analysis above made, it is expected a positive influence on the tax effect on the
Return on Equity.
7
The OLS method will allow calculating the importance of the influence. Table 3 presents the
OLS estimation results – it is possible to observe the estimated coefficients, standard deviation,
and individual statistical significance. Moreover, is presented the coefficient of determination.
Table 3: OLS estimation results

Estimation Results
Variables
Estimated coefficient Standard deviation Statistical significance
Constant -1,915 0.042 ***
Tax effect 1.243 0.815 ***
Observations (number) 750
R2 0,237
Note: *** indicates sstatistical significance at 1% level of significance
From the observation of the above table, the tax effect is not alone a very powerful explanatory
variable for the ROE. Indeed, the changes in the Return on Equity depend on a more significant
number of explanatory variables. However, the coefficient of determination indicates the
changes in the tax effect explain almost 24% of the changes observed in the companies' ROE.
The results suggest that for the companies listed in the Eurozone stock market, a variation of
1% in the fiscal effect generates a 1.243% variation in the same direction of the ROE. The
relationship is positive, as was expected. The results are in line with other studies previously
mentioned. Regarding the negative impact of taxation in ROE that significantly influence
profitability, see, for example, Alyeksyeyev et al. (2018), Stefanescu et al. (2018). A similar
trend (negative relationship between corporate income tax and financial performance/
profitability) was found by Gatsi et al. (2013) in Ghana or by Assidi et al. (2016) in Tunisia and
Pitulice et al. (2016) in Romania. Nonetheless, we need to consider if the tax variable used is
the tax effect or effective tax rate when comparing the results.
5. CONCLUSION
Several factors might have an influence on the financial performance of a company. The main
goal of this study is to analyse the tax burden of corporate income taxation on listed companies
of Eurozone stock markets. For this purpose, we use the DuPont model as a starting point to
identify the main factors that have an influence on profitability (return on equity). One of the
main factors is the tax burden, measured by the tax effect in the DuPont model. The others are
the interest burden, the EBIT margin, the total assets turnover, and the leverage. Considering
the sample based on 750 companies listed in the Eurozone stock markets (the data was collected
from the financial statements for 2018 and was available on the ORBIS Database) was found
the following evidence:
1) on average, the return on equity for the global sample was 12.4%;
2) on average, the tax effect for the global sample was 71.4% - in other words, the average of
the effective tax rate was 28.6%;
3) the results suggest that for the companies listed in the Eurozone stock market, a variation
of 1% in the fiscal effect generates a 1.243% variation in the same direction of the ROE.
The relationship is positive, as was expected.
Therefore, the tax effect plays an important role to explain the return on equity and the
performance of financial listed companies in the Eurozone stock market. Consequently, the tax
effect factor is a relevant variable that influences Eurozone companies' competitiveness and an
essential element to be considered for decision-making concerning tax planning and foreign
investments. Future research based on a country-by-country analysis will also be relevant to
determine the differences in the tax effect behaviour inside the Eurozone countries.
8
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11
A REVIEW OF TIME DRIVEN ACTIVITY BASED COST IN SERVICES

AND FREIGHT FORWARDING BUSINESS
Bruno Pacheco
ISCAP, Porto Polytechnic, Porto, Portugal
[email protected]
Amelia Silva
CEOS.PP, ISCAP, Porto Polytechnic, Porto, Portugal
[email protected]
Albertina Monteiro
CEOS.PP, ISCAP, Porto Polytechnic, Porto, Portugal
[email protected]
Sandra Raquel Alves

CEOS.PP, ESTG, Polytechnic Institute of Leiria, Leiria, Portugal
[email protected]
ABSTRACT
This paper aims to characterize and identify trends in scientific research, published in the last
five years, about the application of Time Driven Activity Based Cost to services and freight
forwarding business. The authors employed content analysis to perform a systematic literature
review on a sample of nineteen articles, complemented by a contingency analysis. Surprisingly,
none of the papers were published in any accounting journal. Furthermore, it was found that
the dominant research field is health care costing. Regarding to the freight forwarding
business, it was not found any material evidence specifically related to the application of Time
Driven Activity Based Cost. Such evidence suggests that further research TDABC could
possibly be tested and applied to the freight forwarding business.
Keywords: Systematic Literature Review (SLR), Time Driven Activity Based Costing (TDABC),
Services, Freight Forwarding Business, Health Care
1. INTRODUCTION
Nowadays in the freight forwarding environment exists a massive need of accurate costs. In the
relation among customers and suppliers, deep cost knowledge is the basis for the decision-
making process. It is not a simple task to control and manage the costs and, is very complex to
find the costing method that can fulfil the needs and complete the hard equation cost vs benefits
(Teece, 2010). The global profitability of a firm depends not only upon whether the sales prices
can regain product costs, but also whether this gross margin is enough to cover the cost-of-
serving the customer (Everaert et al., 2008; Shapiro et al., 1987). The cost of serving the
customer includes order-related costs, plus specific logistic, selling, and administrative
expenses. Understanding the cost-to-serve, companies can safeguard profitability, even in a
very competitive environment (Foster et al., 1996). However, this requires that the cost model
used is accurate and detailed enough to capture the many factors that influence the cost of
serving the customer (Everaert et al., 2008). Therefore, managers must know the unit cost of
products and the cost of customer service levels to use them during negotiations with other
members of the supply chain. Only by having detailed and accurate cost information can
suppliers succeed in realizing fair exchanges and profitable partnerships (Lin et al., 2017; Norek
& Pohlen, 2001; Themido et al., 2000).
12
According to Hoozée et al., (2009) both calculating and monitoring cost behaviour must be a
constant task to maintain competitiveness, guarantee profitability, long-term advantage and,
above all, that product and service costs do not exceed market prices. Mazzuco et al., (2017)
observe that, in recent decades, accounting practices management have been defined by the
appearance of several artifacts, with the greater precision in terms of allocation of costs in
products – if stand out in this aspect the Activity-Based Costing (ABC), Activity-Based
Management (ABM) and Balanced Scorecard (BSC) - highlighting the ABC method presented
by professors Robert Kaplan and Rob Cooper as an alternative to costing methods that would
allow more information accurate costs and activities. Understand that the costs of the
implementation of the ABC method were extremely high and complicated to implement, in
2004, researchers Kaplan and Anderson suggested a new methodology for ABC, called
Activity-Based Costing or Time-Driven Activity-Based Costing (TDABC). The TDABC
method simplifies methodology of ABC, when it discards the second stage of Activity-Based
Costing and requires estimating only two parameters for its operationalization: the cost of
supply resources to a specific activity and the time required to perform it. Given the above, this
paper intends to search for the past articles related with the TDABC applied to the services area,
specifically in the freight forwarding business, and make an analysis of the main conclusions
of them.
2. METHODOLOGY
The systematic literature review (SLR) is a research methodology from the medical sciences.
The necessity to integrate the results of the different clinical studies, and the consequent
promotion of “Evidence-Based Medicine”, transformed SLR into a current and well-matured
practice in the scope of medicine. Literature review is a key research step in any field of science.
Through its execution the researcher determines the limits of knowledge about the subject of
interest, obtaining ways to approach new problems through the knowledge already formed or
exploring new approaches to old problems. In the area of logistics and transport, the methods
of Narrative Literature Review (NLR) and the Systematic Literature Review (SLR) are
commonly used (Loureiro et al., 2016). Using the SLR, this study aims to answer the following
research question: What has been investigated in the past years regarding TDABC applied to
freight forwarding and services business? Using the platform Web of science, by the end of the
first quarter of 2021, it was made a data collection using the option: “TDABC” and “Services”
as key words for all the fields, articles published during the last five years in journals index in
WOS. This search strategy resulted of 25 articles. From the 25 articles that have been found,
only 19 were examined, once the other ones were not related with the subject of this paper or it
was not in services’ industry. It is quite interesting that, the only paper published in an
accounting journal resulting from our search strategy was excluded because it was about
manufacturing industry: “Barros, R. S., & da Costa, A. M. (2017). Time-driven activity-based
costing: Designing a model in a Portuguese production environment. Qualitative Research in
Accounting & Management. 14(1), 1-20”.

The table 1 resumes the results of the data collected from the Web of Science database. The
criteria for the analysis of the following table were the identification of the authors of the article,
title, their objectives, applied methodology and the conclusions / contributions identified.
Table following on the next page
13
Table 1: Research Results

Authors Title Objective(s) Methodology Conclusions/Contribution
Process maps were developed for each

phase of care (preoperative,
intraoperative, and postoperative) for
patients undergoing primary TJA
performed by one of three surgeons at
a tertiary care medical center.
Personnel costs for each phase of care
were measured using TDABC based
on fully loaded labor rates, including
Compare the costs associated Traditional hospital cost accounting
physician compensation. Costs
with (1) primary total hip systems overestimate the costs
Time-driven associated with consumables
arthroplasty (THA); (2) associated with many surgical
Activity-based (including implants) were calculated
primary total knee procedures, including primary TJA.
Akhavan, Sina; Costing More based on direct purchase price. Total
arthroplasty (TKA); and (3) TDABC provides a more accurate
Ward, Lorrayne; Accurately costs for 677 primary TJAs were
three surgeons performing measure of true resource use associated
Bozic, Kevin J. Reflects Costs in aggregated over 17 months (January
these total joint arthroplasties with TJAs and can be used to identify
Arthroplasty 2012 to May 2013) and organized into
(TJAs) as measured using high-cost/high-variability processes that
Surgery cost categories (room and board,
TDABC versus traditional can be targeted for process/quality
implant, operating room services,
hospital accounting (TA) improvement
drugs, supplies, other services). Costs
derived using TDABC, based on
actual time and intensity of resources
used, were compared with costs
derived using TA techniques based on
activity-based costing and indirect
costs calculated as a percentage of
direct costs from the hospital decision
support system
The study was exempt from an

institutional review board approval.
Apply an established cost TDABC utilizes process mapping
accounting method, the time- tools from industrial engineering and
Approximately 80% of the direct costs
Dissecting Costs of driven activity-based costing activity-based costing. The process
Anzai, Yoshimi; of AP CT of the academic medical
CT Study: (TDABC), to assess the costs map outlines every step of discrete
Heilbrun, Marta E.; centre are related to labour. Potential
Application of of performing an abdomen activity and duration of use of clinical
Haas, Derek; Boi, opportunities to reduce the costs include
TDABC (Time- and pelvis computed resources, personnel, and equipment.
Luca; Moshre, Kirk; increasing the efficiency of utilization
driven Activity- tomography (AP CT) in an By multiplying the cost per unit of
Minoshima, Satoshi; of CT, substituting lower cost resources
based Costing) in a academic radiology capacity by the required task time for
Kaplan, Robert; Lee, when appropriate, and streamlining the
Tertiary Academic department and identified each step, and summing each
Vivian S. ordering system to clarify medical
Center opportunities for improved component cost, the overall costs of
necessity and clinical indications
efficiency in the delivery of AP CT is determined for patients in
this service three settings, inpatient (IP),
outpatient (OP), and emergency
departments (ED)
It was performed a time-driven

activity-based costing (TDABC) study
using a health care provider
perspective. This was performed over
a 1-month period, capturing every step
Burns, K. E.;
A time-driven, Accurately quantify the costs of the transfusion pathway for patients
Haysom, H. E.;
activity-based of care for patients with with TDT at a designated provider of
Higgins, A. M.;
costing transfusion-dependent specialist thalassemia services in
Waters, N.; Tahiri, Founded significant costs associated
methodology for thalassemia (TDT), and to Australia. Detailed process maps were
R.; Rushford, K.; with RBC transfusion for TDT, with the
determining the evaluate cost-effectiveness of developed to outline treatments and
Dunstan, T.; Saxby, product cost contributing less than one-
costs of red blood new treatments, data are processes directly related to
K.; Kaplan, Z.; half of the total cost
cell transfusion in required on costs of regular transfusion. For each process map,
Chunilal, S.;
patients with beta red blood cell (RBC) detailed data collection, including
McQuilten, Z. K.;
thalassaemia major transfusions timing of activities, was performed
Wood, E. M.
multiple times to account for variation
in practice. Costs associated with
RBC transfusion were broken down
into fixed, process, and RBC
procurement costs
14
Laboratory animal programs

and core laboratories often
Using a time- It was used a time-driven activity-
set service rates based on Time-driven ABC model is a powerful
driven activity- based costing (ABC) model to
cost estimates. However, management tool that can be applied to
based costing determine the cost of services
Gerwin, Philip M.; actual costs may be other core facilities as well as to entire
model to determine provided by a resource laboratory at
Norinsky, Rada M.; unknown, and service rates animal programs, providing valuable
the actual cost of our institution. The time-driven
Tolwani, Ravi J. may not reflect the actual information that can be used to set rates
services provided approach is a more efficient approach
cost of services. Accurately based on the actual cost of services and
by a transgenic to calculating costs than using a
evaluating the actual costs of to improve operating efficiency
core traditional ABC model
services can be challenging
and time-consuming
Pharmaceutical
services cost Pharmaceutical services supply The presented TDABC model gives
analysis using Explore the development of a patterns were studied in three new insights on management and costs
time-driven time-driven activity-based pharmacies during a weekday through of community pharmacies. This study
Gregório, João; activity-based costing (TDABC) model, an observational study. Details of each shows the importance of cost analysis
Russo, Giuliano; costing: A with the objective of activity's execution were recorded, for health care services, specifically on
Lapão, Luís Velez contribution to calculating the cost of including time spent per activity pharmaceutical services, in order to
improve pharmaceutical services to performed by pharmacists. Data on better inform pharmacies' management
community help inform policymaking pharmacy costs was obtained through and the elaboration of pharmaceutical
pharmacies' pharmacies' accounting records policies
management
This study has two distinguishing

features: (1) its use to establish a The study identified a prospective tariff
Using time-driven The regional government of system of tariffs related to services system based on the average total
Ippolito, Adelaide;
activity-based Campania, Italy, launched a provided over a particular time frame resources absorbed according to the
Boni, Silvia; Cinque,
costing to establish study with the aim of in an individualized care plan, and (2) different levels of patient complexity
Ettore; Greco,
a tariff system for implementing a tariff system the method of calculating the daily rather than historical costs, that,
Annarita; Salis,
home health care for the provision of home cost of care (i.e., the cost of a standard although it refers to a Italian regional
Salima
services and palliative care services day, including access to all healthcare context, it highlights a methodology
professionals required to care for the that can be applied in other countries
patient at home
A clear benefit of Td-ABC in our

current health care landscape, is the
Jalalabadi, Faryan; ability of this costing system to identify
This study aimed to show
Milewicz, Allen; Activity-Based inefficiencies in a given production
how to implement TDABC N.A (Systematic methodology)
Shah, Sohail; Hollier, Costing line, thereby identifying opportunities
into the healthcare service
Larry; Reece, Edward to provide further benefit and value to
the patient throughout the health care
system
TDABC method can be applied in
hospital businesses to obtain accurate
cost information, and it is useful in
Time-Driven
helping hospital management to make
Activity-Based
Kurt, Pinar; Saban, This study aimed to show strategic decisions. Also, hospital
Costing in the
Metin; Cankaya, why the TDABC method is businesses will be able avoid waste of
Ophthalmology N.A (Systematic methodology)
Fikret; Annac, applicable and how it can be resources by calculating their costs in a
Department of
Mehmet Cengiz efficiently applied realistic way through TDABC method,
State Hospital: A
which will also contribute positively to
Case Study
the environment as the use of medical
supplies and the amount of medical
waste will be reduced
Laviana, Aaron A.;
Ilg, Annette M.;
Veruttipong, Darlene;
Process maps were developed for each
Tan, Hung Jui;
phase of care from the initial urologic
Burke, Michael A.;
visit through twelve years of follow-
Niedzwiecki, Utilizing time- Given the costs of delivering Use of TDABC is possible in analysing
up for RALP, cryotherapy, HDR and
Douglas R.; driven activity- care for men with prostate cancer services and provides insights
LDR brachytherapy, IMRT, SBRT,
Kupelian, Patrick A.; based costing to cancer remain poorly into cost reduction tactics in an era
and AS. The latter modality
King, Chris R.; understand the described, this study reports focused on emphasizing value. By
incorporated both MRI-fusion and
Steinberg, Michael short- and long- the results of time-driven detailing all steps from diagnosis and
traditional TRUS biopsy. The costs of
L.; Kundavaram, term costs of activity-based costing treatment through 12-years of follow-up
materials, equipment, personnel, and
Chandan R.; treating localized, (TDABC) for competing for low-risk prostate cancer, we
space were calculated per unit time
Kamrava, Mitchell; low-risk prostate treatments of low-risk demonstrate significant cost variation
and based on the relative proportion of
Kaplan, Alan L.; cancer prostate cancer. between competing treatments
capacity used. TDABC for each
Moriarity, Andrew
treatment was defined as the sum of
K.; Hsu, William;
its resources
Margolis, Daniel
J.A.; Hu, Jim C.;
Saigal, Christopher S.
15
Discuss and compare the workflow of

10 library processes covering the four
Understand if TDABC can
Using Time- principal library functions: The main conclusion on the first
be used to enhance process
Lorena Siguenza- Driven Activity- acquisition, cataloguing, circulation, research
benchmarking in libraries
Guzman, Andres Based Costing to and document delivery. Next, based question is that TDABC can be used to
and search if the results at
Auquilla, Alexandra Identify Best on the benchmarking exercise, report enhance process
activity level provide
Van Den Abbeele, Practices in and discuss potential processes and benchmarking in libraries, through the
additional insights compared
Dirk Cattrysse Academic performance improvements that can identification of “best practices” and
to macro result in a process
Libraries be realized from using library time opportunities for micro improvements
benchmarking
and costs information, concerning the
two libraries analysed
Together with stakeholders, the

McBain, Ryan K; project team decided that health-care
Jerome, Gregory; providers should enter start and end
Time-driven activity-based costing can
Leandre, Fernet; times of the patient encounter in every
be implemented in low-resource
Browning, Micaela; fifth patient’s medical dossier. It was
settings to guide resource allocation
Warsh, Jonathan; trained one data collector per facility,
Evaluate the implementation decisions. However, the extent to which
Shah, Mahek; Mistry, who manually entered the time
Activity-based of a time-driven activity- this information will drive observable
Bipin; Faure, recordings and patient characteristics
costing of health- based costing analysis at five changes at patient, provider and
Peterson Abnis I; in a database and submitted the data to
care delivery, Haiti community health facilities institutional levels depends on several
Pierre, Claire; Fang, a cloud-based data warehouse each
in Haiti contextual factors, including budget
Anna P; Mugunga, week. calculated the capacity cost per
constraints, management, policies, and
Jean Claude; minute for each resource used. An
the political economy in which the
Gottlieb, Gary; automated web-based platform
health system is situated
Rhatigan, Joseph; multiplied reported time with capacity
Kaplan, Robert cost rate and provided the information
to health-facilities administrators
Apply the fuzzy logic in the

A combined The results of this study demonstrate
TDABC model to resolve the
modelling of fuzzy that under uncertainty conditions, using
inherent ambiguity and
logic and Time- the proposed model leads to more
Ostadi, Bakhtiar; uncertainty and determine The proposed model is implemented
Driven Activity- accurate and useful results compared to
Mokhtarian Daloie, the best possible values for in a sample of the hospital laboratory
based Costing the TDABC system. Hence, hospitals
Reza; Sepehri, cost, capacity, and time section and the results are compared
(TDABC) for can use this model to reduce the
Mohammad Mehdi parameters to provide with the TDABC system
hospital services uncertainty of the data and make more
accurate information on the
costing under accurate and consistent decisions using
costs of the healthcare
uncertainty the cost data obtained from it
services
The aim of the present study
was to explore the
differences between resource
Improving health Unlike TDABC, RCA calculates lower
consumption accounting A case study was conducted to
care costing with costs for unused capacities but higher
Ozyapici, Hasan; (RCA) and time-driven calculate the unit costs of open and
resource costs for products or services in a
Tanis, Veyis Naci activity-based costing laparoscopic gall bladder surgeries
consumption healthcare setting in which fixed costs
(TDABC) systems in using TDABC and RCA
accounting make up a high proportion of total costs
determining the costs of
services of a healthcare
setting
TDABC was used to evaluate the cost

of providing pain control to patients Founded that the cost of placing
undergoing thoracic surgery and to epidurals in the preoperative holding
estimate the impact of specific process room was less than that of placing
Using Time-
improvements on cost. Retrospective epidurals in the operating room.
Driven Activity- Demonstrate how time-
healthcare utilization data, with a Personnel reallocation and workflow
Popat, Keyuri; Based Costing to driven activity-based costing
focus on personnel costs, were used to changes resulted in mean cost
Gracia, Kelly Ann; Model the Costs of (TDABC) can be used to
assess cost across the entire cycle of reductions of 14% with epidurals in the
Guzman, Alexis B.; Various Process- assess personnel costs and
acute pain medicine delivery for these holding room and 7% cost reductions
Feeley, Thomas W. Improvement create process-improvement
patients. TDABC was used to identify with epidurals in the operating room.
Strategies in Acute strategies
possible improvements in personnel Most cost savings were due to
Pain Management
allocation, workflow changes, and redeploying anaesthesiologists to duties
epidural placement location and to that are more appropriate and reducing
model the cost savings of those their unnecessary duties by 30%
improvements
16
The intraoperative cost of laparotomy

was like previous estimates, but any
Ruhumuriza, J.; This costing study included patients plan to scale-up laparotomy capacity at
Odhiambo, J.; with acute abdominal conditions at district hospitals should consider the
Riviello, R.; Lin, Y.; Assessing the cost three rural district hospitals in 2015 in sizeable preoperative and postoperative
Nkurunziza, T.; of laparotomy at a Understand the costs of a Rwanda and used a time-driven costs. Although lack of personnel and
Shrime, M.; Maine, rural district laparotomy at a rural district activity-based costing methodology. limited infrastructure are commonly
R.; Omondi, J. M.; hospital in Rwanda hospital in Rwanda using Capacity cost rates were calculated for cited surgical barriers at district
Mpirimbanyi, C.; de using time-driven time- driven activity-based personnel, location, and hospital hospitals, personnel and location costs
la Paix Sebakarane, activity-based costing. indirect costs, and multiplied by time were among the lowest cost
J.; Hagugimana, P.; costing estimates to obtain allocated costs. contributors; similar location-related
Rusangwa, C.; Hedt- Costs of medications and supplies expenses at tertiary hospitals might be
Gauthier, B. were based on purchase prices higher than at district hospitals,
providing further support for
decentralization of these services
If TDABC is more commonly used by
health care providers, it is likely that the
process of performing this analysis may
evolve to be more exact. The benefit of
Sharan, Alok D.; TDABC is that it gives providers a
Understanding
Schroeder, Gregory Explanation about how to Explanation method about how to starting point for accurate cost
time-driven
D.; West, Michael E.; apply TDABC method on the perform and apply TDABC step by accounting. As resources become more
activity-based
Vaccaro, Alexander hospitals step limited in the future it will increasingly
costing
R. important for providers to understand
their true costs in providing specific
services. TDABC is one method that
provider scan uses to perform that
analysis
It was adopted quantitative and
qualitative methods to evaluate the
Using Time- library's loan and return processes. i)
The automation of repetitive processes
Siguenza-Guzman, Driven Activity- Application of TDABC in analyzed cost data, ii) interviewed the
in the circulation department may
Lorena; Auquilla, Based Costing to academic library to provide library's staff, and iii) recorded the
significantly decrease the operating
Andres; Van den Identify Best high quality services despite duration for all relevant activities with
costs. This may be achieved by
Abbeele, Alexandra; Practices in their limited budget. a stopwatch. The activities' duration
reducing the number of staff and
Cattrysse, Dirk Academic (Increase efficiency) was recorded via direct observation.
replacing them by robotic services
Libraries The data were collected during the
academic year 2017–2018 to cover all
the different academic periods
Through TDABC, we were able to
highlight how traditional RVU-based
This study aims to measure hospital accounting systems apportion
the costs of treating all overhead costs, including items such
A total of 53 pediatric patients with
Comparing the real obstructive sleep apnea as orthopedic implants, evenly across
symptoms of OSA or sleep-related
Simmonds, Jonathan and perceived cost (OSA) in children with an specialties, thus increasing the
breathing disorder were followed from
C.; Hollis, Russell J.; of adenotonsillectomy using perceived cost of equipment-light
their initial appointment through
Tamberino, Ruby K.; adenotonsillectomy time-driven activity-based procedures such as
surgery to their postoperative visit at
Vecchiotti, Mark A.; using time-driven costing (TDABC) and adenotonsillectomies. We suspect that
an academic medical center. Personnel
Scott, Andrew R. activity-based explore how this differs from providers who perform a TDABC
timing and overhead costs were
costing cost estimates using analysis at their home institution or
calculated for TDABC analysis
traditional forms of hospital practice will find their own unique
accounting. insights, which will help them
understand and control the different
components of healthcare costs
Aim the importance of
business processes modelling
as a precondition system
It can be concluded that public
design. Although many
Business process processes, implemented in public
managers worry the entity´s Shows the concepts of Activity based
management services are both complex and
expenses, some are unaware costing and it´s updates, the TDABC),
Teece, David J. notation for a bureaucratic, mainly due to regulations.
of the process and to support the development of a
costing model The bidding procedure of acquisition
procedures adopted by his costing system for public universities
conception materials or services demand eight
subordinates. Searching sis
sectors activities
to calculate spending on each
step to a proper business
process management
Examining the information from Table 1, is possible to conclude that TDABC can be applied
not only at the production industry, but also on the services business. As we can see from the
results of the previous studies, TDABC has been applied to understand the cost allocation,
mainly in the healthcare business. In most of the analysed articles, when TDABC is applied to
the hospital healthcare services, it helps to obtain accurate cost information, and it is useful,
serving hospital management to make strategic decisions.
17
A clear benefit of TDABC in current health care landscape is the ability of this costing system
to identify inefficiencies in each production line and, in that way identify opportunities to
provide further benefits and value to the patient throughout the health care system.
4. CONCLUSION
According to literature, the beneﬁt of TDABC is that it gives providers a starting point for
accurate cost accounting. As resources become more limited in the future it will increasingly
be important for providers to understand their true costs in providing speciﬁc services. This can
be use in collecting information’s regarding new investments or how to improve the
management of the resources that administrators have to their disposition. The results suggest
that nearly all articles are published in health journals and fall on hospital units predominantly
from EU and US countries. Regarding the topics under study, the studies dedicated to cost
calculation stand out. Generally, the papers follow an empirical and qualitative approach.
Regardless of the limitations and bias intrinsic to the methodology followed, this study is of
great relevance for academics who intend to investigate this issue and for managers of logistics
or accounting professionals who deal with these problematic. Having in mind the huge diversity
of scientific approaches and theoretical perspectives under which the theme is studied, and
considering the growing dynamic of international business, it is expected that near future will
bring new testimonies and solutions for cost calculations and cost management of logistic
operations. Regarding to the freight forwarding business, it was not found any material
regarding the application of TDABC. This means that for further research TDABC could be
tested and applied in the freight forwarding business, to improve profitability and helping in the
decision making of the administration once it gives a more detailed insight of the cost structure
of the companies.
ACKNOWLEDGEMENT: This work is financed by Portuguese national funds through FCT -

Fundação para a Ciência e Tecnologia, under the project UIDB/05422/2020 and the project
UIDB/04011/2020.
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20
CLUSTER DYNAMICS’ FRAMEWORK

Svitlana Magalhaes de Sousa Ostapenko
Faculdade de Economia, Universidade do Porto, Porto, Portugal
[email protected]
Ana Paula Africano

[email protected]
Raquel Meneses
[email protected]
ABSTRACT
The present research aims to present a framework for clusters dynamics. Cluster Life Cycle the
most prominent theory that analyses the evolution of clusters was chosen as a ground for its
development. Main sages of CLC were identified as Emergence, Growth, Maturity, Decline and
Renewal, accounting that the cluster’s evolution does not necessarily will happen in this
sequence. But nevertheless, every stage of CLC has its own characteristics and parameters of
identification. Within the elaborated model the following parameters were allocated: Number
of Firms and Employees, Cluster Brand, Innovation, Network, Policies and Regulations,
External Markets & FDI. Considering changes within the cluster according to these parameters
makes it possible to identify the stages of its CLC. Finally, the Model of Identification of CLC
stage was provided which will be used in further empirical research.
Keywords: Cluster, Cluster Life Cycle, Cluster evolution, CLC stages, CLC parameters, Model
of CLC Identification
1. INTRODUCTION
Cluster stands for "geographic concentrations of interconnected companies, specialised
suppliers, service providers, firms in related industries, and associated institutions (e.g.,
universities, standards agencies, trade associations) in a particular field that compete but also
cooperate” (M. E. Porter, 2000, p. 15). Although the interest in the agglomeration economy and
the geographical distribution of economic activities started in the 19th century since Alfred
Marshall works on Industrial districts, only since the 90s of last century, it became one of the
most relevant research themes (Cruz & Teixeira, 2010). Clusters have proven to be beneficial
to companies’ innovation and performance (Conz, Denicolai, & Zucchella, 2017;
Desmarchelier & Zhang, 2018; Doloreux & Lord‐Tarte, 2013; Felzensztein, Gimmon, &
Deans, 2018; Kowalski, 2014; Platform, 2021; M. Porter, 1998; Trippl, Grillitsch, Isaksen, &
Sinozic, 2015), however, this effect is not constant as positive agglomeration effects, during the
early stages of the cluster life cycle, are replaced by congestion effects that negatively constrain
firms in later stages of cluster life cycle (Dyba, Stryjakiewicz, & De Marchi, 2020; Martin &
Sunley, 2011; Menzel & Fornahl, 2010), justifying this study. “Clustered companies
outperform non-clustered companies at the beginning of the life cycle and have worse
performance at its end" (Menzel & Fornahl, 2010, p. 206). In this context, Cluster Life Cycle
(CLC) theory became one of the prominent research areas on clusters (Lazzeretti, Capone,
Caloffi, & Sedita, 2019), and search for understanding cluster evolution through CLC recently
became an academic hit (Pronestì, 2019). As clusters are not a static phenomenon; their
structure and composition change (Trippl et al., 2015); they continually evolve, maintaining
vibrancy as competitive locations for centuries or losing their competitive edge due to both
21
external and internal forces (M. Porter, 1998). “The existence and structure of clusters can only
be understood when studying their dynamics over time” (Boschma & Fornahl, 2011, p. 1295).
This theory considers that clusters can develop and go through stages of birth, growth, maturity,
decline or renovation. However, contemporary views on this cyclic development do not imply
any imminent logic or sequence of the development, so, for instance, at any time, a cluster can
enter either decline or enter the stage of renovation. It is necessary to understand the concept of
Life Cycle, which connects business decision making (especially strategic) with the
development of the firm's outer complexity (Sabol, Šander, & Fučkan, 2013). However, there
is still no consensus on the model and parameters to apply in analyzing, identifying and defining
the stage in the life cycle of a cluster, requiring further development of the model that
consequently will be applied in the future research. Defining the stage in the cluster life cycle
for a specific cluster may allow to analyze the cluster’s environment going beyond the static
understanding of local attributes´ influence on firm’s strategy and performance.
2. CLUSTER DYNAMICS FRAMEWORK

2.1. Cluster Life Cycle theory
The Product Life Cycle theories (Levitt, 1965) and the Industry Life Cycle (Klepper, 1997)
served as inspiration for the emergence of the Cluster Life Cycle theory. However, clusters’
and industries’ lifecycles are not the same; different clusters belonging to the same industry can
follow very different growth paths. Different clusters in the same industry follow distinct
evolutionary paths (Scur & Garcia, 2019). Clusters can grow or decline independently of the
industry's development for reasons such as homogeneity or heterogeneity in competencies and
cluster-specific technological or institutional lock-ins (Trippl et al., 2015). Cluster is a regional
phenomenon, so Evolutionary Economic Geography (EEG) also inspired developments of
cluster life cycle theory (Mobedi & Tanyeri, 2019), incorporating some of its concepts such as
path develop0ment and lock-in situations (Martin, 2009; Martin & Sunley, 2006). “Path
dependency and lock-in are two closely related concepts that are used to analyse differences in
the ability of regional economies to reshape adjustment problems. Both concepts emphasise the
importance of context and history in regional processes of industrial evolution” (Vanthillo,
Cant, Vanelslander, & Verhetsel, 2018, p. 1522). Belussi and Sedita (2009) acknowledge that
choices made in the past (technologies embodied in firms, labour skills acquired, etc.) influence
subsequent choices and, for this reason, the economic performance of a territory - the past-
dependence argument. Nevertheless, at the same time, it does not imply the rigid sequence
determined by the past as spatial path dependence is not only past/place dependence. Therefore,
a cluster has its development cycle, making it necessary to study the logic of cluster evolution,
considering its regional past and possible future developments. One of the most important
impulses for the growing research on CLC was the development of the identification model of
CLC, proposed by Menzel and Fornahl (2010). It allows to measure cluster’s internal dynamic
and identify the stage of its life cycle, precisely what was deployed by many CLC researchers
(Branco & Lopes, 2013; Dyba et al., 2020; Elola, Valdaliso, Franco, & López, 2017; Elola,
Valdaliso, López, & Aranguren, 2012; Mahroum & Al-Saleh, 2015; Mobedi & Tanyeri, 2019;
O’Connor, Doyle, & Brosnan, 2017; Santner, 2018; Shin & Hassink, 2011; Tavassoli &
Tsagdis, 2014; Viederytė, 2018). Despite its wide application, the lifecycle approach received
some criticism (especially in its initial stage). It was considered too fatalistic and deterministic
(Knop, Olko, & Stachowicz, 2011; Martin & Sunley, 2011), with lack of attention to external
factors (Martin & Sunley, 2011; Rodríguez-Rodríguez, Morrison, & Troncoso-Ojeda, 2016),
not considering the role of agency (Hassink, Isaksen, & Trippl, 2019; Martin & Sunley, 2006;
Trippl et al., 2015), neither institutions (Harris, 2020; Hassink et al., 2019). With a focus on the
non-deterministic nature of regional evolution and existing external influence, the adaptive
cycle model emerged (Martin & Sunley, 2011).
22
This idea of multiple regional path development and external influence has enrichened the
Cluster Life Cycle research and, consequently, was adopted in many studies (Branco & Lopes,
2013; Carli & Morrison, 2018; Desmarchelier & Zhang, 2018; Mobedi & Tanyeri, 2019;
O’Connor et al., 2017; Rodríguez-Rodríguez et al., 2016; Santner, 2018; Scur & Garcia, 2019).
It was proved to be a useful framework of analysis to unravel the evolution of clusters (Carli &
Morrison, 2018). Nowadays, cluster life-cycle approach has gone through a period of
stagnation and could benefit from contributions in recent conceptual advances from
evolutionary and institutional economic geographies (Harris, 2020). “By applying this typology
of path development to clusters, we can hopefully develop a better understanding of how actors
can change the evolutionary trajectories of clusters over long periods of time in a path
dependent manner” (Harris, 2020, p. 8). Thus, Cluster Life Cycle have incorporated the idea of
cyclic evolution with subsequent admission of non-deterministic trajectories and shifting the
attention from only endogenous factors of cluster dynamics to account for exogenous factors
as well. It has also increased the understanding of the role of agency in cluster evolution. Menzel
and Fornahl (2010) and Martin and Sunley (2011) develop the two cornerstone models of
cluster dynamics. However, these ideas will be enriched by other CLC contributions and EEG
developments, specifically by Harris's (2020) convergence framework. Further, the stages of
CLC will be defined and characterized.
2.2. Identification of CLC stages

There is still no consensus on a particular identification of phases or terminology, but they all
follow the same logic, pointing out the appearance, development, and exhaustion of the cluster
phenomenon in parallelism to "life" itself. Additionally, it is noted that clusters do not jump
from one stage to another but slowly turn to the next stage (Menzel & Fornahl, 2010). From the
analysis of these studies, the division of the "life" of the cluster into 4 phases, that are: birth,
growth, maturity, and decline or renewal, - seems to be the most consensual (F. Belussi, 2018;
Bergman, 2008; Brenner & Schlump, 2011; Elola et al., 2012; Martin & Sunley, 2011; Menzel
& Fornahl, 2010; Pronestì, 2019; Shin & Hassink, 2011; Sölvell, 2009; Swann, 1998; Tavassoli
& Tsagdis, 2014; Ter Wal & Boschma, 2011; Tichy, 1998; Trippl et al., 2015; Van Klink & De
Langen, 2001; Wolter, 2003). However, nowadays CLC terminology is converging with path
development concepts (Blažek, Květoň, Baumgartinger-Seiringer, & Trippl, 2020; Harris,
2020), freeing CLC stages identifications from certain rigidity, allowing to see different
tendencies and gradual transitions within cluster dynamics that otherwise may not be observed.
Nevertheless, we are going to maintain the division of the cluster life cycle in 4 stages, but
include “path” lenses in its consideration. Concordantly, the following stages and terminology
is proposed: emergence stage (path emergence), growth stage (path development), maturity
stage (path sustainment), decline stage (path contraction) and renewal stage (path
trasformation). It is stressed that a cluster does not necessarily pass them in the specified
sequence. Nevertheless, each stage of development will have its unique characteristics.
2.2.1. Emergence Stage

Emergence stage is a very early, upstream, and explorative phase of the CLC (Pronestì, 2019).
Various events can lead to the emergence of the cluster, including historical events, some
isolated initiative or even luck (Desmarchelier & Zhang, 2018). At this point the rise of entirely
new industries based on radically new technologies, scientific discoveries, social innovation or
new business models can occur - that is Path creation. Or the path importation can happen,
when established industries from outside the region are attracted and anchored. At this stage,
only a few companies exist and relationships between customers and suppliers are scarce
(Menzel & Fornahl, 2010). It is a very embryonic form of firms’ geographic concentration. Just
few (focal) firms hold the necessary economic and entrepreneurial knowledge to successfully
23
penetrate new markets and exploit novel technologies (Pronestì, 2019). The local fabric of
institutions, knowledge and competencies is not yet formed (F. Belussi, 2018). There are low
critical mass, low identity, and low linkages (Davis, 2006). The cluster has an undefined
structure, dispersed spatial configuration, and lack of formalised cooperation among actors
(Pronestì, 2019). Networks are unstable (Fornahl, Hassink, & Menzel, 2015), interactions are
informal (Dyba et al., 2020), it is the beginning of collaboration, there are both formal and non-
formal institutions (Handayani, Cakravastia, Diawati, & Bahagia, 2011). A group of regional
entities (companies, scientific entities and administration) identify a possibility of cooperation
and expertise and knowledge to be obtained or created (Knop et al., 2011). Knowledge is
heterogeneous, often tacit, concentrated within a few leading firms (Dyba et al., 2020). There
is a tendency towards innovativeness and entrepreneurship (Pronestì, 2019). “A growing stock
of available knowledge and competences allows the growth of the cluster, represented by a
growing number of firms and supportive institutions” (Dyba et al., 2020, p. 1982).
2.2.2. Growth Stage

Cluster enters a growth stage when it concentrates a critical mass of heterogeneous actors that
generate several positive externalities attracting newcomers and fostering the creation of spin-
offs (Desmarchelier & Zhang, 2018). After establishing and getting enough economic strength,
focal firms act as trailblazers for developing the cluster (Pronestì, 2019). At this stage, there is
a substantial increase in employment due to business growth and a large number of start-ups,
creating more and more possibilities for developing innovation networks or customer-supplier
relationships, forming a specialised labour market (Martin & Sunley, 2011; Menzel & Fornahl,
2010; Sölvell, 2009). Spatial and thematic boundaries are being defined (Menzel & Fornahl,
2010). Linkages are being developed, and innovation is high (Davis, 2006). Companies'
heterogeneity increases strongly because each new company launches into new technological
areas of the cluster (Menzel & Fornahl, 2010). There is an emergence of a set of cluster-specific
institutions (F. Belussi, 2018), especially the growing science knowledge-base, which allows
firms to cooperate with universities and research centers and various networks of formal and
informal cooperation grow in number and density (Dyba et al., 2020). Collaboration activity is
increased by having a formal institution and awareness from all members of the importance of
cooperation (Handayani et al., 2011). Newcomers have significant opportunities to interact with
the more connected agents in the network and become well connected themselves
(Desmarchelier & Zhang, 2018). In this context, the locational benefits for firms entering the
cluster become incredibly high and profitability of insider businesses rises, reaching its peak
(Pronestì, 2019). Economies of scale, technologies and company routines drive growth, often
aided by deliberate policies dedicated to expansion (Bergman, 2008). Thus, growing clusters
will enter into a process of international competition, both in the factor market (attractiveness
of new companies, people and capital) and the product markets (Sölvell, 2009). International
competition and global demand lead to companies' internationalisation both in the commercial
and production areas (Elola et al., 2012).
2.2.3. Maturity Stage

Maturity stage starts when a cluster reflects a “state of equilibrium”, that “shows neither a high
growth compared to the respective industry nor a remarkable decrease in the number of
companies or employees" (Menzel & Fornahl, 2010, p. 227), although, a decrease in frequency
and number of entries is noted (Pronestì, 2019). The system becomes well established around
a particular form (Martin & Sunley, 2011), having high critical mass and high identity (Davis,
2006). Clusters reach their maximum size, have a well-shaped network structure, precisely
defined core business (Pronestì, 2019). The collaborations among the stakeholders reach a peak
(Handayani et al., 2011), so mature clusters develop more collective action capabilities than
24
newer clusters (Fornahl et al., 2015). Due to the well-established and dense networks of
cooperation various competences of companies are more accessible, and the connections of
cluster companies with organisations and companies from abroad bring new knowledge to the
cluster (Menzel & Fornahl, 2010). Thus, on one hand clusters have knowledge pools that are
homogeneous and accessible to all cluster stakeholders: but, simultaneously, firms based in
mature clusters rely on a more extensive portfolio of knowledge sources than those in growing
clusters (Dyba et al., 2020). Local firms maintain their ability to renew their innovative
capabilities, but they rarely generate radical or breakthrough innovations (F. Belussi, 2018),
usually latest technologies are integrated into the cluster, but from the same technological area
(Menzel & Fornahl, 2010). Therefore, the cluster develops its structures and social
responsibility; however, with the slowing down of its main dynamics (Knop et al., 2011). A
tendency towards high specialisation (if not over-specialisation) of the cluster narrowing the
variety of economic activities and the heterogeneity of available knowledge can eventually lead
to lock-in (Pronestì, 2019; Vanthillo et al., 2018).
2.2.4. Decline Stage

Decline stage is reflected in a dramatic decrease in the number of firms and employees mainly
due to firms' exit (Pronestì, 2019; Trippl et al., 2015), bankruptcies, mergers and rationalisations
(Menzel & Fornahl, 2010). The number of companies and existing networks become less
productive (Trippl et al., 2015), and consequently the cluster becomes locked within long,
closed, homogeneous, redundant networks unable to renew the cluster by integrating new
knowledge (Dyba et al., 2020). A declining cluster “lost the ability to sustain its diversity, its
ability to adjust to changing conditions as well as its potential for an independent renewal"
(Menzel & Fornahl, 2010, p. 227). Thus, the cluster goes into museum mode (Sölvell, 2009).
Possible trajectories are: path downgrading (serving yet lower market segments and/or to
perform mere low-value-adding production activities); path contraction (key companies tend to
make new investments in order to enhance their position in selected and demanding niches);
and path delocalisation (relocation of key economic activities) (Blažek et al., 2020). However,
the decline is not the only way to cluster. "Clusters can also renew themselves. By integrating
and applying new technologies and knowledge, they move back to an earlier phase of the cluster
life cycle and can enter new growth phases" (Menzel & Fornahl, 2010, p. 211).
2.2.5. Renewal Stage

Renewal stage is a reorganisation stage, when happening the reconfiguration, experimentation
and restructuring, in which accumulation of resources is slow, connectedness is low, and
resilience is increased because several options may be open to as to which direction and in
which form a new system develops (Martin & Sunley, 2011). Clusters can renew themselves
by taking advantage of specific existing capacities and infrastructures and build new industrial
and sectoral identities (Trippl et al., 2015). New ideas are the beginning of new networks and
structures that result in a new cluster (Knop et al., 2011), or the cluster enters "renaissance"
(Sölvell, 2009). The main point is heterogeneity; when it increases, the cluster enters again in
a new growth phase (Menzel & Fornahl, 2010). This increase in heterogeneity can be
incremental, with the integration of new knowledge in the same technological trajectory of the
cluster, or it can be of a more radical nature by integrating new technologies. The change can
be so cardinal that clusters go entirely out to new areas. A radical, innovation-based form of
path development is path transformation, where an established path and the regional support
structures it is embedded in do undergo major change (Blažek et al., 2020).
25
2.3. Parameters of CLC Identification

From presented above analysis of the relevant literature on CLC the following parameters,
playing the major role at every stage are allocated: Companies (Blažek et al., 2020;
Desmarchelier & Zhang, 2018; Menzel & Fornahl, 2010); Employees (Menzel & Fornahl,
2010); Innovation (Bergman, 2008; Harris, 2020; Menzel & Fornahl, 2010; Trippl et al., 2015);
Network (F. Belussi, 2018; Fornahl et al., 2015; Handayani et al., 2011; Knop et al., 2011;
Menzel & Fornahl, 2010; Pronestì, 2019; Trippl et al., 2015); Cluster Identity / Brand (Belussi
& Caloffi, 2018; Davis, 2006; Menzel & Fornahl, 2010; Pronestì, 2019); Policies and
Regulations (Bergman, 2008; Sölvell, 2009); External markets - exports /FDI (Elola et al.,
2012; Sölvell, 2009).
2.4. Cluster Life Cycle Model

Grounding in these parameters, a dynamic Model of CLC is proposed (Table 1).
Parameters Cluster Life Cycle
Emergency Growth Maturity Decline / or / Renovation
Cluster Low Being defined Precisely defined ----------- -------------

Identity core business
Companies Small number Increase Stabilization Decrease, relocation Increase

again
Employees Small number Increase Stabilization Decrease Increase

again
Network Unstable, begins Productive Network well- Smaller networks, that Restructurin
identification of networks established and are blocking and non- g
partners dense productive
Innovation Innovation and High Incremental Decrease

Entrepreneurshi Innovation Integration
p of newness
technologies
or exit to a
new area
Policies and ------- Expansion ----------- Salvation of companies --------

regulation aids
External Small quantity New markets, Stabilization Decrease New

markets - exported export growth markets,
exports /FDI export
growth
Table 1: Cluster Life Cycle Identification Model.

(Source: Own Elaboration)
Thus, diverse stages of CLC will create certain conditions of rivalry and competition, human
capital, inert-actor relations in network, innovation, policies and external markets behavior that
provide different conditions where firms’ will elaborate their strategic choice that will be
reflected in theirs performance.
26
4. CONCLUSION
Lorem Thus, clusters play a crucial role in regional and national economic development,
providing various advantages to stakeholders, and especially firms. For that reason, they
became an integral part of regional development policies, including converging with Smart
Specialization Policies adopted by the European Union. However, despite, clusters, generally,
are associated with various benefits they provide to firms, it was pointed out that depending on
the evolution of the cluster the co-location might or might not be beneficial to firms. As clusters
are not a static phenomenon; consequently, the dynamic approach became necessary, opening
the way to the appearance of the cluster life cycle theory. Within this perspective, there are
several paths of evolution of a cluster, without necessarily following a predetermined
evolutionary logic and going through the phases identified consecutively. Based on the
literature review and taking into consideration of most used models of Menzel and Fornahl
(2010) and Martin and Sunley (2011) and new insights from path development literature,
namely from Harris (2020), CLC identification model was proposed where the division of the
Cluster Lifecycle into 4 main phases, defined as emergence stage (path emergence), growth
stage (path development), maturity stage (path sustainment), decline stage (path contraction)
and renewal stage (path transformation). It was stressed that a cluster does not necessarily pass
them in the specified sequence. Nevertheless, each stage of development has its unique
characteristics and parameters allowing allocation of clusters to a specific stage by its analysis.
Namely the following parameters were identified as defining ones: number of companies and
employees, innovation, network, cluster identity/brand, policies and regulations, external
markets - exports /FDI.
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WHAT LEADS TO BRAND HATE? ANTECEDENTS AND OUTCOMES

OF BRAND HATE
Samar Rahi
Hailey College of Banking & Finance, University of the Punjab, Lahore, Pakistan
[email protected]
Mehwish Ishtiaq
Hailey College of Banking & Finance, University of the Punjab, Lahore, Pakistan
Hafiz Fawad Ali

University of Okara, Pakistan
Mazuri Abd Ghani

Universiti Sultan Zainal Abidin Terengganu, Malaysia
ABSTRACT
The purpose of this study is to investigate the concepts of brand hate. It presents the antecedents
and outcomes of brand hate. The study demonstrates five components namely corporate social
responsibility (CSR), product/service failures (FAL), negative past experience (NPE), symbolic
incongruity (SIC), and ideological incompatibility (IDC) to trigger brand hate, which leads to
two behavioral outcomes namely brand avoidance (BAV) and negative word of mouth (NWM).
The study shows that corporate social responsibility (CSR) is negatively related to brand hate.
Four components Product/Service failures, Negative past experience, Symbolic incongruity,
and Ideological incompatibility are positively related to brand hate. Brand hate is positively
related to two outcome variables Brand avoidance and Negative word of mouth. Prior studies
have focused either on antecedents or the outcomes of negative feelings but do not include a
comprehensive model that addresses these issues. The population of this study comprises
individual living in three large cities of Pakistan. The data will be collected using survey
questionnaire based on convenience sampling approach. Smart PLS software will be used to
data analyse.
Keywords: Brand hate, Corporate social responsibility, Brand avoidance, Negative word of
mouth, Symbolic incongruity, Ideological incompatibility
1. INTRODUCTION
Consumers are considerably different in their associations with brands (Alvarez & Fournier,
2016). Although some people love certain brands, several are neutral to them, and even some
have hatred for such brands (Khan & Lee, 2014; S. Rahi & M. A. Ghani, 2016). Prior studies
conduct by Rahi (2015); Romani et al. (2012), brand research has provided scant information
on the negative emotional states that consumers experience in relation to brands. In a similar
way, Fetscherin and Heinrich (2015) say that specifically extreme negative emotions or the
‘dark-side’ of consumer-brand relationships need further investigations. The purpose of this
research is to examine the essence of brand hatred, as well as the antecedents, the outcomes of
brand hate and to examine how to repel and eliminate brands-hatred. What feelings do
customers have when users encounter brands hatred? There're several variables that play an
important role to define brand hatred. These various factors include but aren't limited to
Product/Service failures, Negative past experience, Symbolic incongruity, and Ideological
incompatibility. All of the above-listed considerations are positively related to brand hate.
Corporate social responsibility is negatively related to brand hate while brand hate is positively
related to outcome variables.
31
Hate has become a complicated feeling that can vary from simplistic distancing or devaluation
of the hatred object or entity to extreme anger (S Rahi et al., 2017; Sternberg, 2003). When
customers are dissatisfied with brands, they express bad feelings including hate (Kucuk, 2018;
Rahi, 2016b). Bad feelings towards the brand have been conceived as brand hate, and it is
described as a mental condition where a customer develops extreme unpleasant feelings and
hate towards that brand, hate that expresses through its anti-branding practices (Kucuk, 2016a;
S. Rahi & M. Ghani, 2016). Presently, digitally-driven customers will effectively articulate their
emotions by creating copies of the pictures and logos utilized by their business rivals, which
could be utilized as an illustration of behavioral brands' hatred (Kucuk, 2018; Rahi, 2016a).This
paper has been investigated and outlined the conceptual and empirical factors and outcomes of
brands' hatred. It also has a valuable categorization of brands' hatred.
2.1. Corporate social responsibility
Corporate social responsibility (CSR) encourages incorporating all corporate shareholders, all
individual entities, and the health of the natural surroundings into an organization's management
strategy (Kucuk, 2018; Rahi, Othman Mansour, et al., 2021). Therefore, a corporation's
proactive and moral business practices affect customer recognition with the organization
(Bhattacharya & Sen, 2003; Sen; & Bhattacharya;, 2001), customer preferences towards that
commodity (Berenss et al., 2005; Rahi, Ammara, et al., 2021), and customer loyalty (Luo' &
Bhattachary'a, 2006; Rahi, Othman Mansour Majeed, et al., 2019). According to these studies,
CSR will help businesses to increase their profits (Du et al., 2010). In psychological research,
hate has been discussed in terms of moral judgement and moral rejection (Opotow, 1990, 2005).
Hate creates moral rejection, in which the despised person has been treated as cruel, immoral,
or non-existent, whereas ethically involved entities deserve equal consideration (Deutsch, 1986;
Rahi, Abd.Ghani, et al., 2019; Staub, 1990). When a brand doesn't behave responsibly, it must
be kept complicit and liable towards their acts, that is usually discouraged, resulting in
unfavorable brand-value (Lee et al., 2009) and customer anti-brandings practices
(Krishnamurthy & Kucuk, 2009; Rahi et al.). Moral issues have the main factor why certain
brands are avoided by customers (Lee et al., 2009). This study suggests that the evasion of
moral brands relies on social problems related to immoral corporate practices. Likewise, several
studies suggest that luxurious products might have been hated through low societal success in
companies (Bryson et al., 2013).Therefore, incompetence would results in demonstrations and
brands hatred if a business/brands fail in societal affairs. Thus, CSR is hypothesised as:
• H1: Corporate social responsibility is negatively related to brand hate.
2.2. Product/Service failures

Customers in digital marketing have been considered as collaborators and not the inactive of
products and services recipients (Rahi & Abd. Ghani, 2018; Rahi, Ghani, et al., 2020; Rahi,
Khan, et al., 2020b). Therefore customer satisfactions takes precedence (Rahi & Abd. Ghani,
2019a; Rahi, Ghani, & Ngah, 2018; Samar Rahi et al., 2017; Ward & Ostrom, 2006). Numerous
customers dissatisfied with service-delays and items that do not work properly consider it
convenient to speak up and report via web-based customer complaints (Lee & Cude, 2012; Rahi
& Abd. Ghani, 2019c; Rahi, Ghani, Alnaser, et al., 2018). The online demonstration of customer
grievances and disappointments may hit levels that will affect the potential stock market returns
of certain companies (Luo, 2007). Moreover, the service failure will result in significant
customer dissatisfaction, retaliation, and hatred (Kucuk, 2018; Rahi & Abd.Ghani, 2019).
Customers could protest openly and vehemently on digital platforms causing harm to a brand's
logos and deliberately violating business policy (Grégoire et al., 2009; Tripp & Grégoire, 2011).
32
Kucuk (2016a) discovered that almost all user complaints websites disappeared within a few
years. Customers that experience massive service and product failures, on the other hand, could
still effectively build brands resistance and sow increased frustration and brands hatred in a
wider public (Grégoire et al., 2010; Samar & Mazuri, 2019; Ward & Ostrom, 2006). Therefore,
electronic complaints sites effectively expose customer anger with products. Thus, we advance
the following hypothesis:
• H2: Product/Service failures is positively related to brand hate.
2.3. Negative past experience

Product-related indicators primarily contribute to the customer's unfavourable prior experiences
with the brands' (Hegner et al., 2017). Negative dissonance happens if legitimate achievement
falls short of expectations, that almost often leads to frustration (Oliver, 1980). The difference
though between product hate and brand hate is that a negative experience with a certain product
of a brand affects attitudes toward other products from the same brand name, and, thus, hate
gets generalized on a brand level (Kucuk, 2018). In the field of luxurious products, Bryson et
al. (2013) describe customer frustration as the best indicator of brands hate. Furthermore,
Zarantonello et al. (2016) describe breach of expectations as a significant variable contributing
to brands hate. Thus, we advance the following hypothesis:
• H3: Negative past experience is positively related to brand hate.
2.4. Symbolic incongruity

Market-related considerations are often concerned about symbolic incongruity with the brands,
where a brands portrays an undesirable appearance to the users (Kucuk, 2018). According to
Khan and Lee (2014), consumers have the tendency to buy those brands with images congruent
to their self-concepts or those that will give desired meaning to their lives . Zarantonello et al.
(2016) refers to this class as the flavor mechanism and describe as a potential predictor of brands
hate. Thus, incongruity among the brand's symbolic associations and the user's self-worth can
contribute to negative feelings towards the brands (Kucuk, 2018). The undesirable selves
appear to be the most suited to brands' hate between the activities on the self-image (Ogilvie,
1987). According to Lee et al. (2009), disidentification theory suggests that people may develop
their self-concept by disidentifying with brands that are perceived to be inconsistent with their
own image . Thus, we hypothesized trust as:
• H4: Symbolic incongruity is positively related to brand hate.
2.5. Ideological incompatibility

According to Kucuk (2018), situational aspects related to ideological incompatibility customers
view focusing on constitutional, societal, or ethical business misconduct resulting in negative
sentiments against the company. We describe the ideological incompatibility as the word
ideology applies to a number of views incompatible with the user (Kucuk, 2018; Rahi, 2018;
Rahi, Khan, et al., 2020a). The earlier study have shown that customers dislike products that
violate civil-rights or harm the climate and, they even condemn brands which partake in
immoral corporate tactics (Friedman, 1985; Rahi & Abd. Ghani, 2019b; S. Samar et al., 2017;
Sandıkcı & Ekici, 2009). In this regard, when the brands are accused of organizational
carelessness users experience an ideological incompatibility with that brands due to ethical,
religious, or societal considerations (Lee et al., 2009; Zarantonello et al., 2016). Thus, we
proposed following hypothesis:
• H5: Ideological incompatibility is positively related to brand hate.
33
2.6. Brand hate

Authors like Fehr and Russell (1984) explore the fundamental scale of emotional expressions
by requesting participants to identify sentiment models. They considered hate to be the second
most powerful emotion after love. According to psychological research, emotions have been
related to contextual experiences and behavior’s (Rahi & Ghani, 2018a; Shaver et al., 1987).
Previous studies have found that relative bonding in customer brand associations is dictated by
how consumers personally react to products and how to connect and think towards the brands
(Monga, 2002). According to Sternberg (1986), intimacy, the emotional basis of love relations,
refers to feelings of closeness, connectedness, and bondedness . According to Lee et al. (2009),
brands avoidance is a phenomenon whereby consumers deliberately choose to keep away from
or reject a brand. The degree to which a person talks or communicates negatively about brands
has been referred to as negative word of mouth (Bonifield & Cole, 2007). According to
Baumeister et al. (2001), people are more likely to share negative experiences with others than
they are likely to share an equally positive experience . Customers who engage in negative word
of mouth always seek to inform people of the bad experiences towards the brands (Singh, 1988).
Thus, we proposed following hypothesis:
• H6: Brand hate is positively related to brand avoidance.
• H7: Brand hate is positively related to negative word of mouth.
2.7. Research model
Figure 1: The proposed research framework
34
3. RESEARCH METHOD
3.1. Research Paradigm
The scientific perspectives of researchers are referred to as research paradigms (Rahi, 2017).
There are the rules and arrangements that control how and when to address experimental
problems and conduct research (Creswell, 2003; Rahi, Alnaser, et al., 2019). Such paradigms
are fundamental research concepts on how to proceed with the research (Rahi & Ghani, 2018b;
Samar Rahi, 2017). The positivist approach would be followed in this research (R. Samar et al.,
2017). The paradigm proponents claim that knowledge can be obtained through observations
and experiments (Rahi & Ghani, 2018b; Samar Rahi, 2017). In natural sciences the positivism
paradigm could be adequately used (Hirschheim;, 1985).
3.2. Study Level

This research takes a deductive approach since we all get a theories formulated by researchers
so we're not introducing any different idea; instead, we will examining the theories and models
by acquiring additional responses from participants and observing the results using numerous
statistical tests (Samar Rahi, 2017).
3.3. Research Methods

3.3.1. Qualitative Method
The qualitative approach , even as title implies would be concerned with accuracy and can be
intended to gather rigorously information on a specific study topic (Samar Rahi, 2017).
According to Lune and Bergg (2017), this category encompasses a participant's thoughts and
desires when contrasted to quantitative approaches . We are replacing the current concept in
this research but evaluate consensus view with some statistical tests such that this approach is
not suggested for this study.
3.3.2. Quantitative Method

According to Grinnell. Jr and Unrau. (2010), Quantitative methods are a scientific technique
employed to quantitatively classify findings through statistics and to identify their bases of
positivity and the Interpretivists are mainly using this method. Unlike qualitative approaches,
this technique relies on gathering new information from a wider demographic in response to a
situation and analysing the data, but it ignores a person's thoughts and perceptions as well as
consistency issues (Bell; & Bryman', 2007; Rahi & Ahmad, 2020).
3.3.3. Methodological approach taken

For this analysis a quantitative approach is used as the research has not been inducting new
theory rather dealing and examining an existing theory by applying new statistical tools.
3.4. Research type

The positivist paradigm will be used in this study. For this analysis, a quantitative approach will
be used, as the research does not lead to a fresh concept and testing an established assertion
with the use of new sampling techniques. Empirical data analysis will be required for a
quantitative study(Rahi & Ishaq, 2020). The corporate social responsibility and numerous
assumptions will be evaluated using structural equation modeling. Structural equation modeling
(SEM) is a computational method for evaluating and predicting cause-effect relationships
through combining statistical evidence with qualitative causation hypotheses (Samar Rahi,
2017). Because of the explorative aspect of our study, we will select partial least squares
structural equation modeling (PLS-SEM) to perform our statistical research (Shiau et al., 2019).
We will use the SmartPLS software to analyse data using the standardized PLS-SEM technique
(Dijkstra & Henseler, 2015; Hooi et al., 2018).
35
Path analysis will be employed to evaluate the hypothesis produced by the conceptual
framework. Five parameters will be used to assess convergent validity factor loadings:
Cronbach's alpha, composite reliability (CR), average variance extracted (AVE), and variance
inflation factor (VIF) .
3.5. Research Design

The term research strategy refers to a structured compilation and assessment of information, as
well as the structured description of that statistics. The researcher then employed the technique
for analysis outlined herein for this specific study. Initially, a field of concern for the study will
be chosen and then a subject that will require further investigation in detail will be picked. A
thorough study of the research articles will be conducted. A wide range of experiments will be
performed to analyse the effect of these factors.When the survey will be done, the data will be
analysed in line with the research problem and the research's objective, accompanied by a
description of the findings obtained from the data using analytical methods. Besides that, the
research's results and conclusions will be discussed on a higher stage and suggestions, and
guidelines will be made. Afterward, the research will yield a conclusion. After that, a checklist
of sources will be created to support the topics provided in the study.
3.6. Population and sampling

It indicates people, items and/or organizations researcher want to apply our study and the results
of the study is the population of the study and The representative part of the population is known
to be the sample (Samar Rahi, 2017). Since we could not analyse almost every demographic
owing to time limits, we will choose a specific subset of the demographic to review. A specific
subset of a population will assume information as to the large subset or remainder population
(Malhotra & Birks, 2007).
3.6.1. Population of study

The study's populations consists of users living in various cities in Pakistan.
3.6.2. Sampling Technique applied

The process of the sample determines the sampling procedure required (Samar Rahi, 2017). In
this analysis, the convenience sampling technique will be used, that has been a kind of non-
probability sampling method . Convenience sampling is a method of collecting information
about a population which has been closer by and readily available to the scientist. Convenience
sampling helps researchers to collect responses timely.
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41
A PROPOSAL TO USE BLOCKCHAIN TECHNOLOGY IN

INNOVATION ECOSYSTEMS FOR SUSTAINABLE PURCHASES
THROUGH THE PERCEPTION OF PUBLIC MANAGERS
Victor Andrade da Silveira
Universidade Federal Fluminense,
Rua Miguel de Frias, 9,Niterói – RJ, Brasil
[email protected]
Stella Regina Reis da Costa

Universidade Federal Fluminense,
Rua Miguel de Frias, 9,Niterói – RJ, Brasil
[email protected]
David Resende
University of Aveiro, ESTGA/GOVCOOP/PICTIS,
Aveiro, Portugal
[email protected]
ABSTRACT
The success of organizational processes is increasingly related to sustainable innovation. The
concern with sustainable public purchases has been gaining strength over the years. However,
several barriers are found to implement this practice. The lack of transparency, traceability,
trust and ethics, corruption, centralization of information, too much bureaucracy, among other
problems, make it difficult to achieve social objectives through government acquisitions. At the
same time, blockchain advances as technology part of the innovation of industry 4.0 and as a
proposal to solve these difficulties. The aim of the study was to identify the perception of public
procurement managers on the use of information systems with characteristic features of this
technology, in order to reduce these barriers and elaborate a proposal for the use of blockchain
in open innovation systems. The research developed is qualitative, quantitative, and applied,
being carried out through the application of a structured questionnaire to purchasing managers
using the 92 prefectures of the State of Rio de Janeiro, located in Brazil, with subsequent
analysis through descriptive statistics. The results of this work present relevant findings for
public procurement through innovation and blockchain technology with the possibility of
tracking the entire supply chain, allowing the verification of possible environmental and social
damages such as the use of child or slave labor, the use of deforestation wood, counterfeit
products, unethical agents, in addition to providing more transparency to the process of
acquisition. The resulting proposal could facilitate sustainable acquisitions and serve as a
guide for government managers to go beyond economic interests.
Keywords: sustainable procurement, public sector, blockchain, smart contract, innovation 4.0
1. INTRODUCTION
The activities of public institutions are considered essential to leverage and maintain the
reduction of the environmental impact on the economy, participating directly in the balance of
the market and operating both as a consumer and as an intermediary agent (TESTA et al., 2016).
Governments' purchasing power is increasingly used as a strategic tool to achieve broader
objectives such as promoting innovation, sustainability, social inclusion and supporting small
and medium-sized enterprises (OECD, 2019). In some countries, public works financed by the
government have been used as a social policy against unemployment (MCCRUDDEN, 2004).
42
In South Africa, after Apartheid, public procurement had already been seen as an important
lever for social political actions. Research shows that through public acquisitions it is possible
to achieve consistent results in society and that public agencies are encouraged to acquire
sustainably (BRAMMER AND WALKER, 2011). Insofar as the world population is becoming
more aware of the powerful influence of production and consumption on the environment,
economy and society, sustainable development becomes progressively more relevant
(ROMAN, 2017). The increase in this awareness of environmental depletion has also driven
innovation towards sustainability in the technological and consumer domains, resulting, among
others, in eco-innovations with positive impacts at various levels in society (COSTA &
MATIAS, 2020). The demands of the general population and governments on sustainability in
the supply chain motivate investigations of how blockchain technology can solve problems and
help achieve sustainable goals (SABERI et al., 2018). Nowadays, consumers demand
sustainability requirements and traditional models of price competition are insufficient
(COSTA & MATIAS, 2020). This technology is seen as one of the trends that will influence
business and society in the coming years (ØLNES et al., 2017), and has the potential to provide
benefits to the government and society in addition to presenting the next step in the development
of electronic government, allowing to reduce costs, share reliable processes and improve
auditing (PALFREYMAN, 2015). Very recently, the potential impact of blockchain technology
applied to the public sector has started to be recognized by governments and suppliers in the
sector (HYVARINEN et al., 2017). The OECD created the Global Blockchain Policy Forum,
the main international event that aims to bring together ministers of state, academics, policy
makers and other stakeholders to discuss the main issues and applications of this technology
(OECD, 2019). The State Administration of Taxation (AET) of Beijing in China recently
announced the implementation of an application for issuing electronic invoices by the
blockchain (AET, 2020). The basic benefits of blockchain allow for data integrity and
irrefutable transactions, which can result in tracking and transparency that support the reduction
of corruption and fraud (ØLNES et al., 2017). The blockchain supports the transparency that
has become essential to rebuild trust (DENNY et al., 2017), and can be considered a sustainable
measure against corruption.
2. LITERATURE REVISION
It’s been sought first to understand what was produced on the themes, through a systematic
review of the literature, following the steps and recommendations suggested by Cauchick-
Miguel et al. (2017): selection of sources, access to databases, adoption of keywords, use of
eventual search filters, reading the title, reading the summary, downloading the articles
resulting from the search, reading the articles, archiving and searching for the next article.
2.1. Sustainable public procurement

Public contracts refer to acquisitions made by governmental organizations or the public sector,
being a policy with multiple objectives, mainly the guarantee of quality of services and
responsible consumption (WALKER AND BRAMMER, 2012). Economically, public
procurement is recognized as a means of efficiency and effectiveness of public spending.
Broader political objectives, such as innovation, sustainability, social inclusion, and support for
small businesses, should also be considered. This purchasing power amounts to more than 1
trillion Euros, 12% of the Gross Domestic Product, in the European Union (OECD, 2019). The
concept of sustainable procurement is associated with the idea of sustainable development cited
by the 1987 UN report passing through Rio 92, and the World Summit on Sustainable
Development in 2002 in Johannesburg. It can be understood as the process through which
public authorities seek to acquire goods and services with reduced environmental impact
throughout the life cycle (TESTA et al., 2016), aiming to meet development objectives through
43
the purchase process, incorporating social, environmental, and economic aspects (WALKER
AND BRAMMER, 2012). It then means achieving a good cost / benefit ratio based on the
product's life cycle, generating benefits not only for the organization, but also for the society,
the environment and the economy (LUTTENBERGER AND RUNKO LUTTENBERGER,
2016).
2.2. The blockchain technology

Satoshi Nakamoto, outlined a new protocol for a point-to-point system using cryptocurrency
called Bitcoin, called blockchain, originated in 2009 when Nakamoto described cryptocurrency
as a model of peer-to-peer transactions (WEISS AND CORSI, 2017). In this model, with each
new record, copies of the data are created (SABERI et al., 2018), solving a fundamental
problem of transactions on the internet that is trust. For Paech (2017) the easiest way to
understand blockchain is to think of it as a database on the internet to store value, where all
participants in the network keep an identical copy. It aims to create a decentralized environment
where no intermediary is in control of transactions and data (YLI-HUUMO et al., 2016). This
distributed ledger stores transaction data in “nodes” (WEISS AND CORSI, 2017), which are
interconnected computers around the world (TAPSCOTT AND TAPSCOTT, 2016). This
decentralization is an important property, since the same information is in different nodes and
is only confirmed when there is a consensus on the information between the nodes
(KOUHIZADEH AND SARKIS, 2018). New transactions are added, but previous information
cannot be removed (ØLNES et al., 2017), thus maintaining a growing list guaranteeing the
integrity of the system, even in the face of dishonesty (SABERI et al., 2018). Its structure is
chained, composed of a header, including a hash (encrypted header), containing its own value,
the data of the block and the hash of the block connected to it. The creation of a new block is
known as “mining” (ØLNES et al., 2017). Once the effort has been spent to satisfy a job test,
the block cannot be changed (NAKAMOTO, 2009). All nodes are constantly updated with the
information from the most recent transactions; therefore, all information is available anywhere,
on any node, at any time (PAECH, 2017). There are two types of block chains: public and
private. Bitcoin is an example of public blockchain, open to anyone, the private chain access to
the network is restricted because not everyone can participate. The blockchain enabled the
creation of smart contracts, computer programs that reside in this technology, executed
automatically (PRADANA, 2018). These contracts give rise to the concept of "decentralized
autonomous organizations" (DAOs), the most complex form of a smart contract (LYRA, 2019).
They operate autonomously without human intervention, based on programmed rules and
capable of even signing new contracts (PAECH, 2017), enabling aspects of traditional corporate
governance using software, enabling the benefits of formal corporate structures and at the same
time flexing the scale of informal groups (LYRA, 2019).
3. METHODOLOGY
This work started with a systematic review of the literature, in order to provide greater
familiarity with the problem, with a view to making it more explicit. Subsequently, a structured
questionnaire was applied and the data was analyzed using descriptive statistics. The units of
analysis were 92 prefectures in the state of Rio de Janeiro, in Brazil, with a sample population
of 90 purchasing and bidding managers. The data were obtained from primary sources, by
sending the questionnaire. According to Gray (2012), the questionnaires, adequate to the
research objectives, allow standardized questions and an analytical approach exploring the
relationships between variables. The statements were based on the literature, seeking to
understand the barriers to the use of sustainable public procurement. After obtaining the emails
from the responsible departments, shipments took place from September 2019 to January 2020.
44
The questionnaire statements were elaborated as questions, based on the literature and in order
to seek later the understanding of possible barriers for the use of sustainable public purchases.
For this, the variables that corresponded to the barriers related to the application of sustainable
public procurement, the respective authors, and the correlation between them, were identified
in the bibliographic review, so that the questions were in accordance with the research
questions. In order to get closer to the managers' perception regarding the statements, for ordinal
classification of responses and subsequent analysis of the results, the Likert scale was used,
composed of 5 multiple-choice items from which the manager can choose one of the five
options: (1) totally disagree; (2) disagree in part; (3) neither agree nor disagree; (4) agree in part
and; (5) totally agree. Each item received a weight of 1 to 5 which were used for statistical
analysis of the results. The likert scale was developed with the objective of measuring attitude,
values and beliefs about different aspects. With the principle that the attitude follows a linear
continuum (positive or negative), this method of creating items is widely used
(ANUNCIAÇÃO, 2017). In these cases, sociometric and psychometric scales are often used,
which are generally made up of a set of ordinal items (CURADO et al., 2013).
4. ANALYSIS AND DISCUSSION OF RESULTS

Among the results found, what was most relevant was the difficulty in specifying sustainable
standards and criteria in terms of reference and bidding documents due to the lack of knowledge
of the professionals. When examining this lack of knowledge, it was found that 90% of the
respondents said they agree or totally agree that there is difficulty in specifying sustainable
criteria, as shown in figure 1.
Disagree; 0% Totally disagree; 0%
Neither agree nor

disagree; 10%
Totally agree; 45%
Agree; 45%
Figure 1: Lack of knowledge about specification of sustainability standards

(Source: Research data)
This result exposes that disinformation is a barrier to sustainable acquisitions. Romodina and
Silin (2016) and Kusi-Sarponget al. (2019) concluded through their research on the main
barriers of this acquisition model, that one of the most important issues is related to the lack of
knowledge of employees and collaborators about regulatory information and technical
knowledge in these practices. The answers show the conception that there is a lack of
information on technical specifications that lead to a more sustainable acquisition. The
responses on the difficulty in finding these specifications in documents and websites, totaled a
proportion of 82% by the selection of I agree and I totally agree also due to the lack of
information on the composition of sustainable materials and products. Complementing this
perception Testa et al. (2016) point out that intensifying information and raising awareness
about sustainable public procurement can strongly support sustainable procurement.
45
As with studies already mentioned, Zaidi et al. (2018) identified a lack of information about
products with influences on the supply chain as a major problem. As shown in the graph, none
of the respondents selected the options disagree or totally disagree for this question, which
demonstrates a real feeling that there is a lack of knowledge on how to specify sustainable
products and equipment, which somehow becomes a barrier to these acquisitions. Beker (2018)
confirms that a barrier to the purchase of sustainable products is the lack of knowledge of the
buyer to assess the characteristics of a specific product and recognize the existing advantages
in relation to the others. For Costa and Matias (2020) sustainability does not come in itself, it
requires sufficient resources and capabilities. The second question with the highest proportion
of agreement was if there is difficulty to obtain information about the value chain of products,
since the manufacturing and supply process. For Kouhizadeh and Sarkis (2018), the information
needed for the selection of suppliers and manufacturers is seen by industry and academia as a
critical issue for long-term success. Careful distinction and supplier assessment in the early
stages are necessary to ensure the sustainability of these chains (SONG et al., 2017). Uttam and
Ross (2015) point out that a solution to this problem would be the communication between the
interested parties about the technical specification before the purchase. It’s been sought then to
understand the managers' perception of the use of a single system among the members of the
value chain and if this tool would be useful in verifying the specifications and sustainable
criteria required in the bidding process. The answers to this statement reached the highest
proportion of agreement (63% - totally agree and 32% - agree) among all the questions
presented, totaling 95% of the approval options, as shown in figure 2.
Disagree; 0%
Neither agree nor
disagree; 4% Totally disagree; 0%
Agree; 32%
Totally agree; 64%
Figure 2: Perception about using an integrated system

According to Zaidi et al. (2018) organizations should design tools that can assist sustainable
procurement. For Kouhizadeh and Sarkis (2018) the barrier of misinformation can be
effectively alleviated using blockchain technology. Testa et al. (2016) state that the key success
factor in sustainable public procurement is based on the knowledge necessary to support the
information and training needs of the personnel involved in related tasks, as public procurement
managers are not very sure how sustainable procurement can be implemented and what type of
product is available on the market (ZAIDI et al., 2018). Considering that each product can have
several specifications, this information can be recorded on the blockchain, along with its
historical data. For example, Ikea has a table made of wood cut in a sustainable forest. The
wood must be followed from cutting to manufacture to the final product to ensure that the tables
were manufactured with that specific wood. This process is complex, but it can be managed
with blockchain technology (SABERI et al., 2018).
46
The aim was also to assimilate the idea of managers about this complexity and specificity of
the composition of the various products and how they become a barrier to transcribing them in
the bidding documents. Only 5% disagreed that there is no difficulty and 68% agreed that it is
complex, as illustrated in Figure 3.
Disagree; 5%
Totally disagree; 0%
Neither agree nor Totally agree; 27%
disagree; 27%
Agree; 41%
Figure 3: Complexity and specificity of the technical composition of the products

Sanderet et al. (2018) confirm that government agents express concern about the complexity of
product components. Even though it is generally difficult to obtain information about products,
as well as to verify the manufacturing process, blockchain can be used to guarantee the purchase
of sustainable products (SABERI et al., 2018). An integrated and online system could solve
these problems from the moment that suppliers would keep their data available (SANDER et
al., 2018). A proposal then would be to use a system, based on blockchain technology, that
integrates several members of the value chain and society, forming an ecosystem of open
innovation. This model consists of a dynamic and interactive network inserted in an innovation
mindset, a configuration focused on the creation and diffusion of knowledge, including
governments, the value chain, and users (COSTA & MATIAS, 2020). The knowledge shared
by the blockchain could provide organizations with information on the catalog of products and
suppliers, which would be an advance for this model and purchase (GONZÁLES-BENITO et
al., 2016). According to Zaidi et al. (2018) organizations should design tools that can assist in
this type of acquisition. Innovation is strongly linked to problem solving and, currently,
challenges are related to complex problems that require structural changes in individual and
collective life, such as sustainable development (COSTA & MATIAS, 2020). For Kouhizadeh
and Sarkis (2018) the information limitation barrier can be effectively alleviated using
blockchain technology. Historical performance and sustainability data from suppliers can be
made available through this technology, thus making it easier for employees to examine internal
energy saving and pollution reduction practices and records to determine the relative proactivity
of suppliers' environmental practices, as suggested by Zhu et al. (2013) and creating a large
open knowledge ecosystem. Breaking the boundaries between the company and its environment
will allow the transfer of innovations to different markets, with bidirectional knowledge flows
circulating outside organizational boundaries, highlighting the greatest benefit of knowledge
sharing through partnerships and networks (COSTA & MATIAS, 2020). The products go
through a chain that involves several participants. Having a tool to explore the origin of products
can also create an environment of trust (SANDER et al., 2018).
47
It is then seen the possibility of creating a blockchain system, integrating the members of the
value chain and, also, allowing several public bodies to share knowledge and feed each new
process, as designed by Engelenburg et al. (2019). Blockchain programs would make it possible
to share the best cases of sustainable procurement, rules, and standards, as suggested in the
paper. Blockchain technology could record and provide knowledge of at least five key product
data: nature (what it is), quality (how it is), quantity (how much there is), location (where it is)
and ownership (who the owner is at any time) (SABERI et al., 2018). Enabling the creation of
an innovation ecosystem, which can be understood as a network of relationships that brings
together actors and objects that establish connections, both complementary and substitutive
(COSTA & MATIAS, 2020). Internet of Things (IoT) devices may be linked to a blockchain
platform to collect legitimate information about products and processes, increasing trust
(PRADANA, 2018; SABERI et al., 2018). Sarkis et al. (2020) cite the need to accelerate
sustainable actions after the COVID-19 pandemic and the implementation of smarter logistics
systems and reverse logistics for materials and products enabled by IoT technologies. Other
studies show that there is a possibility that information systems, combined with the technologies
of the fourth industrial revolution (Industry 4.0) (PRADANA, 2018). Innovation is the main
driver of sustainable development and the promotion of growth and, as a consequence, the topic
it has become central to the agenda of policy makers, professionals and researchers. The digital
transformation requires connections, networks, and high speed in innovation cycles (COSTA
& MATIAS, 2020). It was also possible to identify that 55% of the managers indicated that
they do not carry out the life cycle analysis to make the purchase decision. Testa et al. (2016),
mention that public procurement awareness can mean changing from a strategy focused only
on cost to orientation on the cost of the life cycle. In the context of sustainable public
procurement, it is essential to demonstrate that purchasing processes and decisions need to go
further, as the purchase price does not reflect the financial and non-financial gains offered by
environmentally and socially better assets. The possibility of tracing a product from its
production to disposal via the blockchain also allows, through this history, to facilitate the
calculation of the value of the entire life cycle of the product, and to create a base with
increasingly safe estimates (LUTTENBERGER & RUNKO LUTTENBERGER, 2016). With
77% agreement, the managers pointed out the influence of unethical and malicious employees
on sustainable acquisitions, which are responsible for the preparation of the public notices, as
a barrier. The managers transmitted the perception that there is a negative influence of these
malicious people on the specification of products and services. Pradana et al. (2018) point out
that a revolution has occurred by blockchain technology in unreliable processes by replacing
unethical intermediaries with smart contracts, excluding corrupt agents from the value chain.
Disintermediation, which is a crucial effect of applying blockchain technology, can mitigate
potential opportunistic behavior (SABERI et al., 2018). However, the basic benefits of
blockchain are related to improving data integrity and transactions that are irrefutable, which,
in turn, can result in information traceability and transparency, which support the reduction of
corruption and fraud (ØLNES et al., 2017). From the understanding of the respondents, 73%
agreed that the concept of decentralized autonomous organizations (DAO) is a useful system
model. After choosing the products and materials necessary for administration, a DAO could
take over the operationalization of purchases, already with a panel of suppliers and products,
with prices based on the cost of the life cycle. The purchasing process can be automated,
integrating the stages of electronic auctions, eliminating the favor of suppliers and prices. With
this technology, fraud can be avoided due to fidelity and transparency, and it is also possible to
ward off unethical agents and hold the corrupt accountable for social damage (SABERI et al.,
2018).
48
5. CONCLUSION
This work pointed out some sustainable public procurement actions, their possibilities of
providing a better quality of life for society and the barriers to its implementation. With the
advancement of innovation 4.0 and blockchain technology, it is possible to understand the
proposals and possibilities to reduce barriers related to public procurement. After these
observations and the analysis of the results, we return to the problem initially raised and it can
be concluded that blockchain technology has a great potential for transformation for
governments and in the promotion of sustainable actions, in the creation of an innovation
ecosystem and in the requirements of the activities of suppliers and actors in the value chain.
The perception of public procurement managers made it possible to verify that one of the main
difficulties of these managers is related to the lack of knowledge and information that ends up
making public procurement unfeasible with a good economic result and that meets the
environmental and social perspectives. However, studies are found that cite examples and
models of actions that meet these objectives through government acquisitions. The creation of
an open innovation ecosystem, on a distributed basis, integrating prefectures and other
government agencies, would make it possible to share this knowledge. The feeling about
transparency and confidence in public procurement has also been seen by this work. Both
variables were very well evaluated by the participants as to their relevance in public
procurement. The transparency required from public bodies is seen as a relevant factor for
sustainable procurement. The need for consensus on the blockchain network for data changes
and an ecosystem through a distributed network, where interested parties could actively
participate in the network, would guarantee the required transparency in public administration.
In other words, control and inspection bodies, courts of accounts and members of organized
civil society could be part of this ecosystem and would have full visibility of the products and
services being purchased, in addition to being nodes in the network and part of the consensus
needed to the data alteration. It is possible to conclude that innovation has a disruptive potential
for sustainable public procurement, allowing to meet economic and environmental aspects, but
also to attend mainly to the pillar of social interests, giving the possibility of reducing social
inequalities and unemployment, and improving the quality of life of the population, made
blockchain an agent of change for governments.
ACKNOWLEDGEMENT: This work was financially supported by the research unit on

Governance, Competitiveness and Public Policy (UIDB/04058/2020) + (UIDP/04058/2020),
funded by national funds through FCT - Fundação para a Ciência e a Tecnologia.
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51
ARE FEMALE-HEADED HOUSEHOLDS IN POORER LIVING

CONDITIONS THAN MALE-HEADED HOUSEHOLDS?
(DETERMINANTS OF HOUSEHOLD POVERTY IN 4 DISTRICTS OF
TIMOR-LESTE - EVIDENCE FROM 4 DISTRICTS OF TIMOR-LESTE)
Pedro Henriques
Economy Department, Évora University and Mediterranean Institute for Agriculture,
Environment and Development, Portugal
Carlos de Deus
Universidade Nacional de Timor-Leste, Timor-Leste
Vanda Narciso
Independent researcher and CETRAD,
Travessa da Bota, 15 / 7000-542 Évora, Portugal
Maria Raquel Lucas

Management Department, Évora University and CEFAGE, Portugal
Fernanda Peixe
Economy Department, Évora University and CEFAGE, Portugal
ABSTRACT
Achieving sustainable economic growth with a focus on combating poverty has become a key
development goal for governments around the world. According to the UN, most of the world's
poor live in rural areas, are young, have no formal education, and work in agriculture. Female-
Headed Households are largely associated with deprivation and poverty, however, the
relationship between gender and poverty is a complex, controversial, a debatable issue. Against
this background this study has two main folds: find evidence on linkages of whether gender
affects, or not, poverty and attempts to identify the determinants of poverty in four districts of
Timor-Leste (Aileu, Bobonaro, Covalima, and Ermera) having different ecological,
agricultural and socioeconomic characteristics. This study uses Timor-Leste’s 2014 census
data to construct a Standard of Living Index that reflects on people's permanent income, which
can be seen as a poverty proxy, and later to explore the determinants of poverty and estimates
the likelihood that a household has to be poor. The data is analyzed by both descriptive statistics
and econometric analysis techniques. Location, education level, and sector of employment of
the household head are among the key determinants of the households' standard of living.
Despite the vulnerable characteristics of the female-headed household, the results do not
provide evidence to support the claim that female-headed households are poorer than male-
headed. Maybe this is because of the difference in other demographic and socio-economic
factors leaving space for further research.
Keywords: Poverty, determinants of poverty, gender, Timor-Leste
1. INTRODUCTION
Achieving sustainable economic growth with a focus on combating poverty has become a key
development goal for governments around the world, as reflected in the Sustainable
Development Goals, namely Goal 1; “End poverty in all its forms everywhere”. The
Government of Timor-Leste adopted the 2030 Agenda and Sustainable Development Goals
through Government Resolution No. 34 of 2015 on 23 September 2015. Timor-Leste was poor
already during the Portuguese colonization and Indonesian occupation of the country.
52
Poverty reduction has a high priority on the policy agenda of Timor-Leste since 2002.
Nowadays, data from 2014, 41,8% of the population is living below the national poverty line,
this value increases to 47,1 in rural areas (World Bank, 2016), the situation in Timor-Leste is
better than in other Asian countries. On the contrary, if the Multidimensional Poverty Index
(MPI) rate of 68% is taken into account (data from Demographic and Health Survey 2009-
2010) this is one of the worst value among countries in Asia and the Pacific (OPHI, 2018). The
government should continue its efforts to combat poverty and to improve the wellbeing of the
Timorese people, especially in rural areas, to eliminate poverty by 2021-2030, as stated in the
Timor-Leste Strategic Development Plan 2011-2030 (Timor-Leste, 2010). Understanding the
poverty profile and the determinants of poverty is imperative for effective poverty reduction
strategies for any country. Traditionally, poverty has been defined by an individual’s level of
income. In 2015 the World Bank updated the international poverty line from 1.25 USD to 1.90
USD a day, but poverty is not synonymous with low income only. According to the World Bank
“poverty is pronounced deprivation in well-being” of an individual and comprises many aspects
and dimensions (World Bank, 2000). Poverty is a multidimensional phenomenon. This leads to
the questions of what is meant by well-being and how to measure well-being and deprivation.
The multidimensional concept of poverty imposes severe restrictions on the number and the
type of attributes that constitute poverty. Multidimensional poverty is made up of several factors
that constitute poor people’s experience of deprivation – such as poor health, inadequate living
standard, lack of education, lack of income, poor quality of work, and the threat from violence.
The UNDP currently estimates a Global Multidimensional Poverty Index for over 100 countries
–including Timor-Leste (OPHI, 2018). The relationship between gender and poverty is a
complex, controversial, a debatable issue and the “precise nature of the nexus between gender
and poverty needs to be better understood and operationalized in policymaking” (Cagatay,
1998). In Timor-Leste, discriminatory attitudes towards women have existed for generations
and this affects the lives of men and women. The females are facing gender discrimination
concerning education, earnings, access to resources, economic and social rights, and
opportunities, thereby creating a higher potential risk of poverty. Social and cultural costumes
and practices in Timor-Leste restrict women's access to education and work, and hence women
participate less in labor market. Moreover, with ideologies entrenched in the patriarchal form
of society, women's access to family inheritance and productive assets is limited or absent
(Narciso & Henriques, 2010) and women have also more difficulty accessing economic
resources (World Bank, 2018). Thus, socio-economic gender bias against women in Timor-
Leste places female-headed households at a greater risk of poverty, when women are the
primary earners. However, in Timor-Leste few studies were made to get evidence about it,
however the report “Poverty in Timor-Leste 2014” (World Bank, 2016) shows the opposite:
“As in 2007, poverty incidence is lower among female-headed households than male-headed
households, but the difference in the incidence rates between the two groups has more than
doubled in 2014” (World Bank, 2016, p. 36). Against this background, this study, using data
from the census 2014, attempts to identify the determinants of poverty in four districts of Timor-
Leste and to seek whether there is a causal relationship between the gender of the household
head and being poor in these districts. The next section provides a background and a literature
review, section 3 is dedicated to the methodology and gives an overview of the study sites,
section 4 states the empirical results, gives a demographic and socio-economic profile of
households, and presents the probit model results, finally, section 5 provides policy implications
and conclusions.
53
2.1. Defining household and household head
In general, a household comprises a father, mother, children, other relatives, as well as other
persons sharing in their household arrangements. It is important to note that there is a clear
distinction between 'household', which is construed in terms of domestic arrangements, and
'family', which is defined in terms of kin relationships. The Timor-Leste Census 2014 devised
the following definitions: Private Household is defined "as one or more persons residing in the
same dwelling, and who make common provision for food and other essentials for living" and
“Head of Household is the person identified by other members of the household as such” and
i.e. in the Timor-Leste CENSUS 2014 it is up to the respondents to define who is the head
(Timor-Leste National Statistics Directorate, 2015). The likelihood that women will consider
themselves heads of household and relate to themselves as such, especially if an adult man lives
in the household, varies with cultural aspects and is associated with the status of these women.
In Timor-Leste, a patriarchal society in general and where male authoritarianism is emphasized,
there may be a tendency to overstate male headship, with a consequent underestimation of the
number of female heads of households. On the other hand, the association between the head of
household and primarily responsible for the economic well-being of the household is not
guaranteed.
2.2. Measuring Poverty

Measuring poverty and wellbeing is an elusive, difficult and endless task. However,
measurement is the first step to understanding and understanding the poverty profile and the
determinants of poverty are imperative for effective poverty reduction strategies for any
country. Poverty can be measured in different ways. On one hand, there are objective indicators
such as income level, total consumption expenditure, or possession of assets, on the other, there
are indicators that are harder to measure such as social status, self-esteem, or freedom. The
traditional method to identifying poor people is concerning a dimension-specific poverty line,
which reveals whether a person is deprived in that specific dimension. Consumption or income
is the most commonly used approach to measuring poverty. Alternatively, the multi-
dimensional poverty indices identify poor people based on whether a person is deprived in more
than one dimension (Alkire & Foster, 2011), dimensions such as education, health, and living
standards are used.
2.3. Poverty in Timor-Leste

Most of the reports and studies on poverty in Timor-Leste were produced by the World Bank
in close collaboration with the government. Many of these reports and studies have used the
more conventional method, calculating poverty from the consumption calculation and thus
evaluating the people living below a certain poverty line. Data from 2014- TLSLS show a
significant reduction in poverty in the country since 2007. “At the national poverty line, which
represents the cost of meeting basic needs in relation to food, shelter, and non-food items in
Timor-Leste, the proportion of Timorese living in poverty declined from 50.4% in 2007 to an
estimated 41.8% in 2014. At the internationally comparable extreme poverty line of $1.90 (in
2011 purchasing power parity dollars), poverty in Timor-Leste fell from 47.2% to 30.3% over
the same period” (World Bank, 2016, p. 7). Poverty fell in both rural and urban areas, though
the decline was larger in urban areas. Regarding the gender of the head of household “Poverty
in Timor-Leste 2014” (World Bank, 2016) reports that “As in 2007, poverty incidence is lower
among female-headed households than male-headed households, but the difference in the
incidence rates between the two groups has more than doubled in 2014” (World Bank, 2016,
p. 36).
54
A more in deep analysis of studies on Poverty in Timor-Leste and about the few studies which
attempt to econometrically estimate the determinants of poverty in the country will be made in
the full paper.
3. METHODOLOGY
3.1. Area of study and Data Source
This study uses census data to look at the agricultural, demographic, and welfare reality of four
districts of Timor-Leste. The districts were chosen as the unit of analysis because they are the
key administrative-territorial division. The selected districts, Ailéu, Ermera, Bobonaro, and
Covalima, are located in the central and west zone of Timor-Leste and correspond to a territorial
continuum East-West and North-South. In the central zone, Ermera district concentrates most
of the area and producers of coffee in East Timor and district of Ailéu, located near the largest
urban district of Timor-Leste, Díli, benefits from this fact by specializing in the production of
horticultural crops. In the West zone, along the border with West Timor, Bobonaro district has
one of the largest rice-growing plains in Timor-Leste and the Covalima district has long been
known for its potential for livestock production. Therefore, these four districts represent East
Timor's agricultural economic activities, coffee in Ermera, livestock production in Covalima,
rice in Bobonaro, and vegetables in Ailéu. An additional reason to choose this district is the
long-standing knowledge and connection that the research team has with these districts. The
study uses Timor-Leste 2014 census data, which collect information from a total of 58468
households in the four selected districts. This data is used to construct a Standard of Living
Index (SLI) that reflects people's permanent income and can be seen as a poverty proxy. The
SLI is used to explore the determinants of poverty and to estimate the likelihood that a
household has to be poor. The data is analyzed by both descriptive statistics and econometric
analysis techniques. The descriptive methods are employed to identify the extent of poverty,
among the different demographic and socio-economic variables in the study area; the
econometric analysis enlightens the determining factors for poverty. Descriptive statistics are
calculated by the SPSS Version 22 and inferential statistics by GRETL 2018 and STATA 15
software packages.
3.2. Standard of living index calculation

To assess poverty, it is necessary to choose the relevant dimensions and indicators of well-being
and after to select a poverty line, that is, a threshold below which a given household or
individual will be classified as poor. Income and consumption are probably the two most
common measures of poverty. However alone neither of them is enough to measure resources
available to households and these measures may face low reliability. Poverty measure based on
households’ possession of assets or the housing condition of people is more likely to represent
the household’s inventory of wealth and therefore affect its income flow, revealing the lifetime
wealth, and thus reflect upon the chronic living standard of people. The Standard of Living
Index used in this paper is inspired by the MPI work of Alkire et al. (2011) but not all the
dimensions are used. The indicators associated with education were not included because this
dimension is explored as a poverty determinant and health indicators were not used because the
2014 census data related to health was not available. In sum, comparing with the MPI
methodology, this study just uses the standard of living dimension. A Standard of Living Index
based on wealth characteristics and household assets combines many factors that make up a
household’s poverty/wellbeing into one number, this is a reductive picture but a useful one for
indicating overall rates of poverty/wellbeing.
55
Indicators used here are:

• Flooring, households living under houses with soil/clay, bamboo, and other floor are
classified as deprived (zero points)
• Electricity, households living in houses with other sources of lighting rather than electricity
are classified as deprived (zero points)
• Drinking water, households living in houses with tube well/borehole, rainwater collection,
not protect well or spring, water vendors/tank, river lake, stream, irrigation channel and
others as the main source of drinking water are classified as deprived (zero points)
• Sanitation, households living in houses with pour/flush to elsewhere (not septic tank/pit),
pit latrine without slab/open pit, public latrine, no facility or bush and other, as the main
type of human disposal used by household members are classified as deprived (zero points)
• Cooking fuel, households living in houses with coal, wood, and other as the main source of
energy for cooking are classified as deprived (zero points)
• The number of assets, households which own 2 or fewer items from 16 items are classified
as deprived (zero points).
The six above indicators were pooled and equally weighted to form a single aggregate variable
in a unidimensional approach. For a given household if SLI falls below a threshold, then the
household is identified as poor. In this case, households with deprivations in two or more
indicators are considered poor.
3.3. Model specification and methods of SLI determinants

Logit and probit models have been widely used to measure the determinants of the probability
of being poor in developing countries (World Bank, 2005) and (World Bank, 2007). Recent
examples are (Garza-Rodriguez, 2015), (Islam, Sayeed, & Hossain., 2016, (Cho, 2017), and
(Buba, Abdu, Adamu, & Jibir, 2018). This study uses a probit model, to capture the
contributions of several factors on one's probability of being poor, specified as:
𝑃(𝑝𝑜𝑣𝑒𝑟𝑡𝑦 = 1|𝒙) = 𝛷(𝛽0 + 𝒙𝜷)
Where
𝑧
𝛷(𝑧) = ∫ 𝜙(𝑣)𝑑𝑣 , 𝜙(𝑧) = (2𝜋)−1/2 exp(−𝑧 2 /2)

−∞
are, respectively, the standard normal cumulative distribution function and the standard normal
density function. The dependent variable, poverty, is one if the household is considered poor
and zero otherwise; x is a vector of explanatory variables and β the corresponding vector of
parameters.
The dependent variable P, measured by the LSI, is expressed as a dummy variable, taking a
value of 1 if the household is poor and a value of 0 if the household is no poor. Thus, factors
that negatively influence the dependent variable are those that reduce poverty and therefore
have a positive impact on the living standard while those with positive effects increase the
prevalence of poverty. The choice of independent variables, vector of parameters, was largely
guided by the theoretical work and empirical literature on the determinants of welfare and
poverty in developing countries and by the availability of data in the 2014 census. A key rule
in selecting potential explanatory variables is that they are exogenous to the living standard/
poverty which is taken as the dependent variable.
56
These variables (Table 1) are broadly grouped in socio-demographic characteristics -which

comprise fixed geographical factor, household characteristics, head of household
characteristics- and rural-agricultural characteristics which comprises land size and ownership,
crops sold, livestock ownership, and technologies features.
Table 1: Descriptive statistics of Determinants of Poverty – General Probit Model

Type of
Expected Hypothesized effect
Variables variable Min Max Mean
sign on living standard
Poverty binary 0 1 0,49 na na
Geographical factors
Dummy Aileu dummy 0 1 - - positive
Dummy Bobonaro dummy 0 1 - - positive
Dummy Covalima dummy 0 1 - - positive
Rural binary 0 1 0,91 + negative
Household characteristics
Sex ratio continuous 0 1000 124,02 - positive
Household size continuous 1 30 5,75 -/+ positive/negative
Household size square continuous 1 900 40,88 + negative
Head of Household characteristics
Gender binary 0 1 0,85 -/+ positive/negative
Marital status binary 0 1 0,86 - positive
Age continuous 16 98 48,93 - positive
Age square continuous 256 9604 2616,97 + negative
Education continuous 0 20 4,99 - positive
Sector of employment binary 0 1 0,76 + negative
Rural and agricultural characteristics
Farm hired labor binary 0 1 0,17 - positive
Agricultural level of binary
0 1 0,03 - positive
activity
Cultivated land5 binary 0 1 0,02 - positive
Land tenure status binary 0 1 0,49 - positive
LSUSEA * continuous 0 100,2 2,76 - positive
CropSEcount continuous 0 12 1,88 - positive
TechnologyCount continuous 0 8 1,01 - positive
Tractorcount10 binary 0 1 0,2 - positive
Valid N (list wise) = 47952 * Livestock Unit for South East Asia
Source: author’s calculation using 2014 CENSUS data
4. RESULTS AND DISCUSSIONS

4.1. Demographic and socio-economic profile of six types of households
The households were divided according to gender (male/female-headed households), poverty
status (poor/non-poor households), and location (rural/urban households). A summary of key
characteristics for each category is shown in Table 2.
57
Table 2: Summary of key characteristics of six types of households

Type of households & Key Female
Male HH Poor H Non-Poor H Urban H Rural H
characteristics HH
Household characteristics
Number of Households 49587 8881 28570 29898 5337 53131
Percentage of Households % 84,8 15,2 48,9 51,1 9,1 90,9
Total of persons 299106 37096 157648 178554 33155 303047
Percentage of Total Persons % 89 11 46,9 53,1 9,8 90,2
Average size of household 6,3 4,8 5,5 6 6,2 5,7
Head of household
Sex ratio 108 63,9 102 102,4 101,8 102
Average age 48 53,9 49,5 48,4 45,4 49,3
Married 92,6 7,4 48,1 51,9 86,5 85,6
Widowed 27,6 72,4 56,8 43,2 6,4 10,3
Never attended school % 47,1 74,7 62,1 41 28,6 53,6
Average school years total 5,4 2,5 3,3 6,5 9 4,57
Average school years who

9,7 10,3 8,8 11,3 12,7 9,6
attended school
Self-employed farmer % 74,9 80,6 86,5 65,1 44,5 78,7

Private Sector 11,22 12,74 7,9 14,9 24,6 10,1
Public sector 13,92 6,65 5,6 20 30,9 11,3
Assets
Number of assets 2,13 1,62 1,2 2,9 3,6 1,9
Cultivated land, more than
1,9 1,1 1,7 1,8 1 1,8
5ha %
Crossing the 6 types of households with each other
MHH - - 84,2 85,4 84,5 84,8
FHH - - 15,8 14,6 15,5 15,2
Poor 48,5 50,9 - - 15,1 52,3
Non poor 51,5 49,1 - - 84,9 47,7
Rural H 90,9 90,7 97,2 84,8 - -
Urban H 9,1 9,3 2,8 15,2 - -
Regarding head of the household gender, 15,2 per cent of household heads are female. The
share of the total population living in FHH is smaller than the share of FHH is smaller than the
share of FHH. This is confirmed by the mean size of the household, which is 6,3 for MHH and
4,8 for FHH. Concerning the poverty status, the mean size of the household is 6 for non-poor
and 5,5 for the poor household. Regarding the rural/urban location, the mean size of the
household is 5,7 for rural and 6,2 for the urban household. The sex ratios inform us about the
gender composition of these six kinds of households. The data shows that this value reaches the
highest (108) in male-headed households and the lowest (63,9) in FHHs. Thus, including
household heads, FHHs have fewer males per female than do male-headed households. This is
particularly important because males have more access to and control over societal resources,
however, when comparing poor and non-poor households and rural and urban households these
differences are very small.
58
On average, female heads of households are older than male heads of households, poor
household heads are older than non-poor household heads and rural households have on average
an older head than urban households. The data confirm that a common route to household
headship for women is likely to be widowhood and that widows do form the highest proportion
of FHHs. On the contrary, the great majority of MHH are married. On the other hand, the great
majority of heads of households in the poor and non-poor household are married; however,
there are more widowed heads in the poor household than in non-poor households. In both
locations, rural and urban, most heads of households are married and there is more widowed
head of households in rural areas than in urban areas. According to Table 3, female-household
headship is most common among households where the head has not attended the school (0
years) and it is least common among households where the head has higher education. For
MHH0 years of school is also the most common situation but with a much smaller percentage
(FHH 76,5% and MHH 48,6%). In most cases of poor (63,4, %) and rural (55,2%) households
the head have also not attended the school. Male household heads tend to be better educated
than their female counterparts, in that more males tend to proceed to a secondary and university
level of education, and the differences between the sexes are significant. Household heads who
have not attained or attained a level no higher than primary are 72.2 per cent for male and 86.5
per cent for female household heads. The difference is as much as 14,3 percentage points in
favor of the males. At the secondary and higher education level, the difference is not so evident.
For the region, only 3,8 per cent of male household heads and 1,5 per cent of female household
heads have achieved a university level of education. If we consider the poverty status of the
household 65,5 per cent of poor household heads in the region and 44,5% of non-poor
household heads have not attained or attained a level no higher than primary. In urban areas,
41,6 attained at least the secondary school from which 11,8 reach the university, on the other
hand in the rural area most households’ heads not attained the school at all (55,2%).
Table 3: Number of School years/Level of school and gender of the head of household and
poverty status of the household
Number of School Head of household Household poverty
years/Level of school gender status Household location
Years Level Male Female Poor Non-poor Urban Rural
0 No School 48,6 76,5 63,4 42,7 29,8 55,2
3 Pre- Primary 2 1,1 1,8 1,8 1,8 1,8
7 Primary 21,6 8,9 19,5 19,8 17,1 19,9
9 Pre- Secondary 8,9 5 7,1 9,5 9,7 8,2
15 Secondary 13,8 6,2 7,1 18 26,8 11,2
18 Polytechnic 1,3 0,6 0,3 2 3 1
20 University 3,8 1,5 0,7 6 11,8 2,6
For both sex and both poverty status, the most common sector of employment is by far the self-
employment farmer, followed by the public sector, self-employment non-farmer, and private
sector (Table 4). In terms of their occupational classification, more female household heads,
more head of poor households, and more rural head of households are involved in agriculture.
It is in the self-employment farmers occupation where the greatest proportion of female heads
of households are to be found, 80.60 per cent of their number being in this occupational
category, for males this value is slightly lower (74,9%).
59
It is also in self-employment farmers occupation where the greatest proportion of heads of poor
households are to be found 86,5%, for non-poor households this value is much lower (21,4
lower, i.e. 65,10%), for rural areas the value is 78,7, on the contrary in urban areas this value
decreases to 44,5%.
Table 4: Head of household Sector of employment %

Head of the Household poverty Household
Sector of Employment household gender status location
Non-
Male Female Poor Urban Rural
poor
Employed in Public sector 13,9 6,6 5,6 20,2 31 11
Employed in Other (Private) sector(s) 5,1 3 2,9 6,7 10 4
Self-employed non-farmer 6,1 9,8 5 8 14,6 5,8
Self-employed farmer 74,9 80,6 86,5 65,1 44,5 78,7
In Figure 1 the distribution of female- and male-headed households, poor and non-poor
households and rural-urban households are compared across assets levels categories. A higher
proportion of male-headed households, non-poor households, and urban households have more
assets, while a higher proportion of FHHs, poor households, and rural households have very
few assets.
Figure 1: Nr of assets according to the type of household

60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
7,00
,00
1,00
2,00
3,00
4,00
5,00
6,00
8,00
9,00
10,00
11,00
12,00
13,00
14,00
15,00
16,00
Nr of Assets
Female HH Male HH Non-Poor H Poor H Urban Rural
Regarding the size of cultivated land (Table 5) during the last 12 months, a very high proportion
(66,8%) of FHHs cultivated less than 1 ha, while a higher proportion (36,0%) of male-headed
households cultivated between 1 and 5 ha and/or more than 5ha. A similar pattern is found for
poor and non-poor households, with a very high proportion (62,3%) of poor households
cultivated less than 1 ha, while a higher proportion of non-poor households cultivated between
1 and 5 ha and/or more than 5ha. 3% of non-poor households do not cultivate land, which
indicates that maybe they have other occupations, this value dropped off to 1,7% for the poor
households. For both locations, the majority of household's head cultivate less than 1ha,
followed by from 1 to 5 ha and in 3rd place more than 5ha.
60
Table 5: Estimated size of cultivated land during the last 12 months %
Estimated size of Head of household Household Poverty

Household location
cultivated land during gender status
the last 12 months
Male Female Poor Non-poor Urban Rural

< 1 Há 59,9 66,8 62,3 59,6 53,4 61,6
1-5 Há 36 29 34,3 35,6 39,4 34,6
> 5 Há 1,9 1,1 1,7 1,8 1 1,8

No Land 2,2 3,1 1,7 3 6,1 2
Although both -poor households and non-poor households- are in a larger proportion headed
by men, FHHs constitute a non-negligible proportion of all households in these 4 districts of
Timor-Leste (15,2%). As in most countries, female-headed households constitute a share of
households that are relatively more vulnerable: the household head has no education, is older,
and the majority falls in the poor category (50,9%, slightly higher proportion than male-headed
households - 48,5%). Overall, this comparison suggests that more female than male-headed
households are economically disadvantaged, but the difference is not very significant.
According to the data, 90,9% of the households are situated in rural areas where 52,2 % are
poor, on the contrary in urban areas only 15,1 are poor. And more relevant of all is the fact that
roughly half (48,9%) of the households are poor and within this group a huge proportion, 97,2%
live in rural areas. This leads us to the next step which is to identify some determinants of
poverty in the region.
4.2. Determinants of poverty

To explore the determinants of poverty a model was conceptualized as mentioned in point 3.3.
The descriptive statistics of the variables used were presented in Table 1, Table 6 reports the
results of probit model estimations for the living standard/poverty. As can be seen, almost all
determinants are significant, the exceptions are sex ratio, household size squares, and cultivated
land5, and conform to a priori expectations.
61
Table 6: Determinants of Poverty – General Probit Model

Dependent Variable: Living Standard Index (poor = 1)
Variable coeficiente standard Z P value Sig. Slope
error statistics
Const 0,443413 0,0782760 5,665 0,00 ***

Aileu −0,188799 0,01967 −9,693 0,00 *** −0,075
Bobonaro −0,469223 0,015796 −29,65 0,00 *** −0,184
Covalima −0,372414 0,017884 −20,79 0,00 *** −0,147
RuralUrbano 0,725668 0,028037 26,56 0,00 *** 0,267
SexRatio −1,78510e-05 6,17E-05 −0,2874 0,77 0,000
HH_PERSONS −0,0450733 0,008239 −5,418 0,00 *** −0,018
HHsquare 0,000367556 0,00055 0,6623 0,50 0,000
Male 0,150782 0,023867 6,318 0,00 *** 0,060
Married −0,0597623 0,025829 −2,302 0,02 ** −0,024
Age −0,0193700 0,002711 −7,078 0,00 *** −0,008
Agesquare 0,000120746 2,63E-05 4,541 0,00 *** 0,000
Schoolyears −0,0461866 0,001241 −37,52 0,00 *** −0,018
Sectorofemployme 0,434458 0,016081 27,16 0,00 *** 0,170
HiredLabor −0,156355 0,016818 −9,258 0,00 *** −0,062
LevelofAgricultu −0,0984277 0,039308 −2,515 0,01 ** −0,039
Cultivatedland5 −0,0274359 0,045112 −0,6049 0,54 −0,011
Ownland −0,104823 0,012317 −8,511 0,00 *** −0,042
LSUSEA −0,00500834 0,001447 −3,304 0,00 *** −0,002
CropSEcount −0,0115573 0,002425 −4,790 0,00 *** −0,005
TechnologyCount −0,00664351 0,003595 −1,841 0,06 * −0,003
Tractorcount10 −0,256010 0,016261 −15,67 0,00 *** −0,101
Notes: Observations / n = 47925 *significant at 10%, ** at 5% and *** at 1%
Table 7: The information criteria’s for the model

Mean dependent var 0,500678 Adjusted R-squared 0,118334
McFadden R-squared 0,118997 Log-likelihood −29266,08
Number of cases 'correctly predicted' 31437 (65,6%)
Households living in a district other than Ermera (Aileu, Bobonaro, and Covalima) are less
likely to be poor while living in rural areas increase the chances of being poor, these are in line
with the results of the Poverty in Timor-Leste 2014 (World Bank, 2016, p. 26) which indicates
Ermera as 2nd poorest district (56.7%) in poverty incidence. therefore households that resided
in Aileu, Bobonaro, and Covalima are 7,5 / 18,4 and 14,7 percentage points, respectively, less
likely to be poor than those that resided in Ermera. The urban and rural segments have different
characteristics and different forms of living, rural households are heavily dependent on
agriculture for their livelihood. Due to this fact, and in line with the Timor-Leste Poverty
(World Bank, 2016, p. 10) is expected that the SLI will be lower in rural areas. This is
confirmed, households that reside in rural areas are 26,7% more likely to be poor. Sex ratio, is
not a significant factor, however, reflects the fact that household with a great proportion of
males is less poor, this fact is in line with the expectations, since women and men have different
rights and access to resources of all kind and this has an impact on poverty/SLI. The Household
size carries negative coefficients whereas household size squared carries positive coefficients,
i.e. presents a non-linear relation. Therefore, increasing household size at lower initial levels
would decrease poverty faster than at higher initial levels of household size. Ultimately, at very
high levels, the increasing household size would increase poverty.
62
The results show that at lower initial levels increase the size of the household in one unit,
decreases the probability of being poor by 1,8%. The results indicate that everything else held
constant the gender of the HH is significant in determining poverty, with male-headed
households having 6% more chances of being poor. This result is contrary to some literature
and expectation since in many societies, including Timor-Leste, women are systematically
excluded from access to essential assets, such as land, and have a lower level of education, but
in line with data from Timor-Leste Poverty (World Bank, 2016) which states that “As in 2007,
poverty incidence is lower among FHHs than male-headed households”. The fact that FHHs
are less likely to be poor than male headed-households is likely to be driven by a larger share
(44 percent) of FHHs being remittance recipients compared to 23 percent for male-headed
households (World Bank, 2018). The marital status connection to poverty may be derived from
several factors that are associated with marriage, it is expected that to be married or living
together reduce the probability of being poor. In our work households headed by a head of
households who were not married or living together were 2,4% more likely to be poor than
those headed by a married person. Age of the household carries negative coefficients whereas
age-squared has positive coefficients, the head being older reduces the probability of being poor
up to certain age, from which the relationship is reversed, implying nonlinear relationships.
Thus, consistent with the life-cycle hypothesis, poverty is relatively higher at young ages,
decreases at middle age, and then increases again at old age. At initial stages increase one year
the age of the head of household decrease the chances of being poor in 0,8%. A one-year
increase in schooling led to a 1,8 percentage points decrease in the probability of being poor.
The education level of the household head is widely recognized as a key factor to improve the
living standard, increases the skills and the earning capacity of a person, determining the
number and nature of opportunities available to enhance livelihood strategies and reduced
poverty levels. The better educated a household head is, the lower the risk of poverty. The
results show that to be self-employment farmers is a factor that increases the probability of
being poor. The chances of falling into poverty are 17 times more likely if the head of household
is a self-employment farm. Since 75,6 % of heads of households are self-employment farmers
and to be self-employment farmer is a strong poverty determinant factor, we decide to enlarge
the model with variables related to agriculture to explore which features are more relevant in
explain farmer's poverty. Only in very productive activities, the profits are high enough to hire
workers, therefore the households which hire non-household workers are the ones with bigger
income and less like to be poor. In this work to hire non-household workers to decrease the
chances of being poor by 6,2%. Similarity households who have an agriculture activity oriented
to the market (producing mainly to sell in markets) are less like to be poor since this increases
the household income. This is consistent with the fact that an increase in the number of different
crops (CropSEcount) that are producing to sell decreases the chances of being poor. Households
who have an agriculture activity oriented to the market are 3,9 times less likely to be poor and
increase the number of crops sold in the market in one unit, decrease the risk of poverty by
0,5%. Having land of their own has a great positive impact on poverty, the households with
their own land are 4,2% less likely to be poor. Regarding the land size, to have in total more
than 5ha has also a positive, but not significant, impact on poverty. This result is consistent with
the findings of many authors who concluded that ownership of assets such as land reduces the
probability of being poor, for instance, according to Dowling & Yap, “… various studies using
microeconomic data from different countries highlights the importance of having or obtain
physical assets to break out of poverty cycle. These physical assets include land and farm
implement, as well as farm animals” (Dowling & Yap, 2009). The probability of being poor
generally declined with increasing livestock herd size. Increase the LSUSEA in one unit,
decrease in 0,2 % the chances of being poor. The increase of technologies used and the use of
tractors are also factors with a positive impact, contributing to reduce poverty.
63
In this study increase the number of used technologies by 1, decrease the chances of being poor
by 0,3 percent, on the other hand, the use of hand or four wheels decrease the chances of being
poor by 10,1 percent, highlighting the importance of mechanical traction, hand or four wheels,
to increase agricultural performance and therefore increase income.
5. FINAL REMARKS
The two main objectives of this paper were to identify the determinants of poverty in four
districts of Timor-Leste (Aileu, Bobonaro, Covalima, and Ermera) and find evidence on
linkages of whether gender affects, or not, poverty. This study uses Timor-Leste's 2014 census
data to construct a Standard of Living Index that reflects on people's permanent income. The
data is analyzed by both descriptive statistics and econometric analysis techniques. From the
results, the main points to highlight are: Around half of the households are poor; within this
group, the household has an average size of 5,75 and a sex ratio of 124,0; in average the head
of households is male, married, 49 years old, with five years of education and a farmer;
agriculture uses low levels of hired labour, the agricultural activity market-oriented is very low,
large farms are residual, around half of households have ownership of cultivated land, the
average livestock standard units is 2,8, households sell an average of two crops, only one of
modern inputs/technologies is used and one fifth uses hand or four-wheel traction. This article
concludes that all independent variables use to explain poverty are conform to a priori
expectations and significant, with 3 exceptions: sex ratio, household size squares, and cultivated
land5. Regarding the determinants some of the main findings are:
• Regional analysis shows that poverty in Timor-Leste is more prevalent in rural areas than
elsewhere and that Ermera is the district with a higher % of poor household and where the
likelihood of being poor is higher;
• Gender of the HH positively related to poverty, implying that FHH had lower probabilities
of being poor than MHH.
• Age brings gains in household welfare and negatively relates to poverty. However, the
relationship between age and poverty is nonlinear, implying that poverty is relatively higher
at young ages, decreases at middle ages, and then increases again at old ages
• Head of households whose heads were employed in a sector rather than “Self-employment
farmer” were less like to be poor. This is the determinant that presents the biggest impact
in poverty, it, therefore, becomes imperative to investigate how to improve the living
standard and promoting sustainable development of the self-employment farmers.
• Educational attainment positively relates to welfare and lowers poverty, a one-year increase
in schooling led to a 1,8 percentage points decrease in the probability of being poor.
• Level of agriculture positively relates with welfare and lowers poverty, HH with an
agriculture activity oriented to the market are less like to be poor,
• To have land of their own have a great positive impact on poverty and livestock ownership
reduce poverty;
• The increase of technologies used is also a factor with a positive impact, contributing to
reduce poverty, among them it is worth highlighting the importance of mechanical traction.
The results indicate that male-headed households having 6% more chances of being poor, this
fact is likely to be driven by a larger share (44 percent) of FHHs being remittance recipients
compared to 23 percent for male-headed households. A variable that we do not explore in this
work due to the lack of data. Despite this fact, there is the consensus that FHHs face obvious
limits in accessing productive assets, credit, health care, and agricultural services in Timor-
Leste, which make them more vulnerable to poverty. It should also be kept in mind that this
finding is based upon the assumption that consumption is equally distributed within the
households.
64
Strategies and or policies aimed at poverty reduction need to identify these factors that are
strongly related to poverty as key ingredients in poverty reduction efforts. Short-term policies
for poverty reduction should concentrate on those areas where poverty is higher (i.e. rural,
farmers, low level of education). Most people, and especially the poor, still live in rural areas
and will continue to be rural-based soon. A route that takes the people out of farming and rural
areas and into urban areas and wages employment or business is not the solution. It, therefore,
becomes imperative to investigate how to improve the living standard and promoting
sustainable development of the self-employment farmers. Interventions that are effective in
supporting the agricultural and forestry (and fishing) sectors on which the poor rely are needed,
improving productivity (e.g. promoting improved technology adoption) and processing of food
and other marketable products, and develop effective access to markets at all levels are part of
them. Education is another key factor, to increase education levels among the poor is crucial to
reduce poverty and for this is necessary to improve the quality of education services, namely in
rural areas. Initiatives for promoting economic diversification and employment creation should
be created as well.
ACKNOWLEDGEMENT: This work is funded by National Funds through FCT—Foundation

for Science and Technology under the Projects UIDB/05183/2020 and UID/04007/2020.
LITERATURE:
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66
FAMILY OWNED BUSINESSES AND THEIR INNOVATIVE

BEHAVIOR: AN THEORETICAL BACKGROUND
Rafael Castro
University of Aveiro, DEGEIT- Department of
Economic, Management, Industrial Engineering and Tourism, Portugal
[email protected]
Joana Costa
University of Aveiro, DEGEIT- Department of
Economic, Management, Industrial Engineering and Tourism, Portugal
[email protected]
ABSTRACT
Family-owned businesses have been a hot topic in the academic community in recent years in
which there has been a great focus on studying these types of firms. The literature reveals
contrast finding regarding family-owned businesses and their innovative behavior as their
propensity to create new innovation output. The aim of the theoretical background is to analyse
in which ways innovation has an impact on family-firms and what is expected from them. We
try to uncover the main state of the art and what hinders family businesses in their innovation
strategies and why innovation must be perceived as a vehicle to economic prosperity and
survival.
Keywords: family involvement, innovation, family business
1. INTRODUCTION
Family Businesses (FB) are a critical asset for economic development [1]. They are represented
all over the world in virtually every sector. FB are frequently depicted as being traditional
businesses afraid of risk and withdrawing from new opportunities [1]. There are several
dimensions that differentiate FB from non-FB [2, 3]. One of the most distinguishable features
in these companies is their management, organizational and ownership structure [4, 5]. FB are
usually correlated with being efficient and effective, they tend to have a stronger pledge towards
the firm and to the family values [9, 10]. The family´s social and emotional side is also one of
distinction [3, 6]. In FB there is a direct linkage between the family and the ongoing business[7],
meaning that, family-life circles around the life of the company [8]. Nevertheless, some authors
suggest that family involvement does not indicate better performance, rather, they are more
inclined to underperform in contrast to non-FB [10, 11]. Family involvement alters the way in
which the businesses is drove, meaning that FB have a different set of values that characterizes
them from the rest [12]. Thus, the family dimension shapes the organization culture of the
business meaning that it sets economic and non-economic goals and founds the path to
accomplish them [3, 16, 17]. Researchers have recognized FB as being resilient with a great
aptitude towards long-term survival with great capacity to access human, social and financial
resources [13,15]. The present work has the goal to analyse FB and the prevalent strategies they
follow when it comes to innovation.
2. FAMILY INVOLVEMENT
2.1. Family Ownership Structure
FB are one of the most predominant types of business organizations around the world [2, 4].
Although they tend to be in smaller size, mostly small and medium firms, FB are inserted
throughout all economic sectors, as they embody a huge share of the economic sustainability
[5].
67
The involvement of a family has effects in the way they implement their businesses strategies,
actions, decisions and ultimately their performance. Consequently, FB are different from non-
FB in the sense they operate differently [2,6,7] . There is a wide definition of FB in the literature,
some scholars may use a different definition from others, regarding the subject in which the
research is being developed [8,9]. However, the most consensus definition of FB is when family
member exercises a strong influence on the firm or have at least 50% of the capital [10,11]. FB
lean to be more motivated towards family-centered goals such as legacy, family-harmony and
perpetuate the family’s identity this can be a challenge towards the financial goals of the firm
[2,4]. The non-economic goals present in FB can be defined as socioemotional wealth (SEW)
[4]. These goals can be aligned or conflicting towards the financial performance of the firm
leading to a broader range of strategic choices and outcomes in contrast to non-FB [3,5,12].
Some research proposes that in order to preserve their SEW these firms may dismiss business
opportunities of financial gain, in order to preserve their ownership control and loss of SEW
[4,10,13]. This aversion towards risk can prevent strategic change and can point to lower levels
of diversification and investment, making the performance in FB lower comparing to the rest
[14–18]. Nevertheless, FB have a higher tendency to survive, due to their SEW, when they are
facing threats they can backdown on the family-centered goals and engage in riskier activities
[19]. FB have a long-term orientation instead of short-term goals [20]. They also have a great
aptitude to access human, social, and financial resources which is positively related to their
survival skills [4,21]. In order to better understand the dynamics in FB Davis & Tagiuri, [22]
established the 3 circle model, this model is includes three elements: Family, Ownership and
Business. This model describes how family members interact and cooperate among each other,
in the sense that, they make decisions and improve management strategies in order to meet the
goals of the family and the organization [47]. Nevertheless, the presence of family members
inside the organization can lead ,in some cases, to organizational tensions which can affect the
decision-making process [13,23]. The family sub-system is a crucial element to identify new
opportunities (exploration) and exploiting existing activities leading FB to gain and develop a
successful business model across multiple generations [14,24]. As listed above, FB tend to have
a risk aversion in order to preserve their SEW. Nonetheless, the founding generations are more
interested in exploration than later generations, to preserve the family identity and legacy later
generation pursuit more exploitation activities, which are less riskier strategies in contrast to
exploration activities[24,25]. Succession is one of the most important topics in the literature
regarding FB, it is a great development issue in FB [26]. The succession process represents a
highly crucial phase, in this phase there must be a balance between the emotional side of family
while making pivotal decisions regarding the future management of the firm shaping the
survival of the business into future generations [26]. Like succession, the founder member role
in FB determines the values that the company develops, these will be transmitted to future
generations of the family and are maintained throughout the life of the business [4,27]. FB
companies have a pyramidal structure in which the founder is the reference point during
business activity, this is present even when they do not have an active participation within the
firm [27].
2.2. Innovative Behavior

According to Schumpeter [28] innovation is the creation of new knowledge by combining
existing resources and processes. Innovation is a milestone for FB, it is the quintessence
element for the firm’s long-term success and prosperity as well as a vehicle to make them
competitive [40, 43]. The main purpose behind every innovation activity is to invigorate the
businesses across the exploration and exploitation of new opportunities [33]. The involvement
of the family represents a critical aspect for their running of business, the dimension of SEW
represents a key aspect for this firms and has become a mean to explain how these firms differ
68
in their strategies, goals and their innovative behavior [4,16]. Innovation in FB is seen as
strategy to preserve their SEW and remain competitive across multiple generation [34].
Moreover, SEW is a key contribute to understand how family-owned business perceive and
approach their innovation strategies [35–37]. Some research has found that the levels of
investment in R&D in FB is considerably less than non-FB, this is due to the short-term nature
of R&D [17,36]. In R&D long-term investments are more profitable and more stable than short-
term investements [17,36]. Thus, FB have a proclivity to investment in longer term R&D
investments leading to more stable innovation outputs ,conversely, short-term investments in
R&D can produce negative outcomes in SEW in the sense that these are intricate, which may
lead the family to adopt riskier strategies that are not accustomed to [17,36]. Family owners
and family members in the organization perceive the businesses with a strong emotional
connection [4], they also have a very attentive behavior towards the reputation of the firm [38].
The strong emotional attachment extends to the fact that if the firm is facing financial problems
the SEW diminishes [12,36,38]. Conversely, the emotional effects of running businesses can
lead the family to adopt or reject innovation as a vehicle to their economic growth [39].
Regarding the innovative behavior in FB it is not clear how this firms can remain innovative
across multiple generations [32,40]. FB who are owned by multiple family members are more
likely to invest less in innovation than those who are owned by a unique element which implies
a negative generation-innovation connection [41,42]. Earlier generations are less exposed to
conflicts and have a better knowledge of the businesses, they also have a more innovative
behavior than future-generations [41,42]. However, some authors found that later-generations
have a higher tendency to innovate than earlier generations [37] .
3. LESSONS FROM THE PAST

The literature regarding the effect of family involvement in innovation has been of contrast
results. Scholars have tried to comprehend and analyse the intricate and multifaceted dimension
of innovation in family-owned businesses [36,39,43]. Due to the inconsistency of the results it
is difficult to reach a final representation of the state of the art regarding this subject as stated
by Calabrò et al., [54]. Nevertheless, FB have unique attributes that enhances their innovative
behavior such as their long-term orientation and the family involvement across several
generations which promotes their strategies in innovation [54, 55]. On the other hand, due to
their more conservative approach [54], risk aversion [14] and control of the company, family
involvement [49] might have a negative impact on their innovation strategies. There is a strong
emotional attachment in family owned businesses, family owners are perceived as being overly
sensitive [26] , according to Bendig et al., [47], higher emotional attachment leads firms to
adopt a very conservative approach towards new technological knowledge which ultimately
will affect the innovative behavior and the innovation processes. Although the long-term
orientation that FB adopt would give them a greater incentive to innovative and to have a more
active attitude towards investing in innovation the fact is that the risk aversion they have and
the agency costs in family conflict leads them to avoid investing in R&D [16, 28, 45].
Nevertheless, these firms can and have a great efficiency when it comes to implement
innovation, meaning that in some cases the innovation output is higher than other firms [43,
45]. The research evidence points to the fact that FB do not have a higher investment in
innovation in contrast to non-FB , however, they have the skills to innovate with fewer
resources [43, 45, 56]. Moreover, to fully understand the specific and distinctive innovative
behavior of FB, variables like innovation output and innovation input do not provide the best
foundation [47, 57]. Instead, research needs to focus on different elements, such as their
capacity in the decision-making process, the structure that leads them to a better implement
their resources and their internal knowledge and capital [45, 46, 58, 59]. Inter generational
succession if one the most important aspect in FB it is the source for their prominence on long-
69
term sustainability instead of short-term [3, 4, 60]. The continuity and durability of FB relies
on their aptitude to produce and apply innovation [3, 61]. Innovation is a key feature that
distinguishes firms and creates competitive advantages [20, 22]. Innovation has a positively
correlation towards performance and growth in FB [24, 63]. Nevertheless, FB have a tendency
to avoid risk meaning that they are more risk averse comparing to non-FB [64]. As a result,
when taking new challenges and new opportunities they consider not only the financial factors
but also the non-financial factors [3, 65]. In order to protect future generation owners of FB
tend to have a very restrictive investment strategy, meaning that they develop a more
conservative innovation strategy [65, 66] , nevertheless, some FB have a very active innovative
behavior and are ready to take risks worldwide [42, 63, 67]. The study and understanding of the
innovative behavior in family-owned businesses is an important topic of research. More and
more, researchers are trying to figure out in which ways FB differentiate from the rest. There is
a lack of research on this topic which justifies the make of this theoretical background in the
sense that understanding the innovative behavior in family-owned businesses can contribute
not only to research but also the applicability that it has, in the sense that can help firms to have
a more engagement in their innovation activities and a better understanding in what makes them
different from the rest.
4. CONCLUSION
Innovation is one of the main drivers for the development and sustainability of FB [43]. This
process can represent a milestone achievement when it is successful due to the risk and the
effort needed to accomplish it [44]. To have an active innovation strategy organizations must
be able to change and adapt to new and challenging environments [71]. The choice to innovative
is critical for managers and CEOs, business-owning families must take this process into account
if they want to achieve a superior competitive advantage and sustainability [29]. Family
involvement can impact positively and negatively the innovation process [54]. The great
emotional connection with the business, can lead processes like innovation to be hampered [29,
30]. FB managers and owners must separate the relationship between firm and family this can
positively impact the innovative behavior [14, 29, 72]. Nevertheless, the literature points to an
negative relationship between the presence of family managers and R&D investments [24],
although the commitment of family members can have a positive effect on innovation [8].
Looking at the state of the literature it is clear that there is a unanimous opinion that FB are in
fact an important element in the world economy [1]. However, there is a fragmentation in the
literature in the sense that there is no single definition for FB which can hinder the full
understanding of their innovative behavior. To examine and understand the multiple facets of
this topic is of must importance.
5. FURTHER RESEARCH
FB have been a hot topic in the academic community, in recent years there has been a great
focus on studying these types of firms. The current state of literature in this field evidences that
FB are one of the most important typologies of businesses for the world economy being
responsible for most of the Small and Medium sized firms representing a crucial role for
regional and social sustainability[43]. This theoretical background yields numerous
propositions for the literature on the innovative behavior in FB by taking into account their
SEW, early generation versus later generation innovative approach, the effect of family
involvement in proactive innovation activities and the effect of family ownership in business
strategies and outcomes. SEW is one of the main differentiation elements in FB [14]. The
pursue of non-economic goals is a vital aspect to understand the synergy of family ownership
on a firm. This concept is also regarded as a mean to highlight and explain their innovative
behaviour [14, 47].
70
There is a lot of research on FB and innovation, however, there is a need to study these firms
in new perspective such as their innovative behavior in digital platforms and the relationship
between multiple processes like internationalization. By doing so, it could be added to the
literature and even create new directories that could help these firms not only in their initial
stages to overcome barriers and start their innovative journey. Also following the work of
Bendig et al., [47] there can be more avenues of research to draw and expand the concept of
board social capital and the relationship it has on family involvement this concept is a valid and
concrete vehicle to analyze the innovative behavior of these businesses [47]. Having a full scope
approach to analyze and study FB under the innovative behavior can evidence the influence and
significance that these businesses have in the economic development and sustainability.

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74
THE BULGARIAN MODEL OF THE PROSECUTOR’S OFFICE AND

THE POSITION OF THE PROSECUTOR GENERAL
Venelin Terziev
Georgi Rakovski Military Academy, Sofia, Bulgaria
University of Rousse, Rousse, Bulgaria
Kaneff University Hospital, Rousse, Bulgaria
[email protected]
Marin Georgiev
[email protected]
Stefаn Bankov
Ministry of Interior, Sofia, Bulgaria
[email protected]
Ivan Ivanov
[email protected]
ABSTRACT
The independence of the Prosecutor General of any Member State of the European Union is
extremely important with a view to comply with the legal framework and the rule of law. It lays
the foundations of trust in the judiciary and the fundaments of statehood, creates a sense of law
and legal order. That is why it is highly important in the context of the present to outline the
control of the activity of the Prosecutor General in the exercise of his powers, clearly
emphasizing that the Bulgarian Prosecutor General is not out of control in his powers. The
legal powers of the Prosecutor General of the Republic of Bulgaria are even more limited than
the powers of analogous figures in the legal systems of other EU countries. The Prosecutor
General exercises his powers only in exceptional cases and according to previously prescribed
legal procedures.
Keywords: Prosecutor's Office of the Republic of Bulgaria (PORB), Results, Combating Crime,
Trends
1. INTRODUCTION
Тhe protests in Bulgaria are interesting phenomena and in principle they should be aimed at
demands and intensions for something better, something different and tending to achieve a
development of the public relations in a specific direction. Our recent and more distant history
abounds of facts and circumstances presenting multiple examples for the consciences of such
activities or inactions. We often search and find the guiltiness within the others and nor in
ourselves at all. It is a common characteristic of Bulgarians that they are used to make
evaluation and qualifications without any competences for that, neither any experience in the
specific subject of matter. We are witnessing of a similar phenomenon in the last months – the
idea of protesting or expressing our personal opinion, which is really positive, itself for a
democratic and developed society, what we are pretending to be. The tensions, the wishes and
strivings following our daily routine are surely affecting all parts of our prosaic and daily life.
It is basic and fundamental for each of us to strive a better way of life and to be part of the
community, which is at maximum fair to ourselves and others. The feeling of satisfaction and
equality are basic principles that are of great importance for the human-being and if some
75
actions are satisfying myself, for the people around me it could be to some extend or at all
unsatisfactory (Terziev, Georgiev, Bankov, 2020). The achievement of appropriate and right
decisions in the context of a crisis situation is a really difficult mission, which is experiencing
the need of high quality expertise and a good reaction in such circumstances. We are in the
middle of such crisis situation at the moment. Without trying to make a defined analysis about
the reasons predispose it, it is obvious that the situation is happening and that it is happening in
a way that provokes discomfort for its participants. An interesting point is the environment,
moreover the circumstances around the Bulgarian Prosecutor’s Office; at least because of the
requirements for the Prosecutor’s Office which are too high, or even out of the competences of
the institution. Unfortunately, the society is critical enough and is directing task, expectations
and is striving for responsibilities, which are legally not of the competence of the institution.
Moreover, this makes the Prosecutor’s Office to search other possibilities for answering these
expectations, without violating the rule of law. In case, when this opportunity is namely the
providing more and reliable information, some of us are reacting as its role is as a political
speaker or media spectrum. In opposite, if there is a lack of such information – it looks like that
the institutions are not well working and inactive (Terziev, Georgiev, Bankov, 2020a).
Undoubtedly, the persons themselves are defining also part of the look of the specified body or
organization and that is more than logical. If we like that or not is a question of personal
acceptance and self-feeling but surely it is a characteristic of the individual behavior.
Paradoxically in this specific situation is that namely the protesters for human rights and
freedom are using such methods and tools violating the fundamental human rights. When we
are “searching” and “striving” a just society, the rules must be basic for the formation of this
society and its public development, whose destruction is not of interest of nobody. Without any
evaluations and characteristics of specific personal positions it is needed to be mentioned that
the protection of the rules – legal, moral and generally speaking those, which are guarantee for
the normal flow of the social processes, it is obligatory and to the extend satisfying the
expectations of the participants in this process (Terziev, Georgiev, Bankov, 2020a). The
features of this change of that social process are common and well-known to economists, jurists,
sociologist and analyzers – namely the use of enough free media scene for presenting
information not corresponding to the actual facts and events. Undoubtedly, within this crisis
situation the discrediting individuals is easy and quick approach. And without knowing in
personal the Prosecutor General of the Republic of Bulgaria it could be given as a good example
for the fact that we are aware of so much personal information about his private life, bank
accounts and even about his educational development. Some of you will say that this action is
absolute rightful in accordance with the social status of the person working for the benefit of
the society. Partially, those of you will be right only with regards to the fact that to be informed
is an important right but not in relation to the opportunity for misinterpretations, explanations
and malicious hints (even if we are not searching it, it is all over the internet). And without
being defenders it should be noted that academic experience and the academic PHD honor is a
process and good opportunity for upgrading personal competences. If this is the decision of an
individual, even when he is a prosecutor general of the Republic of Bulgaria, it should be
admired. Just to remind you that with this regard there are accredited universities, Law of
development of human resources, Regulations and other documentation, regulating this process
and in case we are not supporting this or we have any counterclaims to this process, we should
change the regulation itself or should impose some criteria (Terziev, Georgiev, Bankov, 2020;
2020a). Backwards to the procedure, which we wants so much to be followed. We cannot be a
judge of whether an individual is successfully or not coping with his or her official duties but
if we would like at least to go further in our social development, so the following of rules is the
base of it. When we strive for resignations and when we are reaching out personal fairness, we
should be led by the rules.
76
The opinion of the protesters could not be evaluated as objective but it is real and possible. And
when it exists, it should be answered convincing us in the trueness that we are doing it in favor
of the country. And when the powers of this prosecutor general seem to us very much or his
actions not fair enough, we must again follow the rules to change or put in such a way that they
are clear enough, accurate and under public control. Otherwise, everything else speaks of
processes of frantic desires that we want to happen outside the rules, and we will let the rules
apply after that.
2. COMPARATIVE LEGAL RESEARCH OF THE FUNCTIONS, NOMINATION

PROCEDURES AND PROFILES OF THE PROSECUTORS GENERAL IN THE
MEMBER STATES OF THE EUROPEAN UNION
One comparative legal research of the functions, procedures for nomination and the profiles of
the prosecutors general in the Member states, observing the timeframe from November 2018 -
January 2019 and team of: Dr. Ivanka Ivanova (project manager, author), Georgi Angelov
(expert, data collector) and Dr. Yani Kirov (expert, data collector) and is funded by the project
“What do we (not) know about the prosecutors general in the EU Member States?”. The
Ministry of the Foreign Affair of Netherland gives some interesting interpretations about
specifications of the Bulgarian model. This research is, of course, trying analytical and
comparative analysis but could not be accepted as a complex because of multiple reasons
(Terziev, Georgiev, Bankov, 2020; 2020a; 2020b; 2020c). In the Bulgarian Constitution of
1991, the issues of the status and organization of the Prosecution are settled together with those
of the court in chapter “Judiciary”, but the Prosecution as a structure has retained the two main
characteristics it had in the totalitarian state: individual prosecutors do not return to the
composition of the courts (as it was until 1947), and remain in an independent structure parallel
to that of the courts. While the Prosecution in most EU Member States is a body specialized
exclusively in the field of criminal law, the Bulgarian Prosecutor's Office retains the function
of general supervision of legality (Article 127, items 5 and 6 of the Constitution) (2020d). The
appointments, career development and discipline of judges, prosecutors and investigators are
regulated in the Constitution and the law in an identical way i.e. prosecutors and investigators
have the statute of irremovability as that for judges and the same guarantees of independence
as them. The personnel matters of the three magistrates' professions are decided by a separate
collective body - the Supreme Judicial Council, which until 2015 functioned as one collegе
body, and then two separate colleges were formed: Judicial College, which is responsible for
appointments, discipline and career development of judges, and the Prosecutorial College -
which resolves the same issues for prosecutors and investigators. In the other Member States
of the European Union, the appointment and career development of prosecutors are usually
regulated differently from those of judges, and appointments, especially of prosecutors, in the
majority of Member States are made by a single body (Minister of Justice or Head of State). In
Bulgaria the case is special because, on the one hand, the Prosecutorial College of the Supreme
Judicial Council as a collective body appoints prosecutors, the Plenum of the Supreme Judicial
Council as a collective body elects a candidate for prosecutor general, and then it reports on the
organization's activities to a collective body the National Assembly and may be removed by the
President only on the initiative of collective bodies the Supreme Judicial Council or the National
Assembly. However, the collective bodies themselves do not bear any responsibility for their
decisions, and by definition they act more slowly and with difficulty than the individual ones.
Conversely, entrusting the procedure for appointing prosecutors and appointing or dismissing
the Attorney General to sole bodies, which is the most common model in the other Member
States of the European Union, serves as a guarantee for the efficiency and accountability of the
Prosecution itself. There is no much about the role of the prosecutor general in the Bulgarian
constitution: like the presidents of the Supreme Court of Cassation and the Supreme
77
Administrative Court, the prosecutor general is appointed by the president on proposal of the
Supreme Judicial Council; with a 7-year term and is not subject to re-election according to
Article 126, para. 2 of the Constitution, his main function is to supervise the legality and
methodological guidance of the activities of all prosecutors. The Bulgarian Prosecutor General
is accountable to the National Assembly for the activity related to criminal investigation and
prosecution. On a proposal of a quarter of MPs, the Parliament can initiate a removal procedure
for the Prosecutor General, for which a decision is required by a qualified majority of 2/3. The
matter of the removal of the chairmen of the two supreme courts is settled in the same way. The
Bulgarian legislature has provided guarantees for the independence of the prosecutor peneral
from political power, which are the same as those of the chairmen of the two supreme courts.
The Bulgarian Prosecutor General is by right a member of the Supreme Judicial Council and
after 2015 he is by right Chairman of the Prosecutorial College of the Supreme Judicial Council.
Five of the members of the Prosecutorial College of the Supreme Judicial Council are
subordinate to the Prosecutor General, which gives him great power in resolving issues related
to the appointment and career development of prosecutors. In addition to the Prosecution, the
Bulgarian Prosecutor General also heads the National Investigation Service and may delegate
investigations to it at his own discretion. All specialized units of the Prosecutor's Office are
subordinate to the Prosecutor General and, at his discretion, may set up special teams to
investigate certain crimes. He may amend or revoke the acts of all prosecutors in the country,
he may also, on his own decision, second prosecutors. In summary of this comparative analysis
and based on the actual situation, it can be argued that a sufficiently objective mechanism for
selection and control in Bulgaria has been created to meet the respective needs. Whether this
mechanism works effectively and transparently is a matter for another type of analysis and
assessment. Nevertheless, Bulgaria is not particularly different from the accepted European
practice, and this is an objective right with its functional significance of the Bulgarian legislator.
3. THE CASE OF KOLEVI V. BULGARIA, ON APPEAL №1108 / 2002 IN THE

EUROPEAN COURT OF HUMAN RIGHTS
An interesting example in this direction is the case of Kolevi v. Bulgaria, on appeal №1108 /
2002, fifth Chamber, chaired by Peer Lorenzen at the European Court of Human Rights. The
specific factual circumstances are as follows: The case is on an appeal (№ 1108/02) against the
Republic of Bulgaria, filed in the Court on 17 December 2001 on the grounds of Article 34 of
the Convention for the Protection of Human Rights and Fundamental Freedoms (the
“Convention”) by Nikolay Georgiev Kolev, a Bulgarian citizen born in 1949. Mr Kolev was
shot dead on 28 December 2002 (2020d). His wife, Ms Nanka Koleva, his daughter, Ms Hristina
Koleva, and his son, Mr Georgi Kolev, stated that they intended to continue the proceedings on
the complaint, as well to submit additional complaints. “The applicants alleged, in particular,
that Mr Kolev's detention in 2001 had been unlawful and unjustified, that his complaints against
his detention had not been considered in due time, and the investigation of the first applicant's
murder had not been independent and effective”. By decision of 4 December 2007, the Court
declared the appeal partly admissible and in part inadmissible. The applicable domestic law is
as follows (2020d):
• Detention without a judicial warrant
- Article 202, para. 1 and Article 203 of the Penal Procedure Code of 1974 (“PPC 1974”),
which was in force at the time, provide that a suspect may be detained without charge
for up to 72 hours with a prosecutor's decision.
- Article 152a of the 1974 PPC provides that a person who has been formally charged
with a criminal offense may be detained temporarily for a period of up to 72 hours by a
prosecutor's decision. Within this period, the accused must be brought before a court;
78
- There is no data on the existence of internal court practice on the issue of whether the
72-hour terms for detention under Article 202 and Article 152a may or may not be
sequential.
• Moving complaints against detention on remand
- According to Article 152b of the 1974 PPC, in force at the time, appeals against
detention must be lodged with the relevant investigator or prosecutor, who has the
obligation to send them “immediately” to the competent court. The court must hold a
hearing on the case within three days of receiving the appeal.
• Prosecutorial immunity and procedure for bringing criminal charges against prosecutors
- All judicial officials, including prosecutors, enjoyed immunity against prosecution until
September 2003. According to Article 132 of the Constitution, in force until September
2003, in connection with Article 70, criminal proceedings against prosecutors may be
initiated only if their immunity is removed by a decision of the Supreme Judicial
Council. The Judiciary Act of 1994 (section 27 (1) (6) and section 134 (3) states that the
power to make proposals to the Supreme Judicial Council to remove the immunity of a
judicial official is conceded to the Prosecutor General.
- As the immunity can only be lifted upon a proposal of the Prosecutor General, which
means that it is not possible to lift the immunity of the Prosecutor General against his
will, in 1998 the National Assembly amended the Judiciary System Act of 1994 and
empowered the Chairmen of the Supreme Court of Cassation and of the Supreme
Administrative Court as well the Minister of Justice to submit a proposal to the Supreme
Judicial Council for waiving the immunity of each judicial official. On 14 January 1999
the Constitutional Court declared the amendment unconstitutional, concluding that it
violated Article 127, paragraph 1 of the Constitution, which gives the Prosecution
authorities the exclusive power to bring charges and lead the prosecution against
criminal suspects (decision № 1, constitutional case № 34/1998).
- In June 2002, the National Assembly adopted a new amendment aimed at eliminating
the shortcomings in the law. During the debate on the amendment, several MPs
considered it unconstitutional, given the decision of the Constitutional Court in 1999,
and expressed the opinion that the shortcoming is derived from the text of the
Constitution and can be eliminated only after an amendment to the Constitution.
However, Parliament adopted a text according to which one-fifth of the members of the
Supreme Judicial Council could propose to the entire Council the waiver of the
immunity of any judicial official.
- On 16 December 2002, the Constitutional Court rejected the amendment (decision №1,
constitutional case № 17/2002), citing the reasons set out in its ruling dated 1999. The
Constitutional Court did not give an opinion on the question whether the ensuing
impossibility to waive the immunity of the Prosecutor General is compatible with the
constitutional principle of legality, as well as with the fundamental rights protected by
the Constitution.
- The shortcoming was eliminated as of September 30, 2003, after the National Assembly
amended the Constitution and introduced, by virtue of Article 132, para. 4, the
possibility for one fifth of the members of the Supreme Judicial Council to refer to the
entire Council, which has the right to make a decision for bringing charges and detention
of each judicial official. In addition, with the amendment, Article 132 of the Constitution
no longer uses the term “immunity” and limits the number of cases in which permission
from the Supreme Judicial Council is required. According to the amended text, such
prior authorization is only necessary for bringing charges against judges and prosecutors
when the charges are for crimes committed by them in the performance of their official
duties.
79
Obtaining such permission is also necessary for the issuing of detention orders for
judges and prosecutors, regardless of the nature of the charges in respect of which
detention is sought. The Judiciary System Act was amended as of April 9, 2004 to reflect
the new constitutional provisions.
Following the above amendments, in theory, any prosecutor or investigator could bring
charges against the Prosecutor General without the need for prior authorization in the
case of a crime not related to the latter's official duties. However, the Prosecutor General
could overturn any such decision taken by a subordinate prosecutor or investigator.
Also, the permission of the Supreme Judicial Council to detain the Prosecutor General
remains necessary.
A further amendment to the Constitution of February 2007 removed all procedural
restrictions on the prosecution of judicial officials. The new Judiciary System Act of
2007 reflects this change in its provisions. Since February 2007, in theory, any
prosecutor or investigator has the right, without prior authorization, to bring charges
against the Prosecutor General, or to request a pre-trial detention order from the relevant
court when there is sufficient information that he may have committed a crime. As
mentioned above, however, the Prosecutor General may overturn any such decision
taken by a subordinate prosecutor or investigator.
• The prosecutor's office. Appointment, mandate, dismissal and suspension of judicial staff
in general, and of the Prosecutor General in particular
- According to the 1991 Constitution, all prosecutors have the status of judicial officers
(magistrates), and are thus part of the judiciary. After three years of service, they receive
a mandate. The appointment and dismissal of judicial officers is possible only by a
decision of the Supreme Judicial Council (see paragraphs 136 and 137 below). The
Prosecutor General, who is also a judicial officer, is appointed by the President of the
Republic of Bulgaria on the proposal of the Supreme Judicial Council for a single seven-
year term. Prior to the expiry of his term of office, the same grounds for removal apply
to him as to all other judicial officers. He may be removed by the President of the
Republic of Bulgaria on the proposal of the Supreme Judicial Council.
- According to Article 129 of the 1991 Constitution, in force as of 30 September 2003,
judicial officers with a mandate, including prosecutors, may be dismissed only by
retirement, in cases of permanent physical incapacity, or when they are sentenced to
imprisonment after the final entry into force of a sentence on charges of intentional
commission of a crime.
- Since 30 September 2003, when the Constitution was amended, removal is possible in
case of “serious breach or systematic failure to perform the duties of a judicial officer”
and in cases of “acts detrimental to the reputation of the judiciary”. In 2006, the National
Assembly adopted an amendment to the Constitution, according to which not only the
Supreme Judicial Council but also two-thirds of parliament members can propose to the
President to remove the Prosecutor General or the Presidents of the two Supreme Courts
for the reasons mentioned above.
On 13 September 2006, the Constitutional Court annulled the amendment, ruling that it
aimed to change the balance between the various authorities, and that the Constitution
required such changes to be made by the Grand National Assembly. Several judges
differ and believe that the change is necessary because the current legal regime does not
offer sufficient guarantees against illegal actions committed by senior prosecutors or
judges. In his dissenting opinion, one of the judges noted the following:“Given the fact
that the Supreme Judicial Council includes members who are subordinate to (the
Prosecutor General and the Presidents of the two Supreme Courts) or are in friendly
80
relations with them, it is very likely that the Supreme Judicial Council will not be able
to form a majority in support of the dismissal of these three high-ranking judicial
officials despite the violations of the law committed by them….”. Prior to the (rejected
constitutional amendment), the domestic legal order was helpless in such situations and
the illegal conduct of judicial staff had to be endured for long periods. Tolerating lack
of control and accountability is contrary to the spirit of the Constitution.
“Unfortunately”, as a result of (the majority decision in the present case), control over
the activities of senior judicial officials will continue to be ineffective, as it is exercised
by themselves and their subordinates.
- Under the Judiciary Act 1994 (section 40) and the Judicial Systems Act 2007 (section
230), the Supreme Judicial Council has the right to remove from office any judicial
officer against whom criminal charges have been brought.
• Powers of the Prosecutor General
- The system of the Prosecutor's Office in the Republic of Bulgaria is centralized. All
prosecutors are subordinate and accountable to the Prosecutor General (section 112 of
the Judicial Systems Act 1994 in force until 2007, and section 136 of the Judiciary Act
2007).
- The Prosecutor General, as the highest-ranked prosecutor in the hierarchy, has the right
to issue mandatory orders concerning the work of each prosecutor, including the work
in specific cases, or to take over the work in a case in which another prosecutor works
(section 116 of the Judicial Systems Act 1994, in force until 2007, and sections 139 and
143 of the Judicial Systems Act 2007).
- The Prosecutor General has the right to submit to the Supreme Judicial Council
proposals for the promotion, dismissal or disciplinary sanction of prosecutors
(paragraphs 27, 30 and 172 of the Judicial Systems Act 1994, in force until 2007, and
paragraph 38 and 312 of the Judicial Systems Act 2007).
- Under the 1974 PPC, in force until 2006, the prosecutor controlled the investigation
(Article 48 § 3 of the 1974 PPC). This includes the right to give specific instructions, to
change the investigator, or to take over the entire investigation (Article 176, paragraph
1 of the same Code). The 2006 PPC strengthens prosecutorial control and his direct
involvement in the investigation of crimes. Furthermore, as a result of constitutional and
legislative changes of 2006, 2007 and 2009, the investigative services were integrated
into the prosecution offices, and for the moment they are administratively subordinate
to the Prosecutor General (Articles 127 and 128 of the Constitution of the Republic of
Bulgaria and Articles 136, 148 - 153 of the Judicial Systems Act of 2007). In 2009, the
Constitutional Court rejected a proposal to declare as unconstitutional the amendments
to the Judiciary Act 2009 that regulate this subordination.
• The Supreme Judicial Council
- The Supreme Judicial Council has 25 members. The Chairmen of the Supreme Court of
Cassation and the Supreme Administrative Court and the Prosecutor General are ex
officio members. Parliament elects eleven members, who may be judges, prosecutors,
investigators and lawyers. The remaining eleven members are elected at separate
meetings by delegates of judges (elect six members), prosecutors (elect four members)
and investigators (elect one member) (Article 130 of the Constitution of the Republic
of Bulgaria, paragraphs 17-20 of the Judicial Systems Act from 1994, in force until
2007, and paragraphs 17 and 20-26 of the Judicial Systems Act of 2007).
- Decisions concerning, inter alia, to the dismissal of a judicial officer or a proposal to the
President of Bulgaria of removal the Prosecutor General shall be taken by the members
of the Supreme Judicial Council by secret ballot. Until September 2003, when Article
81
131 of the Constitution was changed, this was not the case, as regards the decisions to
waive the immunity of judicial officers of the prosecution office, which were taken by
a procedure of open voting. Between September 2003 and February 2007, these
decisions also had to be taken by secret ballot. Since February 2007, the permission of
the Supreme Judicial Council has no longer been required to bring charges of any kind
against a judicial officer (see § 127 above) (2020d).
The decision in these proceedings is as follows (2020d):

• Assume that the widow and children of the first applicant are in a position to continue the
proceedings instead of him;
• Accepts that a violation of the right of the first applicant has been committed according to
Article 5, paragraph 3 of the Convention to be brought promptly before a judge or other
official authorized by law to perform judicial functions;
• Assume that the first applicant's deprivation of liberty between 13 September and 29
November 2001 was unlawful and contradict to Article 5, paragraph 1 of the Convention;
• Accepts that it is not necessary to consider separately the complaint under Article 5,
paragraph 3 of the Convention, in the sense that the first applicant's deprivation of liberty
was unjustified and had lasted too long;
• Assume that there has been a violation of the first applicant's right under Article 5,
paragraph 4 of the Convention that the complaint against detention to be dealt with
promptly;
• Accepts that a violation of Article 2 of the Convention, consisting in the fact that the
investigation into the murder of Mr Kolev had been ineffective and the necessary
independence was lacking;
• Accepts that the respondent State must pay the relevant taxes, such as non-pecuniary
damage, as well as the costs and expenses;
• Dismisses the remainder of the applicants' claim for righteous satisfaction.
4. CONCLUSION
The independence of the Prosecutor General of any Member State of the European Union is
extremely important with a view to comply with the legal framework and the rule of law. It lays
the foundations of trust in the judiciary and the fundaments of statehood, creates a sense of law
and legal order. That is why it is highly important in the context of the present to outline the
control of the activity of the Prosecutor General in the exercise of his powers, clearly
emphasizing that the Bulgarian Prosecutor General is not out of control in his powers. The legal
powers of the Prosecutor General of the Republic of Bulgaria are even more limited than the
powers of analogous figures in the legal systems of other EU countries. The Prosecutor General
exercises his powers only in exceptional cases and according to previously prescribed legal
procedures (Terziev, Georgiev, Bankov, 2020e; 2020f). The Prosecutor General of the Republic
of Bulgaria provides methodological guidance on the activities of all prosecutors and
investigators (Article 136, para. 5 of Judicial Systems Act (In 2016 (issue 62/2016, in force
from 09.08.2016) Article 136 of the Judicial Systems Act was amended, according to whose
new wording (corresponding to Article 126 of the Constitution of the Republic of Bulgaria) the
Prosecution is united body and its structure corresponds to that of the courts'. With the change
of this norm the centralization in the system of the Prosecutor's office ended. This idea has been
realized not only through an editorial change (dropping the word “centralized”), but also finds
expression in the provisions of Article 136, para. 3 of the Law on the Judiciary, which stipulates
that prosecutors and investigators are guided by the administrative heads of the respective
Prosecutor's office and of Article 136, paragraph 5 of the Law on the Judiciary (former
paragraph 6), which provides that the Prosecutor General supervises the legality and
82
methodological guidance of the activities of all prosecutors and investigators for accurate and
equal application of laws and protection of legal rights and interests of citizens, legal entities
and the state. I.e. the administrative guidance in the prosecution system is clearly limited
horizontally by the methodological guidance vertically), analogy Article 46, para. 5 of Criminal
Procedure Code) for accurate and equally application of the laws and protection of the legal
rights and interests of the citizens, legal entities and the state, through the issuance of common
methodological instructions and directions regarding the activity of the Prosecution (power
under Art. 138, para. 1, item 6 of Law on the Judiciary). The acts cited in support of the
allegation are general. It should be noted that they relate generally to the activities of all
prosecutors and investigators, have the character of recommendations that create organizational
prerequisites and contain methodological guidelines for the proper application of the law. Due
to these general methodological guidelines, containing directions for the same type of cases
used (most often in case of legislative changes), there is the possibility of applying the norm by
all prosecutors equally and fairly (Terziev, Georgiev, Bankov, 2020g; 2020h). It is clear that
the methodological guidelines and directions, as general and principled, aim to promote
professional development and at the same time to support the separate and independent exercise
of the prosecutorial activity. The claims of various subjects that they are specific are not only
untenable, but lead to the conclusion of ignorance of the regulations. All instructions do not
concern a separate and specific case. It is for this reason that the recommendation of the experts,
who performed an independent analysis of the structural and functional model of the Bulgarian
Prosecutor's Office, is that they be publicly available, as long as this does not conflict with the
effectiveness of the investigation in relation to prosecution and national security. The trend over
the last year and a half, which has been undertaken by the Prosecutor General of the Republic
of Bulgaria to publish more such acts, leading to a fuller transparency of cases in which the
Prosecutor General himself has exercised his powers of methodological guidance, implements
the recommendation and is a sign to the Bulgarian society for a clearly expressed will and firm
position on transparency and control of the activity of the Prosecution, insofar as this does not
pose a threat to national security and/or would vitiate an investigation in various cases. The
actions of the Prosecutor General of the Republic of Bulgaria are also related to the exercise of
legally regulated powers and control of lawfulness in specific cases, as expressly provided by
law (for example Article 243, paragraph 10 of the Criminal Procedure Code, the requests for
reopening of criminal cases under Chapter Thirty-three of the Criminal Procedure Code, etc.)
(Terziev, Georgiev, Bankov, 2020e; 2020f; 2020g; 2020h). Generally speaking, if the
Prosecutor General commits a crime, he cannot remain “anonymous”. It is considered that
proclaiming the untruth about the untouchability of the Prosecutor General in a state governed
by the rule of law, it is also worrying that in practice this puts unacceptable pressure on the
Prosecution, which will not be exaggerated if it is qualified as motivational violence vis
compulsive - especially against the Prosecutor General himself. As the current Prosecutor
General is the first Prosecutor General from practice, he is aware of the need for legislative
changes and interpretative decisions that ensure a unified standard in the resolution of cases. It
is necessary to unify the practice between the Prosecution and the Court, in order to ensure
effective criminal proceedings and fair sentences.
LITERATURE:
1. Terziev, V., Georgiev, M., Bankov, S. (2020). Functions, rights and obligations of the
“Expert Council” of the prosecutor general of the Republic of Bulgaria. // International
scientific journal “Internauka”, Kiev, Ukraine, № 14(94), 2020, 2 т., pp. 28-29, ISSN 2520-
2057.
83
2. Terziev, V., Georgiev, M., Bankov, S. (2020a). Rezulytatay i tendentsii v bolgarskoy

prokurature v protsesse ee protivodeystviya prestupnosti. // Mezhdunarodnayy nauchnayy
zhurnal „Internauka“, Kiev, Ukraina, № 15 (95) 1 t., s. 62-67, ISSN 2520-2057 (Терзиев,
В., Георгиев, М., Банков, С. Результаты и тенденции в болгарской прокуратуре в
процессе ее противодействия преступности. // Международный научный журнал
„Интернаука“, Киев, Украина, № 15 (95) 1 т., с. 62-67, ISSN 2520-2057).
3. Terziev, V., Georgiev, M., Bankov, S. (2020b). Bolgarskaya prokuratura kak vedushtaya
institutsiya v Bolgarii. // Mezhdunarodnayy nauchnayy zhurnal «Internauka», Kiev,
Ukraina, № 15 (95) 1 t., s. 68-75, ISSN 2520-2057 (Терзиев, В., Георгиев, М., Банков, С.
Болгарская прокуратура как ведущая институция в Болгарии. // Международный
научный журнал «Интернаука», Киев, Украина, № 15 (95) 1 т., с. 68-75, ISSN 2520-
2057).
4. Terziev, V., Georgiev, M., Bankov, S. (2020c). Edinayy katalog korruptsionnayh
prestupleniy v bolgarskoy prokurature. // Mezhdunarodnayy nauchnayy zhurnal
«Internauka», Kiev, Ukraina, № 14(94), 2020, 2 t., c. 43-45, ISSN 2520-2057 (Терзиев, В.,
Георгиев, М., Банков, С. Единый каталог коррупционных преступлений в болгарской
прокуратуре. // Международный научный журнал «Интернаука», Киев, Украина, №
14(94), 2020, 2 т., c. 43-45, ISSN 2520-2057).
5. https://www.parliament.bg/bg/const (2020d).
6. Terziev, V., Georgiev, M., Bankov, S. (2020e). Meray i iniatsitivay bolgarskoy
prokuraturay po osushtestvleniyu horoshih praktik. // Mezhdunarodnayy nauchnayy
zhurnal «Internauka», Kiev, Ukraina, 2020, № 12 (92), s. 69-72, ISSN 2520-2057 (Терзиев,
В., Георгиев, М., Банков, С. Меры и иниацитивы болгарской прокуратуры по
осуществлению хороших практик. // Международный научный журнал
«Интернаука», Киев, Украина, 2020, № 12 (92), с. 69-72, ISSN 2520-2057).
7. Terziev, V., Georgiev, M., Bankov, S. (2020f). Achieved results of the Bulgarian
Prosecutor`s Office in the prosecution and investigation of crimes of corruption. // 58th
International Scientific Conference on Economic and Social Development – Budapest, 04-
05 September, 2020, Economic and Social Development (Book of Proceedings), pp. 384-
387, 2020, ISSN 1849-7535.
8. Terziev, V., Georgiev, M., Bankov, S. (2020g). The functions of the Bulgarian Prosecutor`s
Office to guarantee compliance with the law during investigations. // 58th International
Scientific Conference on Economic and Social Development – Budapest, 04-05 September,
2020, Economic and Social Development (Book of Proceedings), pp. 1-5, 2020, ISSN 1849-
7535.
9. Terziev, V., Georgiev, M., Bankov, S. (2020h). Interaction of the Prosecutor's office with
the competent state authorities for counteraction of corruption. // International scientific
journal “Internauka”, Kiev, Ukraine, 2020, № 12 (92), pp. 54-57, ISSN 2520-2057.
10. Terziev, V., Georgiev, M. Bankov, S. (2020i). Increasing the risk of corruption activities
during a COVID-19 pandemic. // International scientific journal “Internauka”, Kiev,
Ukraine, 2020, № 12 (92), pp. 58-59, ISSN 2520-2057.
84
STRATEGIC CHALLENGES OF TRANSNATIONAL CORPORATIONS

FROM EMERGING ECONOMIES
Najla Podrug
Faculty of Economics and Business University of Zagreb,
Trg J. F. Kennedyja 6, 10 000 Zagreb, Croatia
[email protected]
ABSTRACT
For the first time in 2020, there are more Chinese corporations on the Fortune Global 500 list
than American corporations. The objective of this paper is to analyze transnational
corporations from emerging economies. Their most common corporate advantages are related
to entrepreneurial agility, flexibility / responsibility, and business experience in demanding
business environments. A large number of these corporations have developed the brand and
technology in an unconventional way and joint investments with transnational corporations
originating from developed countries are an important driver for the acquisition of
technological knowledge. The paper also emphasizes important category of transnational
corporations from emerging economies - state-owned corporations. Specific challenges faced
by transnational corporations from emerging economies are presented in detail.
Keywords: transnational corporations, transnationality index, emerging economies, strategic
challenges, impact
1. INTRODUCTION
Transnational corporations are the strongest and most significant single economic entity of
today. Their role and strength is indisputable. In 2019, the 500 largest corporations in the world
generated revenue of $ 33.3 trillion, or a profit of $ 2.1 trillion. In 2020, the 500 largest
corporations in the world represented 32 countries and employed 69.9 million people. The
economic strength and income of the largest corporations today significantly exceed the gross
domestic product of most middle-developed and developing countries. Analyzing the largest
transnational corporations in 2020 according to the Fortune Global 500, among the top ten
largest transnational corporations are three corporations from China, three from Europe, two
from the US, one from Japan and one from Saudi Arabia. Looking at the ten largest
transnational corporations in 2020, it is interesting to notice changes compared to 2000.
According to the Fortune Global 500 in 2000, the structure of the ten largest transnational
corporations consisted of six corporations from the U.S. (ranking first five and ninth on the list)
and four corporations from Japan. In 2020, only Walmart and Toyota remained among the ten
largest transnational corporations on the 2000 list. For the first time in 2020, there are more
Chinese corporations on the Fortune Global 500 list than American corporations. The Fortune
Global 500 list for 1990 included a total of 151 U.S. corporations and three Chinese
corporations, and in 2020, a total of 121 U.S. corporations and 124 Chinese corporations were
recorded. When Taiwan is added to China, then the total number of transnational corporations
is even higher (133 corporations). But they still lag behind in total revenue relative to U.S.
corporations. The challenges that transnational corporations from emerging economies have
faced in recent years will be described below.
2. TRANSNATIONALITY AND TRANSNATIONAL CORPORATIONS

In 1995, the United Nations Conference on Trade and Development (UNCTAD) introduced the
Transnationality Index (TNI) with the idea of assessing the extent to which transnational
corporations are involved in foreign activities in relation to activities in the country of origin
(UNCTAD, 1995).
85
The index is designed to give a quick and comprehensive view of the position of different
companies / industries / countries in the process of internationalization. It is calculated as the
average value of the three ratios (foreign sales / total sales + foreign assets / total assets + foreign
employees / total employees). The Transnationality Index is calculated annually for the 100
largest transnational non-financial corporations selected according to the criterion of the largest
foreign assets. The calculation is done by Erasmus University of Rotterdam. The advantage of
this index is that it includes three aspects of measuring the intensity of foreign activities in
relation to total activities; the disadvantage, however, is that it does not make a distinction
between those transnational corporations that concentrate most of their foreign activities in a
small number of countries and those that operate in a large number of countries. Since the index
does not cover the size of the national economy, the interpretation is somewhat ambiguous. A
high value of the transnationality index may indicate strong international competitiveness, but
it can also mean a questionable competitive advantage in the country of origin. It is also
interesting to note that transnational corporations coming from small countries record a higher
degree of internationalization than corporations from strong, large economies. This is logical
because large economies have greater opportunities to absorb corporate activities, and
transnational corporations can realize most of their potential nationally (Rahimić and Podrug,
2013). Tables 1 and 2 refer to the largest non-financial transnational corporations from
developed countries and developing countries and transition countries, ranked according to the
value of foreign assets.
Table 1: The world's top non-financial transnational corporations, ranked by foreign assets,
2019a, millions of dollars and number of employees
Ranking by: Assets Sales Employment
Foreign TNI b
TNI b Corporation Home economy Industry c Foreign Total Foreign Total Foreign d Total
assets (Per cent)
1 19 Royal Dutch Shell plc United Kingdom Mining, quarrying and petroleum 376 417 402 681 276 518 331 684 59 000 83 000 82,6
2 46 Toyota Motor Corporation Japan Motor Vehicles 307 538 485 422 187 768 275 390 227 787 359 542 65,0
3 22 BP plc United Kingdom Petroleum Refining and Related 259 860 295 194 215 203 278 397 58 900 72 500 82,2
4 41 Softbank Group Corp Japan Telecommunications 253 163 343 306 29 286 56 910 55 272 74 953 66,3
5 27 Total SA France Petroleum Refining and Related 249 678 273 865 137 438 175 985 71 456 107 776 78,5
6 54 Volkswagen Group Germany Motor Vehicles 243 469 548 271 227 940 282 776 374 000 671 000 60,3
7 17 Anheuser-Busch InBev NV Belgium Food & beverages 192 138 237 142 44 352 52 251 148 111 171 915 84,0
8 29 British American Tobacco PLC United Kingdom Tobacco 184 959 186 194 25 232 32 998 31 196 53 185 78,2
9 56 Daimler AG Germany Motor Vehicles 179 506 339 742 163 875 193 357 124 842 298 655 59,8
10 60 Chevron Corporation United States Petroleum Refining and Related 172 830 237 428 75 591 140 156 22 800 48 200 58,0
11 78 Exxon Mobil Corporation United States Petroleum Refining and Related 169 719 362 597 123 801 255 583 35 058 74 900 47,4
12 13 Vodafone Group Plc United Kingdom Telecommunications 168 394 184 253 42 530 49 971 58 429 68 724 87,2
13 88 EDF SA France Electricity, gas and water 155 021 340 692 30 625 79 827 34 381 165 790 34,9
14 11 CK Hutchison Holdings Limited Hong Kong, Retail Trade 143 367 155 523 32 556 38 163 279 000 300 000 90,2
15 33 Honda Motor Co Ltd Japan Motor Vehicles 143 180 188 541 116 150 137 382 153 215 219 722 76,7
16 71 Enel SpA Italy Electricity, gas and water 135 691 192 570 28 311 86 597 38 503 68 253 53,2
17 32 Siemens AG Germany Industrial and Commercial 134 634 163 598 77 280 97 957 269 000 385 000 77,0
18 96 China National Petroleum Corp (CNPC) China Mining, quarrying and petroleum 133 636 595 935 171 756 410 023 122 704 1 266 400 e 24,7
19 49 Deutsche Telekom AG Germany Telecommunications 132 443 191 723 62 605 90 140 116 422 210 533 64,6
20 63 BMW AG Germany Motor Vehicles 126 609 256 160 101 614 116 644 43 360 133 778 56,3
a) Preliminary results based on data from the companies' financial reporting; corresponds
to the financial year from 1 April 2019 to 31 March 2020.
b) TNI, the Transnationality Index, is calculated as the average of the following three ratios:
foreign assets to total assets, foreign sales to total sales and foreign employment to total
employment.
c) Industry classification for companies follows the United States Standard Industrial
Classification as used by the United States Securities and Exchange Commission (SEC).
d) In a number of cases foreign employment data were calculated by applying the share of
foreign employment in total employment of the previous year to total employment of 2019.
e) Data refers to 2018.
(Source: https://unctad.org/topic/investment/world-investment-report?tab=Annex%19Table)
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Table 2: The world's top non-financial transnational corporation from developing and
transition economies, ranked by foreign assets, 2018a, millions of dollars and number of
employees
Ranking by: Assets Sales Employment
TNI
Foreign
TNI b Corporation Home economy Industry c
Foreign Total Foreign Total Foreign d Total (Per cent)
assets
1 4 CK Hutchison Holdings Limited Hong Kong, China Retail Trade 144 891 157 337 33 036 35 358 279 000 300 000 92,8
2 80 China National Petroleum Corp (CNPC) China Mining, quarrying and petroleum 133 636 595 935 171 756 410 023 122 704 1 266 400 24,7
3 5 Hon Hai Precision Industries Taiwan Province of China Electronic components 106 644 110 609 171 647 175 576 824 063 987 613 92,5
4 84 Sinopec - China Petrochemical Corporation China Petroleum Refining and Related Industries 90 492 328 607 132 500 443 308 39 658 423 543 22,3
5 42 Samsung Electronics Co., Ltd. Korea, Republic of Communications equipment 84 717 304 057 136 064 221 464 215 542 308 746 53,0
6 90 China COSCO Shipping Corp Ltd China Transport and storage 81 190 315 020 22 786 114 465 8 091 173 300 16,8
7 56 Tencent Holdings Limited China Computer and Data Processing 77 594 119 824 1 555 53 813 35 169 54 309 44,1
8 69 China National Offshore Oil Corp (CNOOC) China Mining, quarrying and petroleum 69 517 176 882 65 071 108 065 4 671 94 000 34,8
9 37 Sinochem Group China Chemicals and Allied Products 57 275 71 200 75 201 89 308 11 023 65 271 60,5
10 32 China National Chemical Corporation (ChemChina)
China Chemicals and Allied Products 54 090 117 011 32 768 34 433 86 025 167 000 64,3
11 59 Huawei Technologies Co, Ltd China Communications equipment 53 242 96 803 52 735 108 964 45 000 188 000 42,4
12 64 Petronas - Petroliam Nasional Bhd Malaysia Mining, quarrying and petroleum 45 031 153 978 43 580 62 177 9 600 48 001 39,8
13 16 Trafigura Group Pte Ltd Singapore Wholesale Metals and Minerals 43 056 53 801 139 256 180 744 3 454 4 316 79,0
14 94 Saudi Aramco Saudi Arabia Mining, quarrying and petroleum 42 109 358 978 61 005 355 941 7 970 67 947 13,5
15 99 State Grid Corporation of China China Electricity, gas and water 41 636 571 770 15 537 387 191 15 759 917 717 4,3
16 75 Formosa Plastics Group Taiwan Province of China Chemicals and Allied Products 40 685 134 779 21 156 79 780 38 246 115 376 30,0
17 47 Legend Holdings Corporation China Computer Equipment 39 621 81 169 38 529 54 427 16 929 75 000 47,4
18 30 América Móvil SAB de CV Mexico Telecommunications 35 849 71 976 48 351 53 055 100 835 189 448 64,7
19 24 Tata Motors Ltd India Motor Vehicles 35 238 44 408 33 425 43 157 39 795 82 797 68,3
20 77 China Communications Construction CompanyChina
Ltd Construction 34 568 139 649 23 480 74 164 31 788 135 813 26,6
a) Preliminary results based on data from the companies' financial reporting; corresponds
to the financial year from 1 April 2018 to 31 March 2019.
b) TNI, the Transnationality Index, is calculated as the average of the following three ratios:
foreign assets to total assets, foreign sales to total sales and foreign employment to total
employment.
c) Industry classification for companies follows the United States Standard Industrial
Classification as used by the United States Securities and Exchange Commission (SEC).
d) In a number of cases foreign employment data were calculated by applying the share of
foreign employment in total employment of the previous year to total employment of 2019.
(Source: https://unctad.org/topic/investment/world-investment-report?tab=Annex%20Table)
As can be seen from Tables 1 and 2, data on transnational corporations from developed
countries are separated from those originating from developing countries and transition
countries. UNCTAD has retained the terminology (transnational corporations from developing
and transition countries) although in modern literature they are even referred to as world-class
transnational corporations (Van Agtmael, 2007). The new terms coined for these corporations
are: BRIC transnational corporations, VISTA transnational corporations, etc. BRIC is an
abbreviation and economic term referring to the growing economies of Brazil, Russia, India
and China, and VISTA is an English abbreviation and economic term referring to the growing
economies of Vietnam, Indonesia, South Africa, Turkey and Argentina. Table 3 shows other
examples of clusters of growing economies.
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Table 3: Clusters of growing economies

NEXT 11 Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines,
South Africa, South Korea, Turkey
CIVETS Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa
BEM - Big Brazil, China, Egypt, India, Indonesia, Mexico, Philippines, Poland, Russia,
Emerging South Africa, South Korea, Turkey
Markets
MINT Mexico, Indonesia, Nigeria, Turkey
BRICET Brazil, Russia, India, China, Eastern Europe, Turkey
BRICK Brazil, Russia, India, China, South Korea
BRICM Brazil, Russia, India, China, Mexico
BRICS Brazil, Russia, India, China, South Africa
(Source: Van Tudler, R., Carneiro, J. and Gonzalez-Perez, M. A. (2017) Introduction: What
makes BRIC multinationals special?. In: Van Tulder, R., Verbeke, A., Carneiro, J. and
Gonzalez-Perez, M. A., eds. The Challenge of BRIC Multinationals. Progress in International
Business Research. Vol. 11, Bingley: Emerald Group Publishing Limited, pp. 45.)
3. CHALLENGES OF TRANSNATIONAL CORPORATIONS FROM EMERGING

MARKETS
Analyzing transnational corporations from emerging economies, Verbeke and Kano (2015)
identified how their most common corporate advantages are related to entrepreneurial agility,
flexibility / responsibility, and business experience in demanding business environments. They
also noted that a large number of corporations have developed the brand and technology in an
unconventional way and that joint investments with transnational corporations originating from
developed countries are an important driver for the acquisition of technological knowledge.
Wells (1983) very cautiously predicted the long-term progress of transnational corporations
from emerging economies. He warned that their competitive advantages in the international
market may not be beneficial to the long-term success of the corporation. Collinson and
Rugman (2007) emphasize that the majority of their sales are concentrated in the region of
origin and that a small number of transnational corporations from emerging economies have a
global reach achieving relatively uniform sales among different regions of the world. Numerous
studies point to the problematic long-term business results of cross-border activities of
transnational corporations from emerging economies (Peng, Sun, & Blevins, 2011; Quer-
Ramón, Claver-Cortés, & Rienda-Garcia, 2014). The reason for this is the lack of
recombination competencies that are necessary for the effective integration of the acquired
companies as well as for the management of the transfer and the development of specific
corporate advantages after the takeover. In particular, state-owned corporations from emerging
economies face difficulties in developing specific corporate advantages, but nevertheless carry
out internalizing activities for political and other external reasons. Kano, Verbeke, and Van
Tulder (2017) point out that state-owned corporations from emerging economies fail to
effectively combine specific corporate advantages with specific advantages of the host country.
Wells (1983) predicted that the technology and products of transnational corporations from
emerging economies are the result of specific conditions in the country of origin and that such
technology and products will best suit other emerging economies. But that didn’t turn out to be
true. The best examples of significant high-tech investments around the world are Brazil’s
Embraer, Argentina’s Tenaris, Mexico’s Cemex, South Korea’s Samsung and China’s Lenovo.
Although in the beginning these corporations developed technology in collaboration with
transnational corporations from developed countries, it can now be said that R&D practices in
transnational corporations from emerging economies are among the world’s leading innovators
(Kano, Verbeke, & van Tulder, 2017).
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Wells ’prediction, however, proved to be accurate for Russian transnational corporations

(Kuznetsov, 2010). Russian investments are predominantly linked to the former Soviet bloc,
part of the Balkan countries and the Commonwealth of Independent States (CIS) because these
are countries that have similar languages, historical heritage (and consequently similar
economic and legal systems), similar transition problems as well as political connections that
reduce distance-related transaction costs (Kuznetsov, 2010). As an important category of
transnational corporations from emerging economies, it is important to single out state-owned
corporations. Although they can differ significantly in the degree of state ownership, the way
the state is involved, etc., the most important are the differences in strategy, goals and other
characteristics. However, for success in the international market, recombination competencies
are crucial, not ownership structures. Namely, all corporations, both private and state-owned,
face the same challenges in the international market, but state-owned corporations most often
have specific corporate advantages related to state ownership, so they are very likely
locationally limited or non-transferable. Therefore, a major challenge faced by state-owned
corporations from emerging economies is the effective transfer and recombination of specific
corporate advantages with the specific advantages of the host country. Successful examples of
transfer and recombination of corporate advantages with specific advantages of the host country
are the Chinese Lenovo and Haier where the state also participates in ownership. In contrast,
an unsuccessful example is China’s Changhong Electric, a Chinese state-owned corporation
that failed to enter the U.S. consumer electronics market due to an inability to connect with
local distributors (Kano, Verbeke, & Van Tulder, 2017). Why are transnational corporations
from emerging economies interesting? Yiu, Lau, and Bruton (2007) identified how their
internationalization strategies are oriented toward acquiring strategic assets, and are aggressive,
high-risk, and radical because they target many consumers in different countries at the same
time. Dunning, Kim, and Park (2008) compared transnational corporations from developed
countries in the 1960s with transnational corporations from emerging economies in the early
21st century. They noticed the following differences: the form of entering the foreign market
(transnational corporations from growing economies are more oriented to strategic alliances),
motivation (transnational corporations from growing economies are more oriented to increase
assets due to insufficient ownership advantages), managerial approach (transnational
corporations from emerging economies apply a more regional and geocentric approach), the
role of the government of the country of origin (governments of emerging economies are taking
a more active role than in the past). Furthermore, Cuervo-Cazurra and Ramamurti (2014) argue
that the ownership advantages of transnational corporations from emerging economies are
distinctive to the advantages of transnational corporations from developed countries. Their
ownership advantages are primarily related to organization and management, and less to brand
and technological innovation. In addition to the history of state ownership, Cuervo-Cazurra and
Ramamurti (2014) also identified how transnational corporations from emerging economies
resort more to takeovers than to organic international expansion.
4. IMPACT OF TRANSNATIONAL CORPORATIONS FROM EMERGING

MARKETS
Although transnational corporations develop for their own interests, their productive, financial,
technological, and market capacity and strength have a significant impact in each country where
they develop their activities. This is why transnational corporations, especially from emerging
economies, are not only business, but also extremely important political and social institutions
of the modern world. Transnational corporations as bearers of continuous change increase
interdependencies among people, economies and countries, and greater interdependence also
means a greater likelihood of conflict. Therefore, there are frequent discussions about the
controversy of the phenomenon of transnational corporations because they can have a positive
89
and negative effect on the economies of individual countries (Rakita, 2013). It is unquestionable
how transnational corporations increase the degree of technological dependence of less
developed countries, but they also have a positive effect on those same countries. With the
strength of their development and market potentials, transnational corporations provide
additional resources for many countries, technology transfer, knowledge transfer for citizens,
more dynamic industrialization, higher employment, international market standards, better
basis for development, greater economic diversification, competitive training to enter foreign
markets. etc. (Rugman and Doh, 2008). At the same time, transnational corporations are treated
as a significant threat to the sovereignty and economic independence of individual countries.
Therefore, conflicts often occur between transnational corporations and individual countries
due to different expectations and the relative market power of the corporation in the new
environment, the industry in which the corporation operates, management style, etc. Often
countries and their representatives initiate potential conflicts, so it is common for transnational
corporations to encounter a number of limitations (Rakita, 2013). Experience shows that
countries that do not behave too restrictively towards transnational corporations, get positive
results for their own economy. In the context of the external effects of the operations of
transnational corporations, it is important to point out the dark side of their operations. Although
dominant theoretical considerations define transnational corporations as agents of economic
exchange and as benign or neutral in terms of ethics, a number of transnational corporations are
still involved in activities that can be labeled as unethical or even illegal (Crains and As-Sareb,
2017). The dominant contemporary view of benign or neutral transnational corporations in most
cases ignores the fact that there are businesses whose activities are very problematic. An
example of this is transnational corporations from the fast food industry that create the problem
of obesity and other health problems in less developed countries (Patterson, 2011). One of the
biggest tragedies related to the textile industry is the demolition of the Rana Plaza building in
Bangladesh when 1,113 workers were killed and over 2,000 workers were injured in 2013. This
tragedy pointed to a number of omissions and problems and resulted in the Accord on Fire and
Building Safety Agreement signed in May 2013. It was the first modern, five-year, binding
agreement between workers, factory management and transnational corporations under which
transnational corporations (global brands and retail chains) are responsible for ensuring safe
working conditions for factory workers. The 2018 Fire and Building Safety Agreement was
signed by more than 200 global brands and retail chains, extending the original agreement to
three years. Among the global brands that signed the Agreement in 2018 are Inditex, H&M and
UNIQLO, which have more than 1,600 factories and together employ over 2 million workers.
Unfortunately, every day workers die in shipyards in Bangladesh and India, in mines in China,
etc. Experience confirms that only tragic events with loss of human lives can change business
practices.
5. CONCLUSION
In conclusion, it is important to point out that transnational corporations from developing
economies are specific, but just as important as those from more developed economies. In the
context of external effects (positive and negative) of transnational corporations' operations, it
is important to conclude that the activities of transnational corporations should be analyzed
contextually, taking into account different stakeholders, to determine the legislative and ethical
dimensions of these activities. It is also important to point out the relativization of the national
origins of transnational corporations. Namely, today it has become very difficult and even
impossible to identify the national origin of many products. The products are assembled from
components from different parts of the world. It is through this process of emphatically
decomposing national intent and hybrid product origins that new opportunities for business
cooperation and networking of leading transnational corporations and accompanying
90
international competitors need to be identified. Future research should certainly analyze

Verbeke’s model of international corporate strategy for transnational corporations from
developing economies to specify the specifics of their global success.
LITERATURE:
1. Collinson, S. and Rugman, A. M. (2007) The regional characteristics of Asian multinational
enterprises, Asia Pacific Journal of Management, Vol. 24, No. 4, pp. 429-446.
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Ramamurti, R., eds. Understanding multinational from emerging markets. Cambridge:
Cambridge University Press.
3. Dunning, J. H., Kim, C. and Park, D. (2008) Old wine in new bottles: A comparison of
emerging market TNCs today and developed-contry TNCs thirty years ago. In: Sauvant, K.,
ed. The rise of transnational corporations from emerging markets: Threat or opportunity?.
Northampton, MA: Edward Elgar.
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https://fortune.com/global500/list/
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Aggregate_Report_July2020.pdf
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7. Kano, L., Verbeke, A. and Van Tulder, R. (2017) Third world multinationals – then and
now. In: Van Tulder, R., Verbeke, A., Carneiro, J. and Gonzalez-Perez, M. A., eds. The
Challenge of BRIC Multinationals. Progress in International Business Research. Vol. 11,
Bingley: Emerald Group Publishing Limited, pp. 17-40.
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China Today.
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overview of the current state of research. In: Verbeke, A., Van Tulder, R. and Lundan, S.,
eds. Multinational enterprises, markets and institutional diversity. Progress in International
Business Research. Vol. 9, Bingley: Emerald Group Publishing Limited, pp. 477-503.
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fakultet.
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14. Rugman, A. M. and Doh, J. P. (2008) Multinational and Development. New Haven &
London: Yale University Press.
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document/wir2020_en.pdf
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companies is overtaking the world. New Yor, NY: Free Press.
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20. Van Tudler, R., Carneiro, J. and Gonzalez-Perez, M. A. (2017) Introduction: What makes
BRIC multinationals special?. In: Van Tulder, R., Verbeke, A., Carneiro, J. i Gonzalez-
Perez, M. A., eds. The Challenge of BRIC Multinationals. Progress in International
Business Research. Vol. 11, Bingley: Emerald Group Publishing Limited, pp. 41-57.
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enterprises from emerging economies: A business history perspective, Business History
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92
ACCOUNTANTS IN THE DIGITAL AGE, FROM PRIVATE TO

PUBLIC SECTOR: A LITERATURE REVIEW
Carina Ferreira
Porto's Higher Institute of Accounting and Administration, Portugal
[email protected]
Pedro Miranda
Higher Institute of Accounting and Administration of Porto, Portugal
[email protected]
Amelia Ferreira da Silva

CEOS.PP, Polytechnic of Porto, Portugal
[email protected]
Maria Jose Angelico Goncalves

CEOS.PP, Polytechnic of Porto, Portugal
[email protected]
ABSTRACT
Organizations are being reinvented due digitalization and the age of disruption is announced
by accounting scholars. This article aims to describe how the topic of Digitalization of
Accounting has been integrated in research agenda, both in private and public sector. By
applying the systematic literature review methodology, we provide an overview of the research
on the topic, identify the methodologies and main contributions of the studies published in the
web of science, between 2015 and 2020. This study concludes that the digital skills of
professionals are the crucial factor in the development and implementation of emerging
technologies in organizations. It also concluded that the optimistic perspective is dominant,
i.e., digital transformation is an opportunity for accounting and accounts more than it is a
threat. The paper contributes to the definition of new research questions.
Keywords: Accounting, Emerging Information Technologies, Digitalization, Systematic
Literature Review
1. INTRODUCTION
The evolution of technology has driven the transformation of many industries, as well as public
organizations. As a result, accounting profession has been challenged to adapt this new era. The
fourth industrial revolution can be characterized as the fusion between physical processes and
digitalization in decentralized systems. This means a huge change of the social and
organizational environment in which accounting operates, as well as in the tasks, functions,
duties, and skills demanded to accountants. The age of disruption is announced by accounting
scholars. According to Michael Bromwicha (2016), despite greater amount of data suggests that
the decision-making process are more rational, at the same time there is an increase in the level
of complexity. It is here accountants distinguish themselves from other professions since they
have different skills than those of computer analysts and the ability to identify relevant
information. This involvement of accountants with data analyses is highly valued Quattrone
(2016); Greg Richins et al. (2017); Moll and Yigitbasioglu (2019) illustrate the new reality
mentioning that, access to distributed ledgers (blockchain) and big data supported by cloud-
based analytics tools and AI will automate decision making to a large extent. However, Tuomas
Korhonen (2020) asks our attention for the risk of automation regarding information quality.
93
The authors emphasize that “practitioners need to carefully analyze the entity they wish to
automate and understand the factual possibilities of using and maintaining the planned
automatic system throughout its life cycle. This paper reviews the accounting literature that
focuses on Digitalization of Accounting. The key questions are: How do researchers interpret
this process? What are the big ideas that researcher bring to us? To answer these questions, a
systematic review of the literature was carried out, based on the indexed articles on the Web of
Science platform, over the last five years. In the next session, the methodology adopted, and
the procedures carried out during the data collection, selection and analysis process will be
addressed. Following, the results of the analysis will be presented and discussed in session 3.
Finally, we expose the final considerations and proposals for future work.
2. METHODOLOGY
The systematic review of literature requires the application of very clear and explicit
methodological procedures. Currently, researchers have practical guidelines for the
development of these studies, such as the Cochrane Handbook, and the Preferred Reporting
Items for Systematic Reviews and Meta-Analyses. The application of these procedures in the
social sciences requires some adaptations. In this review, the PRISMA (2019) methodology
was adopted. The next figure illustrated the main step we followed:
Phase 1 - Identification of the databases used (Web of Science)

Research Protocol Definition
Phase 2 - Definition of key words (145 articles)
Phase 3 - Election of potentially relevant articles (53 articles)

Phase 4 - Inclusion of relevant articles (33 articles)
Reply to the research questions

Figure 1: Data collection procedures
(Source: Self elaboration)
The databases used for the research of articles were the Web of Science platform. Since the aim
was to analyse the latest research trends in this area, it has been restricted to the last five years
and carried out with the keywords: "accounting" and ("digitalization" or "digital" or "ICT").
The survey was carried out on June 20, 2020 and 145 articles were obtained. To establish
literature review reliability, we define the following inclusion criterion: to have accounting or
accounting subject as research field; and simultaneously; to address digital transformation of
accounting as the issue. To assess this last criterion, the paper must tackle at least one emerging
technology in the accounting area (blockchain; big data; artificial intelligence; cloud
computing). In turn, it would have to fit into the accounting perspective by listing digital
competence profiles, including reporting of accounting information. On the other hand, articles
that focused more on the economic and financial area rather than on the accounting were
excluded. Again, the articles which focused on technology, but without discussing it on
accounting field were also excluded. The inclusion criterions were applied by two researchers.
The first filter was based on title and abstract and it reduced the total number of articles to 53.
This screening process raised doubts about 2 articles. The two researchers ended up agreeing
to include these articles. Subsequently, the selection process for the relevant articles was carried
out by the researchers in an independent manner by reading the entire paper.
94
There were three cases that triggered discussion. These cases were decided by a third researcher.
After the selection process was completed, 33 articles remained for further analysis of the
contents included in Table 1.
Authors/ Objectives/Research
Methodology Conclusions/Contributions
year Question
This study focuses on
With a high score in terms of
relationship between tax Quantitative –
Diller et al. extraversion and openness to experience
consultants' Big-Five Survey.
(2020) and low in neuroticism, they exhibit a
personality
higher level of digitalization.
and their level of digitization.
The presented model made it possible to
state that: the number of analytical
The importance and processes increases with the
Qualitative and
V. Pashaeva et significance of digitalization systematisation of accounting positions;
quantitative -
al. (2020) determined the research focus should be given to adaptive
mix research
objective databases aimed at scalability and
.
simplification of data; and the use of
automatic tools allow vertical and
horizontal analysis of DBs.
Examines the innovation Accounting has started on the traditional
Qualitative and
capability of accounting path to digital innovation,
Schiavi et al. descriptive
firms in the Brazilian market, Technology-related solutions can
(2020) research
in their use of digital generate changes in the business and
technologies. especially in processes.
Acceptance towards technology and
Examining continuous Quantitative
Lois et al. modern techniques, provided companies
auditing in the digital age research
(2020) ensure adequate preparation and staff
from the auditors' perspective
training conditions.
Technological and regulatory
innovations have the potential to enable
Identify the impacts of
Qualitative product and process innovations in all
Gardner and changing accounting standards
research industries. The ongoing application of
Bryson (2020) using new technologies.
artificial intelligence and machine
learning will require new regulatory
supervision.
Show the potential of the The SAM constructed for this exercise
disaggregated multisector Qualitative – allows for a proper disaggregation of the
Severini et al.
analysis with the macro Case study; labour factor by formal educational
(2020)
multipliers approach as a tool attainment, digital competences and
of economic policy. gender for the case of Italy.
Explore the applicability of
It presents research issues and
conventional methodological Qualitative –
Bhimani methodologies in the area of
thinking applied to digital data Literature
(2020) Technologies applied to management
environments on management review.
accounting.
accounting studies.
The main benefits of the technologies
Narcisa Present how artificial include: reducing the risk of error; low
Qualitative –
Roxana intelligence combine financial risk of fraud; system automation, big
Exploratory
Mosteanu information with tech data analysis, huge cost savings,
research.
(2020) capabilities. increased reliability in financial reports,
and reduced workflow.
Qualitative and
Dominant financial technology tools in
Definition of the dominant quantitative –
Melnychenko digital banking are cloud technologies,
ideas of financial technologies mix research
et al. (2020) big data, blockchain and artificial
in digital banking. Case study.
intelligence.
95
Qualitative and
Explores emerging themes Broader implementation of RPA in
Kokina and quantitative-
surrounding bot accounting and finance tasks is still in the
Blanchette mix research
implementation for accounting early stages.
(2019) Multiple case
and finance tasks (RPA).
study
Reviews the accounting The technologies create new
literature that focuses on four opportunities: sharing of data, access to
Qualitative –
Internet-related technologies cutting-edge hardware/software.
Moll and Systematic
that have the potential to The accounting profession may need to
Yigitbasioglu literature
dramatically change and be vigilant in developing the required
(2019) review.
disrupt the work of skills, and policies to effectively govern
.
accountants and accounting the implementation and use of these
researchers in the near future. technologies in organisations.
Qualitative – The initial enthusiasm for implementing
Examine several proposed
Publication blockchain has been dampened
Pirrong (2019) DLT (Digital Ledger
article. considerably by its collision with
Technology) applications.
economic realities.
Examine the supply of
In comparing the controller’s recent
business analytics
skills requirements with the current
Oesterreich competences in the current Quantitative –
competence profiles of controlling
and Teuteberg competence profiles of Text analytics
professionals, we have observed a skills
(2019) controlling professionals in an approach.
gap, namely the adoption level of IT and
attempt to answer the question
big data and the degree of job
whether or not a skills gap
specialization.
exists.
These journals do not have a singular
focus. The most frequently applied Other
Analyze methodologies used,
methodology is design science research
accounting areas Qualitative –
(21.0%), followed by archival methods
Chiu et al. studied, and emerging Systematic
(18.7%). Auditing (41.6%), and financial
(2019) technologies examined in Literature.
(28.5%) are the most commonly
scholarship in accounting
researched accounting areas XBRL
information systems journals.
(26%) and Artificial intelligence are the
most researched emergent technologies.
Trace the development,
governance and adoption of Whilst the taxonomy enables IFRS-
I. Troshani et IFRS Taxonomy to highlight Qualitative based reporting in the digital age,
al. (2018) the implications for research tensions and detours result in the need for
accounting practice and a realignment of the setting.
standard setting.
The results show that some forensic
accounting skills, namely auditing;
Quantitative communication; psychological,
Identify the influence of
Fadilah S. et and qualitative- criminological and victim logical; and
forensic accounting skills.
al. (2019) mix research. ICT are influential in fraud detection,
while other skills, that is investigative,
legal, and accounting skills do not have
an influence.
The system guarantees that credible
Mix of customers are selected, and avoids the
qualitative and potential risk of bad debts incurred by the
Creation of an effective digital
Zhang et al. quantitative loose credit limit, it strengthens the
system for intelligent financial
(2019) evidence – preventive control over aging
environments.
Case study. receivables management and detects the
potential risk of bad debts in the earlier
system alert.
Yusasniza Examines the role of business Qualitative The findings revealed that support from
Mohd Yunus leaders in the new era of research the business leaders is necessary to
et al. (2019) disruptive technology and how methodology motivate and encourage IT users to
it can fundamentally change and case innovate with new technology. However,
96
the organisations or study approach resistant to change, feeling complacent

individuals to adapt to work . and anxious towards new technology are
challenges in changing market some of the challenges that the business
dynamics across industries. leaders have to deal with IT users.
To use the
The analyses confirm the effectiveness
conceptual lens of institutional
of regulatory mandate in stimulating
work; to examine how
disruption of traditional reporting to
traditional business-to-
government and
government reporting
Indrit Troshani its replacement with digital reporting
is abolished and how digital Qualitative
(2018) which is powered by XBRL, a radical
reporting is established to
technology that digitises reports,
replace it in attempts to reduce
facilitating exchange of
administrative burden but
information between business and
without compromising
regulators and sharing among regulators.
regulation effectiveness.
Analyse the level of The degree of development of a
Lalević digitalized financial reporting qualitative and particular region can also determine the
Filipović et al. process in local governments quantitative – perception of companies within it in
(2018) of three different Mix research. terms of applying modern IT standards in
Montenegrin geographic the field of AIS.
regions.
Presenting a cognitive
AI’s capability to support less-structured
computing model, based on
Marshall and Qualitative – decision making provides the accounting
artificial intelligence (AI)
Lambert Research profession with the opportunity to
technologies,
(2018) Article. transform a disruptive technological
supporting task automation in
innovation into a competitive advantage.
the accounting industry.
Research on the evolution of the
professional competencies of
To identify key directions for Quantitative
accountants shows a lag in the content of
Zhyvets improving the professional and qualitative-
their “digital” training from the real
(2019) “digital” training of mix research
proficiency requirements for work
accountants.
at an automated workplace of the
accountant of an enterprise.
With the Big Data, customers of
Discusses the viewpoint that accounting output will increasingly seek
Big Data’s major impacts on atomized, reconfigurable and transparent
the accounting community Qualitative – data.
Green et al.
will be changes in consumers’ Text analytics. Decision-making consumers of
(2018)
demand of accounting data accounting data will increasingly
and its impact on decision- demand indirect raw data that they can
making. combine into their own structures to
perform their own analyses.
It was observed from this fieldwork point
to real evidence of the relationship
Analyse technological Quantitative between the constructs (perceived utility,
Lieda Amaral
acceptance in the accounting research. behavioral intention and the current use
Souza (2017)
environment. of the system) to explain the intention
and current use of a system by
accountants.
The tasks of bookkeeping, accounting
Quantitative
Arntz et al. Analyze the risk of job and auditing clerks are assigned a 98%
research.
(2017) automation in the USA. probability of being automated in the
near future.
Analyze the question as to Is not feasible Blockchain as a safer
whether blockchain could alternative. Was identified several flaws
Coyne and Qualitative –
become a safer alternative to that prevent the implementation of
McMickle Text analytics.
today's accounting books. blockchain as a financial reporting tool:
(2017)
Evaluate the problems of the transactions exist outside accounting
specific application of records and security benefits of the
97
blockchain as accounting blockchain that make it seemingly

ledgers. immutable are not fully available or
reliable in an accounting environment.
Analyze the preparation of the
accounting profession for the Currently, the existence of multiple
implementation of the XBR; regulators with different levels of
evaluate the area in order to Quantitative development and different standards
Martić et al.
use modern methods related to research when submitting financial statements
(2017)
accounting theory and seems to be one of the main challenges at
practice, highlighting positive the national level.
and negative aspects.
Contribute to the debate, in
TIFRS XBRL taxonomy, without
Italian research community, of
resolving the problems of translation and
accounting information
allowing a possible extension, could
Mancini et al. systems, on the impact of Quantitative
represent an element of rigidity for IFRS
(2017) digital technologies on research.
financial disclosure, created to provide
accounting and management
the more and better information to
information systems that
stakeholders.
support control activities.
Represents the first step of a The IFRS taxonomy has not shown the
multiyear project to improve degrees of quality and completeness
Fradeani et al. the IFRS taxonomy by Quantitative – needed to make its application
(2017) identifying the labels that need Case study compulsory, if the compulsory adoption
to be adjusted to match the of XBRL is to become operational for
local Italian accounting IFRS fillers, preparers should be free to
requirements. extend the taxonomy.
While the effects of the digital revolution
on management accounting are still
Reflect on the future of Qualitative –
Quattrone unclear, these effects surely will not
management accounting. Text analytics.
(2016) deliver the dream of perfect information
Implications for management
and rational decision-making as one may
accounting.
be lead to believe by the growth of data-
driven organizations and societies.
Try to linked strength and
The result is a continuous innovation of
directness or indirectness Empirical
employees in improving processes and
impact of changes in study based on
Chirica (2018) reducing costs, thereby preserving and
management accounting quantitative
enhancing the competitive advantage of
processes on efficiency and research.
the organization.
innovation organizations.
Determine the learning styles The outcome showed no significant
Barbosa and the use of ITC in differences among LS or in the
A descriptive
Granados and university students within a frequency of ICT use in students with
and
Amariles competency-based training competency-based training.
quantitative
Jaramillo model and to identify possible Additionally, the outcome showed a
approach.
(2019) differences gender gap in which male students had
in terms of gender. the highest scores for the use of ICT.
to identify the influence of
The results show that some forensic
forensic accounting skills,
accounting skills, namely auditing skills;
consisting of the auditing;
communication skills; psychological,
investigative knowledge; legal
criminological and victim logical skills;
Fadilah S. et knowledge; communication; Quantitative
and ICT-related skills are influential in
al. (2019) psychological, criminological approach.
fraud detection, while other skills, that is
and victim logical; accounting
investigative skills, legal skills, and
and ICT skills of external
accounting skills do not have an
auditors, on their ability to
influence.
detect fraud.
Table 1: Summary of the content analysis process
(Source: Self elaboration)
98
3. ANALYSIS AND DISCUSSION OF RESULTS

Computerization is growing and accounting tasks are increasingly being developed through
ICT linked to emerging technologies. Accounting as a profession seems to be moving slowly
to this landscape and opinions are opposed for many reasons. ICT adds more speed and a lower
incidence of error, but they lack something like critical thinking. This dual reality therefore
requires critical thinking about the influence of industry 4.0 on the accounting sector. Four
particularly relevant technologies have been identified: Big Data, Blockchain, RPA and XBRL.
This review seeks not only to demonstrate that technologies are an important ally of a
professional, considerably improving the scope of action and decision-making, but also to
create several competitive advantages in business-day life. As shown in the above table, there
is growing interest on the topic. The majority of the studies follows an exploratory approach.
Many scholars focus on the impact of digitalization on the professional skills demanded to
accountants and how universities and professional bodies are dealing with it. For instance,
Severini et al. (2020), by using the Social Accounting Matrix Sekkal et al. (2019), carried out
a multi-sectoral analysis to achieve a breakdown of labour by level, education, digital skills and
gender in Italy. The authors' conclusions suggest that countries with abundance of highly
qualified labour and digital competences are more developed. As a result, they tend to grow
faster than others, except for the importance of the digital competences of professionals.
Oesterreich and Teuteberg (2019) consider that the emergence of Big Data has led to a change
in the expected skills profile of the controllers and management accountants. Digital and
business analytics skills are considered mandatory for these professionals. The authors have
analysed the current skill profile of professionals in order to understand whether there is a gap
between demand and supply, concluding that the current skill profile of professionals does not
correspond to market needs. emphasize the importance of the digital competences of accounting
professionals, suggesting that they are a factor which positively influences the voluntary
adoption of digital reporting of accounting information. Moll and Yigitbasioglu (2019) warn
that accountants should be alert and develop the digital skills needed to be able to implement
the use of these technologies in organizations. In addition to the technical skills characteristic
of the profession, it is increasingly important for accountants to be able to develop their digital
skills to take advantage of these technologies and to extend their scope of action within
organizations. According I. Troshani et al. (2018), new organizational reporting and
communication structure are emerging with new information technologies. The authors point
out that one of the key elements for digital accounting infrastructure is IFRS Taxonomy, a
digital representation of international accounting standards required in digital media
production. By studying the development, administration, and adoption of IFRS Taxonomy, the
authors were able to conclude that while it allows accounting information to be reported in
accordance with IFRSs in the digital age, the tensions generated during the process resulted in
a need to realign the perspectives of both accounting professionals and creators of this standard.
Today more than ever, accountants must be at the forefront of technology so that they can be
the interlocutors of organizations in these digitization processes. The provision of digital
accounts presents several challenges, such as the integrity and quality of the information
reported. Narcisa Roxana Mosteanu (2020) encourage the production of financial statements
using tools such as XBRL and Blockchain. According to the authors, the main benefits of using
these tools are reducing errors, especially human error, reducing fraud risk, automating systems,
Big Data analyses, reducing costs, reducing workflow and increasing the reliability of the
information produced. One of the key technologies that helps accounting professionals in these
tasks is Robotic Process Automation (RPA), this is an emerging technology that enables you to
automate processes through a set of rules and the use of bots’ software. Kokina and Blanchette
(2019) studied the implementation of bots’ software in the accounting area and concluded that
organizations do not benefit from the automation of all their processes, only those that are
99
structured/repeated/executed based on a set of digital rules and inputs. In addition to reducing

costs, authors identify other gains for organizations, such as improvements in process
documentation, reduced error rates and improvements in measuring performance and quality of
reporting. In addition to the production of accounting information, emerging technologies are
also able to assist in the reporting of accounting information. The XBRL is the international
standard for the digital reporting of financial, performance, risk, and compliance of
organizations. Through the textual analysis of the three largest groups of XBRL of LinkedIn,
Perdana (2019) were able to identify the most interesting aspects for accounting professionals
regarding XBRL and Data and Information Quality (DIQ). The authors propose a framework
containing eighteen relevant DIQ dimensions derived from both accounting and information
systems. The study of Al-Htaybat et al. (2019) explores the intersection between accounting
practices and the new digital age technologies as a form of intellectual asset, by analysing the
real implications of accounting performed using technologies such as Big Data Analytics and
Blockchain, explaining how they can create value and achieve sustainable development
objectives. According to the authors, this is possible because of the global brain, which is a
network that connects all the technologies. Second, technology enables and facilitates
unprecedented data sharing, access to hardware/software and cutting-edge tools that can
complement and improve accounting tasks. In their study, Moll and Yigitbasioglu (2019) say
that the legitimacy of the accounting profession may be called into question, given the number
of tasks that these technologies have relieved from their daily lives. On the contrary, Narcisa
Roxana Mosteanu (2020) argue that one of the main advantages of using these tools is precisely
the fact that they, since they eliminate the need to carry out repetitive, time-consuming, and
redundant tasks, allow accounting professionals to devote more time to more profitable analyses
and research. In our opinion, this increase in productivity and efficiency will allow the
profession to be transformed, in the sense that accountants will have the opportunity to
demonstrate their true value by taking on new functions within the organizations, in which they
will be able to apply their wide range of competences to the resolution of complex problems.
It is curious to note that literature on the topic is mainly exploratory and, not surprisingly, it is
dominated by developed countries and business accounting oriented. However, the implications
of digitalization of accounting in public sector is an emerging topic.
4. CONCLUSIONS
Initially, it is worth highlighting the fact that several research articles on this subject are
published by the International Journal of Accounting Information Systems which analyses the
application of the tools, despite limited information in concrete situations. This study focused
on the main emerging technologies, Big Data, Blockchain, RPA and XBRL and their
implications for the accounting profession. From this analysis it was concluded that digitization
strongly disrupts business and professional life, thus the digital competences of professionals are
the crucial factor in the development and implementation of these technologies in organizations.
However, the current skills profile of professionals does not correspond to market needs and
they should continue to make efforts to reduce this gap of skills. Although these new
technologies are a major challenge for professionals and organizations, it is up to accountants
to work on developing the two digital skills so that they can be the interlocutors of organizations
in their digitization processes. There are several benefits associated with implementing these
technologies, such as reducing errors, especially human error, reducing fraud risk, automating
systems, Big Data analysis, reducing costs, reducing workflow, increasing the reliability of the
information produced and creating value. Finally, it has been possible to conclude that although
these technologies are jeopardizing the accounting profession, professionals should look at
these technologies not as a threat but as a challenge, an opportunity to add value to
organizations, taking on new roles within organizations.
100
To do so, they will have to continue to develop a skills profile that is appropriate to this new
reality. It is curious to note that literature on the topic is mainly exploratory and, not
surprisingly, it is dominated by developed countries and business accounting oriented.
However, the implications of digitalization of accounting in public sector is an emerging topic.
This literature review opened a huge range of research questions which are urgent, namely:
• What will be the profile of the accounting professional 10 years from now?
• How are universities preparing the future accounts?
• What are the main changes in day-to-day accountant professional?
• Is there an emerging market of on-line accounting services?
• Is digitalization led to outsourcing of accounting services in distant countries?
• The impact of digitalization will be the same in all the subjects of accounting: financial
accounting; management accounting; public accounting?
• How accountants interact with managers and decision makers in the context of decentralized
organizations?
These are some of the questions still unanswered. But digitalization also has great effects on
how accounting research carrying out investigations. As point out by Bhimani (2020), digital
data environments impact methodological precepts and digital data characteristics alter what
can be drawn from empirical studies.
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103
PARTICIPATION OF AZERBAIJAN IN THE WTO: PROBLEMS AND

PROSPECTS
Zahid Farrux Mamedov
Director of «Organization and Management of Scientific Activity» Department,
Azerbaijan State University of Economics (UNEC),
İstiqlaliyyat 6, Baku, Azerbaijan
[email protected]; [email protected]
Khalide Bayramova
Associate Professor at
Azerbaijan State University of Economics (UNEC), Azerbaijan
[email protected]
ABSTRACT
The changes that took place in the world after 1991, as well as the intensified development of
the process of globalization in various fields, greatly influenced both the international position
of Azerbaijan and the internal situation in the country. In connection with a fundamentally new
course towards "opening" the Azerbaijani economy and its integration into the system of world
economic relations, liberalization of all forms of foreign economic activity, the urgency of the
problem of ensuring the national interest of Azerbaijan in the context of globalization increases.
The problem of ensuring foreign economic security for the national interest of Azerbaijan in
the context of globalization is not presented in detail in the works of domestic authors. The lack
of full-fledged scientific papers on the above issues determines the need to consider these
problems within the framework of the work. Globalization and national interests attract the
attention of not only state bodies, but also a researcher of academic institutions and universities
in Azerbaijan. This topic is relevant throughout Azerbaijan for everyone interested in the public
economy. The growing interest in Azerbaijan's foreign trade is observed abroad, as well as in
a number of international organizations, including those in which Azerbaijan does not yet
participate (for example, the WTO). Although joining the WTO has now become one of the
priority tasks (from the point of view of national interest) of the country's government.
Naturally, the relevant issues are extremely relevant, taking into account also their significance
and the prospective impact of one or another of their solutions on our economy. Accordingly,
the author's goal - to determine measures to ensure the national interests of Azerbaijan in
international economic relations - defines the scientific tasks that he set for himself: study of
the regulation of our foreign trade; consideration of the problems of Azerbaijan's relations with
the WTO. This work has a novelty in many works of Azerbaijani scientists, Azerbaijan's
membership in the WTO was considered mainly from a political point of view, and not an
economic one. Our work focuses on the pros and cons of Azerbaijan's participation in the WTO,
unresolved issues and prospects. Particular attention is paid to the problems of Azerbaijan's
accession to the WTO, taking into account both its increased relevance and the expected impact
of this step on the domestic economy. We believe that this work will be useful to everyone who
is interested in Azerbaijan's national security, foreign and trade policy.
Keywords: Globalization and national interests, WTO, foreign and trade policy of Azerbaijan
1. INTRODUCTION
As of October 2020, WTO members in the post-Soviet space are Armenia, Georgia,
Kazakhstan, Kyrgyzstan, the Republic of Moldova, the Russian Federation, Tajikistan and
Ukraine. Azerbaijan, Belarus and Uzbekistan have been in the process of joining the WTO for
more than 20 years, and Turkmenistan submitted an application only in 2020.
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Azerbaijan is a member of many international economic organizations. Azerbaijan's

representation in international economic organizations and close cooperation with these
organizations further accelerate its integration into the world economy. At present, Azerbaijan
intends to become a member of the World Trade Organization (WTO). The WTO plays an
important role in the development of the world economy, the expansion and dynamic growth
of world trade and the maintenance of a competitive environment in the world market. It is
expected that Azerbaijan's membership in the WTO will further expand the country's foreign
economic relations, accelerate the development of foreign trade and its integration into the
world economy. It is very important to determine precisely the problems that Azerbaijan may
face in connection with its membership in this organization, and the benefits to be gained, is
the subject of serious research, and awareness of these problems is of great importance. In order
to speed up the process of accession to the WTO, by the Order of the Cabinet of Ministers of
the Republic of Azerbaijan dated August 22, 2003 No. 175s, a Commission was established to
prepare for the accession of the Republic of Azerbaijan to the WTO. Also, the Department of
Trade Policy and the WTO operates in the Ministry of Economy of the Republic of Azerbaijan.
2. GOALS AND OBJECTIVES OF AZERBAIJAN'S MEMBERSHIP IN THE WTO

Azerbaijan submitted its application for membership in the World Trade Organization (WTO)
to the WTO Secretariat on June 23, 1997. The Working Group on Azerbaijan, established on
July 16, 1997, includes 42 states. The working group is chaired by Ambassador Walter Werner,
Permanent Representative of the Federal Republic of Germany to the WTO. The first meeting
of the Working Group took place on June 3-7, 2002 in Geneva. At the first meeting with the
participants on the memorandum on foreign trade regime, Azerbaijan was recommended to
submit the following documents:
• proposals for customs tariffs (inapplicable tariffs, applicable high tariff rates);
• proposals for domestic assistance and export subsidies to the agricultural sector;
• proposals for trade in services;
• information on technical barriers to trade, sanitary and phytosanitary measures;
• information on trade-oriented aspects of intellectual property rights.
The main goals of membership in the World Trade Organization are:

• acceleration of the process of integration into the world economic system;
• use of benefits from privileges provided by WTO member countries to each other;
• carrying out trade operations with most countries of the world in accordance with the
general rules adopted by the WTO;
• achieving an increase in assistance to economic reforms carried out in the country from
international organizations, as well as from developed countries;
• attracting more foreign direct investment after the implementation of the WTO rules;
• the possibility of using the WTO dispute settlement mechanism.
The objectives of the Azerbaijani government are as follows:

• providing developing countries (DCs) with various types of assistance (in terms of animal
and plant health standards, technical standards, telecommunications, etc.);
• setting a limit for subsidizing agriculture (de minimis) at the level of 10%, provided for
developing countries (5% for developed countries);
• recognition of the importance of taking into account the special needs of developing
countries in the development and implementation of technical regulations, standards,
quality assessment procedures and sanitary and phytosanitary measures in accordance with
the Agreement on Technical Barriers to Trade.
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• providing developing countries with technical assistance provided for by the agreement on
technical barriers to trade and the WTO agreements, etc.
Negotiations on Azerbaijan's accession to the WTO continue. Thus, Azerbaijan cooperates with
the WTO as an observer.
2.1. Activities of the Commission on Preparation for Azerbaijan's Accession to the WTO
In order to speed up the process of accession to the WTO, by the Order of the Cabinet of
Ministers of the Republic of Azerbaijan dated August 22, 2003 No. 175s, a Commission was
established to prepare for the accession of the Republic of Azerbaijan to the WTO. By the order
of the Cabinet of Ministers of the Republic of Azerbaijan dated December 27, 2019 No. 821s,
a new composition of the Commission for preparation for the entry of the Republic of
Azerbaijan into the World Trade Organization was approved. The commission includes deputy
ministers of the relevant ministries, senior officials of state committees and agencies.
2.2. Bilateral negotiations

In the process of joining the WTO, the Republic of Azerbaijan conducts bilateral negotiations
with 22 members (USA, European Union, Canada, Japan, Norway, Russian Federation, Brazil,
South Korea, Ecuador, Taiwan Province (China), Sri Lanka, India, Switzerland, Honduras,
Indonesia, Malaysia, Dominican Republic, Saudi Arabia, China, Paraguay, Vietnam, Thailand).
During the negotiations, the issues of Azerbaijan's access to the market for goods and services
are being discussed, and the necessary measures are being taken to protect areas of particular
importance. As a result of bilateral negotiations, the first protocol was signed with Turkey in
2007, the following protocols - in 2008 with Oman and the United Arab Emirates, and in 2010
- with Georgia. The latest bilateral protocol was signed on March 30, 2012 with the Kyrgyz
Republic. Thus, the number of protocols signed by Azerbaijan on the completion of bilateral
negotiations within the WTO accession process has reached five. It should be noted that the
interests of Azerbaijan are fully secured in the signed protocols. On the basis of bilateral
appeals, analyzes are regularly carried out in the field of goods and services. The last time on
December 16-20, 2019, bilateral negotiations with Canada, Ecuador, South Korea, Thailand,
Indonesia and Japan were held in Geneva, including extensive discussions and consultations
with members of the Cairns Group on Agriculture (Cairns Group - a group of countries -
exporters of agricultural products) by the level of domestic support. After negotiations from
Canada, South Korea, Thailand and Ecuador, applications for goods were received, which are
currently being considered in conjunction with the relevant authorities. At the request of the
Canadian side, together with the Food Safety Agency of the Republic of Azerbaijan, a number
of information on sanitary and phytosanitary measures (SFS) was prepared and presented to the
other side.
2.3. Adaptation of legislation to WTO requirements

The "Action Plan" approved by the Order of the President of the Republic of Azerbaijan dated
August 2, 2006 No. 1583 provides for 39 normative legal documents. Of these, the laws "On
plant quarantine" and "On plant protection" have lost their force, according to other 37 laws,
18 normative legal documents have been adopted. Currently, 10 draft documents have been
prepared and agreed with the relevant authorities, as well as the Law of the Republic of
Azerbaijan "On standardization" dated May 17, 2019 No. 1587-VQ and the Law of the Republic
of Azerbaijan "On technical regulation" dated September 30, 2019 No. 1669-VQ. In addition,
10 projects are planned to be developed. The Law of the Republic of Azerbaijan "On
Standardization" entered into force on 14.10.2019, the Law of the Republic of Azerbaijan "On
Technical Regulation" - from 27.05.2020.
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3. PROBLEMS THAT AZERBAIJAN WILL FACE IN JOINING THE WTO

To become a WTO member, first of all, it is necessary to develop competitive local production.
The fact is that the level of development of local production (especially the production of
industrial products) is still not high enough to compete with final products and services on the
world market. At the same time, Azerbaijan has great potential for the development of
agriculture. The reforms carried out in the agricultural sector of Azerbaijan in recent years
suggest that in the near future the country will be able to export more and more competitive
agricultural products to the world market. The WTO offers member countries special benefits
in the agricultural sector, and Azerbaijan will also be able to take advantage of these benefits.
Thus, when joining the WTO, the current situation of countries is differentiated and some
conditions are adapted to this situation. According to these conditions, tariff concessions
include the volume of export subsidies during the transition period and in agriculture. WTO
membership does not deprive states of the ability to protect their domestic markets. Membership
in this organization does not mean an immediate reduction in tariffs. Thus, it is not expected
that Azerbaijan will reduce tariffs soon after joining the WTO. Customs tariffs are determined
on the basis of bilateral negotiations, and some customs tariffs may be increased. On the other
hand, in the course of negotiations, “fixed tariffs” (“fixed tariffs”) are established, and the state
must take preventive measures against future tariffs. At the same time, ensuring by the state
that the real exchange rate of the national currency is lower than that of foreign currencies can
lead to an increase in domestic production due to an increase in export demand. A second
important issue relates to the relative quota applied to the amount of agricultural export
subsidies. This quota provides subsidies for developing countries in the amount of 10% of total
agricultural production and for developed countries in the amount of 5%. According to this
condition, Azerbaijan can take advantage of a 10% discount. As noted above, there is significant
direct and indirect support to the agricultural sector in Azerbaijan at present, and the issue of
assessing the volume of this support and whether it exceeds the quota limit needs to be
investigated separately. When agricultural subsidies differ in partner countries, this negatively
affects trade in general. The main requirement of the Uruguay Round was the regulation and
reduction of domestic aid.
4. CONCLUSION
Thus, Azerbaijan's membership in the WTO is very important for ensuring sustainable
economic development. Azerbaijan has a large enough potential to join the WTO, but in the
first years of membership it will inevitably face certain problems. Therefore, in order to
accurately determine the problems that Azerbaijan may face in connection with its membership
in this organization, and the benefits received, it is necessary to conduct in-depth studies and
take appropriate preventive measures to timely eliminate the problems. To speed up the process
of accession to the WTO, it is necessary to create a special body that will determine the country's
promising interests in all areas within the framework of the WTO multilateral agreements, take
them into account in negotiations and develop an appropriate policy for the preparation of an
Action Plan for the admission of the Republic of Azerbaijan to the WTO. In principle, the action
plan of this body should reflect recommendations in the following areas:
• strengthening the sectoral approach to the development of industrial sectors in the country
(taking into account the prospective development of the country's economy and the
international division of labor);
• focusing on ensuring the most favorable conditions in the future for the sectors, the
formation and development of production of which in the country is possible (for example,
privileged industrial parks, industrial districts, free economic zones, etc.) and a thorough
study of industry initiatives;
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• revision of customs tariffs for raw materials and components imported into the country for
the needs of all industries, especially mechanical engineering, light and food industries (in
the direction of reducing the tariff rate);
• accelerating the process of privatization of a number of medium and large state industrial
enterprises that remain in state ownership, increasing attention towards taking measures to
revive privatized enterprises;
• prevention of monopoly and ensuring fair competition for all entrepreneurs;
• formation of an information bank and a system for foreign trade of the state, especially in
the field of legal and economic information (clarification of the mechanism for resolving
disputes, monitoring the price situation, etc.);
• achieving the highest possible customs tariffs and a longer transition period;
• protection of manufacturing industries related to the agricultural sector, which are less
competitive than imported goods;
• an attempt to re-obtain the right to negotiate on certain items, being a member of the WTO
(as you know, this right allows you to resume negotiations and sign a protocol between
interested parties on these items every 3 years);
• achieving the maximum build-up of the Green Box and Yellow Box measures;
• striving to achieve the level of subsidies in the amount of 10 percent of gross agricultural
production;
• accelerating the implementation of comprehensive measures to further improve the
investment environment in the country (adoption of a new law on the protection of
investments and the rights of investors, ensuring the rule of law, eliminating factors holding
back investors, etc.);
• achieving an extension of the transition period, which allows the introduction of national
regulatory regimes;
• creation of exchanges for convenient and efficient sale of agricultural products;
• the definition of a strategic agricultural product or product and product or food processing
products to benefit from benefits in the WTO (this can be cotton, tobacco, sugar beets,
olives, wine, etc.);
• development of perfect legislation on competition and investment in order to accelerate the
process of membership in the WTO.
It should be noted that a number of reforms have recently been carried out in Azerbaijan,
including the adoption of 12 strategic road maps for the development of the economy, changes
have been made to the regulation of the trade sector, the system of import tariffs, and the trade
and logistics infrastructure has been improved. It is expected that the implementation of the
roadmaps will become the basis for the successful election of Azerbaijan to the WTO.
Accordingly, after the initial results are obtained from economic reforms, which are expected
to be carried out in the country by 2020, the intensification of negotiations and completion of
the process of Azerbaijan's accession to the WTO is possible. To strengthen the position and
desires of the country during the negotiations on WTO membership, such issues as the leading
role of agriculture in the country's economy, the presence of good traditions in the agricultural
sector, favorable agro-climatic resources for the development of this industry, the fact that more
than half of the population lives in rural areas. In the WTO lexicon, measures of domestic
support for agriculture mean the provision by the state of agriculture and economic entities
operating in this area, subsidies or other support. However, it is important to observe certain
restrictions when implementing these measures. During the negotiations, it is necessary to take
into account the need to adapt newly created farms in Azerbaijan to market conditions and the
importance of state support for agriculture in order to stimulate domestic production.
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This is important from the point of view of increasing the competitiveness of agricultural
products and maximizing the satisfaction of domestic demand through local production.
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экономикой // Экономика и управление: проблемы, решения. 2019. Т. 4. № 2. С. 13-
16.
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Мировая экономика и международные отношения. 2019. Т. 63. № 6. С. 5-12.
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предпринимательство. 2019. № 2 (103). С. 77-81.
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рамках программы «один пояс — один путь» Экономический рост республики
Беларусь: глобализация, инновационность, устойчивость XIII Международной
научно-практической конференции. Минск, 14 мая 2020 года
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sphere are more liberal than the commitments of WTO members // Central Asia and the
Caucasus № 1.
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implementation of the megaproject // 55th International Scientific Conference on Economic
and Social Development, Baku, Azerbaijan.: 25 June 2020. Book of Proceedings Vol. 2/4
(Web of Science Core Collection). P 406-412.
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Российский научный журнал (РНЖ) «Экономика и управление». 2020. - Том 26. № 7.
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торгового потенциала// Экономика и управление: проблемы, решения. 2019. Т. 1. №
3. С. 14-17.
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Мировая экономика и международные отношения. 2019. Т. 63. № 8. С. 13-20.
12. Сумин А.В. (2019). Актуальные вопросы участия России в международной торговле
объектами интеллектуальной собственности в условиях ВТО // Экономика и
управление: проблемы, решения. 2019. Т. 11. № 3. С. 4-10.
109
THE IMPORTANCE OF NON-FINANCIAL INFORMATION QUALITY

FOR THE PERFORMANCE OF PORTUGUESE COMPANIES
Albertina Paula Monteiro
Porto Accounting and Business School, Polytechnic of Porto, CEOS.PP, Portugal
[email protected]
Joana Vale Porto

Porto Accounting and Business School, Polytechnic of Porto, Portugal
[email protected]
Eduardo Manuel de Almeida Leite

Higher School of Technology and Management, University of Madeira, CiTUR, Portugal
[email protected]
Humberto Nuno Rito Ribeiro

GOVCOPP, ESTGA, University of Aveiro, Portugal
[email protected]
Sandra Raquel Pinto Alves

[email protected]
ABSTRACT
Financial reporting and accounting are moving away from traditional procedures and
increasingly covering non-financial information. This study aims to analyse the importance of
non-financial information quality for successful decision making and, consequently, for
relevant non-financial performance. An online questionnaire was developed and applied to
managers of Portuguese companies. The evaluation of the theoretical model was performed
using the statistical software AMOS, applying the structural equation model technique. Based
on a sample of 381 Portuguese companies, the results provide enough evidence to suggest that
non-financial information quality contributes positively to non-financial performance,
increasing the odds of managers' decisions to be made successfully. The existing literature is
mainly focused on the quality of financial information, while this study can be considered
seminal, as it empirically demonstrates that non-financial information quality contributes
favourably to the success of companies in Portugal.
Keywords: Non-financial information quality, Decision-making success, Performance
evaluation, Non-financial performance, Portugal
1. INTRODUCTION
The internationalization of companies, the globalization of the market, the increase in
competition, the influence of the economic environment in which companies operate together
reinforce the importance of accounting information for company management. The information
provided by accounting should respond to some attributes of qualitative origin, given that
qualitative characteristics are those attributes that make the information provided in the
financial statements useful to long range stakeholders. The main qualitative characteristics are
understandability, relevance, reliability, and comparability. Thus, financial information is
useful when it combines the qualitative characteristics of information and is useful for decision
making (Sari, Afifah, Susanto & Sueb, 2019). The stakeholders, in addition to financial
information, emphasize the relevance of non-financial information in decision-making (Eccles,
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Serafeim & Krzus, 2011; Haller, Link & Groß, 2017). Fernando, Li and Hou (2020) mention
that, in both emerging and mature markets, companies must prepare and disclose these two
types of information to decision makers. In fact, non-financial information has received
increasing attention from organizations (Ahmad & Zabri, 2016). Previous research suggest that
the decision-making process is influenced, among other aspects, by the culture, beliefs, values,
personality, knowledge, and perception of the decision maker(s) (Ratcliff, Philiastides & Sajda,
2009; Delazer et al., 2011). Furthermore, financial and non-financial information quality is
extremely important in the decision-making process and can determine its success (Boulianne,
2007; Barker and Eccles, 2018). On the other hand, the literature suggest that decision-making
success has a positive impact on business performance (Bosworth, 2005; Patel, 2015;
Phornlaphatrachakorn, 2019). In this context, this study aims to develop and test a model in
order to analyze the influence of the quality of financial information on the success of
Portuguese companies. Specifically, this research aims to analyze: (1) the direct impact of the
quality of non-financial information on non-financial performance; (2) the direct impact of the
quality of non-financial information on the success of decision-making and (3) the direct impact
of the success of decision-making on non-financial performance. This study covers a gap in the
literature, given that, through empirical evidence, it reinforces the importance of the quality of
non-financial information for the success of decision-making and non-financial performance.
This paper is structured as follows. The next section presents the theoretical framework and
research model. Next follows the methodology section and results is explained. Finally, the
conclusions, contributions and limitations of the research are presented, as well as future lines
of investigation.
2. THEORETICAL FRAMEWORK AND RESEARCH MODEL

According to Gilantier and Underdown (1981) and Ibrahim et al. (2020), accounting is moving
away from traditional procedures, also emphasizing the importance of non-financial
information. According to Muserra, Papa and Grimaldi (2020), in recent years, the
dissemination of non-financial information in Europe has been the subject of several initiatives
by the European Commission (Directive 2003/51 / EC and Directive 2014/95 / EU), national
legislators and professional accounting organizations. according to Grewal, Riedl and Serafeim
(2019), in the last decades there has been an increase in the number of companies that disclose
non-financial information. This fact, which is due, according to the authors, to pressure from
stakeholders. However, for Grewal et al. (2019), this increase is mainly due to the increase in
the number of legislations around these issues. Until the entry into force of Decree-Law
89/2017, the disclosure of non-financial information was voluntary. However, this Decree-Law,
which derives from a European orientation, came to impose the disclosure of non-financial
information by some Portuguese companies. In accordance with Article 66 B, No. 1, and Article
508 G, No. 1, of Decree-Law 89/2017, large companies, and the parent companies of a large
group, which have the statute of public interest entities and, on average, more than 500 workers,
must, as of 2018, present an annual non-financial statement, which may be included in the
management report or presented in a separate report. Thus, this Decree-Law obliges some
Portuguese companies to disclose INF, which until then was optional. However, Hoffmann,
Dietsche and Hobelsberger (2018) state that the disclosure of non-financial information has
been mandatory in other countries (Denmark, Norway, Sweden, Australia, and the Netherlands)
since the 1990s. This fact may have contributed to an increase in the level of disclosure of non-
financial information. Stakeholders are interested in non-financial information because they
face challenges with regard to accessing information considering relevant, reliable, complete
and comparable (Barker and Eccles, 2018). However, there are no standardised qualitative
characteristics for non-financial information, unlike financial information. However, Rezaee
and Tuo (2017) classify non-financial information by the existence of true, complete, and timely
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information. In order to ensure the efficiency and effectiveness of activities, the reliability of
information and compliance with applicable laws, companies need adequate internal control
(Frazer, 2020; Campbell, Li, Yu & Zhang, 2016). Several studies have emerged with the aim
of assessing the relevance of corporate non-financial information to business performance
(Orens and Lybaert, 2010). According to Omondi-Ochieng (2019) and Karamoy and Tulung
(2020), financial performance is one of the indicators that shows the effectiveness and
efficiency of an organization in reaching its financial goals. However, Pinto, Tonini, Yoo and
Katayose (2020) mention that the indicators of non-financial performance are not, in
themselves, sufficient to assess the performance of an organization. This is due, according to
Zigan and Zeglat (2010), to the fact that these indicators do not allow verifying business
performance and the company's strategy and may be unrealistic in the long run. Therefore, the
authors reveal that it is necessary to observe the non-financial performance indicators in order
to have a complete view of the company's performance. The literature suggests that non-
financial performance reflects the result of employee efficiency, improved product and service
quality, employee turnover and satisfaction, as well as customer satisfaction (Sanjaya, 2020).
The literature suggests that non-financial performance reflects the result of employee
efficiency, improved product and service quality, employee turnover and satisfaction, as well
as customer satisfaction (Sanjaya, 2020). In the respect, Callen, Gavious and Segal (2010, p.
61) find that non-financial information is relevant in explaining annual returns, share prices and
investment grade by investors (long-term) and that “non-financial variables are value relevant
after controlling for financial variables suggesting that the two types of variables are
complements. Thus, in this study, the first research hypothesis is formulated:
• H1 – The quality of non-financial information has a positive and direct impact on non-
financial performance?
Non-financial indicators can satisfy the existing gap in terms of information needed for
decision-making (Laskin, 2016). Gal and Akisik (2020, p. 1236), state that ‘although financial
statement information is value relevant, there is evidence that shareholders also consider
nonfinancial information in their evaluation of firms' value’. Ahmad and Zabri (2016) add that
the use of this type of information can contribute to a better assessment a of the company.
Regarding the reporting of non-financial information, in addition to companies being able to
disclose non-financial information in management reports, Jastrzebska (2016) states that there
are two main means of disclosing non-financial information, sustainability or social
responsibility reports and integrated reporting. With Directive 2014/95 / EU, some companies
are required to disclose non-financial information in a Non-Financial Statement together with
the financial statements or in a separate report. Ježovita (2015), when analyzing 320 Croatian
companies, concluded that the information available in the annual reports is important in the
decision-making process. Decision-makers need information to support their choices, that is,
information of a qualitative and quantitative nature (Smith, 2020). This author mentions that
the largest number of data, in real time, can help the decision maker to make the best choices.
However, Elvisa and Ilgȕn (2015) state that the type of information the user needs will be
according to their role in the organization. Thus, the authors mention that there are three levels
of management:
• Strategic management (top) needs diverse and concise information, often oriented towards
the future.
• Intermediate (tactical) management requires more detailed information than strategic
management and for a shorter period.
• Operational Management requires detailed information on a daily basis.
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Decision making differs in many ways and varies depending on some aspects related to the
information needed (i.e., the quantity, complexity, and accuracy of the information) and the
complexity of the process to obtain that information (Athanasou & Perera, 2019). This is
because not all the information that is needed is always easy to access, and / or is available in
due time by companies, especially regarding non-financial information. So, different situations
require different ways to process the best decision (Gati & Levin, 2014). Successful decision-
making depends on the ability of business decision-makers to successfully manage problems
(White, Pothos & Busemeyer, 2015). Therefore, the literature suggests that non-financial
information is important and determines Decision-Making Success (Barker and Eccles, 2018).
In this context, the second research hypotheses of this research formulated:
• H2 – The quality of non-financial information determines the success of decision-making?
The preparation of non-financial information depends on the need for this type of information
to make decisions. On the other hand Flöstrand and Ström (2006) refers that the importance
attributed to non‐financial information is related to the company´s size and that the use of non‐
financial information is related to the level of non‐financial information. In this context,
Elshabasy (2018) argues that companies that attribute usefulness to non-financial information
are the best performers, that is, once, companies with better non-financial performance are the
most likely to disclose non-financial information. Ježovita (2015), when analyzing 320 Croatian
companies, it is concluded that the information available in the annual reports is important in
the decision-making process. The literature review suggests that decision making process,
based on financial information, which brings together qualitative characteristics, can determine
business success. Although there is no empirical evidence, we expect that non-financial
information, if of quality, can contribute to the non-financial performance of companies. In this
sense, the third research hypothesis is formulated:
• H3 – Successful decision-making has a positive impact on non-financial performance?
Figure 1, shown below, presents the conceptual model designed for this research.
Figure 1: Conceptual model
H2 H3
Quality of non-
financial
information
H1
3. METHODOLOGY
In this study, a questionnaire survey was developed using the Lime Survey software. After duly
tested in managers and academics, we send the link to the survey by email to the managers of
Portuguese companies. The selection process of the sampling was carried out in the SABI
database, applying the following 5 filters: (1) all companies with an e-mail address (Portugal);
(2) last number of employees: minimum 50; (3) audited companies; (4) companies, whose legal
form is: sole proprietorship, foreign entity, corporation, limited partnership, limited liability
company and sole proprietorship; and (5) active companies.
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The SABI database generated a list of 7,812 Portuguese companies. Despite being a substantial
number, was decided to apply the survey to all companies instead of limiting the study to a
region or district in the country. This option is because this study is applied to company
managers and there is a probability of obtaining a reduced response rate. In a total of 7,812 e-
mail sanded, from 2 to 31 March 2020, 389 complete observations valid observations were
considered in this study. Given the high number of Portuguese companies, we work with a non-
probabilistic sample, which is practical in scientific studies covering a very large population
(e,g., Cepêda and Monteiro, 2020). Regarding the structure of the survey, it is divided into two
parts. The first part includes questions regarding the characterization of the company. The
second part includes items that allow to evaluate each of the dimensions under study. In
assessing the quality dimension of non-financial information, we used the scale (adapted) by
Dornier (2018), except for the item “The non-financial information is free of value
judgements”, which resulted from the application of the pre-test. Regarding the success of
decision-making, the assessment of this dimension follows the measurement scale used by
Phornlaphatrachakorn (2019). Only the following item was added that derives from the pre-test
of the questionnaire: “the decisions made in the company determine its success”. The scale for
measuring non-financial performance is adapted from Soudani (2012). All items were evaluated
on a 5-point Likert scale, where 1 corresponds to “totally disagree” and 5 corresponds to “totally
agree”. Before proceeding with the analysis of the Structural Equation Model (SEM), we carry
out a preliminary analysis of the data, namely the missing data, the outliers, the central tendency
and the normality and sample size. After being properly processed, the data was subjected to
SEM analysis, which involves two phases: the evaluation of the measurement model and
evaluation of the structural model.
4. RESULTS
4.1. Sample
Regarding the distribution of companies by district, as can be seen in figure 2, 111 companies
(29.1 %) are based in the district of Lisbon, 67 (17.6 %) in Oporto and 41 (10.8 %) in the district
of Aveiro. These 3 districts represent 57.5 % of the sample. Therefore, 42.5 % of the companies
are distributed in the remaining 14 districts or autonomous regions of Portugal.
Figure 2: Distribution of companies by districts and autonomous regions
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Regarding the activity of a given sector, 160 companies (42 %) have as their object the
provision of services, 126 (33 %) and 43 (14 %) companies develop industrial and commercial
activities, respectively, and 42 (11 %) of the respondents selected the option ‘other’. Most of
the companies (83.2 %) are medium or large, and the remainder are small companies (16.8 %).
4.2. Conceptual model evaluation

In order to assess the adequacy of the measurement scales, we assessed the unidimensionality
of the measures, the reliability and the validity (convergent and discriminant) of the construct’s
measurement scales. Table 1 presents the items that resulted from the confirmatory analysis
performed in the AMOS software. The results indicate that all items report significantly to the
respective factor, thus highlighting the unidimensionality of the dimensions under analysis
(Marôco, 2010). The results also show the reliability and validity (convergent and divergent)
of the measurement scales through the composite reliability (>0.70), average variance extracted
(>0.60) and standardized coefficients (>0.50) (Marôco, 2010; Steenkamp and van Trijp, 1991;
Fornell and Larcker, 1981).
Table 1: Measurement model results

Construct Sc
Non-Financial Information Quality (CR = 0.912, AVE = 0.598)
The non-financial information is carefully prepared to ensure its quality. .804*
The non-financial information is easily understood by its user. .846*
The non-financial information includes all the information necessary to make decisions. .735*
The non-financial information is free of value judgements. .701*
Decision-Making Success (CR = 0.948, AVE = 0.733)
The decisions made allowed the company to achieve advantages in terms of operations,
.853*
management and performance.
Decisions made about investments took into account different alternatives or options,
.832*
which allowed the company to choose the best solution.
The decisions taken have contributed to maximise efficiency and increase operational
.914*
effectiveness.
The decisions made in the company determine its success. .770*
Non-Financial Performance (CR = 0.928, AVE = 0.645)
The company has improved its customer service. .792*
The company has improved working conditions, regardless of the employee's position. .850*
The company has improved its performance in terms of social responsibility (voluntary
effort on the part of the company in the creation of various measures to meet the .842*
expectations of the different interested parties - stakeholders).
The company has increased its employee retention rates. .721*
Notes: Sc, Standardised coefficients; CR, composite reliability; AVE, average variance extracted.
*Correlation is significant at the 0.001 level.
The goodness-of-fit indices indicate that the initial theoretical model has an adequate fit
(χ2=199,18 (55), p=.000, CFI=.95, GFI=.93, NFI=.90, RMSEA=.08). The results of this study
indicate that non-financial information quality has no significant impact on the non-financial
performance of Portuguese companies. However, this variable contributes positively to
successful decision making ((β=0.62; p<0.001), which determines 32 % of its variance. In turn,
the success of decision making has a positive and significant impact on non-financial
performance (β=0.88; p<0.001). Thus, in this study, the results rejected the H1 and supported
H2 and H3. In addition, we conclude that both non-financial information quality and decision-
making success determine 67% of the dependent variable (non-financial performance). Figure
115
3 presents the standardised coefficients and the significance level for each relationship
postulated in the model, as well as the coefficient of determination for each construct.
Figure 3: Structural model
H2 H3
0.62* 0.88*
R2=0.67
Quality of non-
financial
information
H1
-0.118
Note: * Significant at the <0.001 level
5. CONCLUSIONS AND DISCUSSION

The competitive environment increasingly creates new challenges to organizations (Pinto,
Tonini, Yoo & Katayose, 2020). These challenges should be strategically addressed in order to
allow achieving a better performance. The literature suggests that accounting information, if of
quality, helps decision making. In recent years, there has been an increasing number of studies
focusing on non-financial information, although more focused on the reporting of non-financial
information. However, there are arguments that decision making based on non-financial
information is not sufficient in the decision-making process. In this sense, there are arguments
that the quality of non-financial information, if used in decision making, can determine the
success of companies in competitive markets. In this context, this study aims to assess the
importance of non-financial information for the success of Portuguese companies. In Portugal,
although the number of new enterprises is higher than the number of enterprises that fail, the
number of unsuccessful enterprises remains worrying. Therefore, with this study, we expected
to contribute to a better understanding of the factors that contribute to business success,
emphasising the importance of non-financial information. Based on a sample of 381 Portuguese
firms, we conclude that non-financial information quality has an impact on firms' non-financial
performance and decisions are based on non-financial information and made successfully.
Specifically, the results indicate that non-financial information quality has no direct and
significant impact on firms' non-financial performance, which leads us to reject H1. Our result
is not in line with the arguments of Callen et al. (2010). However, in this study we have
empirical evidence that the quality of non-financial information contributes positively to
successful decision-making, which leads to support H2. Our evidence is consistent with the
arguments of Barker and Eccles (2018). Therefore, successful decision making has a positive
and significant impact on non-financial performance, supporting the last research hypothesis
(H3). This finding corroborates with the fundamentals of Elshabasy (2018). The literature
review identified a gap that lies in the absence of studies that empirically analyse the importance
of the quality of non-financial information for the success of companies. The results highlight
the importance of non-financial information quality for successful decision-making and non-
financial performance of Portuguese companies. Thus, this study is important for managers to
the extent that it can alert them to the importance of the information produced by accounting
that is moving away from traditional accounting to increasingly embrace information of a non-
financial nature. Regarding the limitations of the study, the use of a convenience and non-
probabilistic sample limits the generalization of the results.
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In terms of future research, one can suggest including in the model new variables, such as the
financial information quality and financial performance, in order to assess which of the two
types of information has a greater impact on financial and non-financial performance.
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WINE WITH GRAVITY: SPARKLING VS STILL WINE

Vinko Zaninovic
University of Rijeka, Faculty of Economics and Business, Croatia
[email protected]
Jana Katunar
[email protected]
Nenad Vretenar
[email protected]
ABSTRACT
Since its introduction by Jan Tinbergen in the late 1960s, the gravity model has become one of
the most widely used models in empirical international trade analysis. The object of research
in this paper is the wine trade due to the many changes it has faced in the last two decades,
such as the globalization of the wine market and the increased competitiveness caused by the
emergence of the "New World countries" in the world wine market. The aim of this paper is to
use this proven model to answer some new questions: What are the differences between
sparkling wine and still wine with respect to the variables of the gravity model and what are
the explanations for these differences. In our paper, we quantify answers to these questions by
developing augmented gravity model that includes a set of standard gravity model variables,
such as gross domestic products of trading partners and bilateral distance, contiguity, as well
as additional variables such as regional trade agreements (RTA), cultural "proximity"
represented with a dummy for common/similar language, and historical relations represented
with colonial ties. Using the Poisson Pseudo-Maximum Likelihood Estimator, we estimate
different versions of gravity models for both exports and imports. The results show that RTA,
historical ties and cultural proximity have different effects on trade in sparkling wine compared
to trade in still wine. In the paper, we explain the reasons for these differences.
Keywords: gravity model, sparkling wine, still wine, wine trade, wine imports, wine exports
1. INTRODUCTION
International wine production and trade have faced many changes over the last two decades,
leading to a significant increase in wine production and international wine trade flows, as well
as a transformation of the wine trade. The idea to conduct this research arose from the need to
understand the influence of culture, trade agreements, relationships between countries and
language on the wine trade. The paper focuses on wine imports and wine exports of sparkling
and still wines at the world level over the period 1996-2019. With the emergence of New World
countries on the wine scene and the increase in international wine trade, it became much more
difficult for wine producing countries to gain a competitive advantage. European wine
producers, traditionally the largest wine producers in the world, faced competition, especially
from Australia, Argentina, South Africa and Chile. Larger average plantation sizes of wine
producers from New World countries lead to lower production costs (Katunar et al., 2020),
which leads European wine producers to remain competitive in the international market by
introducing new technologies in the production processes, developing the distribution process
and targeting the new markets. In addition to this juxtaposition of New World vs. Old World
Wine, there is a large gap in the literature regarding trade in different types of wine, i.e. there
is an unanswered question: what drives the international trade of sparkling wine and still wine?
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Are the determinants the same or are there some differences that need to be addressed and
explained? The goal of this paper is to use this proven model to answer some new questions:
What are the differences between sparkling and still wine with respect to the variables of the
gravity model and what are the explanations for these differences, if any. We assumed that there
would be significant differences due to the high concentration of production and international
trade of sparkling wine compared to the production and international trade of still wine. In our
empirical analysis, we use the trade gravity model because it has been proven many times to be
the best possible empirical tool in analysing and explaining international trade patterns, and
since we are studying something new, we wanted to have a stable foothold for our analysis. The
gravity equation for the analysis of international trade was introduced by Tinbergen in 1962
and has since become a standard tool in the analysis of bilateral trade flows due to its excellent
explanatory power (Lombardi, et al., 2016, Castillo, et al., 2016, Gouveia, et al., 2017). The
gravity trade model is generally used for ex-post estimation of the impact of different trade
policies and trade distortions on bilateral trade. An extended version of the model, the
augmented gravity model, emerged with the primary objective of capturing the impact of an
increasingly wide range of trade policy options. The empirical investigation was conducted
using data for global wine trade in sparkling and still wine collected from secondary sources
for the period from 1996 to 2019. After presenting the basic descriptive statistics and based on
the gravity model theory, we estimate the gravity model for both exports and imports using
Poisson Pseudo-Maximum Likelihood Estimator. At the end of the paper, we explain the
possible reasons for the observed differences between sparkling and still wine trade in terms of
the gravity model variables. The rest of the paper is organized as follows. Section two presents
a literature review on international wine trade. The methodology and data used are explained
in section three. The fourth section of the paper presents the main results of the empirical
analysis and discussion. The final section of the paper provides a conclusion and
recommendations for future research.
Due to the large number of wine producers, sellers, and buyers, Rebelo et al. (2018) define the
wine industry as a great example of monopolistic competition, where there are free exits and
entries into the industry in the long run, making it a dynamic market. Therefore, the
globalisation and liberalisation of the wine trade and the impact of the removal of barriers
through the free trade agreements is an interesting topic for researchers as these events simply
add more dynamics to the mix (Rickard, et al., 2018, Anderson, Wittwer, 2018). The reduction
of barriers in the global market has contributed to the increase in international wine trade flows.
However, the drivers of competitiveness at the micro level are changing, especially with new
competition from New World wine regions. According to research by Bargain et al. (2018),
comparative advantage in the wine industry is not static or uniform. Comparative advantages
that traditional wine producing countries had were no longer enough to maintain their leading
position. The breaking down of barriers has brought new wine producing countries into the
global wine scene. In their paper, Bargain et al. (2018) conclude that China, New Zealand, and
Chile have the greatest potential to make their mark on the global wine scene due to their
competitive advantages, which differ from those of traditional European wine-producing
countries. High wage and land costs are cited as potential barriers for European wine producers
to continue dominating the world wine scene. According to the latest research by Carbone et
al. (2021), in which the authors focus on target markets, the products of the old wine world are
considered more sophisticated, especially those from Italy and France. This may still be a
competitive advantage of Old World countries, but the question is until when. Cardebat and
Figuet (2019) analysed French wine exports and concluded that they became less competitive
in the 2000s due to foreign competitors (competitors from New World countries) with lower
121
prices and due to the appreciation of the Euro against the USD and GBP. According to the
research of Galati et al. (2017), specialisation of wine producing countries leads to wine
destination recognition and competitive advantages. This paper deals with the international
wine trade in the period from 1996 to 2019. In the considered period, wine imports increased
by 120%, from 48.4 million hectoliters to 106.5 million hectoliters, while wine exports
increased by 94%, from 54.5 million hectoliters to 105.8 million hectoliters (www.oiv.int).
During the same period, the average value of imports between country pairs remained the same,
about $3.8 million, while the number of country pairs between which wine is imported
increased from 2,828 to 8,024 country pairs. The average value of exports increased by 37.2%
from $2.34 million to $3.21 million, and the number of country pairs between which wine
exports take place increased from 4,672 to 10,361 (UN Comtrade, 2021). Given the above
figures, we can see a rapid increase in international wine trade flows. As mentioned above, the
world wine market has undergone many changes in the last two decades. Production,
consumption and trade of sparkling wine and still wine experienced a boom. In this research,
sparkling wine is defined based on the classification Harmonised System and explained in detail
in section three of the paper. One of the main reasons for the rapid growth of wine production
and trade is changes in consumer preferences. According to the International Organisation of
Vine and Wine (OIV) report on the global sparkling wine market (2020), global sparkling wine
production increased by 57% from 2002 to 2018, growing from 5% of global wine production
before the 2008 crisis to 8% of global wine production in 2017. The distinctive feature of
sparkling wines is that their production and export market is highly concentrated (almost half
of the 2018 production came from Italy and France, while France had 51.4% of the market share
in sparkling wine exports) (Thome, Paiva, 2020). In 2019, the world trade of sparkling wine
recorded a value of $7.1 billion. The gravity model became one of the most used models in the
analysis of international trade, and it is also used in the analysis of wine trade (Lombardi, et al.,
2016, Castillo, et al., 2016, Gouveia, et al., 2018, Martinho, 2019). In their work, Lombardi et
al. (2016) used an extended version of the gravity model to analyse trade in the intra-EU market,
focusing on France, Italy and Spain, and concluded that there is a difference between bulk and
bottled wine in terms of competitiveness, the impact of prices, transport costs and distance on
export volumes. In the same year, another research was conducted by Castillo et al (2016). They
analysed the international wine trade of bulk and bottled wines and concluded that higher
income, lower prices, cultural and geographical affinities, and trade agreements promote wine
exports. Researchers Balogh and Jambor (2018) examined the role of culture, language, and
trade agreements in global wine trade. According to their research, larger countries export more
wine, transportation costs increase with geographic distance, and global wine export costs are
lower when trading partners are culturally similar.
3. METHODOLOGY & DATA

In our analysis we use standard panel data estimator that is used in the gravity model, that is
Poisson Pseudo Maximum Likelihood (PPML) estimator. By using panel data, we have
possibility to control for heterogeneity between trading pairs, and we do that by including
importer and exporter dummies. The gravity equation in multiplicative form for panel data is
generally formulated as follows:
𝑇𝑖𝑗𝑡 = 𝑂𝑖𝑡 𝐷𝑗𝑡 Ω𝑖𝑗𝑡 , [1]
where Tijt is the monetary value of exports/imports from/of country “i” to/from country “j” in
time “t”. Oit includes origin country factors (usually gross domestic product), effectively
representing the supply of exports (in general equilibrium context of the gravity model),
whereas Djt importer-specific factors (again, gross domestic product), effectively presenting the
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demand for imports of the destination market “j” in time “t”. The last term, Ω ijt, denotes the
variables that origin and destination countries have in common. Equation [1] could be
considered as a naive form of gravity equation. The more recent approach is to include fixed
effects for exporter and importer, which are, in case of panel data, time varying, e.g. exporter-
year and importer-year specific effects, in order to account for multilateral resistance terms
(MRT). By including MRT in the model, we control for the effects of third countries on the
bilateral trade between county i and j. We developed the following econometric model, that is
based on Equation 1, and which is in additive form, obtained with logarithmic transformation
of the original model:
𝑡𝑟𝑎𝑑𝑒𝑖𝑗𝑡 = 𝛽0 + 𝛽1 𝑙𝑔𝑑𝑝𝑜𝑖𝑡 + 𝛽2 𝑙𝑔𝑑𝑝𝑑𝑖𝑡 + 𝛽3 𝑙𝑑𝑖𝑠𝑡𝑖𝑗𝑡 + 𝛽4 𝑐𝑜𝑙𝑜𝑛𝑦𝑖𝑗 + 𝛽5 𝑙𝑎𝑛𝑔𝑖𝑗 +

𝛽6 𝑟𝑡𝑎𝑖𝑗𝑡 + 𝛽7 𝑐𝑜𝑛𝑡𝑖𝑔𝑢𝑖𝑡𝑦𝑖𝑗 + 𝜆𝑡 + 𝑢𝑖𝑗𝑡 [2]
In Equation 2 trade represents trade flows from country i to county j in time t. We estimate the
Equation 2 for exports and imports separately. When using PPML, we practically estimate
linear-log model so the trade flows are in original values (expressed in USD dollars) due to the
specific function form (Poisson likelihood function), while all other continuous variable are in
logs. So, lgdp and lgdpd stand for log of the GDP at market prices for origin and destination
country, respectively. Variable ldist stands for the log of the distance between trading partners.
We use dummy variable colony, with the value 1 if the trading pair was ever in colonial or
dependency relationship, 0 otherwise. Dummy variable lang is a dummy variable with value 1
if the trading pair have common official or primary language, 0 otherwise. Dummy variable rta
is a dummy variable with value 1 in the trading pair have signed reciprocal trade agreement, 0
otherwise, while contiguity is a dummy variable with the value 1 if the trading pair shares the
land border, 0 otherwise. 𝜆𝑡 stands for time fixed effects, while 𝑢𝑖𝑗𝑡 represents error term. When
using PPML estimator we also control for country fixed effects by adding exporter and importer
dummies. The bilateral trade data (exports and imports) that we use in our analysis comes from
UN Comtrade and spans from 1996 to 2019. We use Harmonised System classification and
define three product groups: (1) sparkling wine (HS code 220410), (2) Still wine in containers
holding 2 liters or less (HS code 220421) and (3) Still wine in containers holding 2 liters or
more (HS code 220429). The rest of the variables in our analysis come from Centre d'Études
Prospectives et d'Informations Internationales (CEPII) database on gravity variables. Table 1
contains descriptive statistics of our dataset. We emphasise that we calculated statistics only for
wine (both sparkling and still) for which unit price does not surpass 25 dollars, since the unit
prices greater than 25 where unreelable. This meant that our dataset contains 95% of the data
that was originally obtained from UN Comtrade. In Table 1 trade represents average value of
trade flows between trading partners, while we also show separate statistics for exports and
imports (number of observations for exports and imports don’t sum to number of observation
for total trade because same observations in total trade are re-export and re-import trade flows.
We can also observe that 6.7% of the observed dyads (trading pairs) are dyads where one
country is former colony and other is former colonizer. Also, 45% of trading pairs have some
reciprocal trade agreement and 20.6% share similar language. According to UN Comtrade data
in the period 1996-2019 imports of sparkling wine has tripled, from $1.8 billion in 1996 to $5.2
billion in 2019. The number of pairs of countries in which imports take place also tripled, while
average value of imports of sparkling wine remains the same. With exports the situation is
slightly different. Exports of sparkling wine obviously also tripled, from $1.9 billion in 1996 to
$6 billion in 2019, but the number of trading doubled which means that average value of exports
of sparkling wine increased for more than 30%. Imports of still wine (up to 2 liters) tripled,
from $7.2 billion in 1996 to $20.7 billion in 2019, and number of pairs of countries also tripled,
while exports increased from $7.2 billion in 1996 to $23.0 billion in 2019, while number of
123
pairs of countries doubled. Average values of imports remain the same in the observed period,
while the average value of exports increased for 50%. Imports of still wine (over 2 liters) more
than doubled, from $1.4 billion in 1996 to $3.3 billion in 2019, while exports increased from
$1.3 billion in 1996 to $3.5 billion in 2019. Average values of imports slightly decreased in the
observed period, while the average value of exports increased for 25%. These statistics for still
wine just shows that the consumer base is growing across countries.
Table 1: Descriptive statistics

N Mean St.Dev Median min max
trade 374149 2960000 2.91e+07 25141 1 1.58e+09
exports 190423 2850000 2.77e+07 28176 1 1.29e+09
imports 173081 3220000 3.13e+07 23503 1 1.58e+09
sparkling unitprice 84871 6.548 5.493 4.665 .001 24.996
still unitprice 146740 5.02 4.183 3.76 .001 25
traded volume 374149 1160000 1.38e+07 8312 1 3.33e+09
gdp o 370686 1.18e+09 2.81e+09 2.64e+08 12701.09 2.14e+10
gdp d 364093 1.29e+09 2.96e+09 2.64e+08 12701.09 2.14e+10
dist 372166 5556.095 4610.15 4495.316 2.738 19747.4
colony 373785 .067 .249 0 0 1
language 372166 .206 .405 0 0 1
rta 374131 .452 .498 0 0 1
contiguity 366138 .085 .279 0 0 1
(Source: author’s calculation)
4. RESULTS & DISCUSSION

Table 3 contains the results of our main model. We can see that all the main gravity variables
have the expected signs and are significant. That is, in the case of exports, the GDP of the
destination country drives trade, while in the case of imports, the GDP of the country of origin
(in this case, the country of origin is the country that imports wine) drives trade. In all cases,
i.e. for sparkling wine, still wine in containers of 2 liters or less (still wine, 2L) and still wine
in containers of more than 2 liters (still wine, 2L+), we can see the negative impact of transport
costs, represented by the distance between trading partners, on both exports and imports. What
is striking about our results is that the colonial linkages are only significant for exports of
sparkling wine, which is generally more expensive. We find that the reason for this is that the
production and hence exports of sparkling wine are highly concentrated, with the top 5
producing countries accounting for 80% of the world's sparkling wine production (OIV, 2020)
and some large producing countries exporting predominantly to former colonies, such as
France, which exports more than 65% of total world colonial exports of sparkling wine. Also,
the share of France's exports to former colonies in total world exports of sparkling wine is a
remarkable 7%. Moreover, the size of the estimated coefficient is 50% smaller than the
coefficient obtained in the study by Xiong et al. (2013), which is as expected since we estimate
the model for trade between all trade pairs in the world, while they focus on French exports
(and only those of Champagne) and use firm-level data. Language seems to significantly (and
positively) affect only still wine trade. This would suggest that if we assume that the effect of
similar language on trade is similar to the effect of similar culture, as argued by Fidrmuc &
Fidrmuc (2016), trade in still wine is strongly influenced by it, as opposed to trade in sparkling
wine. Reciprocal trade agreements seem to facilitate only imports, that is, RTAs are significant
drivers for still wine imports, while they are not significant for exporters of both sparkling and
still wine at the 5% significance level. We can say that the RTA impact results are inconclusive,
but this is consistent with previous research findings such as those of Castillo et al. (2016).
124
Table 2: Results of estimation of Equation 2 using PPML

(1) (2) (3) (4) (5) (6)
exports exports exports imports imports imports
Sparkling Still wine, Still wine, Sparkling Still wine, Still wine,
VARIABLES wine 2L 2L+ wine 2L 2L+
lgdpo -0.781** -0.135 0.891*** 1.124*** 1.318*** 0.301**

(0.365) (0.222) (0.244) (0.165) (0.176) (0.139)
lgdpd 0.873*** 1.156*** 0.307** -1.241*** -0.350 0.399*
(0.176) (0.128) (0.151) (0.351) (0.236) (0.219)
ldist -0.814*** -0.545*** -0.885*** -0.434*** -0.294*** -0.559***
(0.120) (0.112) (0.144) (0.143) (0.105) (0.136)
colony 0.476** 0.268 0.119 0.334 0.209 0.0529
(0.237) (0.243) (0.275) (0.259) (0.256) (0.285)
lang 0.259 0.864*** 1.432*** 0.411 0.924*** 1.474***
(0.252) (0.160) (0.241) (0.263) (0.163) (0.248)
rta 0.306* 0.171 0.0530 0.432* 0.348** 0.349*
(0.177) (0.142) (0.197) (0.251) (0.170) (0.189)
contiguity 0.189 0.110 0.423* 0.121 0.0724 0.624***
(0.254) (0.243) (0.222) (0.259) (0.224) (0.236)
Constant 21.80** 0.638 -2.010 23.38*** -0.415 5.721
(9.402) (5.112) (5.849) (8.858) (5.774) (5.278)
Time FE YES YES YES YES YES YES
Exporter FE YES YES YES YES YES YES
Importer FE YES YES YES YES YES YES
Observations 41,267 68,363 31,864 36,098 64,309 33,540
Pseudo R-
squared 0.929 0.906 0.796 0.935 0.911 0.810
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
(Source: author’s calculation)
5. CONCLUSION
Our research focused on investigating the possible existence of differential effects of some
important trade-shaping variables such as common language/culture, common historical
relations and trade agreements on trade in different types of wine, namely sparkling wine and
still wine. We used a well-established gravity model to test our assumptions. Our results show
that similar culture, proxied by a common or similar language, is the driving force for
international trade, both exports and imports, of still wine, but not sparkling wine. We argue
that the reason could be that still wine is on average cheaper than sparkling wine and therefore
has a larger consumer base. In addition, still wine is more embedded in culture and its
consumption is not as associated with festivities as is the case with sparkling wine. On the other
hand, common historical ties might drive exports of sparkling wine, as its consumption is
considered more prestigious, i.e., it is a luxury product. Moreover, as we previously mentioned
sparkling wine production and trade is highly concentrated, with the France being dominant
producer, so their sparkling wine is exported all over the world, regardless of language. Since
we obtained our results using aggregate trade data, future research should focus on primary
analyses at the firm level to broaden the research scope and provide more subtle answers to the
question of what drives the demand for sparkling wine compared to still wine.
125
ACKNOWLEDGEMENT: This work has been partially supported by the University of Rijeka
project 20-39 and by Faculty of Economics and Business Rijeka project titled International
Trade and Economic Growth: Comparative Analysis for former CEFTA countries, code EFRI
5/2019.
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bilateral free-trade agreements on the world’s wine market. The World Economy, 41, pp.
2883-2894.
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Global Wine Trade. Agris On-line Papers in Economics and Informatics, 10(3), pp. 17-29.
3. Bargain, O., Cardebat, J., Chiappini, R., Laffitte, C (2018). Long-Term Prospects of the
International Wine Trade. Journal of Wine Economics, pp. 1-9.
4. Carbone, A., Demaria, F., Henke, R. (2021). The Sophistication of International Wine
Trade: A New Import Measure. Italian Economic Journal.
5. Cardebat, J. M., Figuet, J. M. (2019). The impact of exchange rates on French wine exports.
Journal of Wine Economics, 14(1), pp. 71–89.
6. Castillo, J. S., Villanueva, E. C., Garcia-Cortijo, M. C. (2016). The International Wine
Trade and Its New Export Dynamics (1988-2012): A Gravity Model Approach,
Agribusiness, 32(4), pp. 1-16.
7. Fidrmuc, J., Fidrmuc, J. (2016). Foreign languages and trade: evidence from a natural
experiment. Empirical Economics, pp. 31–49.
8. Galati, A., Crescimanno, M. (2017). Changes in the international wine market
competitiveness. International Journal of Globalization and Small Business, 9(4), pp. 277-
293.
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approach. International Journal of Wine Business Research, 30(2), pp. 218-242.
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(2020), Location: www.oiv.int.
11. Katunar, J., Vretenar, N. & Kaštelan Mrak, M. (2020.). Competitiveness of the Wine Sector
in EU Countries. Interdisciplinary Management Research XVI – Conference Proceedings,
Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek, Croatia, pp.
1619-1634.
12. Lombardi, P., Bianco, A., Freda, R. (2016). Development and trade competitiveness of the
European wine sector: A gravity analysis of intra-EU flows. Wine Economics and Policy,
5(1), pp. 50-59.
13. Martinho, Vítor João Pereira Domingues (2019). The place of wine in societies: the cultural
perspective, ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg, Working
paper.
14. Rickard, B. J., Gergaud, O., Ho, S., Livat, F. (2018). Trade liberalization in the presence of
domestic regulations: public policies applied to EU and U.S. wine markets. Applied
Economics, 50(18), pp. 2028-2047.
15. Thome, K., M., Paiva, V. A. L. (2020). Sparkling Wine International Market Structure and
Competitiveess. Wine Economics and Policy, 9(2), pp. 37-47.
16. Xiong, B., Beghin, J. C., Marette, S. (2013). Gains to French champagne makers from tariff
liberalization, August 4-6, 2013, Washington, D.C. 150003, Agricultural and Applied
Economics Association, 2013 Annual Meeting.
126
THE IMPACT OF THE COVID 19 PANDEMIC ON THE BUSINESS OF

THE EBAY PLATFORM
Josko Lozic
University North
Trg dr. Žarka Dolinara 1, Koprivnica, Croatia
[email protected]
ABSTRACT
The aim of this paper is to analyse the business results of the eBay platform at the time of the
global Covid 19 pandemic. The economic crisis, globally, has hit all industrial sectors. At the
same time, lockdown has contributed to greater online shopping and online platforms. The eBay
platform is the largest global auction platform and the oldest of the existing online platforms.
The analysis of the business result of the platform, as well as the trend of the number of
customers, will determine the impact of the pandemic on the business result of the platform as
well as the relationship between sales revenue on the platform and the trend of the number of
users. The research covers the financial results for the last few years as well as the trend of the
number of users before and during the pandemic. The results of the research will be the basis
for comparison with the results of the business results survey of other online platforms in order
to more easily draw conclusions about the impact of the pandemic on online businesses.
Keywords: Covid 19, online auction, platform economy, zero marginal cost
1. INTRODUCTION
The basic idea of launching an Internet commerce platform originated in the time of Web 1.0.
In 1995, an auction platform based on the idea of the founder Pierre Omydiar was launched.
The first name of the platform was AuctionWeb, but the name changed to eBay very quickly.
After only ten years of business, the platform is listed on the NYSE. During the 1990s, it was
the leading online marketplace, which was captivating in the world of Web 1.0 (Simon 2011).
The platform was one of the pioneers of selling goods in the online model. The model will
remain known as the "dot.com burst", and eBay will be one of the few platforms that has
survived. The Pet.com platform has become synonymous with the model of selling goods on
the Internet and the disappearance of that model. Pet.com procured goods from the
manufacturer and sold them online. The eBay platform created direct interactions between
sellers and buyers on the platform. The difference between eBay and Pet.com is based in value
chain control. While Pet.com and similar online services controlled the goods in the warehouse,
sales and distribution or value chain, eBay created direct interactions between users on the
platform (Parker et.al. 2016). Platforms that controlled the value chain, i.e. stored goods for
distance selling, failed in the "dot.com burst" model, and left their place to platforms that allow
interaction between users on the platform. The model that emerged, and was based on building
interactions between users on the platform, became known as the platform economy (Parker
et.al. 2016; Moazed, Johnson 2016; Reillier, Reillier 2017; Lozić 2017; Lozić 2019a). Enabling
interaction between sellers and buyers, or creating a network effect, is nothing more than
combining supply and demand. The same principle is now used by Android and iOS (Moazed,
Johnson 2016). Since the launch of the project, eBay has been structured as a platform that uses
the “zero marginal cost” model (Rifkin 2015; Lozić 2019b), and according to management
strategies uses the “bowling alley model” (Parker et.al. 2016). Doing business in the platform
economy model, ie using the zero marginal cost effect, enables the platform to control operating
cost. The analysis of financial items will investigate gross profit as a direct result of operating
cost control. Although eBay generates significantly less revenue than competing platforms
Amazon and Alibaba, it has managed to develop a stable and reliable user community and will
127
explore the trend in the number of users during the Covid 19 pandemic. they buy products from
a niche and are long-term tied to the platform which is a special competitive advantage of eBay
over other competitors.
2. LITERATURE REWIUV
The development of Web 2.0 and data processing in the "big-data" model has enabled the rapid
growth of the platform. Web 2.0 is defined as a set of applications and technologies that enable
the posting and sharing of user-generated content, such as social media posts, blogs, video and
photo sharing sites, etc. (Laudon, Traver 2016). It differs from the previous phase by a drastic
increase in information density, interactivity and levels of adaptation. It is also important to
draw attention to the shift from online shopping creation to online shopping habit (Hemp 2006).
The platform has developed its own application as well as its own data processing model to
make it easier to match users. It has very quickly positioned itself as the leading online platform
(Silva et.al. 2018). The eBay platform started its business as an online auction service, but over
time has expanded its business to all forms of digital commerce (Hu et.al. 2021). At the turn of
the century, eBay introduced the "Buy it now" option (BIN), which aroused great user interest.
The option was based on the price of the goods sold at auction and a fixed price, if the goods
are not sold at auction (Bauner 2015). Further development of the model brought a combination
of negotiation-based factors, with the final price of the contracted item. Research has shown a
strong correlation between final price and user characteristics, and patience has been shown to
be one of the most significant characteristics (Backus et.al. 2020). The Internet environment
and virtual communities are becoming vital elements in a phenomenon often referred to as
“social commerce” (Huang, Benyoucef 2013). Therefore, the recommendations of other
consumers, instead of the advice of friends / family, are also becoming an increasingly
important decision-making factor (Kotler, Keller 2012). The platform is an example of a
corporation that has evolved into an online retailer model and become the largest global service
for auctions and similar sales model in digital form (Einav 2014). Americans have an average
of 36 unwonted items in their homes, worth $ 3,675, that they could turn into cash, according
to a new report by online marketplace eBay. And during the pandemic a lot of people did just
that (Verdon 2021). Analysing from a consumer perspective, the fundamental determinants of
online consumer behaviour are related to consumer characteristics, environmental impacts,
product / service characteristics, media characteristics, and retailer characteristics (Cheung
2005). Research has shown that new vendors can improve business performance in laboratory
conditions using multivariate regression analysis, but real-time and cyberspace sales differ
greatly from laboratory conditions. Therefore, it is very important to learn from existing
vendors and use customer segmentation studies in correlation with bidding strategies (Li et.al.
2017). Online auction success factors can be divided into three categories: trust increase factors,
transaction increase factors, and product attributes. Factors of increasing trust are directly
related to increasing customer confidence in the process of interaction with the seller and to
reducing customer exposure to information asymmetry (Houser, Wooders 2006). Data on
product characteristics, as well as customer characteristics and preferences are scattered on
different data carriers, which requires the development of a special algorithm for data collection
and processing. Improving the development of customer-seller interactions is a direct
consequence of the development of a special algorithm for collecting, processing and
interpreting results, as well as for the development of machine learning that shortens process
time (Amado et.al. 2018). Application development and data processing requires continuous
improvement of the algorithm, but also increasing the capacity of the data carrier (Canito et.al.
2018). There are currently a billion entries on eBay auction listings. Every week, through
mobile apps, 10 million new items are added to the sales lists. In America, a pair of women's
shoes and dresses are bought every 6 seconds, and women's handbags every 10 seconds.
128
In the UK, necklaces are bought every 10 seconds, and in Germany, women’s fashion
accessories are bought every 14 seconds (Allison 2018). The development of the Internet has
made online auctions not only one of the most important channels for C2C transactions but also
an extensive research area (Chen et.al.2018). The online sales industry is already in a mature
phase and saturation within the industry is getting stronger. Already in the time before the
"dot.com burst" studies have shown a very high rate of saturation and rivalry between industry
entities (Cohen 2002). The research focuses on the analysis of financial results, as well as the
trend in the number of users before the Covid 19 pandemic. On the one hand, the crisis has
significantly limited overall economic activity, and on the other hand, living conditions have
given impetus to the development of online shopping.
3. MEHTODOLOGY AND RESERARCH QUESTION

For the purposes of the research, data from the eBay Annual Report will be used, ie from the
form "Form 10-K" which the administration compiles for the needs of the NYSE. In addition,
data from other specialized sources that cover this topic will be used. The research is aimed at
answering two fundamental research questions:
1) Q1 - How much did the Covid 19 crisis affect the financial result of the platform?
2) Q2 - How did the Covid 19 crisis affect the trend in the number of platform users?
In the research and analysis of financial results, the methods of financial analysis and statistical
analysis of selected items from the income statement will be used. Selected items will be
processed by the regression trend method in order to obtain data on changes in individual items
by periods, and to calculate average changes in a given period. The trend in the number of users
will be analysed by statistical analysis and regression trend methods to determine the direction
and strength of the trend in the number of users. Both types of data will be analysed by the same
methods so that the results can be compared. The final results and interpretation will be
presented in the chapter Discussion and Conclusion.
4. DATA ANALYSIS
Data research and analysis is divided into two basic groups. In the first part, selected items from
the financial statements will be analysed, and in the second part, the trend in the number of
users. The third part is the synthesis and analysis of the data obtained from the first two parts
of the research.
4.1. Financial analysis

The financial analysis of the platform covers a period of eight years. For the purposes of the
research, a smaller period of five years would be sufficient, but the intention is to point out the
saturation and oscillation of income that is already significant. In the analysed period, from
2013 to 2020, revenues increased by 24.4%, from $ 8.25 billion in 2013, to $ 10.27 billion in
2020. The increase was not continuous and in 2014 and 2015 revenues decreased compared to
the previous year. year. The same happened in the last analysed period. From 2018, total
revenues have digressive growth and in 2020 they are lower compared to the previous year by
4.9%. Cheng (2020) also points to the decline in revenue, as well as changes within the online
retail segment, emphasizing the growth of Walmart's share in online sales, as well as the
increase in Amazon's market share in the USA market. In the last two analysed periods,
revenues increased by only 0.3%, i.e. decreased by 4.9%, from which it can be concluded that
the pandemic had a significant impact on the total revenues of the corporation. The results of
the analysis are shown in Table 1.
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Table 1: Selected financial items eBay (millions; $)

2013 2014 2015 2016 2017 2018 2019 2020
Net revenue 8.257 8.790 8.592 8.979 9.927 10.764 10.800 10.271
Cost of revenue 1.492 1.663 1.771 2.007 2.221 2.382 2.508 2.473
Gross profit 6.765 7.127 6.821 6.972 7.706 8.382 8.292 7.798
% 81,9% 81,1% 79,4% 77,6% 77,6% 77,9% 76,8% 75,9%
Total operating
4.311 4.651 4.624 4.647 5.442 6.142 5.971 5.087
expenses
Income from operation 2.454 2.476 2.197 2.325 2.264 2.240 2.321 2.711
Net income (loss) 2.856 46 1.725 7.266 -1.017 2.548 1.786 5.667
Net revenue (n/n-1)% - 6,5% -2,3% 4,5% 10,6% 8,4% 0,3% -4,9%
Source: Own illustration (eBay Annual report)
Table 2: Regression analysis - selected financial items

Revenue Cost of revenue
12,000 3,000
10,000 2,500
8,000 2,000
6,000 1,500
4,000 1,000 y = 156.42x + 1517.2
y = 376.33x + 8230.3 R² = 0.9628
2,000 500
R² = 0.8271
0 0
0 2 4 6 8 0 2 4 6 8
Total cost of expenses Income from operation

7,000 3,000
6,000 2,500
5,000 2,000
4,000
1,500
3,000
1,000 y = 27.952x2 - 182.67x + 2523.7
2,000 y = 206.92x + 4385.2
1,000 R² = 0.559 500 R² = 0.7025
0 0
0 2 4 6 8 0 2 4 6 8
Source: Own illustration (eBay Annual report)
In relation to revenue growth of 24.4%, in the analysed period the cost of revenue had a
significant growth of 65.8%, which is 2.7 times more than the increase in revenue. While
revenue has fallen by 4.9% in the last period, cost of revenue has fallen by 1.4%. The result of
such trends is a 6% drop in gross profit. The decline in gross profit in the last analysed period
is also related to the smallest share of gross profit in revenues in the entire analysed period. The
average share of gross profit, in the analysed period, was 78.5%. In the last analysed period, the
share of gross profit was 75.9%. The regression analysis included selected items from the
corporation's financial report. The average annual revenue growth was 3.94% (s = 3.94) with a
determination coefficient of 0.8271. On the regression line (y = 376.33x + 8230.3) the inflection
point, in the last analysed period, is below the regression line. Revenues are declining and the
coefficient of determination is on the verge of interpretation accuracy (R²> 0.8). Cost of revenue
grows on average annually at a rate of 7.58% (s = 7.58), with a coefficient of determination of
0.9628. On the regression line, the inflection point of the last period is below the regression line
(y = 376.33x + 8230.3), but the growth of costs is continuous with the coefficient of
determination proving a strong connection. Total costs of expenses are continuously growing,
but they oscillate around the regression direction (y = 206.92x + 4385.2), and the coefficient of
determination of 0.559 is insufficient for an accurate estimate of the growth rate.
130
The curve of the direction of the regression trend income from operation (y = 27,952x2 -
182,67x + 2523,7), indicates the oscillation of the financial result and saturation in the industry.
The coefficient of determination is not sufficient for a precise interpretation of the regression
trend. The results of the analyses are shown in Table 2.
4.2. User trend analysis

The research of the trend of the number of users by the method of descriptive analysis covers a
period of ten years. The analysed data were sorted quarterly and covered a period of 44 quarters.
The average size of the statistical set is 145.37 million users; Median 157.5 million; Mod 162
million. Skewness is -0.63, i.e. slightly negatively asymmetric, which reveals that the growth
in the number of users is slow, i.e. that the growth is digressive. The results of the research are
shown in Table 3.
Table 3: User’s trend description analysis
Source: Own illustration
Statistical analysis using the index method takes the number of users at the end of the year as
frequencies in the analysis, ie it uses the number of users at the end of the fourth quarter, at the
end of the year. The largest annual increase in the number of users was realized in 2012, ie the
number of users in the fourth quarter of 2012 was 23% higher than in the last quarter of the
previous year. After that, the number of users grows digressively until 2016, and then oscillates.
The gross profit trend is very similar to the trend of the number of users on the platform. The
trend in the number of users indicates the strong impact of the pandemic, but also signs of
saturation as well as income. The results of the analysis are shown in Table 3. The average
quarterly growth of the number of users was 1.6% (s = 1.6), explained by the linear regression
of the trend (y = 2.3196x + 95.504) with the coefficient of determination R² = 0.9113.
131
Table 4: User's trend analysis

Reggresion analysis (quarterly) Number of users
250 200 162.0 179.0 185.0
180
160 154.0
200 174.0
140 170.0
140.3 162.0
120
150 100 123.5
80 100.4
100 60 94.5
40
50 y = 2.3196x + 95.504 20
R² = 0.9113 0
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0 10 20 30 40 50
The results of the annual trend in the number of users are shown in Table 4. The total number
of users increased from 94.5 million in 2010, to 185 million users in 2020. That is an increase
of 95.8%. In the context of trend research during the Covid 19 pandemic, the number of users
fell by 2.8% in 2019, and increased by 6.3% the following year, which was insufficient to
maintain positive revenue growth. The average annual growth in the number of users was 5.96%
(s = 5.96), explained by the linear regression trend equation (y = 8.9164x + 104.94), with the
coefficient of determination R² = 0.9034. The points of infection of the regression linear trend,
in the last two analysed periods, are below the trend line, which indicates a slowdown in the
growth of the number of users. The pandemic also had a significant impact on the trend in the
number of users. In the context of attracting and retaining customers, eBay will focus on
attracting Gen Z who should become their key customers (Cheng 2020).
4.3. Table ANOVA analysis

In the context of researching the strength of the relationship between the trend of income and
the trend of the number of users in the analysed period, the ANOVA analysis model was used.
Revenues and the number of users for the period of eight years, i.e. from 2013 to 2020, were
entered into the ANOVA regression model. The result of the research showed a very strong
connection between the trend of income and the trend of the number of users, i.e. the correlation
between the two groups of frequencies is higher than 0.8 (Multiple R = 0.8771). at the level of
significance of 0.95, which confirms the strong dependence of the revenue trend in relation to
the trend of the number of users. Adjusted R Square of 0.7305, or the coefficient of
determination for a small number of frequencies (in this example is 8), is 0.7309 Insufficient
for precise interpretation of the obtained results Insufficient coefficient of determination is
directly related to the oscillations of the trend in the number of users and the decline in revenue
in the last analysed period.
132
Table 5: Table ANOVA

Regression Statistics
Multiple R 0,877147
R Square 0,769386
Adjusted R Square 0,73095
Standard Error 525,746
Observations 8
ANOVA
Significance
df SS MS F F
Regression 1 5533017 5533017 20,01751 0,0042189
Residual 6 1658453 276408,9
Total 7 7191470
Standard
Coefficients Error t Stat P-value Lower 95%
Intercept -707,35 2299,576 -0,3076 0,768784 -6334,2091
Users 61,85538 13,82523 4,474093 0,004219 28,026254
5. DISSCUSION AND CONCLUSION

The analysis of the platform's business results in the last eight years indicates the first signs of
industry saturation, and the very significant impact of the crisis caused by the pandemic. We
will reduce the results of the research to several key conclusions:
• The Covid 19 crisis significantly affected the trend of the corporation's total revenues.
• Cost of revenue increased 2.7 times more than revenue.
• The average share of gross profit has been falling in the last three years, and is the lowest
in the last analysed period.
• Revenues fluctuate significantly and grow very slowly on average, indicating signs of
saturation within the industry.
• The trend in the number of users is oscillating and is strongly influenced by the Covid 19
pandemic.
• Total revenues directly depend on the trend in the number of users and show a strong link.
In the context of the first research question, the research results showed a very strong impact of
the Covid 19 pandemic on the financial performance of the platform. The amount of revenue
fluctuated even before the pandemic, but in 2020 the largest decline in revenue was recorded
in the analysed period. In addition, the average gross profit is continuously declining, and 2020
was the lowest in the analysed period. In the context of the second research question, the results
of the analysis show a large correlation between the pandemic and the trend in the number of
users. In the analysed period, the trend number of users increased digressively, and in the last
analysed period it increased by 6.3%. The trend of the number oscillates and, in that part,
overlaps with the financial result. The growth in the number of users in the last analysed period
is directly related to the impact of the Covid 19 pandemic, based on which the strong impact of
the pandemic on the trend in the number of users is confirmed. Future research, after the end of
the pandemic, should provide an answer to the question of whether revenue growth will
continue and what will be the trend in the number of users.
133
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135
COMMUNITY PARTICIPATION IN LOCAL ECONOMIC

DEVELOPMENT
Kristina Afric Rakitovac
Associate Professor at Juraj Dobrila University of Pula,
Faculty of Economics and Tourism “Dr. Mijo Mirković”, Croatia
Alen Belullo
Associate Professor at Juraj Dobrila University of Pula,
Faculty of Economics and Tourism “Dr. Mijo Mirković”, Croatia
Moris Ivancic
City of Vodnjan, Croatia
ABSTRACT
Sustainable rural development is based on the preservation and balanced development of
environmental, social and economic capital. A necessary precondition of sustainable rural
development is the participatory involvement and networking of relevant stakeholders. The
participatory process results in many benefits for local communities (e.g. more democratic
local governance, better response to stakeholders’ needs, improved efficiency of public
services, etc.). The purpose of the paper is to elaborate the importance of participatory
approaches in the process of revitalisation and sustainable development of rural areas. The
aim of the paper is to identify development opportunities and constraints for local development
viewed from the perspective of external stakeholders. The paper presents the results of the
empirical research intended to identify the development opportunities and constraints of the
City of Vodnjan – Dignano, a small town in the rural parts in Croatia, from the external
stakeholders’ perspectives. The research has involved three groups of external stakeholders
(respondents from the two main economic activities, i.e. agriculture and tourism and from civil
sector). The research showed various development opportunities and constraints, as well as the
willingness of local stakeholders to become more involved in development processes. The
research results contribute to a better understanding of the importance and long-term benefits
of community participation in local development.
Keywords: community participation, sustainable development, rural areas, small towns
1. INTRODUCTION
The long-term sustainable development of rural areas is a challenge faced by many local
governments. These areas traditionally rely on agriculture, with the gradual strengthening of
other activities, especially sustainable rural tourism. A necessary precondition of sustainable
rural development is the participatory involvement and networking of relevant stakeholders.
The participatory process results in many benefits for local communities (e.g. more democratic
local governance, better response to stakeholders’ needs, improved efficiency of public
services, etc.). The local government have the responsibility to implement the participative
approach by using various mechanisms (public hearings, focus groups, interviews, surveys,
etc.). With such a complex approach, it is very important to inform, prepare and educate the
relevant stakeholders on the mechanisms of participation. In the EU member states the
LEADER program has been implemented since 1991, aimed to engage local stakeholders in
the design and delivery of strategies, decision-making and resource allocation for the
development of rural areas. The programme is realised on the basis of local development
strategies implemented by Local Action Groups (LAGs). Until the end of 2018 it has been
implemented by around 2,800 LAGs, covering 61% of the rural population in the EU and
136
bringing together public, private and civil-society stakeholders. The aim of the paper is to
identify development opportunities and constraints for local development viewed from the
perspective of external stakeholders. The paper presents the results of the empirical research
aimed to identify the development opportunities and constraints of the City of Vodnjan –
Dignano, a small city in the rural parts in Croatia, as determinants of future sustainable
revitalisation. The research has involved three groups of external stakeholders (respondents
from the two main economic activities, i.e. agriculture and tourism and from civil society). The
research showed various development opportunities and constrains, as well as the willingness
of local stakeholders to become more involved in development processes. The research results
contribute to a better understanding of the importance and long-term benefits of community
participation in local development.
2. PARTICIPATIVE MODELS OF LOCAL COMMUNITY DEVELOPMENT

Cities, with their variety of stakeholders, are complex social and economic systems. According
to OECD (2020), urbanisation continues to grow all over the world, with 70% of the global
population expected to live in cities by 2050. Urban areas nowadays range from metropolitan
areas (more than one million inhabitants), intermediary cities (between 50,000 and one million)
and small towns with up to 50,000 residents. Overall 20 percent of the world’s urban population
lives in small towns. In Europe there are 22.6 % of the population living in metropolitan areas,
41.9 % in intermediary cities and 35.5% in small towns (UCLG, 2016). The paper is focused
on small towns in rural areas. Rural space and rurality at the same time could be understood as:
1. real, material geographical space and time outside the boundaries of the (morphological)
urban agglomeration, which is both a factor and a reflection of the process of satisfying basic
human functions: to live and live in the community, to work, to be supplied, to be educated and
to spend free time, 2. discursive social representations, formal and informal, of high cultural
charge, with diversity and contradiction of meaning and 3. concepts that affect the
understanding of spatial relationships, but also of life in general (Lukić, 2010). Small towns
contribute to regional and rural development in five main ways: by acting as centres of
demand/markets for agricultural products from the rural region, by acting as centres for the
production and distribution of goods and services to their rural region, by becoming centres for
the growth and consolidation of rural non-farm activities and employment, by attracting rural
migrants from the surrounding region and by managing natural resources (IIED, 2017).
Promoting good governance is one of the main drivers of local economic development. It should
be based on some basic principles: accountability, transparency, participation, efficiency and
coherence (EC, in: Kordej-De Villa et al. 2009). Successful development of local communities
is a result of carefully designed and implemented development strategies. In the last four
decades, many local authorities have, at least nominally, committed themselves to
implementing the concept of sustainable development. The implementation of the concept of
sustainable development requires the informed participation and collaboration of all interested
stakeholders. A key feature of the participatory approach is the involvement of all those who
may find their interest in the development and implementation of the strategy (Đokić, I. et al.
2010). Community participation requires the application of different methods, i.e. interviews,
surveys, focus groups, ongoing dialogue and reflection on each phase. Comprehensive
development is, therefore, a process in which no one's interest dominates and in which different,
sometimes conflicting, interests are named, processed and resolved. Creating a participatory
government in which different stakeholders identify problems and define goals, the whole
community is consulted, different experts define professional measures, officials implement
policies in the most efficient way possible and politicians support programme development at
all stages, actively participate in the implementation and bear the political consequences, may
be a more realistic but sufficiently ambitious goal of such programmes (Đokić, I. et al., in:
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Kordej-De Villa, et al. 2009). Successful participatory process is achieved by the inclusion of
all available stakeholders through a transparent process that works through and deals with
power/knowledge conflicts, builds group relationships and brings pressure to bear on the
agenda level (Walker, Shanon, 2011). The concept of stakeholders was originally developed in
the corporate sector and relates to interests above those in traditional stockholding theory
(Freeman, 1984). The World Bank and other development actors subsequently introduced a
stakeholder theory that applies to all those affected by social and other types of development
projects. Stakeholder theory continues to evolve in the business world as one of the fundamental
principles of corporate social responsibility (Stubbs, in: Kordej-De Villa et al. 2009). The most
common arguments in favour of citizens’ involvement include better accountability and
responsiveness to the needs of the recipients (Bardhan and Mookherjee, 2000), introduction of
more democratic principles in local governance (Bishop and Davis, 2002) and improvement of
public service delivery efficiency (Hoddinott et al., 2001; Bardhan, 2002, in: Kvartiuk, 2017).
The participatory approach faces a number of limitations: it takes time, many stakeholders have
different perspectives and expectations, a consensus between stakeholders is difficult to reach,
etc. In EU countries LEADER (“Liaison Entre Actions de Développement de l'Économie
Rurale" – “Links between the rural economy and development actions”) is a local development
method which has been used for 30 years in order to engage local stakeholders in the design
and delivery of strategies, decision-making and resource allocation for development of rural
areas. It was introduced in response to the failure of traditional, top-down, policies in order to
address problems faced by many rural areas in Europe. Until the end of 2018 it has been
implemented by around 2,800 Local Action Groups (LAGs), covering 61% of the rural
population in the EU and bringing together public, private and civil-society stakeholders. For
the 2014-2020 funding period, the applicability of the LEADER approach was further extended
as Community-Led Local Development (CLLD) in rural, fisheries and urban areas. Under
CLLD, local stakeholders form a local partnership that designs and implements an integrated
development strategy. The strategy is designed to build on the community’s social,
environmental and economic strengths or “assets”, rather than simply compensate for its
problems (ENRD, 2021). Outside Europe, the World Bank has supported projects using a very
similar “community-driven” methodology (Community-driven development - CDD) in 94
countries, with a total investment valued at almost 30 billion dollars (Wong, 2012). According
to Kvartiuk (2017), the evidence related to participative governance in rural areas in transition
countries indicates that individual decision-making to get engaged in the participatory process
may be largely dictated by the mental models persistent within the communities. Besides, those
citizens that believed that the government should be the ultimate public goods and services
provider were less likely to get engaged. It has been noted that social trust improves cooperation
and thus increases participation rates. A participative approach in planning and creation of
strategic development documents has been implemented in Croatia since 2000. The project,
managed by the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) and The
Institute of Economics Zagreb has involved five local communities: three small cities:
Virovitica, Samobor and Benkovac and two municipalities: Šolta and Lišane Ostrovičke. The
project has shown that consensus must be reached in such a way that all stakeholders of the
local unit are informed and involved in the preparation of the development document.
Cooperation with stakeholders achieves transparency of the procedure and quick response to
changes (Đokić et al. 2011). The paper presents the results of the empirical research aimed to
identify, through a participatory process, the development opportunities and constraints of the
City of Vodnjan – Dignano, a small city in the rural parts in Croatia, as determinants of its
future sustainable revitalisation.
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3. EMPIRICAL RESEARCH
3.1. Research methodology
The city of Vodnjan - Dignano, Croatia, is the youngest city of one of the most developed
regions in Croatia, Istria County. According to the latest Population census (2011) it has 6,119
inhabitants. The average population density is 58 inhabitants/km², below the average for the
County (73.78 inhabitants/km²). The identity of today's Vodnjan - Dignano is based on
multiculturalism that stems from turbulent historical events. The first written mention of
Vodnjan - Dignano appeared in 1150 under the name Vicus Atinianus. After the Second World
War, Vodnjan - Dignano was part of the Municipality of Pula until 1993, when it received the
legal status of its own Municipality. In 2015 the City of Vodnjan - Dignano adopted the City
Development Strategy for the period from 2015 to 2020. The purpose of the empirical research
was to elaborate the importance of synergy of local self-government and external stakeholders
in the process of revitalisation and sustainable development of rural areas on the example of the
city of Vodnjan - Dignano. The research hypothesis was: Participatory involvement of relevant
stakeholders in the process of revitalisation of the economy of the city of Vodnjan - Dignano,
as a unit of local self-government in a rural area, contributes to the joint identification of
development challenges, priorities and opportunities for future development. The aim of the
empirical research was to identify the development opportunities and constraints of the City of
Vodnjan - Dignano through a participatory process as determinants of its future sustainable
revitalisation. The authors have used the stakeholder analysis (Yang, 2013) in order to map the
potential respondents. The main criteria for selecting respondents were twofold: the most
important economic activities (agriculture and tourism) and active citizens involved in the civil
sector. The questionnaire was sent to members of the agricultural association Agroturist
Vodnjan (70 members), the Association of family accommodation renters of the City of
Vodnjan (100 members) and non-governmental associations (41 NGOs). There were 73
respondents, i.e. 34.6%, of which 18 respondents from the agricultural association (25.6%), 30
from the renters’ association (30%) and 25 from NGOs (73.2%). The research instrument was
a questionnaire consisting of 20 questions. The empirical research was realised in November
and December 2018. The paper presents the selected questions and answers. The data have been
analysed by methods of descriptive analysis and nonparametric tests were used for inferential
analysis, processed with the SPSS programme 24.0. The characteristics of the sample are
presented in Table 1.
Table 1: Structure of sample
Age (in %)
Group Total
18-29 30-39 40-49 50-59 60 and more
Agriculture Female 33.3 11.1
Male 66.7 100.0 100.0 100.0 100.0 88.9
Tourism Female 100.0 72.7 25.0 75.0 60.0
Male 27.3 75.0 25.0 - 40.0
NGO Female 40.0 50.0 64.3 33.3 33.3 50.0
Male 60.0 50.0 35.7 66.7 66.7 50.0
(Source: Authors’ research)
There were one third of female and two-thirds of male respondents. Regarding the age structure,
the largest group were those in the age group from 40 to 49, followed by those from 30-39, then
from 50-59.
3.2. Research results

The respondents were asked to evaluate the level of satisfaction with the quality of public
services (5-point Likert scale) (Table 2). Nonparametric methods were used in the analysis
because the variables were not normally distributed. The table shows the mean and mean rank
of the satisfaction with the quality of public services, the Friedman test for K related samples
139
was used to test the difference between mean ranks for assessing the satisfaction of different
public services, while the nonparametric Kruskall-Wallis test for K independent samples was
used to test the difference between mean ranks of groups. The significance levels of test (p) are
shown in parentheses.
Table 2: Satisfaction with the quality of public services

Difference between services Difference between groups
Kruskall
Public service Mean Friedman Mean
Mean Group Mean Wallis test
rank test 2 (p) rank
2 (p)
Agriculture 3.00 35.83
Health and social 1.600
3.04 3.93 Tourism 3.24 41.08
care (0.449)
NGO 2.90 34.30
Preschool and 0.920
3.40 4.47 Tourism 3.48 39.12
primary education (0.631)
NGO 3.30 34.33
Care for the elderly 0.907
2.70 3.15 Tourism 2.80 39.52
and infirm (0.635)
70.677 NGO 2.70 36.93
(0.000) Agriculture 3.11 39.06
Communal 4.606
2.92 3.55 Tourism 3.12 42.54
infrastructure (0.100)
NGO 2.63 31.15
Agriculture 2.33 38.00 3.538
Public transport 2.30 2.45 Tourism 2.60 42.30 (0.171)
NGO 2.03 31.98
Environmental Agriculture 3.11 41.50
1.876
management 2.85 3.45 Tourism 2.88 38.14
(0.391)
NGO 2.67 33.35
Bold = level of significance p<0.05
The highest grade is given to Preschool and primary education (3.40), while the lowest is to
Public transport (2.30). Based on the Friedman test, 2=70.677 (p<0.05) we can conclude that
there is a significant statistical difference in mean ranks in satisfaction between different public
services. Based on the Kruskall-Wallis test, we can conclude that there are no significant
differences in the satisfaction of different groups with a particular public service. A slightly
larger difference can be seen for Communal infrastructure, between Tourism group
(mean=3.12), and NGO (mean=2.63), but this difference is not statistically significant at the
significance level of 5% (2=4.606, p = 0.100> 0.05). In Table 3, we see that survey
participants were most satisfied (5-point Likert scale) with Cultural events and manifestations
(mean=3.52) while they were least satisfied with Sports and related activities (mean=2.99).
Based on Friedman's nonparametric test, we conclude that there is a significant statistical
difference in satisfaction between different activities 2=41.414 (p<0.05). When we look at the
difference in satisfaction of individual activities between different groups we see that, based on
Kruskall Wallis test, we cannot reject the hypothesis that satisfaction is the same for all groups
(p>0.05).
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Table 3: Satisfaction with the offered activities

Difference between activities Difference between groups
Kruskall
Activity Mean Friedman Mean
2 (p)
Cultural events and 0.635
3.52 2.42 Tourism 3.60 39.46
manifestations (0.728)
NGO 3.50 36.35
Concerts and 41.414 1.307
3.08 1.82 Tourism 3.28 40.50
entertainment (0.000) (0.520)
NGO 3.03 36.22
Sports and related 3.321
2.99 1.76 Tourism 3.28 42.98
activities (0.190)
NGO 2.80 33.42
From table 4 we see that respondents are more satisfied (5-point Likert scale) with the
development of the city in the last ten years (mean=3.16) compared to local community
participation in planning and decision making (mean=2.62). There is a statistically significant
difference between different items based on Friedman's nonparametric test (2=20.161,
p<0.05). Based on the Kruskall-Wallis test, that there is no statistically significant difference,
at 5% significance level, in satisfaction between different groups regarding the analysed items.
Table 4: Respondents' satisfaction with the development of the city

Difference between items Difference between groups
Kruskall
Item Mean Friedman
Mean Group Mean Mean rank Wallis test
rank test 2 (p)
2 (p)
Development of the Agriculture 3.33 38.44
city over the last ten Tourism 3.40 42.40 3.968
3.16 1.67
years (0.138)
NGO 2.87 31.63
20.161
Local community (0.000) Agriculture 2.33 31.78
participation in Tourism 2.92 43.04 3.626
2.62 1.33
planning and (0.163)
NGO 2.53 35.10
decision-making
The next questions were related to the respondents' active participation in city development
planning and their awareness of development opportunities (Table 5). Only one fifth (27%)
have been actively involved in the planning process. The respondents from Agriculture
participated mostly in the city development planning (33.3%), while NGOs participated the
least (20.0%). Testing for differences between groups was done by Pearson's 2 test based on
a contingency table. We see that there are no differences between the group related to
participation in planning of city development (2=1.410, p=0.494>0.05). Two-third of
respondents (68.5%) were informed about the development opportunities of their business
activities. The most important information sources are Media and social networks (52.1%), the
Tourism office (22.9%) Associations (16.7%) and the Local government (8.3%). The most
informed group is Agriculture (88.9%), while the least informed is the NGO group (56.7%).
141
Table 5: Respondents' active participation in city development planning and their awareness
of development opportunities
Participation in Source of information
Awareness of
city Media and
Group development Tourism Local
development social Associations
opportunities office government
planning networks
Agriculture 33.3 88.9 62.5 37.5 0.0 0.0
Tourism 32.0 60.0 73.3 0.0 0.0 26.7
NGO 20.0 56.7 23.5 11.8 64.7 0.0

Pearson 2 1.410 5.746 40.066
(p) (0.494) (0.057) (0.000)
We cannot reject the hypothesis that there is no difference at 5% significance level, but it is
possible to reject at 10% significance level (2=5.746, p=0.057). The group Agriculture
receives mostly information from the Media and social network (62.5%), and from Associations
(37.5%). The group Tourism receives mostly information from Media and social networks
(73.3%) and Local government (26.7%), while NGOs receive mostly information from the
Tourism office (64.7), Media and social networks (23.5%) and Associations (11.8%). Based on
Pearson's 2=40.066 (p<0.05) we can conclude at 5% significance level that there is a
statistically significant difference regarding the sources of information of different groups.
When asked about the most significant development constraints (Table 6), respondents point to
communal infrastructure (25.4%), local self-government (10.4%) and state land and property
(7.5%).
Table 6: The most significant limitation for current development of city
Group
Development constraints Total
Agriculture Tourism NGO
State land and property 22.2% 4.8% 7.5%
Market and billing 11.1% 3.0%
Production 11.1% 3.0%
Finance and criteria of EU funds 14.3% 3.6% 6.0%
Legal frame 11.1% 3.0%
Administration 3.6% 1.5%
Associations and clusters 22.2% 6.0%
Water costs 11.1% 3.0%
Labour force 11.1% 7.1% 6.0%
Supply of services 10.7% 4.5%
Cleanliness 14.3% 6.0%
Cultural and sports activities 4.8% 1.5%
Communal infrastructure 33.3% 35.7% 25.4%
Marketing 9.5% 10.7% 7.5%
Local government 19.0% 10.7% 10.4%
Accommodation offer 3.6% 1.5%
Inhabitants 14.3% 4.5%
Total 100.0% 100.0% 100.0% 100.0%
Pearson 2 78.906
(p) (0.000)
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From the contingency table we see that for the Agriculture group the most significant constrain
is State land and property (22.2%) and Associations and clusters (22.2%), while for the Tourism
and NGO groups the most important constrain for current development of the city is
Infrastructure (Tourism 33.3%, NGO 35.7%). Pearson's 2 test (2=78.906, p<0.05) indicates
that there is a significant statistical difference between groups regarding their perception about
limitations that affect current development of the city. In the next question, participants were
asked to rank from 1 (less significant) to 3 (more significant) the three future investment
priorities (Table 7). The Investments in communal infrastructure (2.26) were ranked slightly
higher compared to Investments in entrepreneurial infrastructure; the difference is significant
at the significance level of 10%. However it is not significant at the significance level of 5%
(2=5.706; p=0.058). Different behaviour of groups was observed only for Incentives for
entrepreneurs (farmers, renters and caterers), where NGOs have a slightly higher mean rank
(2.26) compared to other groups, which is statistically significant at the significance level of
5%.
Table 7: Future investment priorities

Difference between sources Difference between groups
Kruskall
Source Mean Friedman Mean
2 (p)
Investments in Agriculture 2.22 33.94
0.593
communal 2.26 2.20 Tourism 2.41 36.75
(0.744)
infrastructure NGO 2.15 32.81
Investments in Agriculture 1.88 31.17
0.933
entrepreneurial 2.02 1.99 5.706 Tourism 2.12 36.75
(0.627)
infrastructure (0.058) NGO 2.03 34.73
Incentives and Agriculture 1.55 28.33
subsidies for Tourism 1.58 29.29 10.393
1.83 1.82
entrepreneurs, farmers, (0.006)
renters, caterers, etc. NGO 2.26 43.58
In the next question the respondents were asked to choose the future spatial planning priorities,
i.e. the revitalisation of the old town or development of other locations in the surroundings. As
indicated in Table 8, most respondents (60.3%) prefer the revitalisation of the old town.
Friedman non-parametric test for related samples concludes that there is not a statistically
significant difference between the observed groups.
Table 8: Future development priorities

Group
Future development priorities Total
Revitalisation of the old town 77.8% 64.0% 46.7% 60.3%
Development of other locations
22.2% 36.0% 53.3% 39.7%
outside the old town
Pearson 2 4.768
(p) (0.092)
In the next question the respondents were asked about the values on which the future
development should be based (Table 9).
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The majority of them, similar to the previous answers, consider existing customs, cultural and
traditional values as fundamental for future development. Friedman non-parametric test for
related samples concludes that there is not a statistically significant difference between the
observed groups.
Table 9: Fundamental values of future development

Group
Foundations of development Total
Existing customs, cultural and
77.8% 60.0% 50.0% 60.3%
traditional values
New goals of future development and
22.2% 40.0% 50.0% 39.7%
revitalisation
Pearson 2 3.626
(p) (0.163)
In the last question the respondents were asked to rank three priorities for future development,
proposed as an open question. The three most significant priorities were the communal
infrastructure (21.1%), followed by further development of the two main activities, i.e.
agriculture and tourism (16.9%) and the revitalisation of the old town centre (11.3%). Pearson's
2 test (2=59.666, p<0.05) indicates that there is a statistically significant difference between
the observed groups. For the group Agriculture the most important priority was state land and
property, for the group Tourism, further development of the main economic activities
(agriculture and tourism), while for the NGO group, the communal infrastructure.
4. DISCUSSION AND CONCLUSIONS

The participatory process, as observed in many local communities in different countries,
through models such as LAGs, CLLD or other community driven methods could result in many
benefits, i.e. more democratic local governance, better response to stakeholders’ needs,
improved efficiency of public services, etc. The local government have the responsibility to
implement the participative approach. Prerequisites for effective participation are motivating,
informing and educating stakeholders about the mechanisms of participation. Although it is a
complex and time-consuming process, the long-term benefits often outweigh the shortcomings
of the process. The conducted empirical research, although on a relatively small sample of
external stakeholders, indicates numerous possibilities for improving the local governance
through community participation. Respondents mostly gave mediocre grades, e.g. the quality
of public services was ranked with the average grade good, the highest grade being 3.40 for
preschool and primary education, the lowest grade 2.30 for public transport and, similarly, for
the offered activities, where the highest grade was 3.52 for cultural events and manifestations
and the lowest, 2.99 for sports and related activities, the satisfaction with the development of
the city over the last ten years 3.16, etc. The possibility of participating in the planning and
decision-making process was also assessed as mediocre (2.62). Only one fifth have been
actively involved in the planning process. On the other hand, two thirds of respondents were
informed about development opportunities of their business activities. The local government
was considered as the least significant source of information, indicating the need to develop a
more effective communication strategy. The most significant development constraints are the
communal infrastructure, the local government and the state land and property. The research
has shown a statistically significant difference between groups regarding development
constraints, which indicates the need to reach a consensus. Investment in communal
infrastructure was recognised as the most important future public investment priority. Most
respondents consider the revitalisation of the old town to be a future spatial planning priority.
144
As expected for rural areas, the majority of respondents consider existing customs, cultural and
traditional values have been recognised as fundamental for future development.
The research has confirmed the willingness of local stakeholders to be better informed and more
actively involved in developmental processes.
ACKNOWLEDGEMENT: This paper is a result of the scientific project "The Determinants

and Challenges of Competitiveness", supported by the Faculty of Economics and Tourism "Dr.
Mijo Mirković", Juraj Dobrila University of Pula. Any opinions, findings and conclusions or
recommendations expressed in this paper are those of the authors and do not necessarily reflect
the views of the Faculty of Economics and Tourism "Dr. Mijo Mirković" Pula."
LITERATURE:
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Community Development Journal Vol 46 No S2 April 2011 pp. ii63–ii82,
doi:10.1093/cdj/bsr011 (10.01.2021)
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Development Programs? CDD impact evaluation review and operational and research
implications, Washington, D.C. World Bank Group. Retrieved 10.01.2021. from:
http://documents.worldbank.org/curated/en/967431468161087566/What-have-been-the-
impacts-of-World-Bank-Community-Driven-Development-Programs-CDD-impact-
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145
BLOCKCHAIN AND IMPACT INVESTMENT - CASE STUDY OF THE

BLOCKCHAIN FOR ZERO HUNGER INITIATIVE AND ITS
CONTRIBUTION TO THE UNITED NATIONS SUSTAINABLE
DEVELOPMENT GOALS
Luis Barbosa
CICANT, Universidade Lusófona do Porto, Porto, Portugal
[email protected]
ABSTRACT
The technological evolution that is taking place is drastically changing the way individuals,
companies and governments operate, leading to social transformation. In a global context of
alert to climate change and many of the irreparable damage to the planet, and to extremely
serious social situations resulting from drought, war and other calamities, it is necessary to
find alternatives for sustainable development and instruments that facilitate the implementation
of actions to respond to global humanitarian needs. In terms of public and private management,
policies aimed at sustainable development, environmental protection and the improvement of
the quality of life and well-being of citizens have been gaining prominence. Impact investing, a
disruptive financial mechanism, is managing to attract more and more followers. The paradigm
shift is becoming more visible with the realization that something has to change in the concept
of capitalism. Blockchain is a new technology that can be considered a new type within the
Internet. The “Building Blocks Application” is one of the best expressions of systems based on
blockchain technology for humanitarian purposes today. The main beneficiaries are refugees.
Considering that environmental and social sustainability are two unavoidable themes of today,
in this paper we analyse how blockchain interrelates with impact investing, especially to
support the achievement of the United Nations Sustainable Development Goals. In terms of
methodology, we anchored our research in the exploratory study and case study methods. So,
in this exploratory study the main inference is the extraordinary benefit provided by the
combination of the two tools – blockchain and impact investment - in social action such as the
refugee aid. We believe that the combination of blockchain with impact investment can play a
highly relevant role in achieving the Sustainable Development Goals, and thereby have a
positive contribution to social and environment sustainable development.
Keywords: Blockchain, Climate Change, Impact Investment, Social Impact, Sustainable
Development Goals
1. INTRODUCTION
Technology is changing faster than ever. The interconnectivity between devices, between
systems, the relationship between the virtual world and the physical world are fundamental
characteristics of the digital age. Blockchain technology is considered a new class - as was the
internet - or a new type of technology within the internet. Although it can be used in various
sectors, it is in the financial sector that it has had the greatest application and dissemination
through crypto currencies (virtual currencies), which incidentally constituted one of the bases
of its creation, as we will see in the third chapter. In juxtaposition, from the perspective of
public and private management, policies aimed at sustainable development, environmental
protection and improving the quality of life and well-being of citizens have been gaining
prominence. In a global context of alert to climate change, to the irreparable damage of the
planet, and to extremely serious social situations resulting from drought, war and other
calamities, it is a worldwide emergency to use technology as a force for good; for instance,
through the development of technologic tools that facilitate the implementation of actions that
respond to humanitarian needs.
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The merit of the so-called social economy is enormous and indisputable, but its sources of
financing are usually unstable. The response to pressing environmental and social situations as
well as their grandeur requires more and more financial sources. One of the biggest drivers of
society remains the financial sector. But a new financial instrument has been gaining ground
and is attracting a significant number of investors – impact investing – in which the funds
invested have the primary objective of creating a positive environmental and/or social impact.
The return over investment is longer than in classic funds. In the context of sustainable
development and the need to respond to today's greatest challenges, the United Nations created
the 2030 Agenda or Sustainable Development Goals. It comprehends the achievement of 17
major objectives through several goals defined for each objective. To achieve the objectives -
essential to improve the quality of life for all humans and to minimize the destruction caused
to the planet - it is necessary to involve all sectors of society without exception and a lot of
money. The main objective of our study is to understand the two very recent instruments:
blockchain and impact investment. In addition, we intend to understand how, based on new
technological networks, it is possible to exponentially boost social projects, and the
correspondent contribution to the Sustainable Development Goals. This work begins by
describing in chapters 2 and 3 the concepts of blockchain and impact investing, highlighting
the significant amounts that this financial subsector currently drives. Chapter 4 presents the
summary of our case study: an innovative project that brings together the use of blockchain
technology in the implementation of an action that directly impacts the SDG’s, in this case, the
2nd Objective - Eradicate hunger. In the last chapter we present some final considerations. In
terms of methodology, given that these are very recent concepts and, that their pairing is still
under researched by the academy, the exploratory study method was chosen, “a category of
observational research, considered useful in real cyber systems (related to techno-social
behaviours), (Edgar & Manz, 2017). It is a methodology used to better understand a system for
which there is no preconceived hypothesis or conceptual behaviour (Edgar & Manz, 2017). In
chapter 4, a qualitative case study is presented (albeit briefly). According to Baxter & Jack
(2008), qualitative case study is a research method that facilitates the exploration of a complex
phenomenon in its own context using a variety of data sources. This ensures that the subject is
not explored through a personal view, but through a variety of lenses that allow observing
various facets of the phenomenon to be revealed or understood (Baxter & Jack, 2008). These
two authors argue that: “there are two fundamental views on the methodology of the case study:
one proposed by Robert Stake (1995) and the other by Robert Yin (2003). Both ensure that the
main theme is properly explored and that the essence of the phenomenon is revealed” (Baxter
& Jack, 2008, p. 545).
2. BLOCKCHAIN
To better understand blockchain, it is important to understand how it came about. Despite its
recent disclosure and implementation, according to some authors, including Beyer (2018), the
“blockchain was invented by Stuart Haber and W. Scott Stornetta” (Beyer, 2018). The two
inventors describe this technology in their research work published in 1991, as a
computationally practical solution for digital documents, since they were generated with data
records that could not be altered or tampered with. The system used a chain of cryptographically
protected blocks to store the time-stamped documents. In 1992 ‘Merkle Trees’ were
incorporated into the project, making it more efficient and allowing several documents to be
aggregated in a single block. However, this technology was not widely used and the patent
expired in 2004 (four years before the launch of Bitcoin). Thus, the creation of the blockchain
is generally attributed to Satoshi Nakamoto. Nakamoto published a scientific article in 2008
(“Bitcoin: A Peer-to-Peer Electronic Cash System”) followed by the launch of the software
called Bitcoin in 2009 (Beyer, 2018).
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Beyer argues that, like many innovations, Bitcoin builds on past work that is often overlooked,
so whoever wrote the original Bitcoin article did not steal that idea. In fact, Haber and Stornetta
are cited three times in the Bitcoin article; this indicates some knowledge of common academic
practice by Nakamoto (Beyer, 2018). Going back to the foundation of blockchain creation, it is
important to note that network computing did not start in 2008 and that many of the concepts
used in blockchain technology are the result of previous research. At the same time, the
invention of Bitcoin - being an important element in Nakamoto's work - also provided
innovative advances in the blockchain technology (created by Haber and Stornetta). With
regard to blockchain technology itself, it appears in the context described by Iansiti and Lakhani
(2017): ‘their contracts, transactions and records are among the structures that define our
economic, legal and political systems. They protect assets and set organizational boundaries.
They establish and verify identities and assign a chronology. They generate interactions
between nations, organizations, communities and individuals. They guide social and
administrative actions. Despite this, these essential tools, as well as the bureaucracy created to
manage them, have not kept pace with the digital transformation of the economy. (…) In a
digital world, the way we regulate and maintain administrative control has to change. The
blockchain promises to solve this problem” (Iansiti & Lakhani, 2017, p. 9). With blockchain, it
is possible imagining a world in which contracts are incorporated into a digital code and stored
in transparent and shared databases, but where they are protected from being erased, tampered
with or revised (Iansiti & Lakhani, 2017). From the point of view of the authors, in this
(blockchain) world “each agreement, process, task and each payment would have a registration
and a digital signature that could be identified, validated, stored and shared. Intermediaries like
lawyers, agents, bankers are no longer needed. Individuals, organizations, machines and
algorithms could freely trade and interact with each other without much friction. This is the
immense potential of the blockchain” (Iansiti & Lakhani, 2017, p. 4). To put it simple,
blockchain "is software - it is as simple as that" (Williams, 2019, p. 8) and "the essential
function of the blockchain is to group digital information creating a collection that cannot be
changed, called 'blocks” (Williams, 2019, p. 19). Although blockchain was created with a focus
on Bitcoin, Bitcoin is only the first manifestation of one strand of its potential - blockchain is
technology (Kenigsberg, 2014). It is a highly complex technology, as Greenfield points out,
blockchain is the first information technology that is equally difficult to understand by
intelligent and highly capable people (Greenfield, 2018). Blockchain technology has
revolutionized the way of storing, managing and transferring documents and values between
digital identities and many sectors of the economy, facilitating business based on transaction
processes. Like any new technology it is not exempt from criticism or flaws that need to be
addressed. Several international organizations are working to increase security and encourage
the ethical use of digital networks.
3. IMPACT INVESTMENT
Economic growth continues to be seen as the primary form of development. It is now admitted
that many of the factors that contributed to this development had, among others, two major
impacts: the environmental and the social. At the social level, although society has never had
such a high disposable income throughout human history, poverty (to varying degrees) still
affects a large part of the world population. The efforts of public and private institutions have
not proved to be sufficient to effectively combat, among others, environmental problems and
problems of social fragility. The current complexity of environmental problems arising mainly
from climate change (in many cases they are generating more social dramas themselves), seems
to be finally creating a new way of approaching management (especially business management)
regarding the need to work based on strategies and objectives beyond the immediate financial
profit and at any cost.
148
In this context, the impact economy in the form of impact investment may come to be
considered as the greatest innovation to financing well-being, development and progress as
“financial capital can intentionally achieve environmental and social results, in addition to
financial returns” (Martin, 2013, p. 4). The concept of impact investment was an initiative of
the Rockefeller Foundation in 2007 and designates all “investments made with the intention of
generating financial returns simultaneously with social and environmental impact” (Murray &
Arrillaga-Andreessen, 2017, p. 4). Impact investing (also called 'social finance', 'social impact
investing', 'mixed value investment' or 'impact finance') has gained significant momentum in
recent years” (Martin, 2013, p. 5). As Houérou (2018) points out, companies and individuals
are increasingly adopting an enlightened view of their role in society. The simple idea that
getting good results by doing good created new business opportunities and inspired investors
to rethink where they put their money (Houérou, 2018). The operation of the impact investment
market is similar to the traditional financial market Dexler & Noble, 2013. In terms of value,
the impact investment market multiplied by five between 2013 and 2017 reaching $US 228
billion globally. According to the Annual Report of the Global Impact Investing Network
(GIIN) - one of the largest organizations linked to impact investment - published in April 2019,
the value of the impact investment market had already reached US$ 500 billion, and was
expected to reach as much as $US 1 trillion by 2020. Bringing impact investing to the fore
would provide a huge boost to the achievement of the Sustainable Development Goals (SDGs).
The cost of achieving the SDGs is high - $US 7 trillion per year, including $US 4 trillion for
emerging markets only. According to Houérou (2018) “we must be creative in mobilizing
private capital. Impact investing has the potential to increase trillions to meet the world's most
urgent development needs, from preventing and mitigating climate change to providing the
health and education services needed for lasting prosperity” (Houérou, 2018). Impact investing
is evolving through an “explosion of new products” (Thorpe, 2019) and, according to Thorpe,
“impact investing is increasingly being involved in discussions on how to fix capitalism”
(Thorpe, 2019). So, it can be said that this is an important and growing subsector of financial
markets and that the prospects for its positive influence on society could mean a real turning
point for economy and development. As Shah says, this is a “young and dynamic industry,
reflecting both progress and obstacles. For better or worse, investment has always meant
influence, and this influence comes from a thousand choices each of us makes every day. Let’s
choose better - a world where our choices drive universal well-being and environmental
prosperity” (Shah, 2019, p. 4).
4. CASE STUDY – BLOCKCHAIN FOR ZERO UNGER INITIATIVE

Digital technology is driving financial inclusion around the world, allowing for the first time
more and more people and businesses to join the global economy. Although both concepts
presented in the previous chapters still raise some doubts and several challenges, namely in
terms of ethics and digital security, many world organizations are developing policies and
implementing programs to “shape the future of the digital economy and the digital society”.
The World Economic Forum (WEF), for example, proposes six measures to promote
sustainability, inclusion and trust in the digital world: 1. Access and Adoption; 2. Responsible
Digital Transformation; 3. Fit for purpose - informed governance; 4. Secure and Resilient
people, processes and practices; 5. User centric interoperable digital identities; 6. Trustworthy
Data Innovation, as described in Figure 1.
Figure following on the next page
149
Figure 1: Six Shared Global Outcomes
Source: World Economic Forum
Measures like these are becoming more and more important due to the rapid evolution of digital
technologies and the growing number of citizens with access to the digital world at a global
level to mitigate the risks and doubts of users, particularly in sensitive aspects such as ethics or
financial ones. Blockchain has the potential to revolutionize, above all, the sectors and
ecosystems in which trust is paramount; in this sense, many organizations, governments and
civil society have been working with the objective of accelerating the strategic and responsible
use of this technology. It is in this context that blockchain has been used to launch impact
investment projects, with some of the most recent being related to humanitarian aid. It is not
part of this paper to discuss potential conceptual inconsistencies. It is intended, through the case
study, to understand the mechanics between the concepts of our exploratory study. Thus, the
below we present a summary of the project that uses digital blockchain technology for social
good and impacts the SDG’s: ‘Building Blocks - Blockchain for Zero Hunger’.
Framework
The blockchain has recently found its way into the impact investment community and a
significant number of projects are being developed to take advantage of its characteristics
giving rise to a new application called impact tokens. These tokens represent the link to one
of the United Nations' Sustainable Development Goals, usually in the form of a quantifiable
unit or metric that is linked to its origin (the activity that created it, which also represents
its identity). Tokens can be used to make payments according to performance, register
impacts along the supply chain (or supply chain) or to highlight actions to support the SDGs.
Summary
The 'building blocks' application is probably the best known of the applications of
blockchain technology applied to humanitarian support; it uses blockchain infrastructure to
provide direct cash assistance in refugee camps in Jordan. Notably, the World Food
Program (WFP) uses blockchain to deliver food aid effectively to 106,000 Syrian refugees
in Jordan.
Description
Despite being a relatively young technology, blockchain promises to reduce overheads,
increase security for aid providers and beneficiaries, and ultimately ensure more funds are
150
redirected to end hunger. As a foundational technology akin to the internet, blockchain has
the potential to improve many strands of humanitarian operation. Use cases aren’t merely
restricted to the current pilot and cash-based transfers; WFP is actively working to establish
a broader blockchain architecture that powers the future of identity management and supply
chain operations.
Together with the digital shift, blockchain can facilitate faster intervention in some of the
world’s most difficult operating environments. For vulnerable countries lacking financial
infrastructure, blockchain could help humanitarian actors roll out life-saving cash assistance
in matter of days should disaster strike.
As part of the pilot program called “Building Blocks”, the World Food Program (WFP) has
been testing the blockchain as a means to make money transfers more efficient, transparent
and secure. Cash assistance and emerging digital opportunities empower families to meet
their basic needs according to their priorities.
How it works
Users buy goods at designated stores depending on the role assigned to them. For an end
user, the process is remarkably simple: they buy, usually at one of the designated stores and
pay through the iris reader. The iris reading identifies the customer, confirms that he has
enough balance and proceeds with the payment. Stores receive their monthly payments.
Early tests in Jordan show that the blockchain could help make it safe and efficient for WFP
to offer beneficiaries more choice and more control over how and when they receive and
spend their cash benefits – e.g. in retail shops, at ATMs, via mobile money, etc. WFP now
aims to extend the value proposition of Building Blocks to explore unrestricted cash inside
the refugee camps in Jordan to explore how the platform can support wider unrestricted
cash distributions, starting with mobile money inside the refugee camps.
Harnessing blockchain technology as an effective means to empower people to meet
their essential needs
Research shows that direct cash transfers to those in need can be the most effective and
efficient way to distribute humanitarian assistance, while also supporting local economies.
Globally, WFP is the largest agency delivering humanitarian cash, and in 2019 distributed
record of $2.1 billion, reaching over 28 million people in 64 countries.
But distributing cash depends on local financial institutions and, where possible, WFP
prioritizes working through and strengthening the local financial ecosystem. However, in
some contexts, financial service providers are either insufficient or unreliable. In others,
refugees face restrictions in opening bank accounts. That’s why in January 2017, WFP
initiated a proof-of-concept project in Sindh province, Pakistan, to test the capabilities of
using blockchain for authenticating and registering beneficiary transactions. The blockchain
technology behind the project allowed direct, secure, and fast transactions between
participants and WFP—without requiring a financial intermediary like a bank to connect
the two parties.
After refining the project’s approach, the next phase of Building Blocks was implemented
in two refugee camps in Jordan. Now, over 100,000 people living in the camps can purchase
groceries by scanning an iris at checkout. Cash value from WFP or other partners is stored
in a beneficiary ‘account’ maintained on the blockchain, but the cash that beneficiaries
receive or spend on goods and services is paid to the beneficiaries or to the retailers through
a commercial financial service provider. Built on a private, permissioned blockchain, and
integrated with UNHCR’s existing biometric authentication technology—WFP has a record
of every transaction. This not only saves on financial transaction fees in the camp setting
but ensures greater security and privacy for Syrian refugees.
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A collaborative approach
The blockchain opens the door for a future where the humanitarian community comes
together around a neutral and interoperable infrastructure to harmonize and optimize the
global aid effort, especially as the industry up scales cash programmes.
From Building Blocks Project to Blockchain for Zero Hunger
The Building Blocks application is among one of the best expressions of systems based on
blockchain technology for humanitarian purposes today.
The main beneficiaries are refugees; anything that can facilitate cash-based transfers (CBT)
is generally considered better and more dignified for refugees. WFP also benefits because
it pays much less in transaction fees and, finally, donors also win because, from the start,
their financial contribution is applied more effectively.
WFP is harnessing blockchain technology as an effective means to empower people to meet
their essential needs.
The project has now completed its life cycle with the WFP Innovation Accelerator.
In addition, a new Building Blocks partnership will allow Syrian women who participate in
the UN Women’s Cash for Work Programme to withdraw cash at a supermarket in a
Jordanian refugee camp or make purchases directly. And since UN Women and WFP both
validate each other’s transactions via their own blockchain nodes, the system’s security is
increased.,
Now, WFP is interested in exploring the application of blockchain technology in areas as
diverse as supply chain tracing and digital identity management.
Sources:
Blockchain4Aid: https://blockchain4aid.org/dossier/building-blocks/#dxs-0
Blockchain for Zero Hunger: https://innovation.wfp.org/project/building-blocks
This example allows us to clearly observe the efficiency of the blockchain in the management
of a project within the humanitarian environment. During the study it was found that one of the
great advantages of using blockchain is the ability to follow a process throughout all its steps.
The Blockchain for Zero Hunger initiative very clearly describes the advantages of associating
technology in supporting the management of social causes. From this point of view, it highlights
the various benefits, including the reduction of financial costs. Also of note, from a
humanitarian perspective, is the element about to the dignity of the beneficiaries.
5. FINAL CONSIDERATIONS
Regardless of the major problems that the humanity currently faces, it is going through an
exceptional period in terms of development, namely in technology. Presenting itself as a
complex technology, and still with enormous upgrade opportunities, blockchain can be used far
beyond the crypto currencies that have been giving it more and more visibility. From the
theoretical-conceptual perspective, it is important to highlight the recovery of a concept that
had not been developed and that ended up creating one of today’s the most disruptive financial
developments: the virtual currency. Impact investing, being also a disruptive innovation, is
attracting more and more investors. The growing number of projects and the very significant
increase in the amounts involved make it possible to infer that this may become a preferred
form of investment for many managers and investors. A new paradigm is becoming more
visible with the realization that something has to change in the concept of capitalism, that is,
without disregarding the need to make profit. Thus, the combination of blockchain with impact
investment can play a highly relevant role in achieving the Sustainable Development Goals,
and thereby contribute to the social well-being, citizens’ happiness, fight poverty, regenerate
natural ecosystems, fight climate change, etc. Managers and investors can (and should) support
this mission given that fact that with a global will we could indeed end poverty and that can
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take action avoid the worst impacts of climate change. It is a huge challenge and a great
responsibility, but this study shows that anyone can contribute with effective solutions and that
support can (and should, in our opinion) come from individuals and organizations, including
academia. Based on the example presented in the short version of our case study in chapter 4,
we can anticipate that many similar projects can be developed. It also is important to give credit
to the WFP’s manager who had the idea of using blockchain to create a safer and more
dignifying process to support refugees1. As for the criticism and resistances on both blockchain
and impact investing concepts it is possible to predict that they will be minimized over time due
to the constant technological evolution and the work of several organizations in order to
guarantee a safer digital and ethical world.
5.1. Future Studies

We consider very relevant to create technologic tools for measuring the results of impact
investment in order to help investors and fund managers to make impact investment decisions
based on accurate data. We also believe that’s important to deepen the debate about the
financing of the social economy and the role of the impact economy within the context of social
economy.
LITERATURE:
1. Baxter, P., Jack, S. (2008). Qualitative Case Study Methodology: Study Design and
Implementation for Novice Researchers. The Qualitative Report, Volume 1(4), 542–559.
2. Beyer, S. (2018). Blockchain Before Bitcoin: A History.
https://blocktelegraph.io/blockchain-before-bitcoin-history/: BlockTelegraph.
3. Drexler , M., Noble, A. (2013). Impact Investing: Putting Ideas Into Practice. SSI Review.
https://ssir.org/articles/entry/impact_investing_putting_ideas_into_practice
4. Edgar, T.W., Manz, D. O. (2017). Research Methods for Cyber Security. Elsevier.
5. Greenfield, A. (2018). Radical Technologies - The Design of Everyday Life. Verso.
6. Iansiti, M., Lakhani, K. R. (2017). The Truth about blockchain. Harvard Business Review,
Iansiti, M(January-February), 1–11.
7. Kenigsberg, M. (2014). What is Bitcoin and What Makes it Unique? Bitcoin Chaser.
https://bitcoinchaser.com/cryptocurrency/bitcoin-btc
8. Le Houérou, P. (2019). Rising Momentum for Impact Investing. IFC-ORG. https://ifc-
org.medium.com/rising-momentum-for-impact-investing-b2ac17580298
9. Martin, M. (2013). Making Impact Investible. Impact Economy Working Papers, 4, 1–36.
https://www.impacteconomy.com/download/Impact Economy - 2013 - Making Impact
Investible.pdf
10. Murray, S., Arrillaga-Andreessen, L. (2017). The Rockefeller Foundation: Innovation in
Social Finance. Stanford Graduate School of Business.
11. Shah, S. (2019). ANNUAL IMPACT INVESTOR SURVEY 2019.
12. Thorpe, D. (2019). Impact Investing Trends in 2019 Include Greater Focus On Gender.
Forbes. https://www.forbes.com/sites/devinthorpe/2019/05/01/impact-investing-trends-in-
2019-include-greater-focus-on-gender/#4153ca2f2aa9: Forbes.
13. Williams, S. P. (2019). Blockchain: The Next Everything. Scribner.
1The World Food Programme has achieved another milestone after the creation of the Building Blocks Project in 2017. In May
2020 it launched “The Atrium”: UN blockchain solutions under one roof. The Atrium has been established by the United
Nations Innovation Network (UNIN), in collaboration with the WFP Innovation Accelerator, UNICEF Innovation and UNDP
Innovation. The Atrium’s goal is to help staff members from across the United Nations (UN) system to learn about and apply
blockchain technology in their roles and for their organization’s needs. https://wfpinnovation.medium.com/welcome-to-the-
atrium-7c4182d3682d. Last accessed 22.04.2021.
153
TOURISM ENTREPRENEURS AND THEIR VISION FOR REOPENING

WITH COVID-19
Elvio Camacho
CITUR-Madeira; University of Madeira, Colégio dos Jesuítas,
Rua dos Ferreiros, 9000-082 Funchal, Portugal
[email protected]
Luis Mota
Universidade Europeia, Quinta do Bom Nome,
Estr. da Correia 53, 1500-210 Lisboa, Portugal,
CITUR-Madeira; University of Madeira, Colégio dos Jesuítas,
Rua dos Ferreiros, 9000-082 Funchal, Portugal
[email protected]
ABSTRACT
Since 2020, the pandemic created by COVID-19 has led to the opening and alternately closing
of the world. These are moments of great reflection on sustainable ways of operationalizing
tourism and providing safety in tourist destinations. This study aimed to register the
entrepreneurs' opinions in the accommodation sector on Madeira Island challenged with an
opening scene after the first wave of the pandemic and to compare it with how tourism was
reactivated. In the responses of 76 business managers, the position that the reopening of
tourism should have given priority to the most relevant markets, corresponding with the tourist
profile in Madeira, stands out, instead of focusing on regional and national tourism. However,
if the regional government were to intervene and impose rules for opening accommodation, or
in a coordinated opening, even though the majority agreed, 26% to 34% spoke out against these
actions. It should be noted that entrepreneurs demonstrated a willingness to invest in
disinfection devices and to improve operating procedures in favour of better hygiene and
protection for guests and employees. During the months following the reopening, it was found
that no government restrictions were imposed, with the entrepreneurs themselves adapting the
different openings of hotel units according to their respective vision of the evolution of the
market, having reopened 87.3% of the units in the market. Occupancy rates evolved to
approximately 30% in the months from August to October, with the promotion policy for
national and regional markets having an effect, where the drop registered in July to October
was 27%, against 75% international markets.
Keywords: Accommodation, COVID-19, lodging, tourism, recovery scenario, 1st wave
1. INTRODUCTION
According to the World Health Organization (2021) “globally, as of 2:50 pm CEST, 14 April
2021, there have been 136 996 364 confirmed cases of COVID-19, including 2 951 832 deaths,
reported to WHO. As of 14 April 2021, a total of 733 287 398 vaccine doses have been
administered”. During the COVID-19 lockdown, only basic economic activities were active,
and the condition of stagnation lead many entrepreneurs and policymakers to think about
alternatives to reactivate the economy and recover jobs. Consequently, tourism has collapsed
in a dizzying way, seeing the closing of tourist destinations, airports, cruise boats that could not
go to the port, remaining in the open sea due to the closing of operations on land (Gössling,
Scott and Hall, 2020). The World Tourism Organization (WTO) created an initial scenario for
the year 2020 with a decline of up to 30% in international due to COVID-19 compared to 2019.
However, with the high transmission power of the disease, the scenarios change rapidly causing
the UNWTO to update the scenario on May 7, 2020, to 50-80% (UNWTO, 2020a, 2020b).
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This decline is comparable with 5 to 7 years of growth in exports related to international tourism
(IATA, 2020). The Portuguese government provided financial aid to assist tourism
entrepreneurs, as well as updated legislation to protect tourism workers. However, a destination
like Madeira Island that depends heavily on the operationality of the airlines requires that the
issuing markets remain faithful to the destination. In terms of people arriving in the
Autonomous Region of Madeira, in 2019 there were 1.48 million visitors, with a decrease of
65% in 2020 (Travel BI, 2020). Thus, this work aims to consult the accommodation sector,
which is extremely important for the local economy, on sustainable ways of resuming activity
and compare with the way that the summer of 2020 took place regarding the sector.
2.1. Impacts from covid-19 on the global tourism
Infectious disease severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) has fever,
cough and difficulty breathing as common symptoms and has an incubation period of 2 to 14
days. This disease is transmitted by close contact with infected people, or contaminated surfaces
received the name COVID-19 as a reference to the year of its discovery. This is a different virus
from the SARS-CoV coronavirus that was identified in 2002 (DGS - Direção-Geral da Saúde,
2020a). The 2002 version caused the first major pandemic of the millennium to hit the whole
world and the reasons were attributed to the lack of rules for biosafety in China related to the
consumption of proteins found in game meat. The transmission capacity was registered because
of the rapid progression due to the lack of knowledge and preparation in the control of infections
in hospitals, and by flows of people travelling by air. In 2003, the economy and public health
sectors were strongly affected by the disease, with society, in general, suffering a 10% mortality
rate in more than 8,000 thousand affected people (Cheng et al., 2007). The World Health
Organization (WHO) defined the outbreak of COVID-19 as an international public health
emergency concern, admitting on March 8 that the virus was a global threat. On March 11,
WHO declared the COVID-19 pandemic (Matt et al., 2020). The pandemic present on all
continents has forced governments to define strategies to manage the outbreak of COVID-19.
Consequently, social exclusion was enacted in a variety of countries as a way of reducing
transmission capacity (Anzai et al., 2020). Among many measures to prevent the transmission
of the virus, there was also the restriction of travel of any kind, the closure of schools, public
and social events. Also, to avoid direct contact with the population, all professional activities
compatible with the remote work went on home-office mode. Based on the epidemiological
knowledge of SARS and MARS Coronavirus, Chinazzi et al. (2020) addressed the travel
restrictions imposed by several countries in February 2020 and the reduction in transmission in
Wuhan, China. To this end, they considered scenarios with a 40% and 90% reduction in inbound
and outbound traffic from China, excluding islands. It was concluded that even reducing 90%
of trips, the import of cases is reduced, which in turn will reappear after two to three weeks in
another place. There is also a slight attenuation in the transmission of the virus, but it can be
reduced exponentially if the restrictions are synchronized with interventions by public health
authorities and changes in society's behaviour to act in an even more responsible way.
Concerning the hospitality industry, the evolution of the pandemic led to the closure of activity.
For example, in Portugal, hotels closed voluntarily and those that did not close, had to adapt to
the new situation created by COVID-19. In a survey of tourist accommodation and food and
beverage companies, carried out by the Portuguese Hotel, Restaurant and Similar Association
(AHRESP), 74% of the 1 819 respondent companies closed indefinitely with some considering
not to open again (AHRESP, 2020). Contingency plans were created that include reinforcement
of cleaning and disinfection measures to avoid contamination of employees and customers.
Also, the Directorate-General for Health (DGS), which has always stressed that each company
must develop contingency plans, issued official guidelines with the procedures of "prevention,
155
control and surveillance in hotels", as well as in companies (DGS - Direção-Geral de Saúde,

2020c). Other countries have proceeded with measures to close tourist activities due to
restrictions on the movement of people across borders and according to the degrees of infection
by COVID-19. In the case of Germany, the hotel industry for tourist purposes closed, having
authorization only for necessary reasons, such as the accommodation of health professionals,
accommodation of people at risk or in quarantine (DEHOGA, 2020). It was a matter of a short
time before the economy started to suffer from the reduction and deprivation of activity, a
prolonged stagnation that began to influence its operationality, the net results and the
acquisition of value of companies, products, and services. Society and its habitual routines
started social distancing, depriving themselves of loved ones and resuming fulfilling essential
functions for their survival, such as the labours in the frontline of the attack on COVID-19 and
others incompatible with social isolation. Hotels that were still open started to experience sharp
drops in their occupancy rates, negatively affecting RevPAR and consequently their total
income. In Madeira alone, from March to August 2020, 99.2% of the hotel business closed its
activity and in April, 100% of cruise ships cancelled their call at the Autonomous Region of
Madeira (RAM) (DREM, 2020). Because of the pandemic, the giant meta-search and
accommodation booking platforms Booking and Expedia made it possible to cancel confirmed
non-refundable reservations, refunding the full amount without negotiating with hoteliers. This
unilateral decision affected hotels, which for example in Spain raised a question of business
ethics and contributed to the loss of confidence in the online platform (Hosteltur, 2020).
2.2. Madeira tourism recovery from COVID-19

The RAM is a region with political freedom, but which respond to the Portuguese plan of
confinement. However, given the low rate of infected individuals and high dependence on
tourism, in 2020 RAM was the first geographical area to open for tourism. Although with many
precautions, businessmen continued to work to attract tourists regardless of their nationality
and always focused on the most representative markets as shown in Figure 1.
The main markets on Madeira Island

40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2018 2019 2020
Figure 1: An overview of the most representative markets on Madeira Island

(Source: Travel BI, 2020)
The Portuguese market dominates, closely followed by Germany, the United Kingdom and
France. Other fractions represented less than 5% of the market share, and the total variation to
2019 was in the negative direction with 65%, as can be seen in Fig. 2 (Travel BI, 2020).
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Evolution of guests on Madeira Island

2,000,000
1,617,208 1,605,458
Nr. of guests
1,500,000 1,485,076 1,482,240

1,192,130 1,295,172
1,000,000
500,000 520,536
0
2013 2014 2015 2016 2017 2018 2019 2020 2021
Year
Figure 2: Overall evolution of guests from Madeira Island

(Source: Travel BI, 2020)
According to Portuguese open data for tourism platform, Travel BI (2020), revenue per
available room (RevPAR) in Madeira decreased from 44.31 Euros in 2019 to 23.09 Euros in
2020. This is one of the indicators used to monitor tourism. Due to COVID-19, strategies were
developed to continue supporting tourism in Portugal, addressing the employment situation and
tourist companies. Credit lines were opened to finance startups and the flexibility of tasks with
Turismo de Portugal or financial support programs such as the Community Support Framework,
Strategic Reference Framework, or Portugal 2020 were approved. the rigidity of the “credit
default, specific regime of the relationship between companies in the sector regarding
reservations for accommodation services located in Portugal”, stimulating the areas of business
operation (Turismo de Portugal, 2020a). Among many programs, the “Clean & Safe
Establishment” seal stands out for companies complying with a set of conditions related to
hygiene and safety in a proximity circle of COVID-19, and “complying with the
recommendations of the Directorate-General of Health to avoid contamination of spaces with
SARS-CoV-2” (Turismo de Portugal, 2020c). Specifically for RAM, a specific line was created
to combat the economic crisis and for non-profit entities and artists based in RAM, linked to
the Arts and Culture sector. With 23 eligible applications, the payment of non-reimbursable
expenses due to the interruption of their activities could be made, and even more important it
helped in the process of mitigation and preservation of the same entities (Secretaria Regional
de Turismo e Cultura, 2020a). In conjunction with the Madeira Promotion Association (AP
Madeira), it was invested in strengthening confidence to visit Madeira. To this end, a set of
“recommendations for the resumption of tourist activities” was launched at the Regional level,
which is the basis of the certification process and of good practices concerning the management
of biological risks, which will be available to the associated companies. The objective was to
promote the image of the destination Madeira as a “Covid safe Tourism Destination” (Secretaria
Regional de Turismo e Cultura, 2020b).
3. METHODOLOGY
For this paper, a survey was developed for sampling the universe of hoteliers and entrepreneurs
of local accommodation in the RAM. Thus, it was formed by 209 hotels and 953 units of local
accommodation in Madeira (RNT, 2020), the representative sample of RAM was composed of
76 companies that responded online to the survey, reporting a sampling error of 10.87% in a
95% confidence interval. The purpose was to question the ways considered sustainable and
coherent for the reopening of accommodation to the public. Respondents answered questions
about strategy and the percentage of breaks in the performance evaluation indicators, such as
the net occupancy rate, total income and RevPar.
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The last section comprised questions about changes that are in line with security trends after
COVID-19, the estimated gross value for adaptation to the new reality, examples of adaptations
and lastly, it was possible to collect observations made by the respondents. The alternatives
presented for the reopening of tourism in Madeira were evaluated on a Likert-type scale with
the following designation: 1- Strongly disagree; 2- I disagree; 3- I do not agree or disagree; 4-
I agree; 5- I totally agree. Tourism was reactivated in the summer of 2020 and with the
escalation of the increase in the number of infected people on Portugal mainland, the lockdown
was again installed to contain the 2nd wave of the pandemic. That said, the second research
question is based on the question of whether the responses indicated in the surveys were in line
with the measures adopted by the Government.

4.1. The vision of entrepreneurs and sustainability for the reopening for activity
From the small universe represented by accommodation companies in Madeira, the typology
of accommodation was differentiated by hotel group (18.4%) in which the three largest
registrations exhibit between 1 to 3 establishments, hotel tourist development (38.2%) in which
the three largest registrations they have an accommodation capacity between 51 to 150 and 251
to 500 beds, and the local tourist accommodation (43.4%), in which the three largest registries
have a capacity between 6 and 30 beds. Thus, it is considered that the answers represent much
of the number of beds available in Madeira. Most respondents fully agreed with the
implementation of screening tests at access points in the Autonomous Region of Madeira; with
the development of specific health security procedures for the tourism sector; and with the
implementation of health control measures in the Tourism sector, they were responses at the
highest values of the scale. Indeed, the accommodation sector adhered to the clean and safe
label and provided a sense of safety to their guests (Turismo de Portugal, 2020c) and they were
supported by the Secretaria Regional de Turismo e Cultura (2020b) to enhance operational
procedures aiming to reduce cross-contamination and contribute for the “Covid safe Tourism
Destination”. However, the respondents varied the degree of agreement about the imposition of
rules for the reopening of accommodation in Madeira carried out by the government. Although
the majority fully agreed, 26.3% of respondents did not agree with this measure. As for the
coordinated reopening of the offer, the respondents also registered a superiority for the
maximum degree of agreement, but 34.3% of the individuals disagreed. Regarding the fact that
each management should decide on the best way to resume the activity, the five values of the
scale were marked, leaving 71.1% prevailing for the highest degrees of agreement.
Entrepreneurs were asked about the percentage of accommodation opened in Madeira, with
36.8% responding that it should be in full, and immediately 17.1% suggested opening with half
their capacity, varying other incidences of greater value in the responses at the opening at 60 %
and 80%. Concerning the opening of tourist accommodation to the regional, national
(domestic), German, English, and French markets (see Fig. 3), the level of responses was with
a high degree of agreement, leaving uncertainties to the countries issuing markets that were
heavily affected by COVID-19. Opening, for example, to the Italian market, it registered 36.8%
agreement and 31.6% for neutral entrepreneurs and for those who disagreed with this action.
158
To whom shall Madeira prioritize the opening

Regional
100%
Other 80% Domestic
60%
40%
20%
Spain 0% Germany
Italy UK
France
Agree Neutral Disagree
Figure 3: Satisfaction for opening to dominant markets

(Source: The authors)
Other markets deserved recognition from respondents and those are those that offer controls at
the source, especially countries with a lower infection rate, or that the control of outbreak and
impact of infection is proven. The Nordic countries, Eastern European countries and the Canary
Islands were frequently appointed to be part of the strategy for the recovery of tourism in
Madeira. Analysing the summer of 2020, the facts point out that Portugal was the key market
followed by the issuing countries UK and Germany. When comparing the homolog period, June
registered 96.1% losses and with the reopening, this gap reached only 59.8% at the end of
September (Travel BI, 2020). Still, concerning the reopening, figure 4 indicates the state of a
decision of each management since not resuming the activity, going mostly through operational
restrictions of 50%, to an opening without any restriction.
Scenarios for reopening the activity
I will resume the activity without any restrictions. 34%
I will resume the activity with 75% restrictions. 20%
I am thinking of not resuming the activity. 3%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Figure 4: Levels for resuming the hotel activity on Madeira

(Source: The authors)
Concerning 2020, the estimated breakdown percentages for establishments, or groups, the net
bed occupancy rate was based on an average value of 62.4%, total revenues of 58.4% and 57.0%
of RevPAR. Given this scenario, respondents mostly considered that it would be feasible to
open the sector already in the months of June-July 2020, with some references to the opening
between January and June 2021.
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Thus, 81.6% of the respondents indicated that they would proceed with some type of changes
that respond to new safety and security trends after COVID-19, with a maximum of 200 000
euros, the modal value was 5 000 euros. The examples of adaptations over 30 responses were:
• Obtaining cleaning certificates.
• Obtaining disinfection labels.
• Investing more in personal protective material for workers.
• Making changes to food safety and hygiene in buffets.
• Increasing distance between tables in the restaurant, bar, and entertainment area.
• Providing a digital option for check-in and collection of the room key.
• Providing employees and customers with training on hygiene and safety.
• The use of marketing and advertising techniques based on post-COVID-19 adaptations.
• Health control measures.
The least quoted suggestions were:

• Providing masks and disinfectant gel in rooms and other strategic places.
• Installing sensors with a timer to automate water taps and soap and paper dispensers.
• Developing room service with the possibility of offering meals.
• Modifying the reception to prevent accumulation of people and form of contact with
customers.
• Introducing intelligent machines such as robots to perform customer services.
• The purchase of disinfection equipment such as ozone generators, or sterilization with
ultraviolet light.
After confinement, AHP (2020, p.1) found that in Mainland Portugal and until the end of the
year, “the occupancy rate did not exceed 30% and revenues decreased by up to 75%”. Given
that they resorted to the Lay-off and that they were not legally able to dismiss workers, some
companies did up to 5% of the workers, affecting those who were on an experimental basis and
“36% of the companies did not renew fixed-term contracts” (AHP, 2020, p. 2). Although the
hotel industry did not close completely during the pandemic peaks, Madeiran businesspeople
diverge in the values and goals recorded in Mainland Portugal, where the reopening scenarios
have almost three-quarters of the hotel opened since July, and “more than 50 % think to open
with their full capacity ... and on average 25% open with capacity and services reduced up to
50%, and 15% up to 80%” (AHP, 2020, p. 2).
5. CONCLUSION
Responding to the proposed objective, although increasing the share of the regional proximity
market, Madeiran entrepreneurs considered that priority should be given to the relevant markets
to open their operations, coinciding with the usual tourist profile (DREM, 2020; Travel BI,
2019). In short, the pandemic allows a reflection on the impacts on tourism with all its
conjectures, as well as on policies adopted for its management and the research studies related
to all these occurrences (Gössling, Scott and Hall, 2020). At this moment, it is expected that
consumers of tourism products will be motivated to opt for enterprises adhering to the “Clean
& Safe” quality label (Turismo de Portugal, 2020c), or “Covid safe Tourism Destination”
(Secretaria Regional de Turismo e Cultura, 2020c). However, it is not clear how the
accommodation sector can guarantee good management and react effectively in the event of
sporadic cases of COVID-19 (Gössling, Scott and Hall, 2020). Tourism is one of the biggest
socio-economic activities on Madeira Island, and dependency can lead to challenges to
overcome and comparable to the island of Bali which heavily depends on tourism revenue and
160
is prone to natural disasters and tourism crisis. Tourism recovery is gauged by a set of indicators
such as the consumer ’confidence in the destination and the tourist arrivals (Gurtner, 2016).
Regarding the fact that Madeira felt the impact of the pandemic only in November, tourism was
prepared to receive tourism in the summer of 2020 with several procedures to deal with eventual
outbreaks. Moreover, island accessibility worked as a barrier to the COVID-19 because with
the air-borders being closed during the 1st wave on Mainland, the potentially infected tourists
could not reach the island. Based on the evidence, the view of Madeiran entrepreneurs was in
line with the National strategy for reopening tourism.
ACKNOWLEDGEMENT: Funded by national funds through FCT – Portuguese Science and

Technology Foundation, within the project reference UIDB/04470/2020. The authors also
thank the "Tourism Project: Characterization, Impact and Sustainability of Madeira Tourism",
co-financed by the Operational Program of the Autonomous Region of Madeira 2014-2020
(Portaria nº 92/2015), M14-20-01-0145-FEDER-000007, of the University of Madeira.
LITERATURE:
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THE POSSIBILITIES OF REFORMING TOURIST BOARDS INTO

NEW DESTINATION MANAGEMENT ORGANIZATIONS
Nikolina Seric Honovic
University of Rijeka, Faculty of Tourism and Hospitality Management,
Primorska 42, p.p. 97, 51410 Opatija, Croatia
[email protected]
Manuela Klapan
University of Rijeka, Faculty of Tourism and Hospitality Management,
Primorska 42, p.p. 97, 51410 Opatija, Croatia
[email protected]
ABSTRACT
Due to numerous economic crises, the competition has intensified and new trends, which dictate
the structure of tourism management, have emerged. This indicates the need to find new
methods on how to organize territorial units. One of the possibilities is to create destination
management organizations (DMOs). They represent the latest concept of organized destination
management and involve all stakeholders at the level of both public and private sector. The aim
of this paper is to present the possibilities and ideas on merging the existing tourist boards into
new destination management organizations. The Republic of Croatia divides its territory into
counties and each of these counties has a large number of tourist boards. Zadar County (one
of the leading tourist counties in the Republic of Croatia) has been chosen as an example and
we have presented the reorganization possibilities in order to achieve market advantages
through marketing leadership and the ability to create partnerships with local businesses,
services and public sector agencies. An in-depth interview was conducted with the director of
the County Tourist Board. This enabled us to gain a better insight into the organizational
management structure of the county and we found out more about further organization plans.
The purpose of this paper is to present the characteristics, operations and increased market
competitiveness, in relation to other tourist areas, which would be created by applying the
DMO model. This paper suggests that each DMO can have a unique strategic aim, a different
process in developing specific forms of tourism and implemented projects, which would lead to
larger competitiveness and a better market recognition. DMOs can mutually form competitive
units that could through synergic actions, offer a unique experience to the tourists during their
stay in the county.
Keywords: competitiveness, destination management organization, Republic of Croatia, tourist
board, Zadar County
1. INTRODUCTION
The change in consumer characteristics and the reduced tourist demand caused by the global
pandemic of the COVID-19 virus has increased the competition between the tourist product
offer and the tourist destinations’ total offer. There are studies, which indicate the need to
develop destination management plans in order to improve its performance during the crisis
(Prayag, 2020). A stronger destination positioning in tourism market requires a synergistic
action of all stakeholders, which would nonetheless be able to recognise their "main authority"
at the level of the tourist destination. This “main authority” must have the support of all the
stakeholders from both private and public sectors that form the destination management. One
of the possibilities to achieve competitiveness is to adopt new tourism models of the destination
management organization. Today, the organizational framework operates through tourist
boards and in the future, it should operate through a destination management organization
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(DMO). Although the success of a tourist destination does not necessarily coincide with the
success of a DMO, they are closely related to each other (Pechlane, Volgger, 2014).
Historically, the DMO was considered a destination marketing organization. Over time, it has
been recognized that the role of DMO goes beyond marketing and includes other activities
important for the success of tourism in the destination as well as competitive and sustainable
perspectives (Presenza, Sheehan, 2005). DMOs are destination organizational structures that
perform certain functions, whether they are responsible and supported by the bidder of the
destination or are legally prescribed (Magaš, 2008). They manage the overall area (planning,
organizing, leading and controlling) and take actions in order to achieve the defined goals.
2. ORGANIZATIONAL STRUCTURE OF DESTINATION MANAGEMENT

ORGANIZATION
The structure of the DMO enables significant market advantages such as marketing leadership
and the ability to create partnerships with local businesses, services and public sector agencies.
DMO members can include hospitality-related entities, such as hotels, restaurants, tour
operators, government bodies and any individual or company that directly or indirectly supports
tourism. Potential DMO members can also be attraction parks, petrol stations, retail outlets, city
authorities, transportation companies, airlines as well as universities (Blain, Brent, Levy, 2005).
The correlation of all the DMO actors and the benefits of action is presented in the scheme
below.
Figure 1: Enabling the system of tourist boards to operate according to the model of
destination management organization (DMO)
(Source: Horwath Consulting, 2008)
Product development includes:

• Competitiveness
• Merging the elements of supply and product
• Events
• Call for European Union projects proposals
Information and research include:

• Promotional materials
• Maintenance of the destination website
• Monitoring the work of tourist information centres
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Distribution is characterized by:

• Sending tourist traffic data to the regional tourist organization (RMO)
• The preparation of marketing material regarding the destination and sending it to the final
design and multiplication in the RMO. (Horwath Consulting, 2008)
DMO implies coordination of tourist products. The product is all that can be offered in the
market to induce supply, use or consumption (Amstrong, 2008). It is necessary to create a
product that will best suit the needs of tourist destination, ie an integral destination product that
represents the sum of partial tourist products. Each functional tourist unit forms a part of the
tourist product in a complete tourist destination product, often just mechanically connected to
the detination unit. In order to create an integral tourist product, the following steps are
important:
• To devise concepts of individual tourist attractions arrangement
• To devise concepts of networking the entire tourist destination
• Accommodation capacity
• Catering services
• Rising tourist attractions to the level of market readiness
All the participants in the interrelated network system that creates this product should follow
the thread, or the guiding principle. The guiding principle is a written description of the current
and desirable state of the company, locality, region or organization (Magaš, 1997). It is achieved
by merging stakeholders, as their common interests lie in planning, developing, managing and
promoting a recognizable tourist destination and in the creation of complete tourist products to
satisfy tourists and the well-being of the whole community.
2.1. Possibility of organizing a DMO in Zadar County

Zadar County was chosen as an example of the reorganization of tourist offices into destination
management organizations. It is one of the most popular tourist counties in the Republic of
Croatia. It is located in the central part of the Adriatic coast. Territorially, it includes the coast
and islands of northern Dalmatia, the area of Ravni kotari, Bukovica, part of the Lika-Krbava
area with Pounje and the Velebit channel. The county is a hub that connects the northern and
southern Croatian coast and Dalmatia with other parts of Croatia. The county has a foundation
for the development of different types of tourism, which follows the changing tourist trends. In
order to gain the most successful insight into the organizational structure, an in-depth interview
was conducted with the director of the county tourist destination. The following questions were
raised:
1) Is the development of DMO applicable to Croatian tourism?
2) Is the development of DMO acceptable in the concept of Zadar County development?
3) How many DMOs do you think would be optimal in the County?
4) What are the main criteria in determining the area of newly formed DMOs?
5) What features should each DMO in the county have?
6) What competitive advantages will emerge in relation to tourist boards?
7) What is the development strategy required for each of the DMOs?
8) What could be the main projects and plans within the DMO?
9) During what period do you think that there will be more associations of tourist boards?
All the answers obtained can be summarized. Theoretically, the emergence of DMO is possible,
but in practice, it is not easily feasible. This is due to insufficiently developed legislation. At
lower organizational levels within the destination, the unification of local mayors is the most
important.
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It is important that the government succeed in establishing consultations with private entities.
Currently, one of the problems faced by tourist boards at the local and county level is the lack
of knowledge of people regarding the tasks and capabilities of each of the individual
organizational levels. Tourist boards should often organize meetings with local - communal
society, representatives of accommodation facilities and tourist destination agencies in order to
make a decision on interconnected communication, brochure printing, and website layout. The
most important criterion in the organization and in formation of DMO is the geographical unit.
Another important criterion is the possibility to organize certain similar tourist activities in this
area. It is important to establish cooperation of local tourist boards of a certain area from which
it would be possible to develop DMO. Their link would be joint tourism activities that would
be different from tourism activities of other DMOs within the county. The development of the
main competitive advantage that results from this is the formation of a clearer vision of the
experiential aspect that is easier to present to the guest as recognizable. There are greater cost
savings by printing joint promotional material and managing joint presentation in markets. The
great benefit of DMO operation is achieved by its presentation in well-known international
markets. Through monitoring of the EU projects, the county can coordinate and encourage
tourist boards to apply for EU projects in order to obtain funding and opportunities for further
development. It is important to maintain education and direct tourist boards to cooperate. The
beginning of the merger is certainly current aspiration to unite according the activities through
creation of common identity in logos and common photographs.
ZADAR COUNTY TOURIST BOARD

Encouraging Eu projectd involvement
Co-financing the work of the DMO
Encouraging mutual cooperation - annual meetings organization
Influence of micro and macro environment Adjustment to tourist

demand
Figure 2: Recognizable DMO activities in Zadar County

(Source: Authors)
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The picture shows the most recognizable specific form of tourism in each of the destination
management organizations in Zadar County. Each of these DMOs is affected by the micro and
macro natural environment and trends in tourism demand in the markets. In order to grow,
develop and further improve each of these DMOs, Zadar County Tourist Board should act with
its own activities. The most significant incentive activities should be:
• encourage involvement in the EU projects
• co-financing the work of the DMO with its own budget
• encourage cooperation through organization of annual meetings on the topic of creating
competitive tourism advantages with different prosperities.
The area of Zadar County is locally redistributed to eight DMOs. Each of them differs in
geographical and local characteristics and plans for the future progress and development.
Mutual DMOs are competitive units that, through synergistic action, can provide tourists with
a unique experience of staying in the county.
3. MUTUAL ASSOCIATIONS OF TOURISM OFFER STAKEHOLDERS

Representatives of all relevant stakeholders from the county need to be involved in the creation
of a destination management organization. Engaging stakeholders in the development of
competitive destination is still a significant challenge for academics and for destinations
managers (Lucia, Trunfio, 2018). Cooperation of local mayors, administration and self-
government, directors of tourist boards and all other tourist stakeholders at the newly created
organizational region is important. The main determinant in the annexation of local tourist
boards is the regional development geographical unit. The main idea in this decision on merger
are the possibilities to develop the same specific forms of tourism and the development of the
specific ones in the chosen region – thus enabling the differentiation between DMOs. They
would be characterized as regionally-geographically recognizable units, which connect natural
and geographical features such as the relation between land and sea or cultural and historical
heritage. The joint action of the DMOs consists of competing units that can provide tourists
with a unique experience of staying in the county through synergistic action. In this way, a
defined picture of the experiential aspect is obtained, which is presented to the guest through a
unique promotional presentation, and the main goal is to create a more competitive structure
that follows current tourism trends and meets current tourism needs in a better way. It is possible
to expect the development of destination management companies that will define further
development of tourism. The development of digital collaborative platforms is expected to
serve the organization of DMO management from the perspective of destination tourism
stakeholders and tourists (Abidin, Lundberg, Scarles, 2019). This process strives to provide a
personalized experience. Applying an advanced technology, a DMO can gather useful
information to make decisions and take measures to protect and / or increase the
competitiveness of a destination (Boner, Franzoni, 2019). In the world of digitization, in
addition to advanced technology, it is possible to use both theoretical and managerial
implications for destination management.
4. CONCLUSION
In the past, the destination management organizations (DMO) had only the role in marketing.
Today, these organizations engage in planning, organizing, managing and controlling tourist
destinations and take actions in order to achieve the defined objectives. They represent the latest
concept of organized destination management and involve all stakeholders at the public and
private sector level who are starting to act as partners. They will replace tourist boards in the
future. Zadar County was chosen as an example for the reorganization of the county
organizational structure.
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There are 31 tourist boards of the city, town and municipality in the county. An in-depth
interview with the director of the Zadar County Tourist Board, gave us some answers on the
possibility of developing DMOs in the county, their restructuring based on territorial division
and the implementation of possible activities in each area. In this county area, tourist boards
should be reorganized into 8 mutually connected DMOs. The task of the Zadar County Tourist
Board would be to monitor, coordinate and mutually encourage the joint action of all
representatives of the Zadar County DMOs. Each DMO can be unique in terms of strategic
goal, the development of specific forms of tourism and implemented projects, which would
enable larger competitiveness and better market recognition. New types of DMOs based on
online destination management platforms are expected to emerge in the near future. This elicits
the need to research the way destinations operate in the new era of the development of smart
technologies.
ACKNOWLEDGEMENT: We would like to thank Mihaela Kadija, director of the Zadar

County Tourist Board, who took her time to participate in in-depth interviews.
LITERATURE:
1. Abidin, H. Z., Lundberg, C. and Scarles, C. (2019). Digital Collaboration: A Solution for
Destinations. e – Review of Tourism Research. Vol. 16, No. 2/3.
2. Armstrong, G. et. al. (2008). Priniples of Marketing, Fifth Europian Edition, Prentice Hall
Europe.
3. Blain, C., Brent, J. R. and Levy, S.T. (2005). Destination Branding: Insights and Practices
from Destination Management Organizations. Journal of travel research. Vol. 43 No. 4,
pp. 328-338.
4. Della Lucia, M. and Trunfio, M. (2018). Engaging Destination Stakeholders in the Digital
Era: The Best Practice of Italian Regional DMOs. Journal of Hospitality & Tourism
Research, Vol. 43, No. 3, pp. 349-373.
5. Horwath HTL. (2008). Osposobljavanje sustava turističkih zajednica za djelovanje prema
modelu destinacijske menadžment organizacije (DMO). Horwath Consulting d.o.o., Zagreb.
6. Magaš, D. (2008). Destinacijski menadžment – Modeli i tehnike. Faculty of Tourism and
Hospitality Management: Opatija.
7. Magaš, D. (1995). Turistička putovanja kao ekonomska dobra, Turistički management.
Faculty of Tourism and Hospitality Management: Opatija.
8. Pechlaner, H., Volgger, M. (2014). Requirements for destination management
organizations in destination governance: Understanding DMO success, Tourism
Management, Vol. 41, pp. 64-75.
9. Prayag, G. (2020). Research note time for reset? Covid-19 and tourism resilience. Tourism
Review International. Vol. 24, No. 2-3, pp. 179-184.
10. Presenza, A., Sheehan, L. (2005). Towards a model of the roles and activities of destination
management organizations. ResearchGate.
168
IS MASS CUSTOMISATION THE PATH FOR SMALL AND MEDIUM

ENTREPRIISES TO GROW INTERNATIONALLY? CASE STUDY OF
THE PORTUGUESE FOOTWEAR INDUSTRY
Maria Monteiro
School of Economics and Management of University of Porto,
University of Porto, Porto, Portugal
[email protected]
Raquel Meneses
School of Economics and Management of University of Porto,
University of Porto, Porto, Portugal
[email protected]
ABSTRACT
This study intends to understand if mass customisation can be an internationalisation
opportunity for small and medium enterprises, considering their specific characteristics.
Literature approach and the exploratory investigation indicate how customisation can be an
option, but with some constrains, such as the entrepreneur’s profiler. Flexibility is the key
element joining both small and medium-sized companies and the proposed strategy. As far as
technology importance goes, both theoretical and exploratory research suggest different
perspectives. Nonetheless, this study considers having an important input in today’s statuos
quo of Portuguese footwear companies’ technological investments. In terms of
internationalisation matters, companies may have some leverage for this strategy when
networks and price strategies suggested by authors are considered. As all these features were
analysed, customisation can be an internationalisation option for Portuguese companies,
although it is recognised there is some time to grow before opting for mass scale. The method
chosen for this study is systematic combining, which allowed both theoretical and practical
data to grow simultaneously. The investigation went direction/redirection in order to answer
its own needs. This method allows adding perspectives (active data) that were not considered
at the beginning of the investigation. It allowed it to have a broader view on small and medium
sized companies’ advantages and disadvantages and how mass customisation could work. The
entrepreneurs play a critical role, and grey entrepreneurs appear to be the most significant
limitation.
Keywords: Entrepreneur, Mass customisation, SMEs, SME internationalisation, Portuguese
footwear industry
1. INTRODUCTION
When discussing international business, Small and Medium Enterprises (SMEs) play an
important role because they represent a vast and significant part of the international market
share, and are responsible for billions of products and services every day (Stojanova, Suzic and
Orcik, 2012). The present study focuses on small and medium enterprises (SMEs)
characteristics to understand if mass customisation is a possible strategy for
internationalisation. The investigation’s starting point is a common feature between both main
concepts, SMEs and mass customisation: flexibility. SMEs have a more flexible structure, a
quicker response to new opportunities, informal and autonomous management which helps
build a more adaptable response to market needs (Anderson et al., 2014; Love et al., 2015;
Stojanova et al., 2012). As an internationalisation opportunity, mass customisation requires
such structure. As Pine et al. (1993) and Svensson et al. (2002) suggest, mass customisation is
a process of adaptation, constantly changing its settings.
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The present paper will, initially, focus on SMEs characteristics literature and its
internationalisation, and afterwards, mass customisation. Based on the chosen methodology for
this paper, systematic combining, its introduced how the study proceeded and the selected
sample. Following this analysis, the results of the exploratory investigation are considered and
discussed, ending with the conclusions to the study and answer to the initial question.
2.1. Characteristics of Small and Medium Enterprises
As previously indicated, flexibility is one of the competitive advantages of SMEs, based on
unstructured processes and “[…] flat and less bureaucratic than large firms” (Liao et al., 2015,
p. 1260), which reflects on a more flexible environment (Singh et al., 2008). Serrasqueiro et al.
(2008) agree that SMEs ability to adjust and adapt their structures to new situations and
opportunities is a significant advantage compared to larger companies. In terms of planning,
SMEs also seem to have a more irregular and “intuitive” manner. “The suggestion that
enterprises that plan strategically are more successful than those who do not would entail that
– assuming that SMEs reveal a lower degree of formal strategic planning – big companies are
more successful than SMEs. However, this seems to be very unlikely.” (Kraus et al., 2005, p.
2/4). According to the authors, formal planning is more applicable to big enterprises which are
more bureaucratic “[…] and thus not transferable to the requirements of the fast-moving and
flexibly structured SMEs”. Size seems to impact flexibility, because SMEs size does not require
much internal complexity; companies are more focused on the external uncertainty and try to
adapt their structure external environment’s needs with a flexible structure. So, size can also be
seen as a liability because it limits other resources. Finances are considered one of the most
significant limitations (Sallem et al., 2017); because SMEs do not have much financial power,
the investment in other areas, such as innovation, technology and processes, is scarce.
Kozubíková et al. (2017) also noted that SMEs have more difficulties when trying to get the
banks to help their investments. Similarly, and due to low levels of financial awareness and
knowledge (Kozubíková et al., 2017), the lack of accounting and lack of appropriate record-
keeping also conditions SMEs activity. Anderson et al. (2014) believe that by internalizing
accounting information, decision-making will, most likely, be more informed, resulting in a
more effectively and efficiently management based on insightful resources. Low levels of
information technology systems also determine SME performance. Managers (especially
senior ones) have some anxious thoughts towards their usage, and so their companies’
technology is obsolete, only working with a traditional method (Singh, Garg and Deshmukh,
2008). This behaviour is conditioned by the expensive investments and high costs in
maintenance which generally requires external assistance (Nguyen, 2009, p. 173), claiming it
does not add enough value to the business. Entrepreneurship is a highlight in the company’s
performance because it usually plays a critical role in the ownership (Loecher, 2000; Man et
al., 2002; Pula et al., 2015) and also in business management because they are responsible for
all the decisions and activities in the company (Nguyen, 2009). Kozubíková et al. (2017) tried
to identify the characteristics of a “good entrepreneur” considering gender, age and personality
traits. One of the findings was that older individuals are more averse to risk, aggravated if
previous endeavours have failed. As the world population is ageing, the workforce has its own
characteristics according to this shift. It is possible to understand the rise of “[…] the […] grey
entrepreneur […] someone over a certain age who starts or operates a small or medium-sized
enterprise” (Weber et al., 2004, p. 152). In this study, in many developed countries, SMEs
owners in 2002 had an average age between 45 and 54. Thus, the majority of entrepreneurs are
old, male and autonomous, less energetic and productive. Their poorer personal health might
also affect their business, and they are less likely to have formal educational qualifications
which shows less awareness of financial risk (Kozubíková et al., 2017).
170
Nevertheless, they have higher levels of technical knowledge (industrial and management
wise), enlarged personal networks due to formal and informal contacts made through the years
and a great extent of experience. Human resources knowledge, experience and skills are vital
characteristics for success. Liao et al. (2015) also reflect that employees are flexible resources
when surrounded by rich networks to improve their ability to adapt to new or problematic
situations. Employees play an essential role in managing operational processes and finding
solutions when involved in projects and fully informed, feeling like a responsible and
imperative member of change (Nguyen, 2009). Networks are an important characteristic of
SMEs. Due to entrepreneur’s contacts, SMEs have strong and close relationships within
networks which help surpass some previous limitations mentioned. These relationships have
direct impact on the company daily activities and technology, knowledge, contacts, products,
solutions are shared among members of networks. The need to encourage networks is due to
the fact that SMEs are financially limited, and have to cooperate with others stakeholders to
have access to important resources: “Network relationships may overcome the problems of
limited resources, experiences, and credibility” (Lin et al., 2016, p. 1781). Also, strong
relationships, especially with suppliers, enhances companies capacity to be flexible (Pollard et
al., 2011).
2.2. Small and medium enterprises internationalisation

When discussing internationalisation, it was decided to consider the relationship between price
and networks. The considered characteristics impact in SMEs’ internationalisation. Price is a
critical issue for international marketing, but also the only international instrument that creates
direct revenues. Also, the more accurate companies set their prices, the greater demand will be:
“If the price requested was too low, the firm would cede value created to the customer. If the
price was too high, then the quantity sold would be too low” (Dutta et al., 2003, p. 626). Along
with the importance of price setting, authors highlight the important of quality products, which
present a competitive advantage, such as innovation and service advantage. “[…] There is a
hierarchy in the market performance outcomes of the achievement of service advantage, price
advantage, and—when in balanced combination with service—product advantage in the
overseas markets.”(Falahat et al., 2020, p. 38). Service advantage is the “[…] intangible
elements (activities, processes, and initiatives) developed around physical goods to facilitate
their acquisition, delivery, and use” (Kaleka et al., 2017, p. 29). As the authors describe, to win
international markets, product, price, and delivery need to be in harmony. Thus, networks can
be considered a crucial aspect of allowing products to be delivered quick and seamlessly. SMEs
have a solid possibility to work around this relationships due to the fact that SMEs rely on the
personal, trustable and strong relations to internationalize (Musteen et al., 2010). As previously
mentioned, networks are sturdy characteristics of SMEs activity, permitting access to resources
that it would be harder to obtain or build on an international venture. The need to have
price/quality, but also to add value with good service is indeed essential. External relationships,
such as networks, should be an enhancer to the internationalisation process. Partners within the
network are sources of market knowledge and a way of getting their companies known by
potential partners and clients.
2.3. Mass customization

Mass customisation is suggested, in this study, as an internationalisation strategy, described by
Pine et al. (1993) as a distinct way of doing business. The goal of this investigation is to consider
customisation on a large scale, and not like customisation before the industrial revolution: “In
mass customisation approach, products are just built after the company has the orders in hand
with the exact quantity and quality required” (Pollard et al., 2011, p. 77).
171
This strategy intends, on a large scale, the integration of consumers in the designing and
creation of the product (Stojanova, Suzic and Orcik, 2012). The challenge resides in the value
chain because it demands full integration and connection between every intervenient. Thus,
there need to be standardized processes that allow delivering customized products (Lampel et
al., 1996; Pollard et al., 2011). Companies will need to have integrated informational and
productive technology, flexible structures, a robust, responsive and physically close supply
chain, skilled human resources and solid communication.
2.4. Conclusions on Literature Review

Based on the literature review, we can now interpret it into some propositions for the empirical
research. Flexibility, the starting point to this investigation, is considered SMEs competitive
advantage for mass customisation implementation: companies are flexible, and the strategy
requires a structure with that type of response. On the other hand, finances and financial support
from institutions seem to be more challenging. Companies do not have the financial means to
invest, for example, in information integrated systems. Moreover, as discussed before,
investment in technology seems to be very little when analysing the requirements mass
customisation demands. In terms of information management and due to the management
profile, companies seem to be externalizing that information losing power over it. As the
entrepreneur’s profile was sketched, the grey entrepreneur profile appeared positive due to the
extended contacts, technical knowledge and much experience. But also negative because of the
aversion to risk, decision-based on intuition, less energetic and less likely to have formal
education. Human resources are both flexible and experienced resources able to answer mass
customisation needs. In terms of internationalisation, the mentioned relationship can be an
important enhancer for mass customisation implementation. If SMEs use their connections with
partners, collaborators, suppliers and clients in order to have a quick and smooth answer to the
market, along with distinctive and quality products to gain international competitive advantage.
Besides, mass customisation could use this integrated answer, where suppliers, producers and
clients are all connected.
3. METHODOLOGY
The method used for this investigation is systematic combining, a non-linear and unusual
conceptualisation of scientific investigation (Dubois et al., 2017). With this approach, authors
can go back and forth in the investigation, analysing the theoretical data and with the
information obtained in the exploratory investigation, allowing a more abductive perspective
(Dubois et al., 2002). This research method allows active data, which, for instance, in this
investigation corresponds to the profiling of the grey entrepreneur. During the exploratory
investigation, a pattern started to surface: all interviews were male, within a certain age, with
similar backgrounds. Due to the chosen method, the investigation went back and investigated
more on SMEs entrepreneurs’ profile. One of the critics of this method is that it is very
interpretive and lacks standardised rules usually associated with scientific research (Dubois et
al., 2017). To avoid this biased perspective, this investigation took into consideration both
qualitative and quantitative data (table 1) obtained in the interviews: not only was it considered
the observations to the questioned matters, but also, the number of times they were expressed.
To support the theoretical data, the exploratory study considered the Portuguese footwear
industry. In Portugal, footwear is a significant industry, but also in international markets, since
most of the production is exported. Portugal economy is based on SMEs activity, such as the
footwear industry. The sample for this investigation is: small and medium enterprises that
supply components (five participants), shoe producers (ten participants) and also
clients/intermediaries who have the market knowledge (four participants). The interviewees are
owners and/or managers.
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The data was obtained from nineteen interviews done during the period of 7TH of March 2020
and 2ND of June 2020: five are suppliers, four are clients/intermediaries and ten are producers.
During this period, the interviews were being transcribed and analysed through NVivo
Software, to allow new theoretical data to be considered. All of the interviewed companies are
SMEs within the footwear industry (table 2), with national and international activity: all were
present internationally through direct and/or indirect exportation. Companies considered in the
investigation were managed and/or owned by men, with an average age around 40-60 years old,
and none of the companies were new in the business. The interview’ script is divided into two
parts. The first one concerning SMEs characteristics and internationalisation. The second one
regarding mass customisation, to understand if that market approach was possible and was an
opportunity for Portuguese companies to internationalize. It is important to understand that the
script was semi-structured, due to the chosen method, allowing the investigation and the
interview to go back and forth, including aspects and information that was not considered
initially.

Regarding the results collected, flexibility was confirmed as a critical point of SMEs activity,
with none of the interviewees considering it a disadvantage. Also, it was indicated how size
affects this feature: because companies are small, they can have more flexible structures, faster
responses to market needs. A variation added by interviewees includes the flexibility to plan
and execute faster and easier than larger companies. This specific side of flexibility has mostly
to do with fast responsiveness, shorter and almost daily planning’s, closeness to the European
market, flexible structures which allow change of production easily, and a strong and physically
close network. As Kraus et al. (2005) and Liao et al. (2015) suggested, the capacity to change
productive processes in a less costly and more efficient way is advantageous for SMEs,
especially compared to more prominent companies. On finances, interviewees revealed a much
divided answer, making it difficult to have a clear understanding of the subjected. Nonetheless,
the interviewees were carried out during the pandemic, and answers were about the pandemic’s
influence on the business. On the other hand, those who supported that finances were not a
limitation believe it to be more a management problem, lack of future goals/strategy. Even in
terms of bank support, if companies do not have clear and sustainable strategies, it is more
challenging. The difficulty to access financial support seem to reside more on newness rather
than smallness. While literature reveals a poorly technology investment from SMEs,
exploratory research showed otherwise: more than half of the interviewees support a very
positive attitude towards informational and productive technology, and also, while visiting
some working spaces, it was easy to witness those investments. Information management was
also interesting to take into consideration because literature also supports a different perspective
from reality. Almost half of the interviewees have internal management (only resorting to
external support for technical and authentication reasons), they believe it allows more rigorous,
immediate and integrated view on business. The ones who have eternal help for most
information do not believe there is no decision power loss because the relationship with the
external company is considered a collaboration. In both perspectives, interviewees agreed that
sometimes, due to the small business dimension, it is not necessary to have internal
management. Also, they believe that having external support can be very positive because it is
considered an “outside the box” perspective, which, in many cases, is very valuable. As active
data, the entrepreneur’s profile started to be drawn: average age around 48 years old, male, less
energetic, low levels of formal education, a lot of technical knowledge and decision-making
based on experience. In terms of human resources, interviewees agree they are an essential part
of business and flexibly, considering the Portuguese footwear industry is human labour-intense.
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When discussing internationalisation for SMEs, the price was suggested important as a first
approach but must be supported by a quality product. As Kaleka et al. (2017) suggested, having
a quick service and delivery is an relevant internationalisation matter. SMEs can plan and
execute fast and through a strong network, have a service advantage. Internationalisation throw
networks and its partners has two different sides. An overreliance on partners means depending
and trusting a lot on information shared by a partner, relying a lot on the relationship’s human
side instead of the business side. On the other hand, networks can represent a recommendation
and more credibility to new incomers. When discussing mass customisation, supplier’s
interviewees all believed mass customisation to be not only a possible strategy but also a
differentiating one which could lead to better prices and more gains. Also, they supported this
answer through online consumerism growing. They also mentioned that this strategy would
require producers to increase stocks. As Pollard et al. (2011) suggested, the physical closeness
was also considered vital for the strategy to work, since Portuguese companies “have a 24 hours
a day warehouse of supplies”. The majority of the ones which supported a negative answer for
mass customisation to work, indicated the high costs and investments, the need to increase
stocks and the possible waste of products (modules) that could result from the strategy. Also, it
was suggested how markets and consumers might not be ready for customisation. Some
interviewees explained how this strategy may work in a micro-small scale, but not in mass
customisation: handcrafted and not in an industrialised business. As Lampel et al. (1996) and
Pollard et al. (2011) indicated, mass customisation does not represent handcraft, on the contrary,
companies should find standardized processes and productive systems which allow
personalization. In order to have this type of production system, participants believe there needs
to be some level of product standardization which permits small changes in production system,
allowing customisation from a standardized model (modular proposition which seems to be
possible in the footwear industry since there are many options to be added – accessories, for
instance – in a basic shoe which could be pre-done). Also, mass customisation was not denied
because it was an impossible strategy, but because interviewees believed it not to be a personal
choice. This can be related to entrepreneur’s fear of risk and the lack of energy of grey
entrepreneurs to take on new opportunities. The numbers also support this idea; when asked if
customisation from a ‘basic model’ was possible, only 21% said no and 58% said it to be
possible.
5. CONCLUSION
This study approached SMEs firstly in order to understand if mass customisation could be an
opportunity for internationalisation. Based on the theoretical study and the exploratory
investigation there are some challenges and some chances. Flexibility (considering size and
planning and executing flexibility), technology and human resources are very positive features
of SMEs to mass customisation implementation. In terms of information management, although
two perspectives were considered, both seem positive and not an obstacle for SMEs activity:
each has advantages and disadvantages, and the latter is not a barrier, impeding SMEs to grow
and progress. In terms of finances, more questions can arise since the exploratory research
showed many balanced results. As it was suggested, finances may depend a lot on companies
plan for the future, their strategy and goals – management decision-making. Moreover, as the
entrepreneur role was more explored, a pattern was found which may be the most significant
limitation for mass customisation since to its implementation there are some risks, which
managers are not willing to take. In terms of SMEs internationalisation, mass customisation can
be a possible opportunity. SMEs which can join price, product and service advantage have
better leverage to enter markets. Since networks are a fundamental part of SMEs daily activity,
service advantage can be reached through those relationships.
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Mass customisation is an example of a strategy that requires a good quality product, where price
may even become secondary, but where quick response is essential. Thus, as a result, SMEs
seem to have an advantage when comparing to other sized companies. Mass customisation
mainly was supported with modular parts: build-to-order from scratch seems to be a more
complex and severe challenge for SMEs. Thus, to answer the initial question to this study,
SMEs have an opportunity in the customisation world, but regarding the large scale, that seems
to be more challenging for now. A path is being walked at this moment with the change of
consumers buying habits, where online shopping is growing and proving to be a solid option.
For Portuguese SMEs, this can be a small part of their business for now, and as consumers are
also given this opportunity, it could lead to what this study suggests: customisation of goods on
a large scale. When customisation in the footwear industry becomes a more natural and regular
offer to consumers, Portuguese SMEs can take advantage of offering good quality shoes, at
reasonable prices in short lead times. As the investigation grew, it was possible to identify some
limitations and future suggestions for investigators. As the study suggested, the considered
companies are already mature companies with mature management: if younger companies were
considered, a different and broader outcome could be obtained. There was also a clear
geographical pattern: most companies considered are from a single footwear cluster. As a
suggestion for future investigation, it could be interesting to do a comparative study with a
different industry to understand the differences in terms of technology and management, for
instance, and its impacts on mass customisation.
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APPENDIX
Table 1: Quantification of the answers

No opinion shared
Answers on the matter
Flexibility Positive aspect: 17 Negative aspect: 0 2
Flexible Planning Positive aspect: 14 Negative aspect: 0 5
and Executing
Finances Limitation: 9 No limitation: 7 Null (neither an
advantage nor a
disadvantage)
3
Technology Positive aspect: 13 Negative aspect: 4 2
Information Internal External
Management Management Management 3
9 7
Entrepreneur Central: 6 Other aspects 3
experience considered: 10
Human Resources Positive aspect: 15 Negative aspect: 0 4
Networks for Positive aspect: 10 Negative aspect: 4 5
internationalization
Price Central: 9 Other aspects: 8 2
Mass Possible: 4 Not possible: 15 0
Customization
Mass Mentioned Not mentioned
Customization for
microenterprises or 14 5
subsector of SMEs
Levels of Possible Not Possible
customization 9+2 (referred as 4 4
“allowing the same from scratch)
consumer to
customize from a
basic model”
Source: Authors
177
Table 2: Interviewees ID
Enterprise Name Interviewee Name Interview Role in the Supplier
Age company Footwear Producer
Client/Intermediary
Apple of Eden Nélson Gomes 42 years Manager and Client/Intermediary
old Owner
ASM - Indústria e Fernando Martins 58 years Manager and Supplier
Comércio old Owner
Internacional, S.A
ATSO – Unipessoal António Trindade 56 years Manager, Owner Client/Intermediary
Lda. old and Commercial
Director
Bolflex - – A. António Ferreira 56 years Manager and Supplier
Ferreira e Pereira, old Owner
Lda.
Brasa Fábrica de Luís Macedo 52 years Manager and Footwear Producer
Calçado, Lda. old Owner
Cramarinhos - Abel Monteiro 53 years Manager and Footwear Producer
Fábrica de Calçado old Owner
Lda.
Pintos e Soares S.A. Daniel Pinto 41 years Manager and Footwear Producer
old Owner
Fábrica de Calçado Agostinho 60 years Manager and Footwear Producer
DURA, Lda. Marques old Owner
Euroflex - Mauro Vaz 31 years Manager and Supplier
Componentes para old Commercial
Calçado, Lda. director
Felgui – Indústria e Ilídio Ferreira 55 years Manager and Footwear producer
Comércio de old Owner
Calçado, Lda.
Marina, Calçados Mauro Costa 53 years Manager, Owner Footwear producer
S.A old and Commercial
Director
Wortmann Matthias Tilleke 38 years Manager of local Client/Intermediary
old sourcing
Mazoni – Indústria Fernando Sampaio 65 years Manager and Footwear producer
de Calçado S.A old Owner
Pinho Gomes e Sérgio Miguel 42 years Commercial Supplier
Pinho, Lda. old Director
Rilix - Indústria de Luís Mendes 55 years Manager and Footwear producer
Calçado Lda. old Owner
Calçado Samba S.A Rui Oliveira 36 years Commercial Footwear producer
old Director and
Manager
VAPSOL – Fábrica Décio Pereira 31 years Manager, Owner Supplier
de componentes old and Commercial
para Calçado, Lda. Director
Company A Mr. X 48 years Manager Footwear producer
old
Company B Mr. Y 60 years Production Client/Intermediary
old manager and
quality control
Source: Authors
178
SUSTAINABILITY DIMENSIONS ASSESSMENT: AN ESSAY FOR

DOURO REGION VITICULTURE
Ana Marta-Costa
University of Trás-os-Montes e Alto Douro (UTAD),
Centre for Transdisciplinary Development Studies (CETRAD), Portugal
[email protected]
Catia Santos
CoLAB Vines&Wines - National Collaborative Laboratory for the Portuguese Wine Sector,
Associação para o Desenvolvimento da Viticultura Duriense (ADVID), Portugal
[email protected]
ABSTRACT
Social concerns about the impact of agricultural production on public health and environment
parameters and the requirements for farm cost-effectiveness make the sustainability assessment
as a fundamental tool for the decision making. This study provides a comparative analysis of
the triple bottom line of the sustainability for the three Douro sub-regions following an
adaptation of the Framework for the Evaluation of Natural Resource Management Systems
Incorporating Sustainability Indicators (MESMIS). Data were collected from Douro wine-
farms through 110 face-to-face inquiries distributed by Baixo Corgo, Cima Corgo and Douro
Superior sub-regions. The work aims to establish which sub-region are the most sustainable in
each economic, environmental and social dimensions, identifying the indicators which best
contribute to its sustainability as well as the more unfavourable indicators where improvements
can be made. Analysis of the findings leads to confirm an empirical trend of the conflict between
the economic and environmental dimensions. Through the evaluation of the relationship
between the same indicators per sub-region of Douro and considering the average value from
Douro as the reference, we found that Cima Corgo and Baixo Corgo are the most profitable
and dominates the economic indicators. Cima Corgo is superior on social dimension too.
Douro Superior has a weaker structure than the others, but expresses the most favourable
environmental aspects, with low chemical costs and also the managers of their farms have
lower literacy levels. The sub-region with the best values that balance the various dimensions
of sustainability in its farms can guide sustainable solutions to be adopted for the viticulture
systems in mountainous contexts.
Keywords: Douro sub-regions, MESMIS, sustainability indicators, wine sector
1. INTRODUCTION
In Portugal, wine production has a great tradition particularly in the Douro Demarcated Region
(DDR), the first viticulturist region delimited and regulated worldwide (1756) (Magalhães,
2012). DDR extending over a total area of 250.000 ha, of which 44.162 ha are currently
occupied with vines predominantly located in steep-slope landscapes (IVV, 2021). Due to their
heterogeneity, as regards the land structure, orography and clime, three main sub-regions have
been defined: Cima Corgo, Baixo Corgo and Douro Superior, whose production systems may
have differentiated sustainability behaviours. Due to their historical relevance, grape and wine
production has a high influence in the economic, social and environmental dynamics. So, the
sustainable development targets are of extremely importance and a compromise of the three
dimensions is required for ensure a balanced productive system (Christ and Burritt, 2013).
According several authors (Masera et al., 2000; Marta-Costa, 2010), the sustainable farming
system definition is centred on productivity, stability, resilience, reliability, adaptability, equity
and self-reliance, comprised in the link between economic, social and environmental
179
dimensions. Obviously, economic dimension, plays an important role due to their influence on
activity’s survival and in continuity of the farmers’ in rural areas, which is essential for
protecting the environment and preserving both the landscape and its natural resources (Masera
et al., 2000; CEC, 2001; Fernandes and Woodhouse, 2008; Marta-Costa et al., 2012). Due to
the great variability and interdependency of the several attributes and indicators of
sustainability, the sustainability assessment needs to be made with very cautiousness and
always considering the several criteria structured in the three mentioned dimensions (De Olde
et al., 2016). Publication of studies on sustainability and environmental performance in grape
organizations has increased substantially in recent years (e.g. Annunziata and Zanni, 2018;
Flores, 2018; Gilinsky et al., 2016; Merli et al., 2018; Santiago-Brown et al., 2015; Varsei and
Polyakovskiy, 2017; Zambon et al., 2018). However, the heterogeneity of the methodologies
used are evident due to the complexity and lack of consensus around the sustainability concept
and also due to the multifunctionality of the agriculture. The scales to adopt, the indicators
selection, the linkages and the integration of indicators, and the application of the results in the
systems are the main problems cited by Marta-Costa and Silva (2013), Binder and Wiek (2007)
to assess the sustainability on the farming systems. This paper aims to establish which Douro
sub-region (Baixo Corgo, Cima Corgo or Douro Superior) are the most economic,
environmental and social sustainable and also identify which indicators that best contribute to
that sustainability, as well as the most unfavourable indicators where improvements can be
made.
2. METHODS AND SOURCES

In this work we start from the conception of Masera et al. (2010) that sustainability cannot be
evaluated per se, but only comparatively or relatively. The Framework for the Evaluation of
Natural Resource Management Systems Incorporating Sustainability Indicators (MESMIS),
with adaptations for the conditions of RDD viticulture, was the methodology selected.
MESMIS was chosen because is applicable on farming systems and allows an overview of the
holistically points out their limits and possibilities of sustainability by the intersection of
environmental processes and socio-economic conditions (Masera et al., 2010). It compares the
management systems (in this case Douro average), either by contrast to one or more reference
(in this case Cima Corgo, Baixo Corgo and Douro Superior). It has a flexible structure so that
it can be adapted to different levels of information and technical skills that are available locally,
whose outputs allow to find the critical points of sustainability and to modify the management
systems (Masera et al., 2010). The used data has been collected from Douro region, through
face-to-face surveys of 110 vineyard grape growers, of which 49 from Cima Corgo sub-region,
39 from Baixo Corgo sub-region and 22 from Douro Superior sub-region. The methodological
framework of survey was applied according to Hill and Hill (2008). For sample selection, two
rural municipalities of each subregion were chosen, based on their larger representativeness
regarding their total vineyard area. In order to ensure the diversity and heterogeneity of the
sample the number of grape growers assembled to each municipality were distributed into four
vineyard class areas: a) 1 ≤ area < 5; b) 5 ≤ area< 10; c) 10 ≤ area< 15 and d) ≥ 20 ha. The
survey was structured in the following six sections:(1) identification of the farm and the
surveyed; (2) general characterisation of the entrepreneur; (3) overall characterisation of the
farm and its fixed capital; (4) characterisation of the vineyard and its outputs; (5) production
costs per wine-growing operation; (6) supplementary information. Subsequently, the
information obtained through the surveys was appreciated and validated by the various parties
involved in the enquiry process through the application, in 2019, of the World Café
methodology. To evaluate and compare the sustainability assessment at sub-region level the
following steps were realized: (1) selection of environmental, social and economic indicators
reflecting the critical points of the Douro wine system and on an equitable basis (Table 1).
180
They were defined according to the main attributes of sustainability of productivity; stability;
resilience; reliability; adaptability; equity and self-reliance (Masera et al., 2010); (2)
measurement of the indicators for each farm of the three sub-regions; (3) standardisation and
comparative assessment of each indicator of each sub-region with the reference system (Douro
average, index 100); (4) integration of the figures obtained into economic, environmental and
social indices and then into an overall sustainability index.
3. THEORETICAL FRAMEWORK AND OPERATIONAL CONCEPTS

Sustainability may be generally defined as using business practices that are environmentally
friendly, socially equitable in terms of treating employee and community fairly, and
economically viable (Gilinsky et al., 2016). Specifically, in the agronomic area, namely in the
wine sector this definition has many descriptions that allow to an ambiguity of the concept
(Warner, 2007). This is the result of the complexity of the sector, which comes not only from
its natural conditions and the mode of production that is adopted (organic, biodynamic,
integrated, conventional), but also involves the landscape, culture, history and the immaterial
features (Bordiga, 2016, Merli, et al., 2018). The sustainability concept is based on the triple
bottom line concept (environment-economy-society) where the economic performance is
directly related alongside the environmental and social impacts (e.g. Marta-Costa, 2010; Christ
and Burritt, 2013; Vecchio, 2014). However, most of the sustainability programs and studies
are essentially linked on the environmental pillar of sustainability. Based on a review of 133
articles related with the terms “sustainable”, “sustainability” and “land use”, Gibbes et al.
(2020) conclude that almost half of them are focused on one dimension (environmental), one-
fifth in two dimensions, and the lasting third in all three dimensions of sustainability. But not
only are the dimensions of sustainability important, the measurable ways selected to make them
operational plays a relevant role for an effective and robust sustainability assessment. Their
choice must ensure globally applicability, realism, cost-effectiveness, comparability and
comprehension (Hayati, 2017). Usually, for the sustainability assessment, the environmental
dimension is measured by the indicators related to the product quality, soil and organic matter,
waste, wise use of resources, quantity of agrochemicals and water management. The
production, productivity, income, value added and employment, among others, express the
economic perspective. Finally, related to the social dimension, there are selected the educational
level, equity, training, cooperation and associative participation (Rezaei- Moghaddam and
Karami, 2008; Gaviglio et al., 2017). Mainly in the last years, there is an increasing effort for
adopting complex indicators of sustainability that cross all three dimensions, thereby
minimizing the limitations of using a reductionist approach, and simultaneously, emphasising
the interdependence of the three pillars. In this perspective, Masera et al. (2000), Navarro
(2002) and Partidário (1997) consider that the sustainability of a natural resources management
system should be focused on the following attributes that also were pursued in this work. This
is the capacity or ability to:
• generate goods and services required in a particular period of time (Productivity);
• maintain a state of dynamic equilibrium stable (Stability);
• return the state of equilibrium or maintain its productive potential, after undergoing a severe
shock (Resilience);
• maintain its productive potential, after undergoing a severe shock (Reliability);
• find new levels of balance when faced with of long-term changes in the environment
(Adaptability);
• distribute in a manner fair, both intra- and inter-generational, the relative benefits and costs
the management of natural resources (Equity);
• regulate and control the interactions with the outside, defining endogenously its objectives,
priorities, identity and values (Self-reliance).
181
Specifically for the wine sector, some work has been developed on this topic to evaluate the
used sustainability assessment methodologies and the gathered findings generally between
regions and production systems. A critical review of sustainability programs and initiatives in
the wine industry in the New World, Europe and Italy was provided by Merli et al. (2018) to
evaluate the capacity of its indicators to address the triple bottom line of sustainability. For this
purpose, they have crossed the set of indicators applied by two wine industries initiatives (the
Californian - CSWA and the Italian - VIVA) and the wine Italian companies (EMAS). Their
findings express that while VIVA covers the triple bottom line, CSWA and EMAS focus mainly
on environmental impacts of wine production. Santos et al. (2018) evaluate the sustainability
dynamic regarding two different viticulturist regions of Portugal (Alentejo and North), focused
on the three dimensions of sustainability and through the use of specific indicators. The results
demonstrated that Alentejo presents the best indicators in terms of environmental sustainability,
while North revealed a good social dimension and an increasing economic performance. Other
studies on the sector have been used to compare and evaluate both conventional and organic
farms. Gaviglio et al. (2017) showed that conventional farms seem to have better economic
performance, however, the others present better results in environmental and in the mainstream
of social indicators. More recently, Borsato et al. (2020) studied the use of multiple indicators
to compare sustainability performance of conventional and organic vineyard management,
supported by a case study in the North-East of Italy. They calculated the economic benefit and
environmental indicators such as the Carbon Footprint, Water Footprint and an indicator of
environmental performance that includes the fertilizers and pesticides management, landscape
quality, organic matter content and soil compaction and erosion. The results revealed that
organic management can be applied without economic losses and preserving the natural capital.
In the opposite, Flores (2018) reviewed and analyse different frameworks for wine
sustainability in six countries (South Africa, Australia, New Zealand, US, Chile and France)
and highlight the fact that organic viticulture is not a synonym of sustainable viticulture.
Focused in the concept of the sustainability, its triple bottom line dimension and attributes, this
study adopts a set of indicators to find the wine Douro sub-region that allows a balance between
the three dimensions of sustainability.
4. RESULTS
Table 1 shows the sustainability indicators selected in this work and the average values gathered
for our Douro sample. The result of the relationship between the same indicators per sub-region
of the Douro, considering the Douro average as a reference (index 100) is presented in Figure
1. The winegrowing systems of Baixo Corgo have the best values from the production point of
view and also greater investment capacities, but it is the subregion with the lowest grape sales
prices. Only than 20% of the grape production coming from the farms of our sample is used for
its transformation into wine. However, both in Baixo Corgo and Douro Superior, these figures
are much lower (19 and 11%).
Tablefollowing on the next page
182
Indicators Douro value

Environmental dimension
Grape yield (kg/ha) 5784
Use of fertilisers and phytopharmaceuticals (€/ha) 504
Contribution to physical soil degradation (H/ha) 31
Landscape Physiographic Quality Index 3
Adoption of the organic farming production system (%) 3
Received agri-environmental aids (€/ha) 440
Favourable waste destination (%) 98
Soil analysis (%) 96
Good agricultural practices (%) 93
Social dimension
Manpower on the farm (Days/ha) 53
Evolution of activity in the Evolution of the vineyard area (%) 37
last 10 years Evolution of machine use 60
Continuity of activity by the respondent (%) 95
Sustainability of the activity Existence of successor (%) 62
Vineyard area (ha) 17
Land structure Number of plots 6
Adoption of new techniques and/or production systems (%) 67
Qualification of the entrepreneur/winegrower (%) 67
Remuneration of work (€/day) 37
Farms belonging to sector organisations (%) 97
Participation in organizations Number of interventions/services requested from 2
of the sector organisations (%)
Other sources of income 61
Economic dimension
Benefits/costs ratio 1
Work productivity (€/UTA) 11548
Entrepreneur and Family Income (€/ha) 1269
Business or investment capacity (€/ha) 642
Sales price grape (€/kg) 0,78
Degree of dependence on external production factors (€/ha) 1867
Degree of indebtedness (%) 8
Grape destination (own processing) (%) 20
Organization of information (%) 45
Table 1: Sustainable indicators of the farming systems of Douro
Environmentally friendly practices are a major concern in Douro Superior, where less
contribution is detected to the physical degradation of the soil through mechanical traction. This
may be due to flatter slopes which will lead to more efficient traction. Also in this sub-region
and in Baixo Corgo, the beneficial environmental behaviour is demonstrated by the higher
proportion of farms using the organic production method.
183
Figure 1: Sustainability assessment of the farming systems of Douro subregions (Douro

average - Index 100)
In the social dimension, Cima Corgo stands out namely due to its positive evolution in the use
of production factors such as land and the use of machinery and equipment, which goes against
the intentions of abandoning the system. It is also in Cima Corgo that the best prices are paid
for temporary labour.
5. CONCLUSIONS
Analysis of the findings leads to confirm an empirical trend of the conflict between the
economic and environmental dimension of farms from the Douro sub-regions. When Douro
average is used as the reference (Index 100), Baixo Corgo is the most profitable and dominates
the economic indicators (105). Douro Superior has a weaker structure than the others but
expresses the most favourable environmental aspects (114), with low chemical costs and also
the managers of their farms have lower literacy levels. Cima Corgo is superior on social
dimension and the entrepreneurs of their wine farms have other sources of income, in addition
to the dominant land structure being more appealing to the viticulture activity. Baixo Corgo has
shown to be the sub-region with greatest balance of the various dimensions of sustainability in
their wine farms and the best practices identified in these three sub-regions can guide
sustainable solutions to be adopted for the viticulture systems of the mountain contexts.
ACKNOWLEDGEMENT: This work was supported by the R&D Project INNOVINE & WINE
– Vineyard and Wine Innovation Platform - Operation NORTE -01-0145-FEDER-000038, co-
funded by the European and Structural Investment Funds (FEDER) and by Norte 2020
(Programa Operacional Regional do Norte 2014/2020); and by the Interreg SUDOE project
SOE3/P2/F0917, VINCI – Wine, Innovation and International Competitiveness funded by
FEDER.
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186
ECONOMETRIC ASSESSMENT OF THE ASSOCIATIVE ACTIVITY

OF THE REPUBLIC OF AZERBAIJAN WITH THE COUNTRIES OF
THE WORLD
Tabriz Yadigarov
Institute of Economics of ANAS,
Department "Globalization and International Economic Relations", Azerbaijan Republic
[email protected]
ABSTRACT
Since economics emerged relatively late from other mainstream disciplines, it naturally
benefited from their methodological and conceptual advances. This means that there are
objectively associative relationships between economics and other sciences. The main attention
in the article is paid to this aspect, as an object of research, to the assessment of the associative
activity of the Republic of Azerbaijan with the countries of the world.In the context of
globalization of the world economy, the method of associative optimization of economic
management is of particular importance for assessing the associative activity of each country
with the world. For this, the analysis and evaluation of indicators expressed in different units
of measurement, allows you to get more optimal results in the study. Based on the specific
weights of the main foreign trade partners of any country, it is possible to analyze and evaluate
the associative activity with the surrounding world in accordance with the entropy, the amount
of information and its usefulness. The article, to one degree or another, clarifies the problems
of associative economics, explains the methodology for analyzing and evaluating foreign trade
using entropy - a measure of uncertainty. The article also analyzes the associative activity of
the Republic of Azerbaijan with key partner countries in export-import operations, and also
estimates the impact of the entropy of foreign trade on the partial entropy, calculated as the
share of GDP in socio-economic indicators, in the applied software Eveiws.
Keywords: associative economy, amount of information, entropy of socio-economic indicators,
model adequacy, regression equation
1. INTRODUCTION
In the globalizing world economy, the deepening of the international division of labor and world
economic relations stimulate the convergence of the world environment, creating conditions for
the expansion of economic ties between different countries. 80% of international relations are
international trade. International trade is responding more quickly to economic and political
changes in any region of the world, affecting economic growth in various sectors of the
economy. Declining demand for oil on the world market in late 2020, unfavorable economic
conditions and social tensions in some countries, sanctions, the explosion of Vale's radioactive
and toxic storage facilities in Brazil on 25.01.2019, cyclone Veronica in Australia in March
2019 Significant economic losses to mines and other sectors (US $ 1.2 billion) and the negative
effects of the COVID-19 pandemic have negatively affected the development of world
international trade, accounting for 3.0% of world commodity exports in 2019 compared to 2018.
or $ 579.34 million [5]. In this context, for each country, the development of an optimal foreign
economic activity strategy is important to conduct economic analysis and evaluation of the
associative activities of countries around the world for the implementation of effective foreign
trade, investment, monetary and financial policy. In this regard, compared to other countries,
oil-dependent countries in terms of exports, the Republic of Azerbaijan, which seeks to
associate with the outside world, is forced to give priority to the development of export-oriented
production, including increasing oil and gas exports. Since economics emerged relatively late
from other main fields of science, it naturally benefited from their methodological and
187
conceptual achievements. This means that there are objectively associative relations between
economics and other sciences. This article focuses on this aspect. Many of the ideas that have
played an important role in clarifying the problem of the associative economy to one degree or
another have been developed by world-renowned scientists working in the field of system
ology, synergetic and cybernetics, including Ashenfelter O., Levine P.B., Zimmerman D.J.,
Hatry H. P. Imanov G., Hasanly Yu., Korolev M.A., Mishenin A.I., Khotyashov E.N.,
Lewandowski A., Wertbicki A., Musayev I.K., Stock J.H., Watson M. W., Simon A. H, Newell
A. The ideas put forward by these scientists in their works are of great importance.
2. METHODOLOGY
Of particular interest is the world of associative communication and relations, which is
described by associative thinking, which dominates the scientific way of thinking. This science
is based on the methodological basis of system ology, synergetic and cybernetics, but is formed
as an integration of traditional science and art. Based on the superiority of the ideas and methods
of information theory in the study of socio-economic processes, including export-import
operations in foreign trade, the research can be carried out by highlighting the possibilities
provided by the associative information channel called "entropy". It should be noted that K.
Shannon built the theory of information, which has a very important worldview, on the famous
Markov chain. From this point of view, the terms of information theory can be successfully
used in the description of economic processes in the nature of Markov chains. For example,
measuring the complexity of economic systems with traditional methods is a very difficult
problem. This is explained by the fact that the ever-increasing complexity of economic relations
has a strong impact on the speed and efficiency of production, as well as the structure and
operation of the management system. That is why it is very important to quantify the complexity
factor. There is a great need to measure the complexity of the analysis of factors influencing
the increase of labor productivity or reduction of the cost of production. is the number of
product assortment positions, which is one of the most important moments that characterize the
complexity of production. However, since different types of products are produced in different
quantities and have different weights in the total product mass, it is not correct to determine the
complexity of production only by the number of assortment items. These moments can only be
taken into account with K. Shannon's formulas. Here, special weight should be used instead of
probability. G. Tayl proposed to apply the entropy index and the amount of information for the
purpose of analysis of production relations, which form the basis of inter-sectoral balance.
However, this greatly complicates the cross-sectoral balance model. It is true that the more
complex the model, the more information is obtained. However, in this case, the complexity of
the model precedes the growth rate of the amount of information obtained from it, which is not
a positive thing. In 1948, when K. Sennon created the information theory, he proposed a
formula 𝐻 = −𝑛𝑙𝒐𝒈 for entropy, based on a completely different logical platform. This has
caused a great deal of controversy, as it is the same as Bolsman's formula 𝐻1 = 𝑘𝑙𝒐𝒈𝜔. L.
Brillyuen resolved these disputes by the “principle of negatropy” [9, p.66]. L. Brillouin proved
that there is a mathematical equality between the amount of information and entropy, but the
1
opposite of direction. So that, since it is 𝐻 = −𝑛𝑙𝒐𝒈𝑝, 𝑝 = 𝑛𝑙𝒐𝒈 𝑝is obtained from here. Under
1
the condition 𝜔 = 𝑝 and 𝑛 = 𝑘, 𝐻1 = 𝐻 is obtained. He found that the only difference between
thermodynamic entropy and cybernetic entropy was the inverse relationship between
probabilities. At the same time, it is a fixed number, as in the Sennon formula. In this case, the
proposed formula for cybernetic entropy also expresses the amount of information. In essence,
cybernetic entropy is nothing more than the amount of information per symbol. Therefore, this
1 1
answer σ𝑚 𝑚
𝑖=1 𝑝𝑖 𝐿𝒐𝒈 𝑝 = −𝑛 σ𝑖=1 𝑝𝑖 𝐿𝒐𝒈𝑝𝑖 is obtained from the expression 𝐻 = 𝑛.
188
The left side of this equation represents the entropy, and the right side represents the
neutropenia, ie the amount of information that opposes the information. It should be noted that
entropy, which is a measure of uncertainty, is essentially a real, positive, extensible quantity of
information ore, with a value between o and 1. That is, the maximum entropy is equal to 1, and
if the probability is equal, this answer is obtained and expresses maximum uncertainty- 𝑃 =
1
𝑃1 = 𝑃2 … = 𝑃𝑖 = ⋯ = 𝑃𝑚 = 𝑚
𝑚
1 1
𝐻𝑚𝑎𝑥 = − ෍ × 𝑙𝒐𝒈 = 𝑙𝑜𝑔𝑚
𝑚 𝑚
𝑙=1
This shows that reality is hidden in a climate of maximum uncertainty. Using entropy, it is
possible to analyze and evaluate foreign trade along with all sectors of the economy. For this
purpose, the entropy, quantity and usefulness of information on the specific weights of the main
partner countries in the import or export of the country under study are important. Entropy will
be calculated by the following formula based on the above studies [9, p.196].
𝒎
𝑯 = − ෍ 𝒑𝒊 × 𝒍𝒐𝒈 𝒑𝒊 (2.1)
𝒊=1
Here it means that H - entropy, 𝑝𝑖 - 𝑖 - the share of the partner country in the country's total
¯
imports or exports and 𝑖- 𝑖- indicates the partner country (𝑖 = 1 − 𝑛). The amount of
information is determined in accordance with formula İ = 𝑛 × 𝐻 (2), and the usefulness of
information is determined in accordance with formula 𝐹 = 𝐻0 − 𝐻1 (3). In these formulas it
shows İ − the amount of information, the number of research cycles, 𝐹 − the usefulness of the
information, and the entropy, respectively. Using the research method, it is possible to assess
the associative activity of the Republic of Azerbaijan with the world countries.
3. ASSESSMENT OF THE ASSOCIATİVE ACTIVITIY OF THE REPUBLIC OF

AZERBAIJAN WITH THE COUNRIES OF THE WORLD
3.1. Evaluation of the associative activity of the Republic of Azerbaijan with the main
exporting countries
Entropy, the amount of information and its associative activity with the surrounding world are
analyzed and evaluated according to the specific weights of the main partners in the import and
export of any country in foreign trade. It should be noted that although the increase in the
volume of entropy is mainly a sign of decline, and the decrease is a sign of progress, because
economic events have their own characteristics, in one case an increase in entropy, in another
case a decrease determines progress. Although the increase in entropy in foreign trade activity
in each country is assessed as a positive situation for that country, the opposite is assessed as a
negative situation for partner countries. The increase in entropy in both management and
research processes indicates the complication of the problem. According to the customs
statistics of the State Customs Committee of the Republic of Azerbaijan on foreign trade in
2020, the volume of exports to Italy is 4172239.62 thousand US dollars, and the total volume
of exports is 13740567.63 thousand US dollars, so the structural index of exports will be
0.303643906. According to the formula (1), the entropy of exports of the Republic of
Azerbaijan to Italy in 2020 will be the same as before.
𝐻İ𝑡𝑎𝑙𝑖𝑦𝑎 = −0,304 × 𝑙𝑜𝑔 304 = −0,304 × (−0,517) = 0,157
189
Accordingly, according to the data of the State Customs Committee of the Republic of
Azerbaijan for 2010-2020, according to the structural index of the main export partners of the
republic, entropy, amount of information and potential usefulness of the country's independent
economic import and export policy (1), If we perform calculations using formulas (2) and (3),
we obtain the information shown in the table below.
Countries /
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Years
İtaly 0,159 0,16 0,147 0,15 0,145 0,133 0,158 0,16 0,157 0,156 0,157
Turkey 0,017 0,03 0,04 0,036 0,038 0,109 0,093 0,095 0,096 0,122 0,136
İsrail 0,089 0,047 0,081 0,067 0,088 0,076 0,064 0,058 0,079 0,079 0,047
India 0,026 0,026 0,087 0,061 0,052 0,036 0,057 0,042 0,058 0,064 0,049
Germany 0,002 0,034 0,056 0,071 0,093 0,098 0,061 0,045 0,056 0,063 0,03
China 0,029 0,004 0,016 0,009 0,007 0,01 0,044 0,045 0,013 0,054 0,047
Taiwan 0,026 0 0,043 0,033 0,034 0,018 0,08 0,031 0,053 0,025 0,0085
Russian
0,052 0,06 0,056 0,061 0,045 0,049 0,046 0,054 0,05 0,053 0,0664
Federation
Spain 0,017 0,021 0,007 0,008 0,052 0,04 0,053 0,04 0,034 0,052 0,0389
Czech Republic 0 0,016 0,036 0,018 0,042 0,059 0,029 0,052 0,063 0,049 0,0294
Georgia 0,033 0,034 0,039 0,036 0,039 0,055 0,047 0,048 0,041 0,046 0,0499
İndonesia 0,053 0,05 0,083 0,108 0,095 0,054 0,013 0,046 0,046 0 0,00015
Canada 0,027 0 0,001 0 0,02 0,031 0,016 0,055 0,046 0,015 0,0002
Portugal 0,021 0,023 0,02 0,036 0,04 0,045 0,04 0,049 0,042 0,031 0,0306
France 0,092 0,124 0,084 0,063 0,081 0,079 0,062 0,046 0,037 0,043 0,0169
Austria 0 0,001 0,013 0,03 0,029 0,048 0,017 0,018 0,03 0,019 0,00035
Tailand 0,019 0,012 0,026 0,08 0,054 0,034 0,019 0,015 0,016 0,032 0,02
Greece 0,023 0,016 0,051 0,05 0,023 0,022 0,027 0,021 0,017 0,024 0,0541
Ukraine 0,057 0,05 0,009 0,022 0,006 0,005 0,008 0,043 0,032 0,031 0,0409
Other countries 0,152 0,148 0,143 0,126 0,122 0,126 0,112 0,1 0,112 0,103 0,129
Entropy (main
0,741 0,709 0,896 0,941 0,983 0,999 0,933 0,961 0,967 0,957 0,9513
countries)
The amount of
8,149 7,795 9,854 10,347 10,815 10,988 10,266 10,572 10,64 10,525 10,4643
information
Usefulness of
3,2 -18,7 -4,5 -4,3 -1,6 6,6 -2,8 -0,61 1,04 0,55
information,%
Table 1: Entropy, quantity and usefulness of information in the export of the Republic of
Azerbaijan
(Source: Compiled by the author based on Source (4))
As can be seen from Table 1, the share of the main partners of the Republic of Azerbaijan in
exports tended to equalize on a regular basis for 2010-2020. This means that the state
intervention in the export policy of the republic's economy is aimed at balancing exports. Over
the past 10 years, the share of exports in Azerbaijan's foreign trade has fallen mainly to the
Organization for Economic Cooperation and Development and the Black Sea Economic
Cooperation. This is mainly due to the fact that the country's exports of goods included in the
oil and gas sector account for 85-90% of total exports. As can be seen from the table data,
entropy increased by 3.2% in 2011 compared to the previous year, by 6.6% in 2016, by 1.04%
in 2019, and by 0.55% in 2020, although in 2012 decreased by 18.7% in 2013, 4.5% in 2013,
4.3% in 2014, 2.8% in 2017, and 0.61% in 2018. This shows that the Republic of Azerbaijan
tried to balance its export policy in 2010-2011, but in 2012-2015 again began to give some
advantages to some countries. Although the sharp decline in world oil prices and the value of
the national currency against the US dollar since 2015 was accompanied by a tightening of
export policy in 2016, entropy in 2017-2018 compared to the previous year due to some
preferences in some countries. decreased. In the following years, as the export policy was aimed
at balancing, the entropy of the main partner countries increased in 2019-2020 compared to the
190
previous year. The following graph shows the linear dependence of the change in entropy
depending on the time factor according to the trend model.
1.5
y = 0.0204x - 40.239
0.5
R² = 0.4902
0
2008 2010 2012 2014 2016 2018 2020 2022
Figure 1: Entropy by major partner countries

(Source: Compiled by the author based on MS Excel program)
As can be seen from the graph, according to the trend model, there is an average (R² = 0.4902)
correlation between the entropy of the main partner countries and the time factor in the Republic
of Azerbaijan, expressed by the regression equation y = 0.0204x - 40.239. The amount of
calculated information suggests that the number of major exporting countries in 2010 varied
from 8, in 2011 to 9, in 2012 to about 10, and in 2012-2020 to 10-11. In general, the usefulness
of the information decreased by 21.12% during the period under review. This means that in the
period covering 2010-2020, Azerbaijan has gained up to 21.12% of potential opportunities for
independent economic export policy over the past 11 years, reducing its dependence on key
countries.
3.2. Assessment of the associative activity of the Republic of Azerbaijan with the main
partner countries in imports
According to the data of the State Customs Committee of the Republic of Azerbaijan (SCCR)
for 2010-2020, we calculated the entropy, amount of information and its usefulness based on
the following table.
191
Countries 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Russia 0,219 0,213 0,143 0,014 0,143 0,156 0,192 0,177 0,164 0,168 0,183
Turkey 0,138 0,11 0,158 0,014 0,14 0,127 0,138 0,145 0,138 0,12 0,146
China 0,013 0,02 0,065 0,053 0,076 0,055 0,082 0,097 0,104 0,108 0,132
Great Britain 0,065 0,05 0,051 0,012 0,106 0,06 0,058 0,027 0,023 0,017 0,028
USA 0,008 0,089 0,074 0,035 0,061 0,092 0,053 0,082 0,046 0,056 0,059
Germany 0,045 0,058 0,081 0,077 0,077 0,075 0,045 0,051 0,058 0,052 0,054
Italy 0,037 0,031 0,027 0,023 0,022 0,064 0,039 0,036 0,03 0,027 0,037
Ukraine 0,008 0,024 0,056 0,055 0,046 0,034 0,034 0,052 0,041 0,034 0,039
Japan 0,054 0,014 0,025 0,027 0,026 0,06 0,031 0,019 0,034 0,016 0,018
Norway 0,004 0,005 0,006 0,003 0,024 0,016 0,032 0,018 0,009 0,007 0,006
Singapor 0,04 0,011 0,011 0,004 0,003 0,011 0,024 0,003 0,002 0,002 0,003
Brazil 0,001 0,004 0,019 0,035 0,024 0,013 0,019 0,02 0,015 0,008 0,007
İran 0,003 0,048 0,018 0,019 0,016 0,064 0,018 0,027 0,04 0,033 0,028
France 0,024 0,016 0,019 0,04 0,017 0,023 0,018 0,018 0,016 0,018 0,042
Czech Republic 0,002 0,003 0,021 0,001 0,02 0,001 0,012 0,012 0,009 0,004 0,004
Korea 0,014 0,004 0,025 0,021 0,02 0,014 0,008 0,01 0,02 0,012 0,017
Austria 0,002 0,007 0,001 0,017 0,015 0,013 0,007 0,007 0,006 0,022 0,006
Kazakhstan 0,024 0,049 0,035 0,029 0,02 0,003 0,012 0,012 0,015 0,013 0,011
Niderland 0,015 0,001 0,015 0,017 0,02 0,001 0,008 0,01 0,008 0,01 0,011
Entropy (main
0,716 0,757 0,85 0,496 0,876 0,882 0,83 0,823 0,778 0,727 0,831
countries)
The amount of
7,876 8,327 9,35 5,456 9,636 9,702 9,13 9,053 8,558 7,997 9,141
information
Usefulness of
-4,1 -9,3 35,4 -38 -0,6 5,2 0,7 4,5 5,1 -10,4
information,%
Table 2: Entropy, amount of information and its usefulness calculated on the basis of special
images of the main partners in the import of the Republic of Azerbaijan
(Source: Compiled by the author
The results of the state intervention on import policy in the economy of the republic can be
determined ness in Table 2 [3, 4].
12.5 40.
10. 20.
7.5 0.
5. -20.
2.5 -40.
0. -60.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Entropy (main countries) The amount of information
Figure 2: Entropy, quantity and usefulness of information on the specific weights of the main
partners in the import of the Republic of Azerbaijan
(Source: Compiled by the author)
As can be seen from Figure 2, the share of Azerbaijan's main import partners in 2010-2020,
with the exception of 2013, has always tended to equalize. This means that the state intervention
in the import policy of the republic's economy is increasingly aimed at balancing imports.
Balancing imports is an important indicator that prevents foreign countries from seriously
influencing Azerbaijan's foreign policy. All of this was assessed by an increase in the number
of key countries based on the amount of information calculated. As can be seen from the
calculations, the number of major countries was about 10 based on the amount of information.
The usefulness of the information for the period under review decreased by 11.5%, respectively.
192
This means that by reducing its dependence on major countries in 2010-2020, Azerbaijan has
gained up to 11.5% of the opportunity to pursue an independent import policy over the past 11
years. As can be seen from the data in the table, the number of countries with a preference for
exports in 2010-2020 varied between 8-11, and 5-10 for imports. This shows that the Republic
of Azerbaijan has achieved a higher level of policy in imports than exports. As a result of the
analysis, it can be concluded that the increase in entropy in foreign trade is positive for
Azerbaijan and negative for the country's strong partners. This is explained by the fact that
while it is beneficial for Azerbaijan to establish equal cooperation with all partner countries,
for a relatively strong partner country, equal cooperation with Azerbaijan is not so positive.
Thus, a strong country with political and economic interests in the Republic of Azerbaijan, of
course, will try to expand its sphere of influence.
4. INFLUENCE OF ENTROPY ON IMPORT AND EXPORT IN THE REPUBLIC OF

AZERBAIJAN ON PARTIAL ENTROPY OF GROSS DOMESTIC PRODUCT
The growth of the Gross Domestic Product (GDP) of each country is one of the socio-economic
indicators that characterize the country's economic growth and economic development. By
calculating the entropy of socio-economic indicators, the trends in the development dynamics
of the republic's economy can be more clearly identified. This can be seen more clearly if we
look at the entropy of socio-economic indicators for the period from the independence of the
Republic of Azerbaijan to 2000 and the years 2000-2020. The graph below shows the entropy
of the main socio-economic indicators of the Republic of Azerbaijan for 1990-2020 [3].
1.
0.8 y = -0,0231x + 0,717
0.6 R² = 0,7204
0.4
0.2
0.
1990 1992 1994 1996 1998 2000 2009 2011 2013 2015 2017 2019
Figure 3: Entropy of the index of the main socio-economic indicators of the Republic of
Azerbaijan for 1990-2020
(Source: The Central Bank of the Republic of Azerbaijan, The State Committee on Statistics of
the Republic of Azerbaijan)
As can be seen, the entropy of socio-economic indicators increased rapidly between 1990 and
1993. The increase in entropy indicates that the Azerbaijani economy was in sharp decline at
that time. Indeed, the signing of the contract “Contract of the century” on September 20, 1994,
prevented the economic downturn in Azerbaijan in the early years of independence (1990-
1993). As a result of economic reforms carried out since that period, the Republic of Azerbaijan
has embarked on a path of dynamic development with the development of other sectors of the
economy at the expense of the oil sector. As can be seen from the graph showing the entropy
of socio-economic indicators, there was a reversal from recession to progress between 1993-
1994, a stagnant economic stagnation between 1994-1995, significant progress in 1995-1996,
1996-2000 In the 1930s, however, a recession erupted. Although the decline in entropy in 1996-
2008 resulted in progress in the Azerbaijani economy, the increase in entropy in 2009 created
a tendency for economic decline in the same year. As can be seen, in the following years, ie in
2009-2014, the country's economy entered the path of sustainable dynamic development and
achieved economic progress until 2015. In 2015, economic progress was replaced by recession
due to the sharp fall in world oil prices and the depreciation of the national currency against the
193
US dollar. Although the decrease in entropy in 20016-2018 resulted in progress in the country's
economy, the increase in entropy in 2019-2020 indicates that there is a tendency for economic
recession. Naturally, this decline is due to the increase in the entropy of socio-economic
indicators due to the effects of the global coronavirus (COVID-19) pandemic. Econometric
analysis and assessment of the impact of entropy on imports and exports in the Republic of
Azerbaijan to the relevant partial entropy of the share of GDP, which has the largest share in
the socio-economic indicators of the country, is important. To conduct this assessment, the
relevant partial entropy of the share of GDP in Azerbaijan for 2010-2020 was calculated. The
table below shows the entropy calculated based on the specific weights of the main partners of
the Republic of Azerbaijan in exports and imports, as well as the entropy calculated based on
the specific weight of GDP in socio-economic indicators.
1.25 0.175
1. 0.14
0.75 0.105
0.5 0.07
0.25 0.035
0. 0.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Entropy of export (X1) Entropy of import (X2) Entropy of GDP (Y)
Figure 4: Entropy of exports, imports and GDP of the Republic of Azerbaijan for 2010-2020
(Source: Calculated and compiled by the author based on information (3) and (4))
Correlation between factors affecting the level of entropy of GDP in the Republic of Azerbaijan
for 2010-2020, calculated on the basis of the index of key socio-economic indicators for 2010-
2020, according to Figure 4, which reflects the entropy of exports, imports and GDP in the
Republic of Azerbaijan for 2010-2020 To perform a regression analysis, using the EViews
mathematical software package, we first determine the results of changes in the indicators, ie,
the export (X1) and the entropy of imports (X2) and the Y factor. According to Figure 3, we
obtain the following result using the EViews software package to conduct a regression analysis
of the relationship between the factors affecting the entropy of GDP in the Republic of
Azerbaijan for 2010-2020.
Dependent Variable: Y
Method: Least Squares
Date: 03/06/21 Time: 18:05
Sample: 2010 2020
Included observations: 11
Variable Coefficient Std. Error t-Statistic Prob.
X2 0.023002 0.026643 0.863329 0.4131

X1 0.159772 0.030112 5.305899 0.0007
C -0.052580 0.030454 -1.726507 0.1225
R-squared 0.803960 Mean dependent var 0.111136

Adjusted R-squared 0.754950 S.D. dependent var 0.018098
S.E. of regression 0.008959 Akaike info criterion -6.365309
Sum squared resid 0.000642 Schwarz criterion -6.256792
Log likelihood 38.00920 Hannan-Quinn criter. -6.433713
F-statistic 16.40402 Durbin-Watson stat 1.719797
Prob(F-statistic) 0.001477
Table 3: The result of the Eviews software package

(Source: The EViews application was developed by the author based on the software
package)
194
Based on the results obtained from the Eviews application software package, the regression
equation will be as follows:
Y = 0.0230020033064*X2 + 0.159772413175*X1 - 0.0525798704998 (3)
As can be seen from the table, there is a high correlation between the variables Y and X1, X2
on the Chedok scale (0.7-0.9) 𝑅 2 = 0,8040). The presence of a coefficient of determination
means that the corresponding regression equation is explained by 80.4% of the variance results
and 19.6% by the influence of other factors not included in the model. Table 3 showing the
results of Eviews software package. According to the data, F-statistic (Fisher's criterion) = 16.4
[ 13, p.333]. The F-Fisher criterion, compared to 𝐹𝑇𝑎𝑏𝑙𝑒 (а; 𝑚; 𝑛 − 𝑚 − 1) value, appears to be
the F-Fisher criterion > 𝐹𝑇𝑎𝑏𝑙𝑒 (16,4>4,46). This means that the regression equation as a whole
is statistically significant [13, p.315]. This means that the built-in model (3) is adequate. The
following graph shows the estimates of years and standard errors of the partial entropy
calculated on the basis of the specific weight of GDP in the socio-economic indicators, as well
as a number of characteristics of the use of the equation for forecasting purposes.
.16
Forecast: YF
Actual: Y
.14 Forecast sample: 2010 2020
Included observations: 11
.12 Root Mean Squared Error 0.007640
Mean Absolute Error 0.006416
Mean Abs. Percent Error 5.502228
.10 Theil Inequality Coefficient 0.034006
Bias Proportion 0.000000
.08 Variance Proportion 0.054497
Covariance Proportion 0.945503
.06
.04
10 11 12 13 14 15 16 17 18 19 20
YF ± 2 S.E.
Figure 5: Prognostic characteristics of regression equations

(Source: The Eviews application was developed by the author based on the software package)
It should be noted that using the graph, it is possible to determine the forecast values of the
partial entropy calculated on the basis of the specific weight of GDP in socio-economic
indicators in Azerbaijan. If we calculate the elasticity coefficients calculated on the basis of
these indicators on the built model, we get the following result [14, p.200].
0,15589×0,912573 0,023×0,778727
𝐸𝐸𝑛𝑡𝑟.𝑓 𝑒𝑥𝑝. = = 1,312; 𝐸𝐸𝑛𝑡𝑟.𝑓 𝑖𝑚𝑝. = = 0,16116
0,111136 0,111136
5. THE RESULT
The study found that the increase in entropy in foreign trade is positive for Azerbaijan and
negative for strong partner countries. Because, while it is very useful for Azerbaijan to establish
the same level of cooperation with all partner countries, the same level of cooperation with
Azerbaijan is not so desirable for one or another relatively strong partner country. Thus, a strong
country with one or another economic and political interest in Azerbaijan is trying to expand
its sphere of influence here. According to the EViews application software package, the partial
entropy calculated on the basis of the specific weight of GDP in the socio-economic indicators
of the Republic of Azerbaijan, the entropy calculated on the basis of the special weights of the
main import and export partners increases by 1.32% and 0.16%, respectively. As can be seen.
1% increase in import entropy increases the partial entropy calculated on the basis of the share
of GDP in socio-economic indicators by 1.32%, which is 8.1 times the increase in the share of
export entropy calculated on the basis of the share of GDP in socio-economic indicators. times
higher. The decrease in the entropy of foreign trade is important, as the increase in the partial
entropy calculated on the basis of the specific weight of GDP in socio-economic indicators
195
results in an increase in the economic downturn in the country's economy. In this regard, the
optimal level of increasing the competitiveness of all sectors of the economy depends on
government regulation of the economy, as well as the liberalization of foreign trade, taking into
account the influential factors.
LITERATURE:
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Methods and Applications. Wiley, 320 p.
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2021.
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2021
5. https:// unctadstat.unctad.org/EN/. Date of application: February 25, 2021
6. Imanov G., Hasanly Yu. (2001). Models of socio-economic development of Azerbaijan,
macroeconomic analysis, (248 p.) Baku: Scientific publishing house.
7. Korolev M.A., Mishenin A.I., Khotyashov E.N. (1984). Theory of Economic Information
Systems, Moscow: Finance and Statistics.
8. Lewandowski A., Wertbicki A. Theory, Software and Testing, Examples in Decision
Support Systems.Working paper WP-8X 071, International Institute for Applied Systems
Analysis, Laxenburg, Austria, 1988
9. Musayev I.K., Associative optimization of economic management. Baku, 2005, p. 320.
10. Stock J.H., Watson M. W. Introduction to Econometrics. 3rd edition, Addison-Wesley,
2010, 840 p.
11. Simon A. H, Newell A. Heuristic problem solving: the next advance in operations
research//Operaions research. 1988.V.6.
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on Trade and Development" transitioninig to a new normal. United Nations. Geneva, 2020.
13. Yadigarov T. A. (2019). Research operations and solutions of econometric tasks in software
packages MS Excel and Eviews: theory and practice: Monograph (352 p.). Baku: Europe"
publishing house.
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Monograph (520 p.). Baku: "Europe" publishing house.
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Azerbaijan with the countries of the world. Sh. Muradov. News of NANA. Economics
Series: World economy (p.112-117). Baku: Science and Knowledge Publishing House.
16. Zadeh L.A. Similarity relations and fuzzy orderings. // Inform. Sci., 1971. V0I.3. P. 177-
200.
196
GROWING IMPORTANCE OF CREATIVE THINKING IN HIGHER

EDUCATION IN THE 21ST CENTURY
Vilmos Vass
Budapest Metropolitan University, Hungary
[email protected]
Arpad Papp-Vary
[email protected]
Melanie Smith
[email protected]
ABSTRACT
In this study, we analyse the growing importance of creative thinking in higher education. The
central argument is that creativity is at the heart of knowledge economy and successful life. We
aim specifically to characterize domain-specific creative thinking, especially focusing on
different methodological phenomena of changing domains. In the first part of the paper, we
introduce the contextual background and define relevant key concepts (skills gap, creative
thinking, transversal skills, soft skills, changing domains), then we explain conceptual changes
and the growing complexity of creative thinking. In the second part, we analyze some research
data from focus group interviews at Budapest Metropolitan University. The findings put great
emphasis on teachers’ personality, interactive teaching methods and learning atmosphere.
Finally, we conclude our thoughts posing some questions and dilemmas.
Keywords: creative thinking, knowledge economy, soft skills, transferable skills
1. INTRODUCTION
1.1. Research problem
The apropos of our study – on the one hand - gives the Linkedin-research in 2019 dealing with
the most important skills in work turning to the new decade.1 Research tries to map the most
critical soft and hard skills. Over 660+ million professionals and 20+ million jobs to reveal the
15 most in-demand soft and hard skills. Basically, ’talent developers want to help them identify
skills gaps is to know what the most in-demand skills will be in the future’. Skills gap refers to
the difference between the skills required for a job and the skills an employee actually
possesses. On the other hand, the focus of the innovative domain of the next PISA-survey
(OECD's Programme for International Student Assessment) will be creative thinking in 2021
(Lucas – Spencer, 2017). ’PISA is not only the world’s most comprehensive and reliable
indicator of students’ capabilities, it is also a powerful tool that countries and economies can
use to fine-tune their education policies.’ (Angel Gurría, OECD Secretary-General)2. Turning
back to the skills gap, one of the fundamental aims is to define and improve individual's skills.
Basically, skills have been divided into two parts. Soft skills are broadly classified as a
combination of personality traits, behaviors, and social attitudes, for instance leadership skills,
teamwork, communication skills, problem solving skills, work ethic, flexibility/adaptibility,
1 New LinkedIn Research: Upskill Your Employees with the Skills Companies Need Most in 2020
https://learning.linkedin.com/blog/learning-thought-leadership/most-in-demand-skills-2020?trk=eml-mktg-ldc-lit-20200115-
mids-global-email1&src=e-eml&mcid=6614827356689440768&cid=7010d000001KpjkAAC
2 Andreas Schleicher: PISA 2018. Insights and Interpretations.
https://www.oecd.org/pisa/PISA%202018%20Insights%20and%20Interpretations%20FINAL%20PDF.pdf
197
interpersonal skills.3 Hard skills are part of the skill set that is required for a job. They include
the expertise (knowledge and abilities) necessary for an individual to successfully do the job,
for instance, analytical reasoning, business analysis, sales, video production.4 Turning back to
the Linkedin research, the top soft skills are creativity, persuasion, collaboration, adaptability
and emotional intelligence, As the research concluded: ’this year's results signal that companies
are gravitating more toward talent with strong people-oriented skills.’5 Comparing the required
transversal skills from an economic and educational perspective, we find a lot of similarities on
the lists. (Lucas and Spencer, 2017) Basically we agree with Lucas’s statement: ’creative
thinking is an important capability for success in life’. 6 As we can see, creativity is at the heart
of the knowledge economy and successful life. What about education? In this paper we will
focus on the growing importance of creativity, especially creative thinking in higher education
in the 21st century.
1.2. Research focus

Let us imagine an everyday-life situation in project-based courses in higher education. The first
critical part is questioning. If you are lucky, some students have original, interesting, open
questions. Generally, many students so not ask any questions at all. The second problematic
issue is generating ideas. Some students immediately have a lot of ideas during brainstorming
activities, the others look at you with a bored face without any ideas. The third critical point is
based on project presentations without creativity, for example, reading texts and talking
monotonously. Why are original questions, ideas and presentations so important? Because of
creative thinking.
1.3. Context
Economic, social, scientific and cultural changes have a significant impact on education,
especially changing the education system because of growing needs for global competitiveness
and transformation. (Cheng, 2019; Vass, 2006) In fact, quality of knowledge, in a wider sense
and quality of education is a key to economic progression. (Hanushek – Woessmann, 2009,
Hanushek-Woessmann, 2015a, 2016, Hanushek, 2019) Hanushek and Woessmann pointed out
strong coherence between cognitive skills, basic kills, learning outcomes and economic
productivity. (Hanushek, E. A. – Woessmann, L.,2015b). Florida stated that ’the real driving
force is the rise of human creativity as the key factor in our economy and society’. (Florida,
2011. 5) A knowledge-intense economy and knowledge-based society prioritize creativity,
especially effective development of creative thinking. Focusing on transferable skills, for
instance, creative thinking, and rethinking education systems is based on Davidson’s world-
famous data. Namely, 65% of elementary school students in the United States would grow up
to do jobs not currently in existence. (Davidson, 2011) Not surprisingly, in this context, the
growing importance of transferable skills, such as creativity and innovation can strengthen
inventions in new business models. But the context of this new model is VUCA-world, which
has four phenomena: volatility, uncertainty, complexitiy and ambiguity (Fadel, Bialik and
Trilling, 2015) Mark Twain’s message from the past is relevant: ’It’s difficult to make
predictions, especially about the future.’ It is much more true in the 21st century. The growing
importance of transferable skills raises a fundamental question: ’Knowing what we know about
how children learn and what is necessary for individuals and societies to suceed and thrive,
3 The 7 Soft Skills You Need to Be Successful https://www.omniagroup.com/the-7-soft-skills-you-need-to-be-successful/

4 The Top Hard Skills Employers Seek https://www.thebalancecareers.com/what-are-hard-skills-2060829
5 New LinkedIn Research: Upskill Your Employees with the Skills Companies Need Most in 2020
https://learning.linkedin.com/blog/learning-thought-leadership/most-in-demand-skills-2020?trk=eml-mktg-ldc-lit-20200115-
mids-global-email1&src=e-eml&mcid=6614827356689440768&cid=7010d000001KpjkAAC
6 Bill Lucas: The Power of Creative Thinking. https://www.thersa.org/discover/publications-and-articles/rsa-
comment/2017/11/the-power-of-creative-thinking
198
what should students learning?’ (Fadel, Bialik and Trilling, 2015. 55) Basically, transferable
skills are a significant trans- and interdisciplinary phenomenon. Technological and economic
creativity has strong interactions with artistic and cultural creativity (Florida, 2011).
We try to analyze creative thinking from this trans- and interdisciplinary dimension. We agree
with Csikszentmihalyi statement: ’Most of the things that are interesting, important, and human
are the results of creativity’ (Csikszentmihalyi, 1996. 1). On the basis of 30years of
Csikszentmihalyi’s research work on creativity, his model has three elements: culture, person
and field. According to him, creativity is a domain-specific skill, ’a process by which a symbolic
domain in the culture is changed’. (Csikszentmihalyi, 1996. 8) Changing the existing domain
is a key factor to understanding creative thinking. No doubt, this is a challenging, complex
process with some heuristic moments and incalculable steps. In fact, Csikszentmihalyi’s model
and process of creativity has played an important role in creativity research, including social-
personality approaches to the study of creativity (Sternberg and Lubart, 1999). Turning back to
the domain-specific character of creativity, it emphasizes the importance of structure of
knowledge. Firstly, quantity of knowledge matters in creative thinking, but parallel to this
accumulation, different original combinations of the structural elements are much more
important in this process. Csikszentmihalyi analyzed the process of creativity differently,
namely he defined five components: preparation, incubation, insight, evaluation and
elaboration. Preparation is based on interesting things and curiosity. In the incubation
component, unexpected combinations play an important role. The third component contains a
lot of „Aha!”-moments. Evaluation requires self-reflections and self-criticism in order to
„decide whether the insight is valuable and worth pursuing”. Finally, elaboration is the hardest
work among the different components (Csikszentmihalyi, 1996). Turning back to the past of
creativity research, creativity traditionally has two fundamental components: originality and
task appropriateness (Guilford, 1950) On the basis of these components, Guilford
diffrerentiated two types of thinking: convergent and divergent. Divergent thinking is the
process of generating multiple ideas to maximize the range of possible solutions, applications
and examples. Let us see for instance two types of conclusion in essays in higher education.
The first type of conclusion is based on the previous content and gives simplified, descriptive
summarization of the topic. The second type of conclusion is based on dilemmas, alternatives
and different scenarios. In fact, the first is related to convergent thinking, but the second is
based on divergent thinking. Guilford defined the concept of divergent thinking (later Torrance,
1970), according to four characteristics:
• fluency (the ability to produce a great number of ideas or problem solutions in a short period
of time);
• flexibility (the ability to simultaneously propose a variety of approaches to a specific
problem);
• originality (the ability to produce new, original ideas);
• elaboration (the ability to systematize and organize the details of an idea in one’s head and
carry it out)7
Parallel to this conceptual work, Guilford created the Structure of Intellect in order to analyze
complexity between creativity and IQ. His model contains three components: content, product
and operation. Firstly, he focused on measuring personal characterstics in creativity using his
model. Secondly, three components (content, product and operation) have an enormous impact
on learning: ’students gain a better understanding of the ways in which they are able to learn
7 J. P. Guilford https://www.newworldencyclopedia.org/entry/J._P._Guilford
199
and the ways in which they use the knowledge’ (Richards, 2001). Thirdly, from a teaching
perspective, these components emphasize the importance of cross-cultural strategies and
interdisciplinary approach. No doubt, this psychometric approach to creativity stressed personal
phenomena, but it started to indicate complexitiy. Under the umbrella of giving more details
and research data about divergent thinking, the increasing complexity of creativity should be
mentioned. Structuralization of creativity has resulted in some models, which can put
consciousness into the developmental process. For instance, the Center for Real-World
Learning defined a five-dimensional model of creativity.
Figure 1: Five-dimensional model of creative thinking

(Source: The Center for Real-World Learning)
The five dimensions are: inquisitiveness (wondering and questioning, exploring and
investigating, challenging assumptions); persistence (daring to be different, sticking with
difficulty, tolerating uncertainty); collaboration (cooperating appropriately, giving and
receiving feedback, sharing the product); discipline (crafting and improving, developing
techniques, reflecting critically); imagination (playing with possibilities, making connections,
using intuition). (Lucas and Spencer, 2017) Obviously, this is a more complex view of creativity
than Guilford’s model. The five-dimensional model is a matrix or a wheel in order to indicate
the detailed structure and overlapped items between the dimensions. Basically, there are two
pillars in this model, critical thinking and problem-solving.
200
Lucas and Spencer give some examples of the five dimensions at the primary and secondary
school levels (Lucas and Spencer, 2017). Let us see some examples of the dimensions in higher
education. At the inquitisive dimension, students can pose opene-questions (Why?, How?),
which are based on their curiosity, questioning and intrinsic motivation in order to think
critically about the topic. Dimension of persistence is based on debating, arguing, listening and
tolerating the other point of view using for instance place mat and mind map. This dimension
of collaboration is related to project-method and problem-based learning. Working in teams
requires the previous dimension (see overlapped items) and gives evidence about the social
context of creativity. Collaboration prefers continuous feedback and sharing different ideas,
debating and critical views. Parallel to collaborative work, assessment is based on cooperative
quality standards and evaluation indicators. The dimension of discipline requires a lot of
reflections and comments in order to create the most qualitative product, learning from mistakes
and experience. The dimension of imagination is ’the heart of creative thinking’ and requires
analysis and synthesis in order to imagine different solutions, scenarios and possibilities.
3. PRIMARY RESEARCH
The following section explores some of these theoretical notions in context from the perspective
of students from a higher education institution in Budapest.
3.1. Research aim

Our research aim is to map students’ prior knowledge on creativity and creative thinking.
3.2. Research methodology: Student Focus Group Interviews and fdata analysis
Focus groups were undertaken with students in the researchers’ own institution in order to gain
some insights into what students understand by creative education. Three student focus groups
were undertaken with groups of Masters students at Budapest Metropolitan University between
2018-2020 who were studying a course entitled Creative Industries which runs yearly in the
Spring semester. This cohort of students was chosen deliberately, as they were studying subjects
relating to creative thinking, creative education as well as creative industries management. It
was important that the students understood these concepts at a relatively high level in order to
be able to discuss the issues in depth. Each focus group was undertaken for 80 minutes during
the students’ usual class time. The first two (2018, 2019) were undertaken face-to-face, whereas
the third (2020) took place on Zoom during the Covid-19 lockdown period (however, the
students had already experienced three classes face-to-face before the lockdown, so they had
met each other and the teachers). The groups consisted of mixed nationalities (at least 7-8
nationalities each time) which reflect the internationalization of the authors’ institution. Both
female and male students took part and the gender balance was more or less equal.
3.3. Research Results

Students discussed how some teachers tried to develop students’ creative thinking and skills
more than others. It very much depended on the personality and technique of the teacher.
Interactive, friendly teachers who created a good atmosphere and involved students were the
most creative. Overall, they agreed that creative education needs to be based on interactive
classes where students are encouraged to ask questions and give their opinions. The importance
of using examples in context was also emphasized, as well as applying activities to real-life
situations. One example of this was writing a business plan as well as project-based learning.
It was not thought that creative thinking was more present in arts-related subjects, but could
also be brought to business or marketing subjects quite easily. On the other hand, it was said
that numerical subjects were not taught in a very creative way and that more technological tools
could be used in future (by 2020, this issue had been addressed and was intensified during
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Covid-19 lockdown). When asked how much co-creativity had been present in their higher
education experience, many students were somewhat confused about the term. It was explained
as a combination of freedom to choose and interactivity. Students felt that they had not had
much freedom in choosing subjects (the national curriculum in Hungary is rather rigid), but
they had had some choices in course content, assessment or presentation subjects. Interaction
was rated positively on the whole, not only with certain teachers but also between students.
Groupwork was valued, but it was not always preferred, especially when grades were given for
it. It was noted that during the Coronavirus lockdown period, it was much harder to do
groupwork which was also deemed an important part of creative education. The students also
felt overloaded by individual tasks, which compromised their time rather than their creativity.
Some students felt that being locked in their small room was not conducive to creativity as it
was thought that inspiration also needs to come from the outside world, including social
contacts and the natural environment. They found it harder and less motivating to manage their
own time and to work alone. On the other hand, some students stated that it had given them
time to learn new skills and methods. It had removed the stress and time needed for commuting,
for example. However, it was agreed that regular feedback from teachers was needed for both
motivation and full engagement.
4. CONCLUSIONS AND IMPLICATIONS

Turning back to Csikszentmihalyi’s fundamerntal statement: ’Changing the existing domain is
a key factor understanding creative thinking.’ On the basis of our study and experience in higher
education, creativity, in fact, is a domain-specific skill. But as we see from the Five-dimensional
model of creative thinking, complexity is growing. This more complex, multi-dimensional view
of creative thinking has affected the process of ’changing the existing domain’ especially in
higher education. It requires a high-quality transferable and non-cognitive skills and inter- or
transdisciplinary mindset. In practice, this is the flexible process, which is based on teaching
professionalism and strong students’ intrinsic motivation. As the global knowledge economy
has been expanding and research data on creative thinking has been growing, the basic, a
relevant definition of creative thinking has been changing. ’Creative thinking is both the
capacity to combine or synthesize existing ideas, images, or expertise in original ways and the
experience of thinking, reacting, and working in an imaginative way characterized by a high
degree of innovation, divergent thinking, and risk taking. 8 This creativity-based synthesis and
original expertise can promote students to be able to apply their knowledge to real-life situations
in higher education. Application of knowledge and creative thinking has strong coherency. In
other words, creativity ’is a combination of several key factors’, for instance deep knowledge,
creative thinking skills, motivation, curiosity and metacognition. (Stewart, 2012) This growing
complexity has resulted in some changes in higher education in order to revise thinking about
learning and teaching in higher education. On the one hand, our findings suggest that the
personality of a teacher in higher education plays an important role: interactive, friendly
teachers who created a good atmosphere and involved students were the most creative, which
has an impact on student expectations of creative thinking. On the other hand, the responses
indicated a strong coherency between effective interaction and high-quality creative thinking.
Finally, we raise some questions and pose dilemmas. How can higher education transfer and
adapt these above-mentioned processes into practice? How can higher education put greater
emphasis on the development of creative thinking turning to a student-centered approach
(problem-solving learning, project-based education)? How can higher education recognize that
high-quality education is a key factor to future economic growth?
8 Creative Thinking VALUE Rubric https://www.aacu.org/value/rubrics/creative-thinking
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LITERATURE:
1. Cheng, Y. C (2019): Paradigm Shift in Education: Towards the Third Wave of
Effectiveness. Routledge, New York, NY
2. Csikszentmihalyi, M. (1996): Creativity Flow and the Psichology of Discovery and
Intention. HarperCollins Publishers, New York, NY
3. Davidson, C. N. (2011): Now You See It: How Technology and Brain Science Will
Transform Schools and Business for the 21st Century. Penguin Books
4. Fadel, C.-Bialik, M.-Trilling, B. (2015): Four-Dimensional Education. Center for
Curriculum Redesign, Boston, MA
5. Florida, R. (2011): The Rise of the Creative Class. Basic Books, A Member of the Perseus
Books Group, New York.
6. The Future of Jobs. Employment, Skills and Workforce Strategy for the Fourth Industrial
Revolution, Word Economic Forum, January 2016
http://www3.weforum.org/docs/WEF_Future_of_Jobs.pdf (retriewed: 04.01.2020.)
7. Guilford, J.P. (1950): Creativity. American Psychologist. 5. 444-454.
8. Hanushek, E. A. – Woessmann, L. (2009): Do Better Schools Lead to More Growth?
Cognitive Skills, Economic Outcomes, and Causation. Working Paper No. 14633.
Cambridge, MA: National Bureau of Economic Research, DOI: 10.3386/w14633
http://www.nber.org/papers/w14633 (retriewed: 04.01.2020.)
9. Hanushek, E. A. (2019): The Economic Value of Improved Schools. Hoover Institution,
Stanford University
10. https://www.niet.org/assets/ResearchAndPolicyResources/974a262a85/eric-hanushek-the-
economic-value-of-improved-schools.pdf (retriewed: 04.01.2020.)
11. Hanushek, E. A. – Woessmann, L. (2015a): The Knowledge Capital of Nations: Education
and the Economics of Growth. Cambridge: MIT Press
12. Hanushek, E. A. – Woessmann, L. (2015b): Universal Basic Skills: What Countries Stand
to Gain, OECD Publishing, Paris, https://doi.org/10.1787/9789264234833-en (retriewed:
04.01.2020.)
13. Hanushek, E. A. – Woessmann, L. (2016): Knowledge capital, growth, and the East Asian
miracle. SCIENCE sciencemag.org 22 JANUARY 2016 • VOL 351 ISSUE 6271
14. https://hanushek.stanford.edu/sites/default/files/publications/Hanushek%2BWoessmann%
202016%20Science%20351%286271%29.pdf (retriewed: 04.01.2020.)
15. Lucas, B. and Spencer, E. (2017): Teaching Creative Thinking. Crown House Publishing
Limited Wales, UK
16. Richards, R. (2001). Millennium as opportunity: Chaos, creativity, and Guilford’s structure
of intellect model. Creativity Research Journal, 13(3-4), 249-265.
17. https://creativityepsy5750.wordpress.com/guilfords-sol/ (retriewed: 04.01.2020.)
18. Sternberg, R.J. and Lubart, T. I. (1999): The Concept of Creativity: Prospects and
Paradigms. In. Sternberg, R. J. (ed.): Handbook of Creativity. Cambridge University Press.
3-16.
19. Stewart, V. (2012): A World-Class Education. ASCD, Alexandria, VA.
20. Torrance E. P. (1970): Encouraging Creativity in the Classroom. Dubuque, IA:William C.
Brown
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COCOA MARKETS AND VALUE CHAINS: IMPLICATIONS FOR SÃO

TOMÉ AND PRINCIPE ORGANIC SMALLHOLDERS
Ibrahim Prazeres
Center for Advanced Studies in Management and Economics (CEFAGE),
[email protected]
Maria Raquel Lucas

University of Évora and Center for Advanced Studies in Management and Economics,
(CEFAGE), Portugal
[email protected]
Ana Marta-Costa
University of Trás-os-Montes e Alto Douro (UTAD,
[email protected]
ABSTRACT
Cocoa is one of the main goods in the world agricultural trade markets, occupying the third
position in exports. The paper introduces the cocoa value chain worldwide, its asymmetries,
and the supply and value chain specific to the São Tomé and Principe (STP) organic cocoa. It
aims to understand this value chain’s internal and external tensions and analyse its potential
to be inserted in the international markets. The study uses panel data analysis from the
FAOSTAT database. The tensions mentioned are due to the asymmetries of international
markets and those regarding the production of organic cocoa in STP. At the level of STP and,
despite measures to support organic production as a valuable alternative to the country's
development strategy, imbalances in the value chain persist that compromise the livelihoods of
small producers responsible for most of production exported and the sustainability of the
ecosystem.
Keywords: International markets, value chain, organic cocoa smallholders, São Tomé and
Príncipe (STP)
1. INTRODUCTION
Cocoa is one of the main goods in the world agricultural trade markets, occupying the third
position in exports (Blare and Useche, 2013; Díaz-Montenegro, 2019; Galarza, 2012). It is
mainly concentrated in the tropics, in Africa, which concentrates two thirds of world production
and where Côte d'Ivoire is the main country with around 40% of the world production (Voora
et al., 2019). Approximately 4 million tons of cocoa beans have been annually worldwide
produced since 2010. The combined export value, of whole or broken grades, raw or roasted,
amounted in 2017 to US $ 8.6 billion, with an estimated the global cocoa market grows at an
annual rate of 7.3%, from 2019 to 2025, to reach $ 16.32 billion (Voora et al., 2019). The
chocolate industry consumed about 43% of all cocoa in 2017, with a global retail market value
of $ 106.19 billion in 2017 and forecast to be $ 189.89 billion by 2026 (Eghbal, 2018). Cocoa
is produced mainly by hand, by about 5 million households, in more than 50 countries, of which
70% are small farmers, with one and three hectares. Even so, they represent more than 80% of
the total cocoa available in the markets (Díaz-Montenegro et al., 2018; Voora et al., 2019) and
guarantee the livelihood of 40 to 50 million people worldwide (Voora et al., 2019). Worldwide,
the cocoa value chain is characterized by asymmetric power relations with increasing control
by some dominant companies that have the ability to decide how and where value is created
204
and distributed. Five companies account for 56% of the chocolate market, of which three
account for half of the total cocoa supply. As a result, there is an asymmetric distribution of
value, with producers receiving only 5% of the price paid by the final consumer, while
marketing and processing activities capture 25% and the processing and sales of retail chocolate
capture a 70% share of revenues (Abdulsamad et al. 2015; Fountain and Huetz-Adams, 2020;
Squicciarini and Swinnen, 2016). In STP, the cocoa value chain is very fractional at the
producer level, where approximately 70% of organic producers develop their activity in plots
of less than 2 hectares (Prazeres, 2018; Prazeres and Lucas, 2020). In 2018, the number of
organic cocoa producers was approximately 3300 (Prazeres, 2018) and cocoa, which occupied
about 80% of the agricultural area, represented 90% of the country's export earnings (ANEME,
2018). In addition to its contribution to GDP, through the high weight of exports in the
agricultural sector, the cocoa culture guarantees the livelihood of many families by creating
jobs, developing local microeconomies and giving an international image to the country
(Prazeres, 2018). This paper aims to characterize the cocoa market and value chain globally and
in STP. It is intended to show the main dynamics and challenges that can reduce the
asymmetries between the different actors and create value, as a way of reducing poverty and
improving the quality of life of small agricultural households. In addition to this introduction,
the document is structured in six sections. In the second, the used methodology in the
development of the exploratory study is presented. The main characteristics of the international
cocoa market, whether conventional or organic, form the body of the third section, which also
includes the international cocoa value chain. The fourth focuses on the description of the
organic cocoa value chain in STP. The fifth and last sections present, respectively, the
implications for small producers related to the characteristics of the international market and
the value chain and the main conclusions and perspectives for the continuity of the research.
2. RESEARCH METHODS
The paper combined panel data from FAOSTAT (FAO, 2021) with literature review and field
observation in order to look and characterize the cocoa market and value chain, globally and in
STP, to know policies and practices development around the world and, to engender new ideas
and directions for STP organic sector sustainability. The panel data analysis was carried out for
the 20 main producing countries. It started with the identification and choice of the indicators
and time period in FAOSTAT and its subsequent treatment and interpretation. The indicators,
collected for the last available decade (2007-2017) included: (1) Production Area (ha); (2) Yield
per hectare or Productivity (Kg/ha); (3) Total Production (Ton), (4) Exports in Volume (Ton);
and (5) Exports in Value (1000 US $). These indicators were chosen to allowed characterize
the global cocoa market and its value chain, to compare the situation in STP to the other
producing countries and, to show the contribution of agricultural exports of cocoa beans
produced by small farmers to economic growth.
3. THE COCOA MARKET

The global production of cocoa beans registered an annual growth of 3% in the period of 2007-
2018, reaching a world production of 5.2 million tons in 2017 (FAO, 2021), with a second
global boom in the consumption of cocoa and chocolate occurring since 1990 (Squicciarini and
Swinnen, 2016). Between 2007 and 2012, the annual growth in production occurred mainly due
to the increase in the harvested area and not in productivity or yield per hectare. Favorable
climatic conditions and an increase in the production area seem to be related to the verified
expansion (Fountain and Huetz-Adams, 2018). According to these authors, climate stability in
West Africa, especially after the El Niño phenomenon, policy environment to stimulate cocoa
production in Ecuador and Peru, and the increase in cocoa farms in Africa, many of which
established in old protected forests and with significant cocoa yields, have clearly contributed
205
to expanding the cultivated area. Global cocoa production is dominated by Africa, a continent
that held, in 2017, 70.4% of global production and, in the last decade, showed an annual growth
of the order of 3.8%. The American continent is as follows, with 15.4% of production and an
annual increase of 5.3%. Finally, Asia, which has had annual decreases of 1% in the last ten
years, contributes only with 13.2% of the global production, and Oceania has a marginal
contribution (FAO, 2021). This situation can be visualized in Table 1. Côte d'Ivoire remains
during all the years considered, as the main producer, accounting for about 40% of the total
production and, consequently, it is the main exporter (FAO, 2021).
Table 1: Cocoa Total Production by Country (Ton)

(Source: Own elaboration with FAO data)
In second place as an exporting country is Ghana, which was surpassed by Indonesia only in
2010 in terms of value exports and in the years 2009 and 2010 in terms of volume exports
(Figure 1). STP represents a small proportion both in the total cocoa production, which has
fluctuated over the years, remaining in 2017 at the same level as in 2007 (approximately 2800
tons), but showing positive evolution of exports, both in terms of volume and value.
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Brazil
Cameroon
Colombia
Côte d'Ivoire
Dominican Republic
Ecuador
Ghana
Guatemala
Haiti
India
Indonesia
Madagascar
Mexico
Nigeria
Papua New Guinea
Peru
São Tomé and Príncipe
Sierra Leone
Uganda
Venezuela
Figure 1: Cocoa Exports by Country in Volume in 2017 (Ton)

In 2017, Côte d'Ivoire dominates in all indicators, with the exception of productivity per hectare,
where Madagascar holds the first position, but one modest position with regard to exports
(Table 2).
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In the case of STP, although it has the lowest productivity per hectare of all the countries
analyzed, its position as an exporter is superior. A curious piece of evidence is related to the
ratio between total cocoa production and exports in volume, for the year 2017, because there
are some countries where export volume exceeds total production. This is the case of Ecuador,
where volume exports represent 138.2% of total production, Madagascar (114%), Sierra Leone
(253.9%) and STP (126%), which shows that there is some error or incongruity with the basic
data provided by the different countries.
Table 2: Indicators by Country in Year 2017

World imports of cocoa and its processed products reached US $ 9.34 billion in 2017, with
Netherlands (25%), United States (13%), Germany (8.4%) and Belgium-Luxembourg (8.4%)
being the main importers. The products in greatest demand were chocolate and other foods
containing cocoa (57% of imports), raw or partially roasted cocoa beans (20% and cocoa
powder without added sugar or other sweetener (8%) (OEC, 2020). As an agricultural
commodity, the price of cocoa beans is volatile (Díaz-Montenegro, 2019; Utepi, 2007). Factors
such as changes and climatic events, pests and diseases, fluctuations in production cycles,
especially in large producing countries, variations in cocoa processors' inventories or changes
in consumer markets influence the price. In the particular excess supply causes prices to fall
and, at the same time, encourage farmers to harvest intensively and also to replace cocoa with
other crops, increasing even more the saturation of the cocoa bean market and causing an even
steeper drop in prices (Fountain and Huetz-Adams, 2018). As a result, there is a future shortage
of grains, leading to price increases. Since supply in this market reacts slowly to price changes
or demand pressures, when supply exceeds supply and prices increase, farmers have incentives
to plant new trees. However, due to the length of the biological cycle, they take several years
to reach their maximum productive performance, so farmers receive little benefit from the price
increase (Díaz-Montenegro, 2019). The observation of international price in real terms at 2010
values for cocoa as a commodity shows price instability in the period considered (2007-2017).
There was a rise until 2010 and between 2013 and 2016, but a decline between 2011 and 2012
and from 2016, representing a drop of approximately one third in 2017 (Figure 2). The price
drops observed seem to be linked to the excess supply of cocoa and to the stagnation of demand
in emerging economies (Brazil and Russia), due to the economic crisis and to the decline in the
consumption of chocolate in the USA, China and India (Díaz-Montenegro, 2019; Fountain and
Huetz-Adams, 2018; ICCO, 2016; World Bank, 2019).
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Figure 2: Real Cocoa Price (2010 value)

(Source: Díaz-Montenegro (2019); World Bank (2019))
The demand for chocolate is elastic to price variations, but there are consumer segments focused
on quality and brand (Squicciarini and Swinnen, 2016). Although the world consumption of
cocoa has been decreasing in the last decade, chocolate consumers, especially in developed
countries, are seen as fundamental to induce changes in attitudes towards sustainability. This
situation is due to the growing interest in sustainable and organic products, the requirement for
certification and authenticity and guarantee that does not harm the environment, and to the not
exploitation of the workforce, which ensures fair trade (García-Herrero et al., 2019). If the fall
in international cocoa prices persists, especially in the current state of the world pandemic, this
could induce to a drop in the price of finished cocoa and chocolate products, which could
stimulate consumption. For ICCO (2016), there is always a time lag between the reduction in
the price of cocoa beans and its effects on the price to the consumer (ICCO, 2016). Sensory
quality, together with labelling and information on the origin and method of production and
processing of cocoa, are also important elements for their acceptance, appreciation and
preference by the consumer (Silva et al., 2017). Tools that help to make cocoa traceable and
assess the geographical origin of the beans used in the production of chocolate are also seen as
essential (Acierno et al., 2017).
3.1. The Organic Cocoa Market

Despite the fact that the organic cocoa market represents only 0.5% of production, being a very
small share of the total world cocoa market, the demand for this product has been increasing,
with in some situations an inability of supply to meet demand for organic cocoa market. For
this reason, and despite the social, environmental and economic problems faced by producers
and countries, and the distance between producers and consumers who can value the product
and its way of production, farmers have been sacrificing their few resources to produce organic
cocoa, mainly in the least developed countries (García-Herrero et al., 2019). The main producer
of organic cocoa is the Dominican Republic, with a market share of around 70%. Peru, Mexico
and Ecuador hold about 20%, with the remaining 10% distributed between Ghana, Uganda,
Bolivia and Brazil (ICCO, 2018). The estimate of this source is that the African continent will
be able to produce about 9% of the organic cocoa market by 2022 although, to that end, it must
plan, organize and certify production so that cocoa does not have to be marketed as conventional
due to difficulties in market access. The organic cocoa market encompasses, in general,
products such as cocoa powder, paste, butter and grains, which are used in confectionery,
bakery, functional foods, healthy drinks, homemade food, pharmaceuticals, ointments and
personal hygiene, among other possibilities. In the food industry, the main ingredient from
cocoa and the driver of organic cocoa production is chocolate. Their demand by consumers
results from the growing awareness of health and, consequently, the demand for premium
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organic chocolate, organic ingredients in functional foods, beverages and personal hygiene
products. However, there is a lack of information and market links that allow small organic
cocoa producers to supply high-demand regions such as North America, Western Europe, Japan
and Asia-Pacific (except Japan), where there is an emerging cocoa market potential. Some
emerging markets, including those in growing African countries, have also been linked to the
demand for organic cocoa (EAL, 2020). It is expected that there will be significant increases in
the demand for chocolate in emerging markets while in traditional markets with developed
economies, the trend will go towards the preference for healthier and first quality chocolate
products, expanding the range of prices offered for these products (ICCO, 2018). The price of
organic cocoa, although it is, like the conventional, determined by the balance between world
supply and demand, and pay attention to the quality and flavor, it is always higher than that of
conventional cocoa (Prazeres, 2018).
3.2. The Global Cocoa-Chocolate Value Chain

The global cocoa-chocolate value chain is exposed in Figure 3. Its analysis shows, on the one
hand, a large spatial distance between production, which occurs in a fragmented way in 5.5
million small rural properties of 1 to 3 hectares, in Africa, Latin America and Asia and
consumers and, on the other hand, a governance system where few companies control the
segments of consumption and the stages of cocoa processing and chocolate manufacture, where
the value is created.
Figure 3: The Cocoa-Chocolate Value Chain

(Source: Abdulsamad et al. (2015); Díaz-Montenegro (2019))
Some of the large companies involved in the global cocoa-chocolate value chain develop their
activities simultaneously in the consumer markets, where they control high-value functions
arising from the industrial manufacture of chocolate and branding, and in the intermediate
processing markets, dominating the global supply chain for raw materials from cocoa and
operating in markets of producing and consuming countries (Abdulsamad et al., 2015).
According to these authors, the five leading companies in the consumer markets (Mondelez
International 15%; Mars Inc. 14%; Nestlé 12%; Ferrero 8%; and Hershey Co. 7%) are owners
of well-known brands. They control high-value functions related to the manufacture of
chocolate and the development and marketing of brands have great purchasing and negotiating
power (Abdulsamad et al., 2015). Three of these leading companies dominate the global supply
chains, being vertically integrated, they operate from the rural areas of the producing countries
to the main ports in Europe and North America, where the advanced processing facilities are
located. Barry Callebaut (23%), Cargill (15.3%) and ADM (12.7%) are examples of these
vertically integrated supply chains that control approximately half of processed cocoa
209
worldwide (Abdulsamad et al., 2015). Upstream of the cocoa-chocolate value chain are the
approximately five million small-scale farmers, ranging from one to three hectares of land
(ICCO, 2016), which account for 90% of the global cocoa harvest (Purcell et al., 2018). They
are a link in the value chain with less negotiating weight, more fragmented and geographically
atomized and without financial capacity to face the risks resulting from price volatility
(Fountain and Huetz-Adams, 2018). Furthermore, they are the most dependent on local
commerce and their respective dealers, commission agents or purchasing agents from the
international chocolate industries, who press downward prices (Abdulsamad et al., 2015). In
addition, the processing (grinding) of cocoa beans is commonly carried out in importing
countries, (especially in Holland, Germany and the United States), which owns approximately
one third of the world mills and add the value corresponding to this operation (ICCO, 2016).
The asymmetry in the power relations of the cocoa-chocolate value chain explains the formation
and transmission of prices along the chain. In general, retail prices increase when the price of
cocoa beans goes up, but they react more slowly when prices for cocoa beans go down. Thus,
the fall in the prices of cocoa beans has different consequences for the different links in the
chain. It will immediately and negatively affect farmers' incomes, but the rest of the players in
the value chain can even increase their profit margins, albeit temporarily (Fountain and Huetz-
Adams, 2018; 2020). Table 3 shows the differences in the distribution of value along the chain
between the production activities carried out by the cocoa-producing countries (6.6%),
transportation and marketing (6.3%), processing (7.6%), manufacturing (35.2%) and retail sales
(44.2%).
Distribution of Value Sales ($) Purchases($) Value Added ($) Profit ($) Final Sale Price (%)
Farmers' Income (Weighted) 1,874 664 1,210 1,210 6,6
Ground transportation 1,971 1,874 97 Not available 0,5
Taxes | Marketing Board 2,745 1,971 774 Not available 4,2
International Shipping 2,793 2,745 48 Not available 0,3
Cost per Arrival Fee 2,993 2,793 201 Not available 1,1
International Merchants | Traders 3,038 2,993 45 15 0,2
Processors and Crushers 4,434 3,038 1,395 211 7,6
Manufacturer (per ton of cocoa sold) 10,858 4,434 6,425 870 35,2
Retail and Taxes 18,917 10,858 8,058 473 44,2
Table 3: Distribution of Value in Cocoa-Chocolate Chain
(Source: Fountain and Huetz-Adams (2018); Díaz-Montenegro (2019))
Compared to the conventional cocoa value chain that of organic cocoa is not very different
although, in some cases, it may be relatively shorter and more transparent, encompassing only
producers, their associations or cooperatives and international customers. There are also some
cocoa farmers who individually produce and process cocoa and sell it to traders and
intermediaries of the large international companies that operate locally, receiving a premium
price in relation to the market (Prazeres, 2018). However, because the access of cocoa farmers
to this market is difficult, it is common to associate with cooperatives or associations of
producers and, through these organizations, carry out the marketing of cocoa, with the required
volume and quality (Prazeres, 2018). What can also happen is that producer organizations are
held hostage by a major international negotiator and have few possibilities to set prices
(Prazeres, 2018; Lwesya, 2018).
4. THE ORGANIC COCOA VALUE CHAIN IN STP

The organic cocoa value chain in STP involves five main links - cocoa production, supply and
marketing, powder and butter processing, manufacturing and distribution of industrial
chocolate and retailing to final consumers (Figure 4). The main stakeholders include cocoa
producers, two cooperatives (CECAB and CECAC11), certification companies, cocoa traders,
210
processors (associations or companies Satocão and Diogo Vaz, with their own production),
chocolate manufacturers (national or international industry) and retailers. Despite its large size,
the international cocoa market is very concentrated, with few players representing a significant
proportion of the market (Prazeres, 2018).
Figure 4: Organic Cocoa Value Chain in STP

(Source: Prazeres (2018))
The production link is very atomized, involving approximately four thousand farmers
distributed by two cooperatives, CECAB, which brings together the largest proportion of
producers and CECAC 11, with about half of CECAB's cooperatives (Table 4), where the
average per capita area is 2.1 hectares at CECAB and 1.6 hectares at CECAC11. Both
cooperatives are financially supported by IFAD - Fund for the Development of Agriculture and
the Project for Small Commercial Agriculture (PAPAC) and other several non-governmental
organizations, such as ADAPPA (Action for Agricultural Development and Environmental
Protection), the ADIL Zatona, FENAPA (National Federation of Small Farmers) and the CIAT
(Center for Agronomic and Technological Research). Each of the cooperatives brings together
several associations that receive the cocoa seed from the farmers who integrate them, organized
by geographical areas (Prazeres, 2018). According to this author, the training of farmers and
motivation strategies to guarantee production with the levels and quality required by the market,
is carried out by the cooperatives that provide training to the technicians of the associations that
integrate them and these, later, called “sociotechnicians” provide training and technical support
to their producers, being paid for this task. These sociotechnicians replace the role of the
extension services that belonged to the state.
Table 4: Organic Producers by Cooperative in STP

(Source: Prazeres (2018))
In addition to strictly agricultural work, cooperatives carry out other actions, such as socio-
recreational activities in the communities, inviting specialists who contribute to raising
awareness among farmers on various topics (domestic violence, gender equality, and alcohol
consumption - a problem that affects 10 to 10 years). 15% of the members of the cooperatives
- sexually transmitted diseases), the cooperatives finance small social works in the communities
and provide support to the neediest (medicines, glasses, coffins).
211
Overall, the two cooperatives hold 90% of the country's organic cocoa producers and, in 2015,
approximately 1300 tons of production in total. The fact that the vast majority of producers are
formally integrated into a cooperative, could mean a greater capacity to negotiate with
intermediaries and suppliers of goods and services and to sell cocoa directly, benefiting from
its sale in value markets. However, this is not the case and cocoa farmers, especially the smallest
ones, face several problems, among which, aging plantations, low renewal rate, lack of
improved varieties and technical assistance. This situation highlights the need to rethink the
organic cocoa value chain, through an integration model that encourages the formation of
horizontal and vertical links, which link producers, cooperatives and other actors in the chain
and guarantee the origin of cocoa through a legal figure such as the Protected Geographical
Indication (Prazeres and Lucas, 2020). Of the 10% individual producers, not members of the
cooperatives, the smaller ones deliver the cocoa beans to a buyer / dealer / intermediary who
may be an employee or representative of a large company or an export agent. Of the larger
private producers, of note Sotocao, in partnership with a chocolate manufacturer in Switzerland
and Kennyson in Roça Diogo Vaz, with a chocolate factory and a store in the country and two
more stores abroad, one in Portugal and another in France. Organic cocoa is restricted to the
island of São Tomé. In the case of the island of Príncipe, the cocoa product is not certified as
organic, except for incipient quantities produced in the Roças Paciência and Sundy, certified
by the Portuguese company Agricert. Roça Fundão buys from small producers about half of the
75 tonnes of total cocoa production (not certified), the remainder being bought by chocolate
producer Cláudio Corallo, who also gives his name to the chocolate brand that produces
chocolate in the city of São Thomas. The value chain consists of approximately 20
intermediaries or dealers (buyers and local agents or wholesalers) who are the main links
between individual private producers and cooperatives, with industry, processing centres,
brokers and exporters. These fulfil various functions such as granting credit to small cocoa
farmers, providing basic products (rice, corn, sugar) or paying in cash. Intermediaries often
operate on the credit of large exporters and, in this situation, can lend money to cooperatives,
with which they reach pre-harvest agreements. They work with volume targets, demanding
strict compliance and, in many cases, there are reports of the use of irregular commercial
practices, such as errors in weighing the volume transacted with payment accordingly,
inaccurate price information or quality complaints and uniformity of cocoa beans. All
stakeholders in the value chain, from export traders (intermediaries), to those in charge of public
organizations, cooperatives, development organizations, farmers and specialists, realize the
importance of the quality of cocoa beans and the certification process as biological, for its price
and final value. One of the interviewees, from a public institution, affirms the relevance of
organic cocoa for environmental, economic and social sustainability. Another, from one of the
cooperatives, highlighted the specificity of the São Tomé ecosystem for the production of high
quality organic fine cocoa. The certification is carried out by a qualified entity, qualified to do
so and independent from all other players in the value chain, it starts with planting, visiting lots
and obtaining information on density, age, health status, location (for example, there is no
certification of plantations close to workshops and backyards), status of maintenance of the lot,
so that it is possible to make a projection of the production to be obtained. If the lot is in a
condition to be certified, the owner is asked about the cultural operations it carries out and the
quantity produced.
5. IMPLICATIONS FOR SMALL COCOA PRODUCERS

In a global context of scarcity of resources, the relative inability of cocoa production to satisfy
the growing demand and the attention given to its sustainability, a balance must be found
between production and profitability, with respect for the environment and benefits for small
cocoa producers and for society (García-Herrero et al., 2019).
212
Added concerns of producer countries about price volatility and the dependence of few buyers,
farmers' organizations weak or with little bargaining power, the loss of soil fertility and
biodiversity, and the different understanding and interest in the development of sustainable
cocoa by different links in the chain (Mithöfer et al., 2017). Also due to the existence of gaps
between the standards and practices of sustainability and governance of the cocoa value chain
(Moreno-Miranda et al., 2019) and the distance between the geographically highly atomized
producers and the markets consumption (Prazeres, 2018). Development policies and programs
in many countries have focused on expanding cocoa production and increasing productivity,
regardless of the needs of small farmers for economically viable agricultural systems and
market structures, which results in little bargaining power and low levels of income and well-
being for producers (Mithöfer et. al, 2017). In addition to increasing production and
productivity, improving the livelihood strategies of small cocoa producers may involve other
alternative methods, such as agro-cultural practices in land use and other resources, modes of
production (for example, biological) and changes in the fermentation, transformation and
commercialization processes (Salazara et al., 2018). Innovations and increased investments in
sustainability in the cocoa chain, which are not just incremental changes, but help sustain
transformation and industry and improve the rights, representation and quality of life of small
producers, are essential (Nelson and Phillips, 2018), among these innovations, public-private
partnerships stand out when they create governance rules that improve yields and services to
producers, optimize productivity and, at the same time, limit environmental impacts (Ingram et
al., 2018). Increasing the income of cocoa farmers and reducing poverty in rural areas is also
achieved with the certification (Lwesya, 2018) the creation of Protected Designations of Origin
and Protected Geographical Indication (Moreno-Miranda et al., 2019; Prazeres, 2018; Prazeres
and Lucas, 2020) and quality improvements (Effendy et al., 2019). The governance of the global
cocoa value chain, especially in the further downstream links, concentrated in a few agents, has
created asymmetric power relations that block the distribution and transmission of upstream
value for small producers. The share of the amount retained by the cocoa-producing countries
was reduced by more than 50% in the period between 1970 and 1990. Producers in these
countries (mainly those with a small farm size) had, at the same time, to bear the fall in market
prices and, higher costs and greater risks, production due to the effects of climate change,
market driven by the dynamics of global markets price volatility and, institutional, due to its
inefficient or inadequate functioning. The worsening social and economic conditions in
producing countries as a result of these power imbalances have triggered a proliferation of
private governance responses, such as industry behavioural codes, certification standards and
schemes or multistakeholder initiatives and, more recently, governance mechanisms public and
regulatory (Abdulsamad et al., 2015). Different standards and certification schemes, with
market-based approaches and the development of cocoa brands, can be included in the private
governance processes that led to the expansion of supply. However, there has also been a drop
in demand resulting from economic crises and other diverse contexts, such as the reduction in
sugar and fat consumption or the appetite for chocolate (Abdulsamad et al., 2015; Fountain and
Huetz-Adams, 2018; ICCO, 2016; World Bank, 2019). Even in these cases, there is an
asymmetrical distribution of value along the chain, with the portion of the price paid by the
consumer not reverting to certified cocoa producers (such as organic ones) very different from
that considered for conventional cocoa farmers (Abdulsamad et al., 2015). Public governance
mechanisms have the advantage of seeking a balance between the growth of the cocoa sector
and the improvement of farmers' livelihoods (Abdulsamad et al., 2015). In the specific case of
STP, the option taken by the state was to convert all cocoa plantations into organic cocoa.
Currently, it can be said that all cocoa is produced in an organic way, promoting government
support to producers and their cooperatives.
213
Most producers who sell their product to cooperatives receive a different price compared to the
price of conventional cocoa, and the certification costs are borne by the cooperatives. The main
problem for organic cocoa producers is scale and pressure to use land with alternative crops or
activities, which are more profitable. There is a tension between the allocation of land for cocoa
production and for other productive activities and there is also real estate pressure. The decision
of farmers to plant cocoa or another crop is influenced by external factors, such as market prices
and, also, by internal factors such as physical, human or natural capital that farmers rely on.
The way in which these factors affect the decision of small cocoa producers in STP has not yet
been studied, requiring a thorough investigation in order to assess the impact and provide
solutions. Support for organic production, although it is mostly done by the state, through
cooperatives and respective associations, is not exclusive to this, with investments from the
private sector (such as Satocão and Diogo Vaz), focusing on improving the fermentation
process production systems, including commercial scale and increased market penetration.
Whether through private or public governance, associating small producers with specialized
value chains is an opportunity to alleviate poverty and improve their quality of life.
6. FINAL REMARKS
There are several tensions between the different links in the cocoa value chain. In terms of the
international market, these derive from the existing asymmetries between production,
fragmented in about 5 million producers, the vast majority with less than 2 hectares of land and
the consumer market, controlled by five large multinational companies and, from the small
portion of value passed on to producers. At the level of STP and, despite measures to support
organic production as a valuable alternative to the country's development strategy, imbalances
in the value chain persist that compromise the livelihoods of small producers responsible for
most of production exported and the sustainability of the ecosystem. Low productivity and the
effects of climate change, combined with the drop in world prices and / or the lack of premium
prices in the domestic market, are the main responsible for this situation. Even for the many
producers who sell organic cocoa through cooperatives and are able to receive payments at
higher prices, it is not entirely clear whether this strategy allows them to significantly improve
their livelihoods, a situation that needs to be researched. Cooperatives and private companies
have focused on technical solutions linked to improving agricultural practices, quality and
market prices, with little information on price transmission and governance in the value chain,
where the lack of bargaining power by contrasted with the concentration of power in other links
in the chain. Addressing these issues from a full perspective would also require taking into
account producers' livelihood conditions (e.g. local infrastructure, including schools, health,
access to markets) to understand how cocoa production can contribute to its improvement.
ACKNOWLEDGEMENT: Maria Raquel Lucas is pleased to acknowledge financial support

from Fundação para Ciência e a Tecnologia (grant UIDB/04007/2020).
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DESIGNING A DIGITAL EDUCATION ECOSYSTEM

Venelin Terziev
Georgi Rakovski Military Academy, Sofia, Bulgaria
University of Rousse, Rousse, Bulgaria
[email protected]
Vladimir Klimuk
Baranavichy State University, Republic of Belarus
[email protected]
ABSTRACT
The aim of this scientific publication is to examine the challenges for the digital education
ecosystem in a crisis situation caused by COVID 19. In the current aggravated situation, with
introduced movement restrictions around the world, the most important step to instant and
high-quality adaptation of the educational system is to make it flexible. This will allow gaining
complete and necessary knowledge, introducing the maximum variety of forms and methods of
teaching and the technical perfection of teaching equipment. The modern trend of digital
transformation of the branches of the socio-economic system determines the urgent need for
the operational adaptation of the educational environment to the professional and additional
needs of society, technical modernization and the priorities of social and economic
development. A change in the management of education is needed in order to find solutions for
the modernization of education in a digital environment in which the quality of education is
maintained at a level corresponding to the socio-economic processes.
Keywords: Digital education ecosystem, COVID 19, Social policy, Learning environment
1. INTRODUCTION
The model of a modern society is a “digital society” based on the widespread use of information
and communication technologies. Information is of utmost importance. However,
“unprocessed“, “unprepared“ information is not valuable, but quite the opposite – it causes great
damage (economic, technical, psychological, political and others). First of all, this concerns
young people, who are exposed to the influence of “harmful factors” (information messages,
appeals) more than other categories of the population. Taking into account the recent events,
the spread of the Covid-19 pandemic in particular, it is necessary to create favourable conditions
for the students of schools and universities to continue their education and to implement self-
education in a new format, known as distance learning. At the same time, the goal of education
must remain the same – quality of education. The prevailing share of full-time education in the
modern education system, our mentality, regional peculiarities of development and the needs
of young people, above all, complicate this process. In the current aggravated situation, with
introduced movement restrictions around the world, the most important step to instant and high-
quality adaptation of the educational system is to make it flexible. This will allow gaining
complete and necessary knowledge, introducing the maximum variety of forms and methods of
teaching and the technical perfection of teaching equipment. The modern trend of digital
transformation of the branches of the socio-economic system determines the urgent need for
the operational adaptation of the educational environment to the professional and additional
needs of society, technical modernization and the priorities of social and economic development
(Safuanov, Lehmus, Kolganov, 2019; Strekalova, 2019a).
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2. DESIGNING A DIGITAL EDUCATION ECOSYSTEM

In the Republic of Belarus, a socio-economic model of the digital economy is being actively
implemented, which is associated with an increase in the export of information and
communication technologies, internal costs for scientific research and the use of Internet
communication with users (Fig. 1).
Figure 1: Dynamics of specific value indicators of the digital economy development in the
Republic of Belarus for 2011-2017, %
80 74.7 75.5 6
71 72.6
5
70 5.1
5
4.2 4.3
60 3.8
4.8
3.8
4
50
39.9
40 34.4 3
30.8
30
2
20 6
4.1
3.9
5.1 5.1 4.4 1
10 3.4 17 18.6
11.5 15.1
8.2 9.5 10
0 0
2011 2012 2013 2014 2015 2016 2017
ICT services exports, % Internal costs for scientific research, %

Internet communication with users, % ICT researchers, %
Note: personal work based on the Information Society in the Republic of Belarus: Stat. data
book / ed. by I.V. Medvedeva (2019c).
The education sector, along with other sectors of economy, is in need of finding relevant
approaches to the management, organization and implementation of the educational process
based on developing digital technologies (Averina, et al., 2018). The estimates of the Institute
for Statistical Studies and Economics of Knowledge at the Higher School of Economics (ISSEK
HSE) show that internal costs for the development of the digital economy in Russia amount to
3.6% of GDP, 0.03% of which is the higher education sector. The share of organizations using
software in the field of education is growing rapidly: electronic library systems, electronic
versions of textbooks, reference books, computer training programmes, electronic document
and records management systems, special programmes for scientific research and virtual
simulators (Klimuk, Lazdins, 2019b; Indicators of the Digital Economy, 2019d). ISSEK HSE
experts have distinguished 7 goals for digitalization of education:
• Development of material infrastructure. This includes the construction of data centres, the
emergence of new communication channels and devices for using digital educational and
methodological materials.
• Implementation of digital programmes. In other words, the creation, testing and application
of teaching materials using machine learning technologies, artificial intelligence and so on.
• Development of online learning. Gradual decline in usage of traditional paper media.
• Development of new learning management systems (LMS). In distance education, LMS
refers to course administration and monitoring programmes. Such applications provide
students with equal and free access to knowledge, as well as flexibility in learning.
• Development of a system of universal identification of a student.
219
• Creation of educational institution models. To understand how school and university

education should develop in terms of technology, we need examples of how they should
ideally work: using new LMS, Industry 4.0 tools and devices and so on.
• Improvement of the digital skills of teachers (2020a).
As the Chinese billionaire, the founder of Alibaba, Jack Ma, noted: “If we do not change the
way we teach, after 30 years we will be in trouble” (Kovalev, Golovenchik, 2018a). As a
possible solution to the problem of updating and creating a variety of forms and methods of
teaching in order to maintain and improve the quality of education, we propose to create a
distance information and educational environment, built on a modular principle. By a module
we mean the competence that the user (system participant) needs (for example, “studying the
principles of blockchain technology,” “studying the work of a graphic editor,” “principles of
electronic marketing,” etc.). The system is gradually complemented by new modules with the
help of new partners (“reliable” ones who have passed control for the value of information,
their legitimacy). At the same time, online trainings, seminars, workshops according to the
interests of the participants are necessarily organized in the system. The system has a virtual
library with a set of electronic publications (by thematic groups) with audio recording of
annotations. The participants held online conferences and organize online hackathons (team
defence of start-up projects prepared by international groups of university and school students).
An important aspect in the operation of this platform is the international format focused on the
cooperation of intellectual, technical resources and the capabilities of organizers (partners) from
different countries. This will make it possible to apply advanced foreign experience in training
and to gain specific competencies by users. At the current stage of society's development – the
creation of a digital society, the development of digital technologies in every sector of the
economy and social sphere, as well as the global problem (the Covid-19 coronavirus pandemic),
the importance of the implementation of digital educational platforms is extremely high. It is
required to concentrate the maximum possible resource potential (lecturers, programmers,
students, authorities, public organizations, business sector) to create conditions that allow
young people not to reduce their level and quality of academic performance in certain subjects,
disciplines and competencies, but to maintain and develop them even more, by using modern
technical means of communication, innovative educational technologies, teaching methods,
combining the positive experience of several countries. Cooperation in this direction is
important at the global level: combining foreign experience in the use of innovative teaching
technologies, the accumulated material for the development of modern competencies, the
possibility of exchanging information without territorial and linguistic boundaries, all these
contribute to the creation of a completely new model of the educational process – a digital
model. At the development stage of this model – a global flexible digital model of education –
the most important component is a management system that allows for an operational analysis
of system users` requests, forecasting trends in socio-economic development, adapting to the
changing states of countries' functioning, qualitative, expert selection of downloaded
information, territorial features. There is a wide variety of e-learning and distance learning
platforms (Table 1).
220
Table 1: Features of digital learning platforms

No Name Features
I. Learning platforms for university programmes, additional training for adults and youth
1 ALISON It offers over 1000 free online courses and a certificate after completion. Alison students have
access to courses from renowned universities such as Columbia, Cambridge and Yale, and large
companies such as Microsoft and Google.
2 COURSERA Founded by Stanford University computer science professors. The project cooperates with
universities that publish and conduct courses in the system in various fields of knowledge.
Students take courses, communicate with fellow students and pass tests and exams. The platform
offers over 2000 courses and 160 specializations from 149 educational institutions.
3 UDACITY The webpage contains online, project-based classes that focus on programming, data science, and
math.
4 MIT Open CourseWare Free online courses from MIT.
5 Open Culture A collection of free educational resources including courses, tutorials, videos, and films.
6 Open YALE Courses Provides free and open access to introductory courses by prominent Yale professors and scholars.
All lectures are recorded in Yale classrooms and are available in video, audio and text transcripts.
7 Khan Academy The site contains many lectures on various topics: from history and medicine to chemistry and
computer science.
8 VideoLectures.NET Plenty of videos on various topics.
9 TED Motivation and education lectures from renowned experts from around the world
10 Shodor The site contains learning resources, software, interactive lessons, research, and information on
workshops for students, lecturers and learners of all ages in math and science.
11 Maths & Science Mathematics and science courses, tests, and study materials for all grades.
12 Open Learn Provides free access to Open University teaching materials.
13 Academic Earth Free video lectures of the world's leading scientists
14 Open2study Provides free high-quality online education. In four weeks, you can learn something new, figure
out how to take the next step in your career, challenge yourself or simply satisfy your curiosity.
The courses are from leading Australian institutions and are taught by academics and industry
leaders.
15 OEDb More than 10,000 online courses in various subjects and areas of knowledge.
II. Learning platforms for school programmes
16 Dnevnik.ru A closed information system with a strict registration procedure for educational institutions and
users.
17 Moodle A knowledge management system that allows you to organize the e-learning process from the
development of an online course to its implementation.
18 Google classroom Free set of tools for working with e-mail, documents and storage. The service is designed for
teachers.
19 Russian electronic Full school course of lessons from the best teachers in Russia; it is an information educational
school environment that unites students, teachers and parents.
20 Mobile e-learning Creates a safe educational environment; provides conditions for organizing personalized learning
of students in accordance with their needs, as well as with the needs of the regional economy.
21 Uchi.ru Russian online platform where students from all regions of Russia study school subjects in an
interactive manner.
22 Education.yandex.ru More than 35,000 tasks of different difficulty levels are available. All tasks are developed by
experienced methodologists, taking into account educational standards.
23 Foxford.ru Online preparation of students of 3-11 grades for the Unified State Exam, Basic State Exam and
Olympiads, as well as advanced learning of school subjects in groups and individually.
24 Yaklass.ru The resource is aimed at teachers, students and parents. YaKlass contains electronic magazines
and collaborates with popular publishers. It also contains 1.6 trillion school curriculum
assignments and 1,500 video lessons.
25 1С: Online school Online access to electronic educational resources: simulators, laboratories, games, workshops,
tests and much more.
26 Codewards.ru A platform for teaching children the basics of programming in a playful way.
27 New school platform This digital platform is a complex digital environment for communication and interaction of the
main participants in the educational process regarding educational goals.
28 IntertenUrok.ru Complete distance secondary education. For family education, for those who often miss school
or live outside Russia.
29 Career guidance portal Portal contains video lessons for middle and high school students as well as advanced testing in
“Ticket to the future” various specialties and areas of training already based on school education
(2020).
Note: prepared on the basis of the “List of educational platforms recommended by the
Ministry of Education of the Russian Federation and the Ministry of Education, Science and
Youth Policy of the Nizhny Novgorod region, for the implementation of educational
programmes using e-learning and distance learning technologies” (2020b; 2020c).
221
The above-described platforms and many others that are used for educational purposes work
on one principle – they provide a database of video, audio material on relevant topics.
Distinctive features of our proposed project include:
• preliminary questionnaire in order to identify the main (professional) and additional needs
of the user;
• purposeful individual support of the learning process (preparation of an individual learning
schedule, basic remarks, strengths and weaknesses of the user-student, etc.);
• reflective thinking encouraged by the results of the intermediate and final stages of training;
• combination of online learning with components of distance education (learning the
material independently on the basis of video, audio material, practical case assignments,
project defence, interactive games, etc.);
• selection of news material from the Internet in accordance with the user's requests, their
achievements, the dynamics of progress and other peculiarities (according to their profiles);
• participation in online educational, scientific and practical activities corresponding to the
selected block of competencies, interests and plans;
• operation of the virtual library at the request of the user.
The implementation of the project is aimed at developing a modular educational environment,

including training modules (distance online learning; performing practical tasks; using
interactive forms of training, using case studies for participants), a platform for organizing and
conducting online conferences (seminars, round tables, hackathons), a virtual library (with a
thematic set of electronic publications with audio recording of annotations, for individual
publications – additionally with video theses). Such environment will expand by adding new
participants – reliable (“proven”) partners (universities, schools, scientific, research centres,
incubators, technology parks) – in order to fill and create a comprehensive training base.
Moreover, representatives of business, government and public organizations will be added to
the system, acting as consultants, experts and coordinators for individual educational modules
for the development of the specified competencies. To solve this problem, it is necessary to
perform a number of actions within the framework of the proposed project:
• Create sets of training materials for educational modules. The first experimental modules
will be:
- “Digital Society” (innovative teaching tools, e-mail marketing, big data analytics,
Internet of Things, robotics);
- “Culture and traditions of peoples”;
- “Start-up Design”;
- “Psychological help”.
Training materials will include practical case studies, explanatory solutions for each task,
video recordings, multimedia presentations (including with audio recordings).
Develop curricula, online conference programmes and a digital children's laboratory
programme.
• Develop a functional information environment, upload prepared materials for each module,
create individual classrooms for each teacher (for online learning, storing useful
information, checking completed assignments), create a platform for expanding a virtual
library, develop a platform for organizing a digital children's laboratory (children 5-8 years
old) for experiments;
• Conduct testing of the developed modular learning environment on an experimental group
of university and school students in the process of organizing and conducting training,
organizing online conferences, online courses, the operation of a virtual library, a digital
children's laboratory;
222
• Conduct a marketing campaign to promote and distribute the developed modular distance
learning environment among young people, including abroad.
Consequently, the specific results of the implementation of the proposed digital platform will
be:
• Developed e-learning kits for specific educational modules (audio and video recordings of
courses, practical cases, etc.);
• Developed informational modular learning system (modular distance learning, modular
training online (full-time), platforms for organizing online conferences, virtual library,
digital children's laboratory);
• Interactive training simulators for specific modules.
The results obtained are aimed at improving the level and quality of education among:
• youths (students of universities, schools and colleges);
• teachers (teaching technology, methods of organizing distance learning based on a modular
system);
• business community (recruiting a specialist with modern, in-demand competencies and
skills);
• public authorities (high-quality, prompt solution to existing problematic issues with the help
of the potential of active, intelligent young people; promotion and popularization of the
education of each member of society).
The “modular learning environment” proposed for development includes distance learning
courses on competencies, a virtual library, news filters, online conferences and a digital
children's laboratory (Fig. 2). For its development and successful launch, the possibility of
expansion on the basis of an international network of partners (universities, schools from
Belarus and from partner countries – Russia, Czech Republic, Hungary, etc.), it is necessary to
purchase equipment and organize a series of webinars (Terziev, et al. 2020d; Terziev, et al.
2020e).
Figure 2: Structural model of a digital educational platform
223
The modular learning environment will perform the following functions:

• Distance learning in selected modules (both with full-time participation and in distance
format, based on a set of educational materials, practical tasks, systematic intermediate
control by teachers and studying recommendations from the teacher to improve their results;
• Development of group projects, including international youth teams; systematic training
(online training) is carried out with the subsequent defence of the proposed ideas on the
modules topics;
• Organization of online conferences (round tables, workshops) with international
participation according to the selected module (for the participants of a specific module,
training is immediately carried out with the subsequent preparation of their own reports and
works and their discussion;
• Work in a virtual library (that contains a catalogue of electronic publications with audio
recording of annotations).
3. CONCLUSION
The modular learning environment will improve the quality of distance learning (learning by
modules, virtual library, group start-up projects, digital children's laboratory) on the basis of
international cooperation of the CEI member countries. The system will be supplemented with
new modules with the assistance of intellectual resources (electronic publications, online
modules, trainings) of universities, partner schools from other countries (Ukraine, Poland). The
creation and implementation of this platform will contribute to (Klimuk, et al., 2020f):
• Organization of international distance (including network) cultural and educational schools
with virtual tours to cities and regions of different countries – participants of the project;
• Organization of periodic international online conferences;
• Expansion of the electronic thematic library (smart-library).
The further development of the modular learning environment will be carried out by engaging
new participants – partner universities from other countries, which will create an international
educational distance network for the development of new competencies and practical skills
among young people. Practitioners from organizations, representatives of public organizations,
business communities and government bodies will definitely be involved in supporting this
platform.
LITERATURE:
1. Safuanov, R.M., Lehmus, M.Yu., Kolganov, E.A. (2019). Digitalization of the education
system. // Bulletin of USPTU. Science, education, economics. Economics series. No. 2 (28),
2019. - pp. 108-113
2. Strekalova, N.B. (2019a). Risks of introducing digital technologies into education. //
Bulletin of Samara University. History, pedagogy, philology. Volume 25. - No. 2. -
2019.pp. 84-88.
3. Averina, L.V., Klimuk, V.V., Pecherskaya, E.P., Polynova, L.V. (2018). Modeling Of
Realization оf Educational Programs In The Network Form Of Interaction. // The European
Proceedings of Social &Behavioural Sciences EpSBS, pp.1638-1648.
doi:https://dx.doi.org/10.15405/epsbs.2019.03.166.
4. Klimuk, V.V., Lazdins, V. (2019b). Interaction of education, science and business in terms
of digital economy development. Proceedings of the 2019 International Conference
“Economic science for rural development”. Jelgava, LLU ESAF, 9-10 May 2019, pp. 37-
48.
5. Information society in the Republic of Belarus: Stat. data book. (2019c). // ed. I.V.
Medvedeva. - Minsk, 2019, p. 100.
224
6. Indicators of the Digital Economy, (2019d).

7. http://bilet-help.worldskills.ru/ (2020).
8. https://trends.rbc.ru/trends/education/5d9ccba49a7947d5591e93ee (2020a).
9. Kovalev, M.M., Golovenchik, G.G. (2018a). The digital economy as a chance for Belarus.
Monograph. – Minsk: BSU Publishing Centre, 2018. p. 327.
10. https://nsportal.ru (2020b).
11. https://ru.studyqa.com/articles/30-educational-online-platforms (2020c).
12. Terziev, V., Andreeva, O., Georgiev, M, Klimuk, V. (2020d). Dynamics of scientific results
in the higher education. // Proceedings of ADVED 2020- 6th International Conference on
Advances in Education 5-6 October 2020, International Organization Center of Academic
Research, Istanbul, Turkey, 2020, pp. 335-347, ISBN: 978-605-06286-0-9.
13. Terziev, V., Andreeva, O., Georgiev, M, Klimuk, V. (2020e). Challenges in the
development of Bulgarian higher education system during post-crisis period. // Proceedings
of ADVED 2020- 6th International Conference on Advances in Education 5-6 October
2020, International Organization Center of Academic Research, Istanbul, Turkey, 2020, pp.
348-351, ISBN: 978-605-06286-0-9.
14. Klimuk, V., Tarasova, A., Kuznetsova Yu., Dzhabrailova L. (2020f). Synergistic
Interaction of Education, Science, and Industry. // Leadership, Education, Personality: An
Interdisciplinary Journal, April, 2020, https://doi.org/10.1365/s42681-020-00009-y.
225
INTERNATIONALIZATION STRATEGIES IN FAMILY BUSINESSES:

MAIN TRENDS AND GUIDELINES FOR FUTURE AVENUES OF
RESEARCH
Rafael Castro
University of Aveiro, DEGEIT- Department of Economic, Management,
Industrial Engineering and Tourism, Portugal
[email protected]
Joana Costa
University of Aveiro, DEGEIT- Department of Economic, Management,
Industrial Engineering and Tourism, Portugal
[email protected]
ABSTRACT
This study aims at researching the effect of family involvement in internationalization
strategies. The current state of literature in this field shows that family businesses are one of
the most important typologies of businesses for the world economy. They are responsible for
most of the Small and Medium sized firms representing a crucial role for regional and social
sustainability. We adopted a systematic literature approach as it seeks to analyze and synthesis
all the literature in this field. We performed a quantitative and qualitative assessment of 44
indexed published articles . The research regarding family businesses has been vastly explored.
Nevertheless, there is still a lack of knowledge regarding their internationalization strategies..
Our results point to a lack of proper frameworks and theories that fully explain the unique
characteristics of these firms in their international expansion. We add to the literature by
identifying the main research avenues used in the literature, the predominant strategies used
by family businesses and the need to produce new policies and frameworks hoping it could
change the perceived value of family businesses by policymakers.
Keywords: family involvement, internationalization, family businesses
1. INTRODUCTION
Family Businesses (FB) are among the most vital enterprises for the foundation of economic
sustainability and creation of wealth [1], they are embedded in all sectors and represent between
70 %-80% of all firms in Europe and contribute to employment among 40%-50% [2] . FB can
range from small and medium firms to large multinational businesses, which evidences the
complexity in this typology of organization. To define a FB is still a difficult task despite all
the research done in the field. The absence of an agreement regarding the definition of FB
creates struggles among scholars [1,3]. Some support the definition of FB according to
ownership others with their management structure. Nevertheless, no concrete definition has
been broadly accepted [4]. According to Zahra, [4] family involvement is one of the key aspects
and attributes in FB. Family involvement in FB is always interlinked with the running of the
business [6,7], it is one of the key features in their internationalization commitment. The
synergy between the family and the business not only provides a course guide and drive for
their strategies, but also the knowledge to analyze the benefits of international growth [8].
Nonetheless, some authors diverge regarding the effect of family involvement in
internationalization [4]. Whereas Zahra, [4] regards family involvement as an incentive to
international growth. According to Gomez-Mejia et al., [8] a FB are reluctant to internationalize
and show lower commitment levels in order to prevent loss of their socio-emotional wealth
(SEW). Nevertheless, most of the studies don’t present a unanimous definition of FB which can
determine a divergency of results [8].
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The succession process in FB is one of complex nature, often influenced by the intricate family
structure and dictates the future of the firm and family legacy [9]. If the FB does not engage in
internationalization in the first or second generation it is likely that later generations will not be
involved in this process [10]. According to Okoroafo, [11] the second generation has more
affinity to be more international than the first generation. Conversely, according to the same
author Okoroafo, [11], the second and third generation share the same attitude and perspective
towards internationalization. The literature also shows that the second generation has a more
entrepreneurial behavior which leads to conclude that risk-taking is one key factor that
distinguishes generations in FB [12]. Risk perception can be a determinant factor for the level
of commitment in internationalization. In FB according to Claver et al., [14] risk perception
decreases with the presence of the first generation, the perceived risk becomes higher as firms
progresses in their international. According to Zahra, [4], the dimension of ownership has a
huge effect on internationalization, it is a determinant for the degree and the geographical extent
of international growth and expansion, this supports the Stewardship theory due to the levels of
altruism in FB, rather than the Agency Theory. Family involvement can enrich
internationalization in several ways. FB have a governance structure based on altruism it allows
managers to pursue and develop their business strategies with more openness and freedom this
leads to simplify the allocation and exploitation of international markets [15].Also, the
involvement of non-family members in the governance structure can bring a positive effect on
internationalization, it can provide the necessary resources to their international growth
strategies [16,17]. Conversely, the presence of family members in the governance structure of
the firm can cutback the level of commitment towards internationalization [18]. The
involvement of the family represents a critical aspect for their running of business, the
dimension of SEW represents a key aspect for this firms and has become a mean to explain how
this firms differ in their strategies and goals and their internationalization behavior [19,20]. FB
present different internationalization strategies than Non-FB. Due to the lack of resources and
risk-aversion in FB they are less likely to internationalize and to engage in networks with other
firms [21]. There is a significant relationship between family involvement and
internationalization [22]. Our main goal is to provide new research guidelines for family
involvement in internationalization by constructing a systematic literature review. To do so, we
started with a brief explanation of our methodology approach and the criteria used to gather the
articles reviewed in this SLR. We follow with the results divided by quantitative results in
which we have a bibliometric analysis and a qualitative analysis in which we explore in detail
the main findings of family involvement in internationalization. We add to the literature by
identifying the main research avenues used in the literature and the need to the conception of
new policies and frameworks hoping it could create new guidelines and future research.
2. METHODOLOGY
This article has a systematic literature review approach as it seeks to appraise, synthesis and
evaluate all the relevant literature [23]. According to Tranfield et al., [24] a systematic literature
review organizes and evaluates literature and it is a vehicle to identify gaps and pattern for
future research. In order to achieve our objectives, the structure of this study is divided in two
complementary approaches. The quantitative approach adopts a bibliometric analysis which
leads to a broader overview of the reviewed studies. In the qualitative approach we discuss and
analyze in detail all the contents in the reviewed studies. Both methodologies’ have a different
outcome and mixed together can emphasize and evidence results that can highlight gaps in the
literature and propose future directions of research. Table 1 encapsulates our research approach.
227
Stage Approach Objective

Analysis of the research goal, detailed description of
Stage 1 Quantitative Approach
reviewed papers under bibliometric approach
Discussion and analysis of the findings and results
Stage 2 Qualitative Approach
regarding family involvement in internationalization
Table 1: Research Approach
The research process was conducted on Scopus Database, we decided to use only one database
in order to have a reliable method of replication. The Scopus Database is considered one of the
largest and most used databases of peer-reviewed published articles. The search was conducted
on February 1st,2021. The first stage of the research was to combine the correct keywords to
achieve our goals (Table 2). Therefore, we searched the combination of “Family Involvement”
and “Internationalization” in the topic (title, abstract and keywords). By doing so, we narrowed
down irrelevant studies for our research and assure valid results aligned with our goals. We
found an initial set of 58 articles. The selection of the articles was followed by the inclusion of
only English written manuscripts, published articles in peer-reviewed Journals. Book reviews
and conference papers were excluded in order to guarantee reliability. Taking into account the
nature of our study we only reviewed articles in the “Business, Management and Accounting”
area. Thus, we ended up with 44 articles that were reviewed and analyzed in this systematic
literature review in order to meet the goals and objectives of our research.
Criteria Search string in Scopus Database Articles

Keyword “Family Involvement” and “Internationalization”
58
Restriction Title, Keywords, Abstract
Selection of articles
Language English 58
Document Type Articles 55
Source Type Journals 51
Subject Area Business, Management and Accounting 44
Table 2: Research Methodology
3. RESULTS
3.1. Quantitative results
The number of research studies in the topic of family involvement in internationalization has
been growing over the last years. The present study analyses 20 years of research in this topic,
2000 to 2020, by doing so we have a large scope of the true effect of family involvement in the
process of internationalization (Fig 1). In 2017, there was a peak of published articles in this
research field, this fact denotes the importance of FB business in the scientific area. The
growing expansion and liberation of world markets has made internationalization studies a “hot
topic”; this fact is more evident in the last 10 years with a great surge of scientific publications.
228
7
8
6 6
NUMBER OF PUBLICATIONS 5
6
4
3
4
2 2 2
1 1 1 1 1 1 1
2
0
2000 2003 2005 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YEAR
Figure 1: Evolution of the number of published articles
Family Business 31
Smes 18
Heterogeneity 11
Internationalization Strategy 9
Generation 9
Firms Internationalization 9
Fmily Control 8
Family Member 8
Diversification 7
Successor 7
Figure 2: Top cited keywords with more than 3 occurences
Fig.2 emphasizes the most cited keywords for all 44 articles from 2000, to 2020. The most
applied keyword is “Family-Business”. Taking a closer analysis to the other keywords not only
can we highlight themes for future reasearch but also observe the key themes that are most
related with the subject in this study. Conversely, topics such as “Generation” and “ Family-
Control” are related to family involvement in internationalization strategies. In this regard we
will analyse later in our qualitative study the close connection with the theme of our study. In
the present study 93,2 % of the studies have been cited and 26% have more than 10 citations
(Fig 3). The year of 2012 was the year with more citations (619), this goes inside the fact that
in this year there was a significant rise of published articles in this field.
700 619
NUMBER OF CITATIONS
600
481
500
329
400
300
158 155
134
200 110
51 56 55 69
40 32 42
100 10 2
0
2000 2003 2005 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YEAR
Figure 3: Citation evolution per Year
The following Table 3 highlights the most cited journals in our study, the number of articles
per Journal and the Quartile and H-Index. The 44 articles present in this study were published
in 30 different journals. Moreover, besides the journal distribution we conducted a research in
SCImago Journal & Country Rank (SJR). SJR measures the influence and the prestige of
Journals. The Journal of Entrepreneurship: Theory and Practice which we reviewed three
articles in our study, is the one with most citations.
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This Journal is ranked as one of the most influential business journals with an excellent impact
factor Q1. The SJR results also evidence the great prestige of the most cited Journals present in
our study, namely the “Journal of International Business Studies” and “Journal of Business
Venturing”.
Quartile| H-
Journal Citation Articles index
Entrepreneurship: Theory and Practice 495 3 Q1|140
Journal of Business Venturing 481 1 Q1|170
Journal of International Business Studies 395 2 Q1|184
Family Business Review 181 2 Q1|96
Journal of Small Business Management 144 3 Q1|103
Global Strategy Journal 136 4 Q1|18
Journal of Management and Governance 124 1 Q2|47
International Journal of Globalisation and Small
Business 93 3 Q3|16
International Business Review 73 3 Q1|87
Review of Managerial Science 63 1 Q1|20
Management and Organization Review 32 1 Q1|59
European Management Journal 29 1 Q1|99
Journal of Business Research 19 1 Q1|179
European Research on Management and Business
Economics 14 1 Q1|114
European Business Review 10 1 Q1|39
Table 3: Journals with most citations
There is a huge focus on empirical works in this area of research (Fig. 4). Therefore, there is a
need for theoretical studies in order to support and validate empirical research. Future research
can address this lack of theoretical studies by developing or creating new frameworks and
theories regarding this research field.
6 2
2 1
4 5 1
2 4 5
2 4 3
2 2 2 2
1 1 1 1 1 1 1
0
2000 2003 2005 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Empirical Theoretical
Figure 4: Research approach evolution by year
The countries that developed more publications in this research are were Italy (13 publications),
United States of America (11 publications) and Spain (7 publications) (Fig. 5). This results
highlight the significance and prominence of FB in these countries that have a direct
contribution to the economic structure and sustainability.
230
14 13
11
12
10 7
8 5
6 4
4 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
2
0
Czech…
United…
United…
Taiwan
Australia
Bulgaria
Nigeria
Spain
Germany
Austria
Chile
Malaysia
United States
Italy
Algeria
Georgia
Sweden
China
Iran
Norway
France
Ireland
Liechtenstein
Poland
India
Netherlands
Portugal
Canada
Slovakia
Figure 5: Published articles by country
3.2. Qualitative results

In order to combine the major findings in the literature, we decided to present two different
sections in the qualitative analysis: ownership capabilities and policy frameworks. Thus, we
can present and identify the most valued viewpoints regarding the family involvement on the
internationalization process and present new policies in order to promote and reveal the
importance of FB in economic sustainability.
3.2.1. Predominant Strategies

The articles featured in the present study draw on different concepts and different frameworks.
Nevertheless, there is a common emphasis on the long-term orientation, risk aversion and
stewardship behavior in FB. Family involvement can institute the way in which the the firm
operates [14]. The presence of family members can lead in some cases to organizational
tensions which can affect the decision-making process [25,26]. The family sub system is a
crucial element in family firms, identifying new opportunities (exploration) and exploiting
existing activities helps family firms to gain and develop a successful business model across
multiple generations [27,28]. Exploitation and exploration are two different learning behaviors
that require different attributes from the firm in terms of management structure, resources and
strategy [29]. In order to have a successful business strategy FB must find a balance between
exploration and exploitation activities [29]. Looking at the literature regarding
internationalization, it is clear the lack of a particular framework or approach that explains the
broad scope of the process in FB. Many empirical studies [13] apply theories like Uppsala
model [30] or network-based approaches [31]. Nevertheless, these theories do not explain in its
entirety internationalization processes in FBs [32]. Thus, there is a need to establish current
guidelines that can detail internationalization in FBs in its totally. As suggested by De Massis
et al., [47] future research could also analyse the family´s involvement to internationalize
changes across generations and the effect of the business life-cycle in the process and how they
cope it unforeseeable changes in the markets. The literature highlights ownership and
management capabilities as being one of the most crucial steps to understand
internationalization in FB . The ownership structure in FB differs from non-FB in their access
to resources and management style [34]. Resources can be a detrimental element for the
internationalization process [33, 35], they determine and provide the means in which the firm
operates, thus, they can support the firm to grow internationally or hinder international
expansion and bound the firm to national markets [38]. FB prefer to be surround by family
members, however, their lack of international knowledge and resistance to change can be a
barrier towards internationalization [39,40]. Usually, FB are managed by they founder or
members of the family ,however, the skills and knowledge maybe lbe short when it comes to
international experience [41,42]. Moreover, FB may lack in terms of qualified personnel,
necessary to the engagement in international strategies [43].
231
On the other hand, the relationship among family members improves the commitment and the
transfer of knowledge among its members [44]. FB can obtain more resources to proceed with
their internationalization through external financing or ownership [45]. The inclusion of
external ownership can convey into FB more resources, capital, knowledge and external
networks that can allow the firm to gain additional access in international markets [46–48]. The
duality regarding the choice of FB to expand internationally is apparent in the literature [33,49].
Their SEW and risk-aversion may lead FB to have their strategies fixated on local markets
[47,50]. The choice to remain local can be affected by high concentration of ownership [40].
Thus, external managers should be take into account if FB want to expand their activities
overseas [51]. External managers can invigorate, bring new knowledge and new entrepreneurial
orientation that can reverse traditional mindsets in FB, making them more proactive [36,38,40].
Stewardship orientation is prominent in FB [42,43,52], the members of the firm have a
conservative attitude towards preserving the legacy and survival of the business for successive
generation. This orientation can lead to an aversion towards risk and therefore
internationalization [16,41]. Nonetheless, the collectivism and commitment in stewardship can
prompt FB to follow international strategies [43,52]. Internationalization practices require
quick adaptability towards the changes in the markets [53]. The speed in which the process is
develop can be an crucial phase for its accomplishment [54]. The way FB enroll their
internationalization processes is essential, according to De Massis et al., [47] family
involvement can have contrast effects in the speed of the process. Having a risk aversion and a
great emotional involvement with the business can indicate to a slower decision process [50].
Nevertheless, due to their organizational and ownership structure FBs have a propensity to be
quick in changes in the market which can lead them to achieve faster internationalization [5,33].
Many scholars perceive their processes to be done in a more traditional path, following theories
like the Uppsala stage theory [30]. These firms choose to internationalize in closer countries to
their home base, avoiding more costly and less riskier strategies [49,56,57]. However, this
behavior can lead to miss opportunities and not profiting fully from international expansion.
One way in which FB tend to start their internationalization is through exporting [56]. FB can
benefit from this process and conversely, be more motivated to engage in further processes in
international markets [56]. Therefore, family involvement can influence internationalization in
opposite forms. A high level of family involvement can develop inflexibility and higher risk
aversion, which leads firms to less active pursuit of internationalization strategies [43,47,55].
Introducing non-family managers, investors and qualified personnel can be the right strategy to
invigorate their governance and consequently lead them to pursuit international expansion and
take more opportunities in external markets [43,47].
3.2.2. Policy Frameworks

Region specific attributes can play a major influence on internationalization in FB [58]. Most
of the research on FB has an emphasis on developed countries [59]. As it can observe in Fig.5,
Italy, United States and Spain are the countries with more output of research in the field.
Consequently, it is crucial to take a closer look and understand the reasons that lead these
countries to pursuit more research in FB. According to the latest update on FB contribution to
the U.S. economy, these organizations are accountable for 60% of the GDP, hence it is clear
the prominence and impact these companies have [60]. FB are embedded among developed and
developing countries they are a value of extreme importance for the economy [60,61].
Nevertheless, public entities need to have knowledge and regard FB in different lenses. There
must be a careful effort from policymakers towards these firms not only to support them in their
internationalization strategies but to help them survive [62]. Policies towards the support of FB
have been unnoticed [60]. In light of recent effects, De Massis & Rondi [63] stressed the
challenges in the aftermath of the Covid-19 pandemic for FB.
232
The authors predict a need to future research regarding the disturbances caused by the
pandemic. The work of De Massis & Rondi [63] is of most importance, in present times, not
only to the literature but in practical terms. The authors address the critical need to advance
studies in the field of FB. As a result of the Covid-19 pandemic, many FB will be faced with
great struggles like unplanned generational transition of management and the sudden disruption
of their business [63].Thus, researchers must address frameworks that can help them overcome
and adapt to new realities in a post pandemic scenario [63]. Moreover, we propose the creation
of new policy frameworks, with the basis on the FB distinctive characteristics. Government
policies like fiscal and monetary as mentioned by Pieper, Kellermanns and Astrachan, [60], can
be the key to provide not only financial aid in crisis but also the means to the survival of FB
not only in international scenarios but in their long term activity.
4. CONCLUSION
Although there are a lot of studies regarding family involvement in internationalization there
are avenues requiring further research. In the present article, we can observe a lack of theoretical
research, we recommend the need to develop alternative theoretical frameworks that can
explain the full impact of family involvement in internationalization. FB represent 80% of
European companies [2], thus policymakers need to rethink the role of FB not only in the
economic sustainability but the social and region development of the country. This avenue of
research could be a milestone achievement regarding FB, not only in the literature but in a
practical sense. Highlighting the relevance and the uniqueness of FB into policymakers could
improve the way these firms perceive riskier strategies like internationalization or innovation.
Thus, it could produce a new light into the discussion and the creation of unique policies that
could help them strive in international markets and resort to financial capital in crisis like the
post pandemic of Covid-19. The main reasoning behind this study was to identify the main
avenues of reseach on the family involvement in FB. Firstly, we presented a quantitative study
analysing the state of the art of the literature. Secondly, we discussed the effect of ownership
capabilities and policy frameworks in FB. The contribution of our study is related to the
identification and creation of new policies and frameworks hoping it could create new
guidelines and future research. Although and despite, the high number of publications in this
field there is still room to a broad variety of studies that can help bridge the gap between the
reality and bring awareness to the importance of FB. This article has its limitations, like all
systematic literature reviews there is a bias towards the choice of keywords and the database.
Conversely, we opt to choose a more simpler keyword combination and a single database in
order to create the highest transparency and an easy reproduction of the method.

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236
HEALTH DIPLOMACY AS A SOFT POWER TOOL OF THE PR

CHINA DURING THE COVID 19 PANDEMIC
Petar Kurecic
University North, Trg dr. Zarka Dolinara 1, Koprivnica, Croatia
[email protected]
Vesna Haluga
University North, Trg dr. Zarka Dolinara 1, Koprivnica, Croatia
[email protected]
ABSTRACT
Health diplomacy, in times of any crisis, is an important component of the foreign policy of
world powers with the aim of spreading its geopolitical influence around the world. Since the
advent of the COVID-19 virus in late 2019, it has been shown that health systems, even
developed countries, have not been prepared to respond adequately to the challenges posed by
the coronavirus. We aim to determine whether the People’s Republic of China (hereafter: the
PR China), which was even publicly named by the then US President Trump as the source of
the infection, calling the COVID-19 virus a “Chinese virus”, seems to be exploiting the global
health situation, activating its health diplomacy on a global level as the so-called “soft power”
tool for spreading its influence around the world. The European Union (hereafter: the EU), but
also the United States of America (hereafter: the USA), only a few months after the outbreak of
the crisis, practically remained trapped in their own inertia. On the other hand, the PR China
apparently has used every opportunity to expand and strengthen its geopolitical influence
through health diplomacy. While the whole of Europe was in complete lock-down, there is no
country in Europe that China did not supply with protective equipment, often donating certain
quantities. The result of such a health approach, and in the context of the current situation, we
can say the “vaccine diplomacy” is a delay in the delivery of vaccines, the only possible
solution to the crisis, which again puts the EU in an unfavorable economic and geopolitical
position. The focus of this paper is to analyze how the PR China, in the context of the COVID-
19 crisis, uses its health diplomacy as a “soft power” diplomatic tool and what this means for
China’s future geopolitical positioning.
Keywords: COVID-19, pandemic, health diplomacy, soft power, the PR China, the EU,
hegemony
1. INTRODUCTION
The COVID-19 virus pandemic has not only caused the collapse of the health system on a
global scale, but will most likely result in changes in the world geopolitical scene precisely
because of the economic but health consequences in the post-corona period. The large number
of infected and deceased from the COVID-19 virus, the decline in production and consumption,
the general economic stagnation comparable with the crisis after the Spanish flu pandemic or
with the world economic crisis of 1929-19301. Also, the health systems of not only the
developing, but also the very rich and developed countries collapsed and were unable to provide
adequate healthcare to the ill. The first case of coronavirus was officially recorded in late
December 2019 in Wuhan (Duarte, 2020), and the World Health Organization (WHO) declared
the coronavirus outbreak a “pandemic” on March 11th, 2020 (WHO, 2020). The pandemic has
not only resulted in the opening of new issues in the field of health, but also in the opening of
numerous political and geopolitical issues as well as the dominance of China and questions
1 https://www.geopoliticalmonitor.com/geopolitics-history-and-the-post-covid-world/.
237
referring to the possibility of establishing the next geopolitical world order2, multipolar, but
with the increasing role and influence of the PR China. Since it is a global pandemic affecting
almost all countries in the geopolitical context, health is becoming the most significant
geopolitical code3 that redefines national interests through the identification of external, in the
case of coronavirus general threats worldwide. The PR China (hereafter: China), the primary
country to emerge stronger from the crisis, is reacting to these threats through health diplomacy.
The question of the effectiveness of the radical, authoritarian Chinese and democratic-liberal
socio-political model of Western countries also have arisen. Analyzing data on the number of
new cases (Worldometer 2021), China has solved the problem of coronavirus by March 2020,
at the same time when the countries of the EU recorded the highest number of new cases.
Considering its more than 1.4 billion inhabitants, the number of a total of circa 85 thousand
confirmed cases and 4 636 deaths looked totally unreal4, if we compare it for example with
Croatia, which with a total population of about four million and 5 263 deaths from COVID-19,
or for example Slovenia, with a population of about two million and 3 667 fatalities (up to
February 11th, 2021). We noted these data when we first considered writing about this paper.
Exactly three months later, when we are submitting the final version of the paper, China still
has 4 636 deaths from COVID-19, of which 4 512 are contained to just one province – Hubei,
whose capital and largest city is Wuhan, the most likely place of origin of the pandemic. Two
other states that are mentioned here as a comparison, have in the meantime recorded many new
fatalities (Croatia about two thousand more, total of 7 549 deaths, and Slovenia more than 650
new deaths, a total of 4 302). Nevertheless, it has to be said that all East Asian countries,
democratic or not, have contained the pandemic much more successfully than most European
or Western states in general5. The examples of Vietnam, South Korea, Japan, Singapore, are
especially worth noting, among others. Strong, hierarchically organized societies, with a strong
respect for authorities and collectivist tradition have proven most resilient in fighting the
pandemic. Regardless of the fact whether the numbers regarding fatalities from COVID-19 in
the PR China are real or not6, the Asia-Pacific region is in the focus of possible changes in
international relations through the accelerated transfer of power by Chinese influence, which
could become hegemonic i.e. turn into a hegemony7, in that area. As Hunt (2021) states:
“Vaccines are being acquired through a combination of government funds, donations from local
businessmen, Chinese and Western largess, and investment deals with the greatest needs
emerging from Indonesia, Malaysia, Myanmar, the Philippines, and Thailand. But the rollout
remains in its infancy and is a massive undertaking with governments planning to inoculate up
to 70 percent of the region’s 648 million people against COVID-19.” Hence, we might have,
due to the pandemic, reached “the end of globalization”: “movement of people across national
boundaries has been completely stopped, shipping goods contracted to a tenth of their volume,
and global supply chains have been revealed and questioned as countries limit export of
medications, holding onto them instead for national consumption” (Schake, 2020: 653), we also
have to legitimately question are we in the process of crossing into the new phase of a
geopolitical world-order, characterized by multipolarity, protectionism, efforts to achieve self-
sufficiency in strategic materials, and products that are vital in the fight against the pandemic,
2 According to Kurečić (2004), geopolitical order is “the predominant state of geopolitical relations in a historical period. It is
also a concept that explains the geopolitical relations that form an order in a certain period of history. The geopolitical order
consists of elements and factors that are part of geopolitical issues, and are geographically and geopolitically relevant.”
3 According to Taylor (1993), there are as many geopolitical codes as there are countries in the world, and the codes of the
strongest countries have an impact not only on neighboring countries, but on countries in the region, on the continent or around
the world.
4 https://www.geopoliticalmonitor.com/the-problem-with-chinas-covid-19-statistics/.
5 https://www.geopoliticalmonitor.com/vietnam-repels-another-enemy-at-the-border-covid-19/.
6 https://thediplomat.com/2021/01/chinas-vaccine-diplomacy-leaves-its-mark-on-asean/.
7 Liberal theorists such as Keohane (1984: 34) define hegemony as “a situation in which a state is powerful enough to maintain
and willing to maintain the basic rules governing interstate relations.”
238
which exposed the over reliance not just of certain countries but of the whole continents and
trade blocs on (mostly) Chinese-produced products, such as for example protective masks. In
Croatia, a pretty bizarre level of dependence on imports of products such as medicine alcohol
and baker’s yeast has been daylighted as a consequence of the temporary crisis in supply chains,
after the first lockdown has been imposed in Europe. For example, in Županja, a small city in
Eastern Croatia, the line for the production of medical alcohol, which was disassembled a
couple of years ago, was re-assembled with the parts stored in the warehouse of the factory,
with the help of (too early) retired workers. First contingents of the alcohol produced on the
newly re-assembled production line were shipped to hospitals and clinics in the region for free.
Baker’s yeast was at the time of the imposition of the general lockdown (spring 2020) not
produced in Croatia at all, same as medical alcohol. Two firms, one French and one Turkish are
importing the yeast in Croatia, where it is packed in small packages and sold. Nevertheless, it
is not produced in Croatia, making the country completely reliant on imports. China, through
its health diplomacy, sets and governs the rules set, at the same time influencing international
relations precisely by its rising influence in the Asia-Pacific region. According to Bilandžić
(2014), the classic variant of the cyclical change of the hegemonic balance (status quo) and
disorder through the hegemonic (world) war of superpowers is not valid for explaining the crisis
of the international liberal order since the terrorist attacks of September 11th, 2001 onwards, but
a permanent hegemonic war they generally do not determine the actions of sovereign states due
to the proliferation of new subjects in international relations. Chinese influence and given its
economic power, increasingly sophisticated science and technology, great human resources, the
size and position of the center of world commodity production is on an upward trajectory and
will be difficult to stop. The COVID-19 crisis was a strategic opportunity that China used to
expand its influence through health diplomacy as a “soft power” tool, creating the image of a
benevolent giant in most Asian, but also African and Latin American countries. It remains to
be seen how the US and the EU will respond to this new international political situation as some
countries have voluntarily accepted Chinese medical support by giving market access through
the “One Belt One Road (OBOR)” project and regardless of being members of the EU are
already procuring an EU-unapproved Russian and Chinese vaccines.
2. HEALTH DIPLOMACY AS A "SOFT POWER" DIPLOMATIC TOOL OF PUBLIC

DIPLOMACY
The term “public diplomacy” first appeared in the early 1960ies. With the emergence and
strengthening of the mass media on the international political scene, the commercialization of
marketing by governments, accelerated democratic processes, and global change, the U.S.
News Agency introduces the term public diplomacy attributed to E.A. Gullion. Gullion’s
definition is: “a discipline that deals with the influence of public attitudes on foreign policy-
making and conduct, encompasses dimensions of external relations outside traditional
diplomacy, deals with the influence of governments on public opinion formation in other
countries, and private group interactions and the interests of one country with those in other
countries, reporting on foreign policy and its impact on the policies pursued by the government
of another country, communication among those whose job is communication - such as
diplomats and foreign correspondents, and the intercultural communication process. The
essence of public diplomacy is a transformative flow of information and ideas” (Sparrow
Moses, 2008: 176). According to Signitzer and Coombs (1992: 138), public diplomacy is “the
way in which government, individuals, and groups directly or indirectly influence those public
attitudes and opinions that directly shape the foreign policy decisions of another government.”
With the digitalization of diplomacy, new media is being reconceptualized in which the
relationship between the public, the state and the media is changing, and the dialogical approach
as one of the foundations of public diplomacy is becoming the main tool in attracting audiences
239
who are increasingly involved in global media on the other hand, it enables states, governments
through public diplomacy to create the illusion of a participatory, collaborative atmosphere and
thus the implementation of comprehensive branding strategies of states in various areas beyond
their borders, and thus the expansion of their interests. The goal of public diplomacy is to reach
not only individuals, governments, but the entire population of a foreign country, which
nowadays the global media and the rapid transfer of information enable and greatly facilitate.
Traditional diplomacy was based on secrecy, while public diplomacy takes place in real time,
in front of all people with the help of mass media (Skoko, 2009: 61). It is through the use of
new means of mass communication that the so-called new public diplomacy. According to Cull
(2009: 12-13) there are key shifts in the practice of public diplomacy. These are: 1) international
actors are increasingly non-traditional, and NGOs are particularly prominent; 2)
communication with the world public through the mechanisms used by these actors (global
technologies and the Internet) has moved to real-time communication, 3) these new
technologies have blurred the previously rigid lines between domestic and international news;
4) instead of the old notion of propaganda, public diplomacy increasingly uses concepts on the
one hand explicitly derived from marketing – especially the place and branding of the nation -
and on the other hand concepts that emerge from theories of network communication; 5) the
new terminology of public diplomacy as a language of prestige and the creation of an
international image gives way to a conversation about “soft power” and “branding”; 6) perhaps
most importantly, the new public diplomacy speaks of a departure from the mode of
communication among Cold War actors, with a new emphasis on people’s contacts with the
aim of mutual enlightenment, with the international actor in the role of supporter; and 7) this
model suppresses the old way of conveying top-down messages, and the main task of new
public diplomacy is to “build relationships”. Relationships do not have to be between actors
and foreign audiences, but mutual communication between the two audiences could be useful.
New diplomacy is characterized by the term “soft power”, whose creator is Joseph Nye, who
defines it as the ability to achieve desired foreign policy goals by creating political
attractiveness, persuasion, setting a media-public agenda to reshape the preferences of other
countries, implement them and agreement with the desired action ”(Nye and Owens, 1996: 21)
Therefore, soft power can ultimately be seen as a foreign policy instrument for conducting
international relations. In an international environment with such dynamic changes, questions
arise about the development of public diplomacy concepts in various fields. Global trends will
certainly in the near future lead to the r / evolution of public diplomacy, the area of its operation
and functioning in general. One of these areas is certainly health diplomacy, at this time of the
COVID 19 virus pandemic increasingly called the “vaccination diplomacy”. Health diplomacy,
due to the fact that human health is one of the most sensitive areas, has the opportunity through
various activities in the field of public action to help the country build a better image in the
international community through assistance programs, certainly as a powerful “soft power” tool
can be classified as public diplomacy. Developed countries and international organizations are
increasingly applying health diplomacy globally by providing medical assistance during
emergencies. Therefore, health diplomacy has become an important tool for improving bilateral
/ multilateral relations (Drager and Fidler, 2007). Also, Labonté and Gagnon (2010) state that
global health diplomacy in terms of the theory of international relations is basically a
relationship between global health and foreign policy. With the pandemic of the COVID 19
virus, the issue of global health was raised in 2007. The goals stated in the Oslo Declaration are
therefore becoming a priority. Historically, national self-interest (security) has failed to
motivate a lasting commitment to international health cooperation (Peterson, 2002). The
question remains whether this will happen at the time of the world's largest pandemic or whether
some world powers and the situation with the COVID 19 virus, primarily vaccine production
240
and distribution, will be used for economic and geopolitical dominance8. According to Chattu
and Knight (2019: 151), health diplomacy in its contemporary context represents “a political
activity that meets two goals: improving health while maintaining and strengthening
international relations abroad”. The only way to keep it that way is to prevent the
commercialization of health diplomacy and return to basic principles, that as a vital part of a
country’s foreign policy agenda, it contributes first and foremost to security, only then to
diplomacy and only possibly to trade.
3. HEALTH DIPLOMACY AND COVID-19 THE EXAMPLE OF CHINA IN

RELATION TO CROATIA AND THE WESTERN BALKAN COUNTRIES
In January 2017, Chinese President Xi Jinping initiated the Health Silk Road and signed a
Memorandum of Understanding with the World Health Organization. According to Bing
(2020), the primary goals of the Silk Road are the organization of a high-level forum of regional
health officials, the establishment of a network of public health coordination in public health
emergencies, and capacity building and training. The fact is that since the outbreak of the
COVID 19 virus pandemic, China has been providing and donating large amounts of medical
care around the world and even to the USA and the EU, and through health diplomacy it is
building the status of a responsible world leader. When it comes to the countries of Central and
Southeast Europe, according to Stojanović (2020), the first aid that Serbia received was from
China, which is not surprising, since China has been building and expanding "One Belt One
Road" through its global investment projects for many years. its influence, and what has found
fertile ground in countries like Serbia and Hungary, whose leaders nurture close ties with
Beijing or Moscow. Less than a month after the first donation of protective medical equipment
to Serbia, on April 20th, 2020, approximately 60 tons of medical equipment arrived in Croatia,
including 3.7 tons donated by the Chinese government to Croatia. Through cooperation with
state-owned Chinese pharmaceutical companies, Mehec and Sinopharm, the Croatian
government has also procured large quantities of COVID-19 disease protection equipment, the
largest shipment of medical supplies from China since the outbreak of the pandemic in Croatia.
Chinese entrepreneurs also joined the donations. The Jack Ma Foundation (Alibaba) sent 300
thousand masks, 30 thousand tests and 10 respirators to Croatia, and the entrepreneur Jack Ma
himself donated 10 thousand protective visors and 10 thousand protective suits. As Krasnec
(2020) states in the same text, Jack Ma, the founder of the large Chinese online shopping
company Alibaba, who a few years ago dedicated himself to philanthropy through a foundation
named after him, is by far the most famous Chinese person sending aid to Croatia. The list of
his donations around the world in the fight against the spread of coronavirus is impressive: he
donated 100 million face masks and one million tests for COVID-19 to the WHO, millions of
masks and tests and hundreds of respirators in Africa, and the US Center for CDC and New
York Disease Control and Prevention, has donated across Latin America and Asia… And so
far in Europe, according to a statement from the Alibaba website of April 15th, 2020, it has
donated equipment to Italy, Belgium, Spain, Slovenia, France, Austria, Denmark, Germany,
Ireland, the Netherlands, Sweden, Switzerland, Norway, Portugal, Montenegro and the United
Kingdom. From all of the above, the outbreak of the COVID-19 virus pandemic, China has
used global health diplomacy to build its benevolent image, but also sought fertile ground for
its geopolitical influence in Africa, Asia and Europe. It is undeniable that at the same time,
since the whole world was in complete lock down, China was the only one to produce and
develop its economic power, especially in the Asia-Pacific region, and rising Chinese influence
became more than obvious.
8 https://www.nytimes.com/2021/02/11/world/asia/vaccine-diplomacy-india-china.html
241
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what-is-it-push-influence-covid19-coronav-12782968.
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https://www.geopoliticalmonitor.com/vietnam-repels-another-enemy-at-the-border-covid-
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Review, 31 (2) 148–157.
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Public Diplomacy at the Annenberg School University of Southern California, Figueroa
Press.
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https://www.bbc.com/future/article/20200221-coronavirus-the-harmful-huntfor-covid-
19s-patient-zero.
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https://thediplomat.com/2021/01/chinas-vaccine-diplomacy-leaves-its-mark-on-asean/
(January, 22nd, 2021).
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https://www.geopoliticalmonitor.com/geopolitics-history-and-the-post-covid-world/ (June
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economy. Princeton: Princeton University Press.
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koje je donirao Jack Ma, https://www.vecernji.hr/vijesti/u-sedmom-avionu-pomoci-
hrvatskoj-iz-kine-stigli-i-respiratori-i-maske-koje-je-donirao-jack-ma-1401102.
12. Kurečić, P. (2004) Novi svjetski geopolitički poredak: teorijske odrednice, Zagreb: Hrvatski
geografski glasnik 66/1, 103-120.
13. Labonté, R. and M.L. Gagnon (2010) Framing health and foreign policy: Lessons for global
health diplomacy. Globalization and Health, 6 (1) 14.
14. Mashal, M., Yee, V. 2021. The Newest Diplomatic Currency: Covid-19 Vaccines,
https://www.nytimes.com/2021/02/11/world/asia/vaccine-diplomacy-india-china.html
(February 11th, 2021)
15. Nye, J.S. (2004) Soft Power. New York: Public Affairs Press.
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18. Romaniuk, S.N. (2020), Degrees of Fiction: Gauging the Accuracy of China’s COVID-19
Statistics, https://www.geopoliticalmonitor.com/the-problem-with-chinas-covid-19-
statistics/ (April 24th, 2020)
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COVID-19 and World Order. Baltimore: Johns Hopkins University Press, 649-681.
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hrvatska.
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22. Vrabec-Mojzeš, Z. (2008) Javna diplomacija i mediji. MediAnali : međunarodni znanstveni

časopis za pitanja medija, novinarstva, masovnog komuniciranja i odnosa s javnostima.
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WHO member states have less than 1 physician per 1000 population.
https://www.who.int/gho/health_workforce/physicians_density/en/
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https://www.worldometers.info/coronavirus/?utm_campaign=homeAdvegas1?
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medunarodnim-odnosima/
26. https://www.cambridge.org/core/journals/international-organization/article/health-
diplomacy-in-pandemical-times/A82469023B94AA29F23A52AF0C4B3F27
27. http://www.kina-danas.com/stigla-kineska-pomoc-hrvatskoj-za-borbu-protiv-covid-19/
28. https://www.vecernji.hr/vijesti/u-sedmom-avionu-pomoci-hrvatskoj-iz-kine-stigli-i-
respiratori-i-maske-koje-je-donirao-jack-ma-1401102
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SUICIDE REPORTING IN CROATIA (A CASE STUDY:

BJELOVARSKI LIST, 2009-2015)
Iva Rosanda Zigo
University North, Trg dr. Žarka Dolinara 1, 48000 Koprivnica, Croatia
[email protected]
Marija Brajkovic
University North, Trg dr. Žarka Dolinara 1, 48000 Koprivnica, Croatia
[email protected]
ABSTRACT
The topic of suicide reporting in Croatia was explored by the method of content analysis of the
weekly journal Bjelovarski list, covering the publication period between 2009 and 2015. We
discovered a total of 55 articles that were viewed through the prism of the guidelines on suicide
reporting issued by the World Health Organization, aiming to evaluate the level of observance
of these guidelines within the journalistic practice. The starting point of the research was the
empirically-based expectation that the guidelines were likely to be inadequately applied, and
this hypothesis was questioned – and finally confirmed – across three fundamental questions
and fourteen supplementary questions used in the design of the Analytical Matrix. The content
extracted from the sample was categorized and quantified accordingly and subjected to
qualitative analysis that produced answers to all individual questions. The results of this
research can be taken to point to a lower degree of negative media trends as opposed to the
overall media space in Croatia and provide an indication, or a relative measure to the existence
of more alarming trends in more recently founded publications that lack the tradition and
cultural standing of Bjelovatski list. In that sense, this research project has the value of a pilot
project that invites broader, all-encompassing research into suicide reporting in Croatia.
Keywords: suicide, textual content, sensationalism, media literacy
1. INTRODUCTION
Preventing Suicide, A Resource for Media Professionals is a set of guidelines that was created
for media professionals and published in 2008 by the World Health Organization and the
International Association for Suicide Prevention. This publication aimed to present suicide as
a delicate public health issue and to raise the awareness of media professionals concerning the
relations between how information on suicidal events is publicly communicated and the
effectiveness of preventive programmes that seek to reduce the frequency of such tragic
incidents to the lowest possible minimum. The Croatian The Agency for Electronic Media and
UNICEF created a media literacy portal (medijskapismenost.hr) where, among other topics,
attention has been drawn to the topic of suicide and to the possibly destructive influence of
media reporting in a text written by Nataša Jokić Begić: Research reveals that suicide reporting
often leads to new suicides, especially among adolescents and younger adults. The author of
this article criticizes the usual media approach to suicide and provides guidelines for journalists
that largely coincide with ones provided in the WHO publication. The requirements are as
follows: suicide reporting need to adopt an educational approach; sensationalist approach needs
to be avoided and emphasis put on possible solutions of problems that have been documented
to lead to suicide; reportings need to be as concise as possible; frontpage headings should be
avoided; suicide should never be presented as a solution to any personal problem, etc. The
central position of media in creating and voicing all information, but also in shaping ideas,
values, and attitudes that can affect human relations as well as people’s self-evaluation
(McQuail 2012, p. 82), is beyond questioning.
244
This raises the issue of responsibility on multiple grounds as it touches numerous audiences,
becoming especially relevant when reaching vulnerable individuals caught up in situations that
they find hard or impossible to deal with. The fact that media discourse can affect their decision-
making and provide preventive educational input makes the issue highly worthy of attention. It
is however also necessary to note that studies on suicide reporting that question the relations
between media discourse to ethical guidelines are scarce and in many countries non-existent.
One of the first was based on research that was undertaken in Austria in 1986 (Phillips &
Carstensen); in 1998 Etzersdorfer & Sonneck explored the frequency of the word suicide’ in
Viennese papers and took the topic further to explore the broader ethical context in 2007
(Niederkrotenthaler & Sonneck). A study dating from the year 2000 (Michel, Frey, Wyss &
Valach) was based on an investigation of the Swiss media. A study signed by Jamieson,
Jamieson & Romer based on analysis of articles on suicide published in 1990, 1995, and 1999
in The New York Times was published in 2003. In 2010, Tatum, Canetto & Slater presented
their analysis of several American regional newspapers, including the nationally distributed
USA Today, and explored their writing on suicide on samples from 2002 and 2003, aiming to
establish the correlation between media reporting and the U.S. Media Guidelines Key
Recommendations. So far, only a single article signed by Jasna Burić (Media reporting on
suicide among the minors, 2008) discussed the topic of suicide reporting, focusing on the
population of minors. Besides this, several student graduation papers have been written on the
topic. The hereby presented research is, therefore, the first to explore the problem of suicide
reporting, unlimited to a specific target group, in Croatia. Although our sample is a relatively
small one, it is certainly also an indicative one, and seeks to provide an incentive for broader
research that would cover all relevant media channels, and help in establishing ethical standards
across the Croatian media space.
2. ON ‘BJELOVARSKI LIST’
Bjelovarski list was first published on August 27, 1949, and it is the only Croatian paper that
has continuously, for more than 70 years, been reporting on political, economic, social, cultural,
and sports events, to the present day. It is an inescapable source of information for journalists,
students, pupils, and scientists, and also the best-read weekly publication in the Bjelovar-
Bilogora County. It is, therefore, in no way surprising that two cultural institutions, The
People’s Library Petar Predradović and the State Archives in Bjelovar, sustained by the
Croatian Ministry of Culture, undertook the task to digitalize this long-lived weekly publication
from Bjelovar. The first stage of digitalization took place in 2019 covering all issues between
1958 and 1980, while the second stage was planned for the year 2020. All issues on the period
between 1981 and 1991 have been stored in the Bjelovar library and the Archives.1 The
relevance and the standing of this publication, based on its tradition, is the main reason why we
took interest in its content and selected it as the source of our research on suicide.
3. RESEARCH QUESTIONS AND GOALS

The basic presumption of the research is the following: Suicide reporting in Bjelovarski list
between 2009 and 2015 did not abide by the applicable ethical guidelines. Three fundamental
research questions and fourteen auxiliary ones were formed to test the initial presumption. The
goal of the research was to carry out a content analysis of all articles on suicide published during
the mentioned period, to obtain insight into how this otherwise respected weekly journal
engages with the topic. In this paper, we will present and interpret the results that contribute to
the detection of trends in contemporary journalism and point to the need to raise the level of
critical thinking and the understanding of media literacy concerning both the journalists and the
general audience.
1 Source: https://www.culturenet.hr/default.aspx?id=93689. Accessed on Dec. 7, 2020.
245
Fundamental research questions Auxiliary research questions

1. Does the word ‘suicide’ appear in the article
headings?
2. Are the heading levels (main heading,
a) What elements, if any, of
introductory heading, subheading) and types of
sensationalism can be detected within
headings (nominal, informative, advertorial,
the textual content and across the
indeterminable) formed to inspire shocking
accompanying photographic material
effects?
in articles published in Bjelovarski
3. What elements of suicidal events are
list?
depicted in accompanying photographs
(victims, event sites, next of kin, witnesses),
and what is their level of explicitness?
1. What is the dominantly used genre?
2. How are the articles positioned in the paper
(page, section)?
b) Is the manner of suicide reporting in
3. Are the articles signed?
Bjelovarski list in contradiction to the
4. Are the witnesses directly included in the
existing ethical standards applicable to
reports?
journalism?
5. Is the identity of the victim revealed?
6. Does suicide reporting include reporting on
minors?
1. Does the article point to parallels to other
comparable events?
2. Does the article provide helpline
c)What is the level of consistency information available to individuals with
between article headings and textual suicidal thoughts?
content and what level of 3. Do articles refer to possible illnesses that
responsibility is exercised? suicide victims suffered?
4. Does the article reveal the method of
suicide?
5. Is data provided on suicide sites/locations?
Table 1: Fundamental and auxiliary research questions.
(Source: Authors)
4. METHODOLOGY
We used the method of content analysis and applied it to all articles on suicide published in
Bjelovarski list between 2009 and 2015, which are stored on the People’s Library Petar
Preradović in Bjelovar, where the research was carried out manually, and each article analyzed
following the pre-set criteria. Content analysis is standardly used in social research when
applied to textual or visual material, to detect and establish the existence of characteristics by
which the selected material complies with or differs from a pre-set standard (Halmi 2003, p.
379). The procedure involves the transformation of qualitative empirical data into quantifiable
data, that enables systematization and scientific objectivization (Berelson 1959). Although
Berelsons’s definition of content analysis emphasizes the aspect of quantification, the more
recent trends point to the importance of detailed in-depth observation of the research problem
that can be achieved using mixed methods (see for example Altheide, Schneider 2013, or
Graffigna and Riva 2015). Bearing all this in mind, the authors approached the task of
organizing empirical evidence on symbolic communication (Halmi 2003, p. 379) from which
the backbone of this research, the analytical matrix, was developed. The steps were the
following: the initial presumption was used to define the sample, which resulted in defining the
elements of content that needed to be extracted systematically and used as units. The research
questions were applied in the development of the analytical matrix, which enabled the data to
be referenced and cross-referenced, providing grounds for interpretation.
246
5. RESEARCH RESULTS AND DISCUSSION

During the observed period, 55 texts on suicide were published in Bjelovarski list, and 38 of
them refer to accomplished suicidal events. The rest of the articles refer to suicide attempts,
suicide threats, warnings on high suicide rates, sometimes specifically referring to high suicide
rates among war veterans.
16
14
12
10
8
6
4
2
0
2009 2010 2011 2012 2013 2014 2015
Accomplished suicide Suicide attempt Other
Figure 1: Texts on suicide published in Bjelovarski list between 2009 and 2015.
(Source: Authors)
5.1. Reporting modes and accompanying material (photographs)

The goal was to discover answers to the first fundamental research questions and the related
auxiliary questions. Table 2 shows quantitative data obtained by the analysis of headings, article
positions, and technical features.
HEADINGS, POSITIONS AND TECHNICAL FEATURES

HEADINGS: LEVELS N %
Heading only 23 41,82
Heading and subheading or 28 50,91
introductory heading
Heading, subheading, and 4 7,27
introductory heading
HEADINGS: TYPES N %
Nominal/Neutral 10 18,18
Informative/Assertive 8 14,55
Advertorial/Aggressive 35 63,64
Indeterminable 2 3,64
PHOTOGRAPHS:
N %
PRESENT
Victim photo 10 18,19
Site of event 19 34,55
Next of kin 3 5,45
Neighbours 1 1,82
Other 7 12,72
Absent 15 27,27
Table 2: Headings, positions, and technical features. Total No. of articles (N=55)
(Source: Authors)
247
In our first group of questions, we investigated the language of the headings and focused on
accompanying features of the articles, primarily on photographic material. The headings are
viewed as a semantic “ticket into the text” (Silić 2005, p. 89). We adopted Silićs’s
categorization of media headings, where he distinguishes between nominal, informative, and
advertorial headings. Nominal headings nominate the content, and they are usually phrased by
the use of nouns and adjectives. Informative headings tend to send across messages, and this
type is usually phrased using verbs and tenses, and sometimes interrogatives. Advertorial
headings are assertive and usually expressed via illocutionary forms of speech, such as
imperatives; these are also often accompanied by exclamation marks. To underline the effects
of choice between nominal, informative, and advertorial headings, we additionally added
attributes to accompany each category, and classified nominal headings as closest to neutral,
informative ones as closest to assertive, and advertorial ones as closest to aggressive. We also
observed if the articles were equipped with subheadings or perhaps added introductory
headings. Upon classifying the heading type, we classified the texts by genre and observed the
position of individual articles within the journal. Closer analysis of the headings leads to the
conclusion that the headings are, for the largest part, mainly focused on creating shocking
effects that are likely to draw in the audience. This point can be duly illustrated by quoting some
of the headings:
INTRODUCTORY
HEADING SUBHEADING SECTION DATE
HEADING
Mario shot himself
January
in the heart and Attempted suicide FRONTPAGE
26, 2009
luckily missed
In Gornji Draganec, a 47-year
A Week of Darkness: A Dušek, the
old male wounded himself
man blew himself to Neighbour: Only His CURRENT May 11,
with a bomb, and in Srijedska,
pieces, a woman hanged Sneakers AFFAIRS 2009
a 67-year-old woman hanged
herself Remained…
herself in a plum orchard
Ivan set fire on a
property loaded with After an argument with his
FRONTPAGE
explosives and wife, he set fire on the July 19,
hanged himself property and hanged himself 2010
CRIME
immediately after
Nobody knows why

a quiet youth killed January
CRIME
his stepmother and 10, 2011
then himself
A man stabs his wife to death,
The children saw June 4,
Unheard-of crime in throws her body into the FRONTPAGE
everything 2012
Kašljevac. garbage, and hangs himself
He tied a knot
around his neck and
December
hanged himself from FRONTPAGE
24, 2012
the balcony of his
vacation home
He blew himself up
February
A new tragedy in Bjelovar with a bomb in his FRONTPAGE
11, 2013
orchard
He badly wounded
his stepson and then January
CRIME
hanged himself in 20, 2014
the family home
Table 3: Headings by Level: A Selection.
(Source: Authors)
248
If we go on to observe the photographic material that accompanies these articles, it becomes

obvious that photographs most commonly feature the suicide site, or the victim, or their next of
kin, or sometimes the neighbors. On May 18, a disturbing photograph was published alongside
a text of a high-school graduate after the graduation celebration. This photo shows a high-school
graduate on the Partizan playground in Bjelovar, the traditional site of the so-called “norijada”
(the term is used to refer to the traditional informal gathering of graduates that tends to run
rather wild). It comes with the following caption:
Three years ago, Tatjana Juričan, a high-school graduate, took her own life by swallowing
approximately 100 pills.
Most other texts on suicide, besides the quoted examples, were accompanied by photographic
material. Quite an outstanding example, but also an isolated one, is that of a frontpage
photograph of the victim, showing the victim’s home, alongside the introductory heading
stating:
A tragedy in Jošine; Why did you do it, Ivica? The main heading elaborated further on the event:
He blew himself away with a bomb, his one-year-old son will not remember him.
A crude photograph was added to the text of June 4 (The old man cuts his veins and dies in the
General Hospital), showing a bleeding arm with deadly cuts. The first text on suicide that was
published in 2013, dated January 14 (heading: At least ten persons committed suicide in course
of the holiday season) was part of the section 7 days, on page 5 of the paper. It provided
information regarding the number of persons who took their own lives at the end of 2012
pointing to the fact that during this period there were more such cases than there had been
throughout the entire year. The accompanying photograph – showing a person of female sex
laying over a table and vomiting, different kinds of pills scattered around her – was most
disturbing. Most of the texts published in 2014 and 2015 were accompanied by photographic
material depicting the deceased or the suicide survivors. The analysis of this category reveals a
high level of explicitness and trackability of articles on suicide that correlates with the presence
of the keyword ‘suicide’ and other explicit descriptors of the act. It also shows the prevalence
of aggressive heading style (advertorial headings were detected in 63,64% of the cases), all of
which is augmented by ‘visual emphasis’ that leans towards dramatic, attention-capturing
content.
5.2. Presentation mode

At this stage, the goal was to find answers to the second fundamental research question, and to
accompanying auxiliary questions. Table 4 shows quantitative data obtained by the analysis of
genre, authorship, and the inclusion of witnesses and victims in the reports.
249
AUTHORSHIP, VICTIM IDENTITY, AND WITNESSES

(INTERLOCUTORES)
GENRE N %
News (compact) 19 34,55
Report (detailed) 32 58,18
Positioning 4 7,27
AUTHORSHIP N %
Articles signed by initials 27 58,69
Fully signed articles 19 41,31
Unsigned articles 9 16,36
WITNESSES/
N %
INTERLOCUTORS
Articles with witnesses/interlocutors
11 25,45
included in the text
VICTIMS N %
Articles exposing victim identity 34 61,82
Articles related to the suicide of minors 3 5,45
Articles related to youth below the age 4 7,27
of 24
Table 4: Authorship, victim identity, and witnesses (interlocutors). Total No. of articles
(N=55)
(Source: Authors)
Seeing that most of the articles published in Bjelovarski list in course of the observed period do
not abide by the ethical standards on suicide reporting, but appear to lean towards
sensationalism, it is rather easy to observe that the fully signed articles are those, and fewer,
that tend to assume an educational approach to the topic, refer to the negative statistical data
and warn against the danger of suicide (e.g., on February 1, 2010: Four pupils attempt suicide
each year; February 15, 2010: Devastating: the County with the highest suicide count; February
14, 2012; Fifty-three veterans committed suicide). As far as the identity of the victim is
concerned, it was revealed in as many as 34 articles and can thus be concluded that the victim's
identity was not respected. Elements by which the identity of the victim can be revealed, or
pieces of indirect information that may be revealing in itself, are the following: direct publishing
of the name (first, last, or both) of the victim, publishing of the victim’s initials, or their age,
the area the victim lived in, reference to the victim’s parents or family members, nicknames,
etc. It is also worth noting that 7 (12,73%) out of 55 articles related to the suicide of minors (3
articles, 5,45%), or youth below the age of 24 (4 articles, 7,27%), which adds up to almost one-
fifth of the total number, and reveals a rather alarming ratio seeing the potentially grave
consequences of such news on adolescent suicide. In the discussions on the influence of the
media on suicidal behaviour, adolescents constitute a particularly vulnerable group, which is
also sustained by the statistics that show triplication of such events in age-group 15-24
(Marčinko et al. 2011, p. 196). The alarming rise is largely attributed to the media that can feed
the adolescents with the idea of suicide, seeing the susceptibility of his age-group to external
influences (Kocijan via Ibid, p. 197). The hesitance to expose authorship appears to be related
to the level and mode of elaboration seeing that the shallow approach prevails overwhelmingly,
and in-depth analysis is almost non-existent, while the mode of elaboration leans on the
selection of shocking details to attract the audience in a sensationalist manner. The latter has
also a lot to do with the low degree of testimonial relevance, which is, largely, because the
witnesses, when available, are confronted with shallow questions and are mostly used to
emphasize, rather than to analyze the event.
250
5.3. Heading-content consistency and the issue of responsibility

This part of the research explored the data related to the third fundamental question, including
auxiliary questions. At this stage, qualitative content analysis was applied. The comparison
between the headings and the textual content shows that the correspondence between them was
high. A far greater problem was, however, the content itself, which was usually inappropriate,
diverging not from the headlines but the ethical guidelines regarding the treatment of the topic
of suicide, and diverging from the Code of honour of Croatian Journalists. This observation
can easily be substantiated by a brief analysis of the content of some typical articles. For
example, in the article that appeared in Issue 37 of Bjelovarski list on January 26, 2009, under
the heading, Mario shot himself in the heart and luckily missed, attempted suicide was
described. The article reports on journalists visiting a coffee shop on Slavonska cesta to
investigate the event:
Tracing numerous versions of the event that shocked many a citizen of Bjelovar, and especially
the inhabitants of the out-of-town settlement Novoseljani, we attempted to find out what had
really happened around 19:45 on Monday (…) where the 30-year-old Mario B. fired a shot
from his gun attempting to take his own life.
In this report, the place, and the time of the suicidal event were explicitly mentioned, as well as
the name and the age of the protagonist. Furthermore, the paper published a statement from a
waitress who condemned the event, and the entire text was filled with judgemental remarks on
the victim. The speculative dimension comes through even in the closing statement:
The fortune within the misfortune can be found in the fact that Mario’s hand most likely
quivered, which is what saved his life since the bullet aimed at his heart missed the target by
only a few centimetres and hit his lung.
Another article describes a suicide of a high-school graduate that took place on May 18, 2009
(heading: A young man hanged himself over unrequited love?). This text goes into much detail
in describing how this suicide was carried out:
(…) the young man hanged himself on Saturday, not long after 1.00 a. m, from the eaves of the
family house.
The article not only provides a detailed description of how the suicide took place and the data
on the deceased but also engages in speculation over the reasons for the young man’s act. All
these features are typical of tabloid reporting and reveal a sensationalist attitude, contributing
to the danger of copycat effects that the young audience is liable to. Along the same line of
argumentation, this kind of reporting goes against The Code of Honour of the Croatian
Journalists' Association, being in direct conflict with the Code’s Article 16 that specifically
states that the reporting on suicide and suicidal attempts should not provide any specific data
on the victim and that any identifiable features should be reduced to the utmost minimum,
especially when referring to cases of children or the youth. The eighth page of the crime section,
dated January 10, 2011, featured an article with the following heading: Nobody knows why a
quiet youth killed his stepmother and then himself. The text itself contains the following:
Thirty-five-year-old Alen Kraševac was in the apartment of his father, Josip Kraševac, on the
second floor of the apartment building in Nazorova Street around 14:30 when he fired a shot
from his gun and killed his 53-year-old stepmother Gordana Kraševac, after which he
committed suicide.
251
In this example, not only the full names of all the parties involved in this tragedy are offered
publicly, but also the names of the persons who were not involved (the father of the protagonist
of this murder-suicide case), as well as their age, and the exact time and place of the event. The
article also states that Alen’s gun was illegally possessed, as well as information on the
workplaces of the deceased parties. Further investigation of the content of the articles reveals
that most of them (38) are oriented on the depiction of the protagonist and the event; six (6) of
them point to the comparison with other similar events. In almost all texts, the suicidal event is
described in specific terms, and in most of them, the exact location of the event is provided.
Only a single text (1) provided reference to help channels/contacts for suicidal individuals,
available in the Republic of Croatia; only two articles (2) provided sporadic reference to PTSD
yet with no attempt to engage in any kind of analysis of the condition and of the problems that
caused it. The articles also revealed that there is a difference in the modalities of reporting
between events involving civilians and the military: the first aspire to a romantic depiction of
suicidal events, while the second use negative terms and speak of the dysfunctional medical
treatments (Ramchand, Ayer, Fisher, Osilla, Barnes-Proby, Wertheimer 2004, p. 25). In
evaluating the material in terms of consistency, it is necessary to point out that ‘consistence’,
as such, is not a positive or a negative feature, but that the evaluation of this feature leans on a
pre-set value to be extracted from the text. When it comes to the relations between the headings
and the textual body of suicide reports, these values are usually highlighted by headings and
elaborated in the text, and when that value is negative – if the text follows up on it – the heading-
text consistency becomes a way to fortify, rather than to question the negative value or to affirm
a positive one. It is the negative aspect that emerges from the analysis of our sample, and it
reveals a consistently sensationalist approach regardless of the detailing that may focus on, and
highlight (via heading), the suicidal method or some other circumstance of suicide, with little
or no observation for the ethical consideration of victims’ identities or the possible public
impact of the stories. Omission to publish helpline data is consistent with the latter. Situating
the overall insight into the evaluative module on consistency and responsibility, therefore,
yields yet another negative stride to be added to the cluster of evaluated features across all
modules, categories, and subcategories that we observed via this research.
6. CONCLUSION
The results of our research highlight the urgency to put the general course of Croatian
journalism under serious observation. Examples of shallow sensationalist writing point to the
disturbing trend that is likely to escalate further if measures are not taken to promote ethical
standards and critical thinking among the Croatian journalists. Although this research covered
a rather limited sample of Croatian journalism, it can be taken as evidence of not the worst, but
of the less extreme negative practices in Croatian journalism. There are, nowadays, many new
publishers who were “born into the trends”, and it can justifiably be presumed that the results
of a broader investigation would most likely lead to even more alarming conclusions. In
questioning the approach that we detected in Bjelovarski list, we, therefore, sought to provide
an incentive for such a broader research to be undertaken, as well as to ignite a much-needed
public discussion on the overall media culture in Croatia and on the galloping sensationalist
trends that appear to have infiltrated even the journals of a higher cultural standing. The analysis
of the selected sample of articles revealed a non-selective approach to the suicide narratives.
Everything is, apparently, subject to publication: from suicidal attempts to presumptions on the
contents of the farewell letters. The cases that are judged as unique and for some reason
“interesting” find their way to the frontpages of the journals, to attract more public attention.
The language is too often explicit, shallow, and trackable; the headings are usually dramatic
and attention-seeking; the photographs capture private areas and shocking details; the focus of
writing is on the scandalous effects; there is none or far too little engagement in the analysis of
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causes, effects; almost no attention is given to preventive action; witnesses are asked to engage
in hearsay In most cases, suicide is taken at face value: mental problems are not seriously
discussed; guidance towards solutions alternative to suicide, or, at the very least, reference to
help channels available in the community, is not provided. Apparently, suicide reporting in
Croatia has submitted to the negative processes, and such an approach can be qualified as
unprofessional in its disregard of the published World Health Organization ethical standards,
and ethics in general. Hence, this research revealed a high level of deviation from almost all
recommendations included in the guidelines on suicide reporting provided by professional
organizations. The negative trends prevailed in every category that we examined (explicitness
and trackability; heading styles; visual emphasis; level and mode of elaboration; general
visibility: author's exposure; victim's exposure: testimonial relevance, a consistency and
responsibility), adding up into a negative synergy amongst all categories. The media pursuit of
audiences appears to have arrived at a level in which it negatively affects both the journalists’
and the editors’ awareness of the public responsibility of media writing, resulting in a notable
decline in ethical standards of public communication. This is not to say that suicide is beyond
discussion or beyond reporting: while tabooization of the topic is hardly a solution, seeing that
it could result in unhealthy suppression of knowledge on the events that do occur and affect the
public, superficial and sensationalist reporting can lead to suppression of a different kind: that
of responsibility. It is in the public interest of both the media and the readers that the victims
are offered appropriate help rather than submitted to further victimization, and that the public
is not intoxicated by writing that has been known to lead to added unwanted effects rather than
to their eradication. The inevitable question is: When negative trends take over, can there be an
improvement? In addressing this question, it seems useful to point out that our research yielded
results that directly contrast the ones that were derived from the extensive research on suicide
reporting in Australia, published in 2002. The research covered Australian newspapers, radio,
and television), and it was entitled Reporting on Suicide in the Australian Media (Pirkis.
Francis, Blood, Burgess, Morley, Stewart, Putins 2002). Even though room for improvement
was also observed in the Australian research (e.g. journalists/editors often fail to provide
helpline information, and tend to succumb to detailing when a celebrity status of a victim is
involved), it appears that the Croatian media have a long way to go when it comes to avoiding
overly explicit language and photographic material, and very much so when it comes to shaping
the headlines. However, this also shows that higher standards are achievable, and that the ethical
threshold can be raised. While further research into the Croatian situation is certainly necessary
not only to raise the general awareness of the problem but also to produce new insights that can
point more deeply to its nature, the long-term solution lies in in developing methods that can
help raise the level of understanding of both the journalists and the public, to include education
but also professional and civil surveillance over the media practices in Croatiain the detection
of questionable practices and in the voicing as well as safeguarding of the required ethical
standards. The critical research-based approach to sensationalist suicide reporting that we
aimed to demonstrate is hopefully a step, among many others that need to be taken, towards
achieving such goals, and towards a deeper understanding of media literacy, based not only on
sound and relevant information but also on responsibility and life-affirming values.
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Angeles, London, New York, Singapore, Washington DC: Sage.
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javnostima, Vol. 2. No. 4: 209-214.
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promišljanja za bolju suradnju. Društvo psihologa Istre – Associazione psicologi dell’Istria.
Naklada Slap: 92-8.
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London, New Delhi, Singapore, Washington DC: Sage.
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TESTING FOR COMPETITION IN BULGARIA BANKING INDUSTRY:

THE PANZAR-ROSSE APPROACH – NEW EVIDENCE
Evgeni Genchev
Trakia University, Bulgaria
[email protected]
ABSTRACT
This paper evaluates the level of competition in the Bulgarian banking sector using the Panzar-
Rosse H statistic. Three versions of the empirical model were the estimated-pooled regression
model, fixed effect model, and random effect model. The dataset used in the analysis covers
more than 90% of the country's banking sector for the period 2013–2019. H-statistics is the
lowest value (0,688) using Pooled OLS model, but this model is the least reliable. The H-
statistics obtained from other two models are 0,707 for the random and 0,788 and fixed effect
model. The three versions of the empirical models support the hypothesis of monopolistic
competition in the Bulgarian banking market. Based on the H-statistic, the most important
factor for banks with a positive influence on interest income is the banking size. We tested the
validity of the P-R model in the sense that the Bulgarian banking market is in the long-run
equilibrium.
Keywords: bank competition, H-statistic, The Panzar-Rosse approach, Bulgaria
1. INTRODUCTION
At the outset, it is good to consider banks' role as economic units and the ongoing debate on
their contribution to the country's economy. The motivation behind our research is limited
literature tackling the competition of the Bulgarian banking sector. This research aims to
provide empirical evidence on the level of competition in the Bulgarian sector. Our contribution
to this paper is twofold:
• First, it goes beyond the existing literature in that it uses the most recent dataset to assess
the level of competition in the Bulgaria banking sector by using a larger sample of banks;
• Second, in order to test the robustness of the empirical findings, it combines three different
econometric techniques – Ordinary Least Squares (OLS), Fixed effects (FE), and Random
effect to a reduced-form revenue equation by using the Panzar-Rosse approach.
1.1. The New Empirical Industrial Organization approach

In general, there are two approaches in the scientific literature to describe banking activity: the
so-called “production approach” and the “intermediation approach” Freixas (1997, p. 77-79).
Colwell and Davis (1992, p.114) raised the legitimate question of whether banks should be
treated as companies that use labor and capital to offer different types of deposit and credit
services the so-called “production approach” nearly 40 years ago. Thus regarded, banking
activity could be measured by the number and size of all types of services (numbers of accounts
and transactions per period). On the other hand, in the so-called “intermediation approach”,
banks are seen as intermediaries of financial services and not as deposit and credit services
providers. One of the main differences between the two approaches is how bank deposits will
be treated. As later pointed out (Mamatzakis et al., 2005), the production approach output is
measured by the number of accounts or related transactions, and the total costs are all operating
costs used to produce these outputs. In the intermediation approach, the value of loans and
investments is used as an output measure; labor capital and financial capital are inputs to this
process. Hence, operating plus interest costs are the relevant cost measure. Basically, two
approaches are used to measure bank competition: structural and non-structural indicators. The
main advantage of structural indicators is that they are easy to apply and they are widely used,
255
especially in the last 20 years of the twentieth century. One of their main disadvantages is the
accurate market definition. Defining the relevant geographical market (local, regional, or
national) as well as the product market can be difficult. The new so-called non-structural
approaches to bank competition assessment entered the scientific literature along with the
theory of the New Empirical Industrial Organization. They are mostly applicable in empirical
testing of specific conditions in a given market. This can be done in the presence of aggregated
industry data or individual data of individual banks, as in our case. One of the most popular
non-structural tests used to assess the banking industry competition is the Panzar and Rosse
model. This study views the banking sector through the “intermediation approach” lens, thereby
examining the three input components (funds, labor, and capital). In this case, we use the third
of approaches that have been proposed for measuring competition in the banking sector. The
other two are:
a) To consider factors such as financial system concentration, the number of banks, or
Herfindahl indices;
b) To consider regulatory indicators to gauge the degree of contestability and it takes into
account entry requirements, formal and informal barriers to entry for domestic and foreign
banks, and activity restrictions Claessens (2009, p.7-9)
The rest of the paper is organized as follows. Section 2 concisely reviews the previous studies
that applied the Panzar and Rosse methodology in the banking industry, including Bulgaria.
Section 3 introduces data and methodology of the Panzar and Rosse model. Section 4 presents
empirical results and equilibrium test, while Section 5 provides the conclusions.
1.2. The characteristics of the banking system in Bulgaria for the period 2013-2019
At the end of 2019, 25 banks were operating in Bulgaria, six of which were foreign bank
branches. The number of banks is continuously decreasing due to the consolidation processes
taking place in the sector. The total number of banks in Bulgaria has decreased by 16.6% for
the period 2013-2019. In the European Union, only Croatia and Slovenia had a smaller number
of banks in 2020 than Bulgaria - in 2020, only in Croatia and Slovenia there is a smaller number,
respectively 24 and 17 respectively (https://www.statista.com).
Table 1: Evolution of some bank variables over the period 2013-2019

Change
2013 2014 2015 2016 2017 2018 2019
in %
Total banks 30 28 27 27 27 25 25 -16,6
including: branches of foreign banks 6 6 5 5 5 5 6 0
Total banks assets in billion (BGN) 85,7 85,1 87,5 92,1 97,8 105,6 114,2 33,2
GDP production method in billion
81,96 83,9 89,4 95,1 102,3 109,7 119,7 46
(BGN)
Bank assets, percent of GDP 104,6 101,5 97,9 96,8 95,6 96,2 95,3 -8,9
The average ROA (from the sample) 0,54 0,66 1,02 1,33 1,07 1,33 1,22 125,9
The average ROE(from the sample) 4,77 5,08 6,38 9,05 7,12 10,32 9,37 96,4
* As of the end of the respective year
(Source: National statistical institute, Bulgarian National Bank and author calculation)
In 2019 the total assets of the banks increased by 33, 2 % for the period 2013-2019. Bulgaria’s
Commercial Banks: return on assets ranges from 0,54 to 1,22. The data reached an all-period
high of 1,33% in 2016, 2019 and a record low of 0,54 % in 2013. At the same time, the average
return on equity in the Bulgarian banks ranges from 4, 77 to 10,32%. A significant increase is
also observed in return on assets and return on equity, by 125,9 and 96,4 percent, respectively.
256
Krastev (2015) analyzed changes in the relative shares of banking assets to GDP of the
Bulgarian bank market for the period 2011-2013 and concluded that for the period 2011-2013
the ratio of bank assets and gross domestic product grew steadily. From 2013 to 2019, however,
the trend was completely opposite and this ratio decreased by nearly 9 percent. There have been
several significant changes or mergers in the Bulgarian banking sector for the last six years
(2013-2019) - the most important of which are:
• BNB Governing Council has revoked Corporate Commercial Bank AD’s license for
conducting banking activities on 6 November 2014, because the bank had violated the law
by indirectly financing loan payments to itself. On 4 December 2014, the Deposit Guarantee
Fund began paying out the guaranteed deposits (up to EUR 100,000) to the Corporate
Commercial Bank depositors (www.bnb.bg).
• On 5 February, the legal merger of Cibank JSC with United Bulgarian Bank AD (UBB)
was completed. Cibank now ceases to exist as a separate legal entity, and its customer base
has been automatically transferred to UBB. The merger of both banks is a process that is
designed to make the new UBB the reference on the Bulgarian banking market
(https://newsroom.kbc.com).
• OTP Bank officially announced the purchase of Societe Generale Express bank by its
Bulgarian subsidiary DSK Bank and the beginning of the two banks' integration process on
15 January 2019. The two banks' integration process will result in creating one of the biggest
and strongest banking institutions on the Bulgarian market (https://dskbank.bg).
• Postbank (Eurobank Bulgaria AD), which is part of the Eurobank International Group,
successfully finalized the operational merger with Piraeus Bank Bulgaria AD (Piraeus
Bank) on 17 November 2019. This is the final stage of the deal, which is key to the Eurobank
Group, with major shareholders Canadian and US funds, and is part of its strategy to expand
its focus on the markets in which it is a leader. On 12 November 2019, just 5 days earlier,
the legal merger of the two banks was completed, and thus Piraeus bank was transformed
through the means of absorption that leads to the dissolution of the company without the
need for liquidation procedure (https://www.postbank.bg).
2. PANZAR AND ROSSE METHODOLOGY IN BANK SECTOR – A LITERATURE

REVIEW
In this context, the following subsection provides a review of the previous studies that applied
the Panzar and Rosse methodology in the banking industry that include Bulgaria as part of the
sample.
257
Table 2: Review of the previous studies that applied the Panzar and Rosse approach
Model and type of
N Authors Sample Period dependent control variables Main findings
variable(DV)
liquidity risk as
EU27 banking Values of H-statistic
Andrieş, A. M., & scaled equation; ratio of equity to
1 systems, including 2004-2010 for Bulgaria 2004–
Căpraru, B. (2014) DV-total revenuе total assets and
Bulgaria 2010 was 0,27
size of the bank
monopolistic
reduced-form competition is the
Apergis, N., Fafaliou, Bank leverage,
all EU member revenue equations best description of
2 I., & Polemis, M. L. 1996-2011 credit risk, and
states (27 countries DV- gross interest the extent of
(2016) size
revenues competition in the
EU banking sector
For Bulgaria, the
H=0,06 and H=0
hypothesis is not
share of majority rejected. Its banking
state-owned system is
reduced-form
22 CEE including banks’ assets, characterized by
3 Delis, M. D. (2010) 1999-2006 revenue equation
Bulgaria the GDP per monopolistic
DV-total revenue
capita, and competition and is
others on the edge of
presenting some
anti-competitive
conduct.
For the first period,
operation risk, 1994-2001
reduced-form
Huang, T.-H., & Liu, 17 CEE countries, bank size, Bulgarian H statistic
4 1994-2008 regression equation
N.-H. (2013) including Bulgaria market was 0,90 for the
DV-total revenue
concentration second period 2002-
2008 was 0,395
For the first period
capital structure,
reduced-form 1995-2001
risk. differences
EU-27 and three revenue equation Bulgarian H statistic
5 Kasman, A. (2010) 1995-2007 in the deposit
candidate countries DV-bank’s total was 0.25 and for the
mix and
revenue second period was
business mix
close to zero 0,11
H-statistic ranges
Ten Eastern reduced-form
from 0,72 to-0,82
6 Lapteacru, I. (2014) European countries, 1995-2011 revenue equation;
for Bulgariafor
including Bulgaria DV -total revenues
2007-2011
reduced-form
revenue equation;
DV-ratio of total differences in
Mamatzakis, E.,
7 Eastern European operating revenue risks, bank’s
Staikouras, C., & Monopolistic
7 countries, including 1998-2002 (calculated as production
Koutsomanoli- competition.
Bulgaria interest revenue function, and
Fillipaki, N. (2005)
plus all other non- deposit mix
interest income) to
total assets
8 Marius Andrieş, EU27 banking 2001-2009 scaled equation; 2 Marius Andrieş,
Căpraru, B. (2012) systems, including Căpraru, B. (2012)
Bulgaria
the behaviour of
the loans to total
16 European reduced-form banks operating in
Mustafa, A., & Toçi, assets ratio
9 countries, including 1999-2009 revenue equation the CEE countries is
V. (2017) the equity to
Bulgaria DV-interest income consistent with
total assets ratio
monopoly behavior
Monopolistic
DV -the ratio of competition except
Semih Yildirim, 13 European total interest Bank size- and for FYR of
10 Philippatos, G. C. countries, including 1993-2000 revenue (or total deposit mix) Macedonia and
(2007) Bulgaria revenue) to total Slovakia. H-statistic
assets ranges from 0,4 to-
0,48 for Bulgaria
The H-statistic for
the overall sample
reaches a value of
reduced form
0.44. The empirical
11 Trifonova, S. (2007) Bulgaria 1995-2001 revenue equation -
results are generally
DV-interest income
consistent with
monopolistic
competition
reduced-form H-statistic ranges
EU member states size and bank
12 Weill, L. (2013) 2002-2008 revenue equations from 0,3 to-0,5 for
(27 countries risk
DV-Total revenues Bulgaria
(Source:own author's study)
258
The authors (Mamatzakis et al., 2005) tested a sample of banks from Albania, Bosnia, Bulgaria,
Croatia, the Former Yugoslav Republic of Macedonia, Romania as well as Serbia for the period
1998-2002. They found evidence of monopolistic competition, with larger banks behaving
more competitively than smaller ones. Weill (2013) conducted an analysis of competition in
the EU banking sector for 2002-2008, including Bulgaria. According to him, in our country, H-
statistic was in the range of 0.28-0.52. Again for the same period, in the inclusion of Bulgaria,
Huang and Liu (2013) found that the average H-statistic was 0.395. Lapteacru (2014) examined
Lerner index and its relationship with the Panzar and Rosse H-statistic using bank-level and
country-level data from 1995 to 2011 for ten CEE countries, including Bulgaria. He stated that
“after 2000, Bulgarian banks increase their competitiveness and simultaneously have higher
levels of market power”. Unfortunately, most of them are quite outdated for the last ten years.
We found only one recent study in this regard for Bulgaria, reported by Trifonova (2007). The
other eleven are based on the banking systems in the EU, which include Bulgaria. The only
study that gave some idea of H-statistic in Bulgaria's banking sector in the last 10 years is that
of (Apergis et al., 2016). With one or two exceptions, previous studies confirmed that the
Bulgarian banks' behavior was consistent with monopolistic competition. As we mentioned
above, there is only one single-country study for Bulgaria Trifonova (2007), and for this reason,
we will dwell on it in a little more detail. Trifonova (2007) used the Rosse-Panzar methodology
to the micro data set of Bulgarian banks covering 1999–2005. In her empirical model, the role
of the dependent variable was interest income. The functional form employed was a log-linear
reduced form revenue equation. The H-statistic for the overall sample reached a value of 0.44.
The empirical results were generally consistent with monopolistic competition as a
characteristic of the analyzed banks’ behavior in Bulgaria since the reported H-value is in the
range of above zero and below 1 (0<H<1). A critical factor price driving the Bulgarian banking
system's H-statistic is the price for funds (interest expenses to total deposits) with a coefficient
equal to 0,33.
3. DATA AND METHODOLOGY OF THE PANZAR AND ROSSE MODEL.

3.1. Database
The data are obtained from the (Bankscope database of Bureau van Dijk) for the Bulgarian
banks beginning in 2013 and ending in 2019. This database reports published financial
statements from financial institutions worldwide. The data are annual observations of 18
commercial banks operating in Bulgaria. For a small number of banks, their annual financial
reports published on the Bulgarian National Bank website (https://www.bnb.bg ) were used for
2019. The total number of observations in the panel data is equal to 126 (18 banks over seven
years). This paper uses the non-scaled reduced-form revenue function. In order to allow for
non-linear effects and the log specification was applied on panel data. These data are reported
in USD and are homogenized in order to be comparable and therefore suitable for a panel
approach (Mamatzakis et al., 2005), Andries and Capraru (2014). The statistical data processing
is performed with the Gretl software.
3.2. The Panzar and Rosse methodology

One of the most popular non-structural tests used to assess the banking industry competition is
the Panzar and Rosse model. In the equation proposed by them, the function output and the
function input resources (production factors) are expressed. The sum of the three main factors'
elasticity: labor, finance, and capital calculated by this equation is the so-called "H-statistic".
The Panzar and Rosse methodology requires the assumption that banks are treated as single
product firms, producing intermediation services by using labor, physical capital, and financial
capital as inputs (traditional intermediation approach). Under monopoly, the H-statistic should
be smaller than or equal to zero.
259
In contrast, in the models of monopolistic competition and perfect competition, the H-statistic
should be between 0 and 1. Finally, under perfect competition, the H-statistic is equal to 1.
Overall, a larger H-statistic indicates a higher degree of competition. Nathan and Neave (1989)
point out that this interpretation assumes the test is undertaken on observations that are in the
long run equilibrium. We therefore also test whether the observations which we apply in our
study are in long-run equilibrium.
Figure 1: Extraction and interpretation of the P–R statistic
(Source: Apergis et at., 2016)
All the individual steps of the analysis are shown in (Fig. no.1). To apply the Rosse-Panzar
methodology (PR hereafter) to the described data set of Bulgarian banks and estimate the sum
of the factor price elasticities (denoted below with the coefficients β1, β2, and β3 with respect to
banks’ interest income. Much of the researches on the PR model used interest incomes as a
dependent variable. They are based on the fact that interest incomes represent over 80% of total
bank revenues in the surveyed samples. We will use the following equation the following
estimation equation:
𝑙𝑛(𝐼𝐼)𝑖𝑡 = 𝐶 + 𝛽1𝑙𝑛 (𝑃𝐹𝑖𝑡) + 𝛽2 ln(𝑃𝐿𝑖𝑡) + 𝛽3 ln(𝑃𝐶𝑖𝑡) + 𝛽4 ln(𝑏𝑎𝑛𝑘 𝑟𝑖𝑠𝑘)𝑖𝑡 +

𝛽5 ln(𝑐𝑟𝑒𝑑𝑖𝑡 𝑟𝑖𝑠𝑘)𝑖𝑡 + 𝛽6 ln(𝑏𝑎𝑛𝑘 𝑠𝑖𝑧𝑒)𝑖𝑡 +ε
The superscript i denotes bank i, and the superscript t denotes year t; and with “ln” we indicate
natural logarithms. C is constant, and ε is the error term (idiosyncratic errors). The table
presented below (Table no.3), shows the definition of the variables used in our model.
260
Table 3: Description of the variables in the model

Variables Notation Description
dependent variable
Interest and similar income on the
bank total interest income II loan portfolio and interbank
deposits
Independent
The total interest expenses to
price of funds loan_price
gross loans ratio; (in %)
measured by the ratio between
price of labor labor_price staff expenses and total assets (in
%) ; and
measured by the other operating
price of physical capital capital_price
expenses to total assets ratio (in%)
Bank-specific features variables
the ratio of equity to total assets
bank risk EquityAssets
(in %)
the ratio of customer loans to total
credit risk
assets (in%)
The ratio of bank`s total assets to
bank size market_share
total bank assets in a country
Bank performance
defined as net income
banks’ return on assets ROA
over total assets
(Source: author)
A crucial difference among studies is the definition of the dependent variable applied in the
estimation of H statistic. Most studies have used interest income as the dependent variable.
Some studies have used total income as the dependent variable, considering that non-interest
income was continuously increasing its share in the total income. Unlike most other studies in
the CEE countries context, this paper follows (Bikker et al. 2012; 2007). The authors suggest
not scaling the dependent variable to total assets. Mustafa and Toçi (2017) considered that the
choice between the interest income and total income for the dependent variable is not highly
relevant for estimating the banks' competitive behaviour. Given that the Bulgarian banking
sector is focused mainly on interest income and it accounts for 75% of total bank income
(author's calculations) the dependent variable in our main model specification is the interest
income. Where variables in the model:
• II represents the bank interest income (dependent variable);
• Therefore, in line with most of the studies applying the P-R model to measure banking
competition, input prices in our model consist of three categories:
• PF price of funds (variable loan_price), which is measured by the total interest expenses to
gross loans ratio; (in %)
• PL price of labor (variable labor_price), which is measured by the ratio between staff
expenses and total assets (in %) ; and
• PC -the price of physical capital (variable capital_price), which is measured by the other
operating expenses to total assets ratio (in %)
Bank-specific features variables:

• Some variables (total three) are included to control for bank-specific features that may affect
bank incomes, and they are similar to those utilized in previous studies. They include the
bank risk - the leverage reflecting differences in the risk preferences across banking
institutions (Bikker et al., 2012), the bank credit risk Bikker and Spierdijk (2008) and the
bank size.
261
Here, the bank size is used to test whether large banks enjoy scale economies and thus
higher interest income. Its connection with the dependent variable is expected to be positive,
as many previous studies show Bikker and Haaf (2002).
• PR defines a measure of competition, the H-statistic’, which represents the percentage
variation from the equilibrium revenue derived from an infinitesimal percent increase in the
price of all factors used by the firm. The sum of elasticity often called the H-statistic, ranges
from −∞ to +1. Florian Leon (2015) thought that ‘’the greater the transmission of cost
changes into revenue changes, the more competitive the market is”.
• Estimating the H-statistic enables us to test for a Bulgarian financial market's competitive
condition under which the sample banks are operating.
4. EMPIRICAL ANALYSIS AND EQUILIBRIUM TEST

4.1. Results of regression models
The H-Statistic has been assessed using the total interest income regression equation.
Below, we will present (see table 4) the results of the analysis of the three regression models:
Pooled OLS, Fixed-and Random-effects.
Table 4: Estimation results

dependent variable: interest income
Model Model 1 Pooled OLS Model 2 Fixed- Model `3 : Random-
effects effects (GLS)
Coefficient/p-value coefficient/p-value coefficient/p-value
[1] loan price 0,096/(0,013**) 0,096/(0,0005***) 0,092/(0,0012***)
[2] capital price 0,04/(0,95) -0,028/(0,49) -0,03/(0,458)
[3] labor price 0,59/(0,006***) 0,719/(0,0053)*** 0,648/(<0,0001***)
H-statistics=[1]+[2]+[3] 0,688/(0,0006) 0,788/(0,0009) 0,707/(7,7585e-007)
Competition monopolistic monopolistic monopolistic
competition competition competition
H-statistic=0, Robust Robust Robust
F=17,3/(0,0007***) F=15,8/(0,001***) F=24,47/(6.53984e-
Rejected Rejected 007***)
Rejected
H-statistic=1 Robust Robust Robust
F=3,56/(0,076*) F=1,14/0,301 F=4,24/(0,04**)
Rejected at 10% level Not rejected Rejected at 5% level
constant 1,69/(0,0002***) 0,40/(0,0003***) 2,08/(<0,0001***)
Bank risk 0,39/(0,0043***) 0,122/(0,284) 0,193/(0,165)
Credit risk 0,028/(0,533) 0,123/(0,0003***) 0,048/(0,28)
Bank size 1,146/(8,36e-014***) 0,159/(7,34e- 1,19/(<0,0001***)
08***)
Adjusted R-squared 0,963
LSDV R-squared 0.99
Within R-squared 0,694
Note: Standard errors in parentheses. *** p<0, 01, ** p<0, 05, * p<0, 1
(Source: author calculations)
First, the Wald test rejects the hypothesis of monopolistic market structure (H=0) at the 1%
significance level in all three models. Second, it also rejects the hypothesis of perfectly
competitive market structure (H=1) at the 10% significance level in Pooled OLS, at the 5%
significance level in the Random-effects model. Let's look at the possible requirements of the
three models and choose the most appropriate one. The possible problems using the Pooled
OLS model may arise from several directions: if the presence of multicolinearity or
heteroscedasticity.
262
4.1.1. Dealing with multicollinearity

We check for collinearity with the variance inflation factor (VIF), as shown in other studies
Apergis (2015). Table 5 below represents the VIF, which are the diagonal elements of the
correlation matrix's inverse. As all the values for VIFs are below 4, we conclude that there are
no multicollinearity problems for our models.
Table 5: Variance Inflation Factors

Variable VIF
loan price 1,33
capital price 1,35
labor price 3,51
Bank risk 1,24
Credit risk 2,52
Bank size 2,61
VIF(j) = 1/(1 - R(j)^2), where R(j) is the multiple correlation coefficient between variable j
and the other independent variables
4.1.2. We are dealing with heteroscedasticity

Since our regression equation covers 7 years and a total of 18 banks, it is unlikely to expect that
for each bank, the same variances of the error terms are present. Breusch-Pagan test statistic
(LM = 127.261 with p-value = 1.62889e-029) and since the null is that heteroskedasticity is not
present, we accept the alternative that it is present. This suggests that the data used for our
analysis is suffering from heteroscedasticity, which implies that estimates OLS can be
inefficient. For the above reason, the results of pooled OLS will be presented for informational
purposes only. How to choose the more appropriate of the other two models fixed-or random
effects? For this purpose, we use two tests: the Breusch-Pagan test and the Hausman test.
Table 6: Breusch-Pagan test and the Hausman test for the choice of fixed effects or random
effects
Test H0 p-value Interpretation
Breusch-Pagan test Variance of the unit- 1,62889e-029 Reject
specific error = 0
Hausman test GLS estimates 0,16 Not reject
areconsistent
In our data, a p-value less than 5% indicates that the Breusch-Pagan test rejects the hypothesis
that the effects are not random (in other words, the effects are random). To select an appropriate
version of the GLS model (i.e., between fixed or random effects) we have tested the validity of
the panel model using the Hausman test. The Hausman test p-value (0,16) is greater than 5%.
The random-effects do not appear to be correlated with the regressors, and random effects can
be used (Zulfikar, 2019). This leads us to the conclusion that the best of the three applied models
is the one with random effects. All three applied models support the hypothesis of monopolistic
competition on the Bulgarian banking market. The model pooled OLS shows the lowest (0.688)
and the least reliable value of H-statistic. The other two models: FEM and REM show high
values, respectively 0.788 and 0.707, which corresponds to the state monopolistic competition.
The H-statistic value is high but comparable to that shown by Apergis (2015 ). Higher values
of the H-statistic are associated with more competitive banking systems (Abdul Majid et
al.,2007). This is not the first case of such high levels of H-statistics, and the authors (Olszak
et al.,2013) reached similar conclusions for the Polish banking market. The H-value of the FE
model present, is not significantly different from unity (at the 10% level), which is relatively
263
close to perfect competition, but in the RE model, it is significantly different (at the 10% level).
Finally, the H-statistic can be one if any increase in input prices (p) increases marginal and
average costs in the same proportion without changing banks' equilibrium product. Under this
situation, banks that are inefficient (cannot solve the problem of changes in input prices) will
be forced out of the market (Solano et al., 2020). Because the pooled OLS model doesn't meet
some of the assumptions, we'll only analyze the other two models' results. The random effect
model results slightly different from that of the fixed effect model.
Concerning inputs variables:

• The most significant and statistically significant impact on interest income has two of the
three factors examined: labor price and loan price. In both models 2 and 3, the labor price
provides the maximum contribution (0,719 and 0,648) to explain interest income, and best
describes the H-statistic. In the variable price of funds we find not very high but statistically
significant coefficient at the conventional level (0,01 ), suggesting that higher price of funds
increases banks interest incomes. The dependent variable interest income appears to be non
statistically significant related to the price of capital (PC).
If we pay attention to the specific banking variables, we will find the following:
• The bank risk (the ratio of equity to total assets) has a positive sign but a statistically
insignificant effect on interest income. Credit risk also has a positive impact but is
statistically significant only in the fixed effect model. The bank size exerts a positive and
statistically significant effect in both models, indicating that the bank size is positively
related to interest income and exerts beneficial effects of diversification. This confirms that
larger banks manage to earn more interest income compared to smaller banks.
Given the results presented in our analysis, the degree of banking competition in Bulgaria for
2013-2019 is classified as monopolistic competition. The value of the H-statistic for the banking
market is between 0,707 and 0,788, depending on the two models we apply.
4.2. Test for long-term equilibrium

As shown in (Shaffer, 1983), H-statistic can only be correctly defined for a banking system that
is in long-term equilibrium. The essence of this idea is as follows: if banks are systematically
in a state of competition, this competition should eventually eliminate imbalances in risk
distribution between them. Therefore, the level of profit (ROA) of banks should not closely
correlate with factor prices, reflecting the individual levels of banks' risks. The implementation
of this idea consists of three stages:
1) Replacement of the dependent variable in equation (1) from ln (II) to ln ROA
2) Evaluation of the newly obtained equation - the equation of asset profitability;
3) Calculate Shaffer's E-stat
The P-R approach's underlying assumptions are that it should be used where the observations
are in long-run equilibrium. The resultant E E-statistics is supposed to be significantly equal to
zero in equilibrium and significantly negative in the case of disequilibrium. The idea behind
this test is that, in equilibrium, returns on bank assets should not be related to input prices
(Pawlowska, 2012). The authors (Mamatzakis et al., 2005) employed the equilibrium test for
the SEE countries' banking industries over the period 1998–2002. They found that banks in this
region (including the Bulgarian banking market) are operating under long-run equilibrium.
Delis (2010) came to the same conclusion by tested long-run equilibrium for 22 CEE countries'
banking industries over the period 1999–2006 (including the Bulgarian market).
264
Table 7: Equilibrium tests ROA

dependent variable: ln (ROA+1) dependent variable: ln (ROA+1)
FEM regression REM regression (GLS)
coefficient std. error probability coefficient std. probability
error
[1] loan price -0,19 0,06 0.0075*** -0,502 0,09 2.01e-
08***
[2] capital price 0,035 0,10 0.726 0,174 0,109 0,11
[3] labour price 0.167 0,196 0.404 0,408 0,697 0,558
E- 0,012 0,238 0,958** 0,08 0,675 0,905*
statistics=[1]+[2]+[3]
Once H's value is obtained, the hypothesis tests are carried out to determine whether the value
is consistent with the theory. The P-R model is only valid if the market is in long-run
equilibrium. To test the P–R model's validity, we estimate an equation where the dependent
variable is the return on assets (ROA), and the independent variables are the same as in the
baseline model. In line with Claessens and Laeven (2004), the measure of ROA is expressed as
ln(1+ROA) in order to adjust for potential negative values that might have occurred due to bank
losses in any year. The test for the long-run equilibrium is undertaken using the Wald coefficient
restriction test, which tests whether 𝐸 is equal to zero. The estimation provided an E coefficient
of 0,01 FEM regression and 0,08 in REM regression, which can be considered very close to
zero at the significance level of 5% and 10% . Hence, it makes the P-R model applicable for
our sample of data. Our finding that the Bulgarian banking sector achieved long-run equilibrium
is congruent with the relevant literature in line with the foregoing analysis.
5. CONCLUSION
To assess the degree of competition in the Bulgarian banking industry, an empirical analysis
based on the nonstructural method developed by Panzar and Rosse (1987) was conducted. We
used annual panel data covering 18 banks over seven years (2013-2019). We applied three
different models to evaluate the H-statistic of competition on the Bulgarian banking market.
After a series of tests, we found that the most appropriate of the three applied models is the one
with random effects. Because of the results presented in our analysis, the degree of banking
competition in Bulgaria for 2013-2019 is classified as monopolistic competition. The value of
the H-statistic for the banking market is between 0,69 and 0,788, depending on the models we
apply. We make the conclusion that the best of the three applied models is the one with random
effects. The most significant and statistically significant impact on interest income has two of
the three factors examined: labor price and loan price. In both fixed and random models, the
labor price provides the maximum contribution (0,719 and 0,648) to explain interest income,
and best describes the H-statistic. The dependent variable interest income appears to be non
statistically significant related to the price of capital (PC). The bank risk has a positive sign but
a statistically insignificant effect on interest income. The credit risk also has a positive impact
but is statistically significant only in the fixed effect model. The bank size exerts a positive and
statistically significant effect, indicating that the bank size is positively related to interest
income and exerts beneficial effects of diversification. The bank size coefficient is positive and
statistically significant in both models. This result supports the view that banks with higher
market power obtain higher interest income. Our finding that the Bulgarian banking sector
achieved long-run equilibrium concurs with finding from the relevant literature in line with the
foregoing analysis.
265
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268
APPENDIX
List of banks in the sample

N Bank
1 ALLIANZ BANK BULGARIA AD
2 BULGARIAN DEVELOPMENT BANK AD
3 BULGARIAN-AMERICAN CREDIT BANK
4 CENTRAL COOPERATIVE BANK AD
5 D COMMERCE BANK AD
6 DSK BANK PLC
7 EUROBANK BULGARIA AD
8 FIRST INVESTMENT BANK AD
9 INTERNATIONAL ASSET BANK AD
10 INVESTBANK PLC
11 MUNICIPAL BANK PLC
12 PROCREDIT BANK (BULGARIA) EAD
13 RAIFFEISENBANK (BULGARIA) EAD
14 TBI BANK EAD
15 TEXIMBANK
16 TOKUDA BANK
17 UNICREDIT BULBANK AD
18 UNITED BULGARIAN BANK - UBB
269
CAUSALITY BETWEEN GOVERNMENT EXPENDITURE AND

ECONOMIC GROWTH IN BULGARIA, ROMANIA, SLOVENIA,
CROATIA AND GREECE
Velichka Nikolova
University of National and World Economy (UNWE), Department of Economics,
Sofia, 8th December str., 1700, Bulgaria
[email protected]
Angel Angelov
University of National and World Economy (UNWE), Department of Finance,
Sofia, 8th December str., 1700, Bulgaria
[email protected]
ABSTRACT
The present study focuses on examining the relationship between government expenditure and
economic growth within five selected Balkan countries (Bulgaria, Romania, Slovenia, Croatia
and Greece) for the period from the first quarter of 2000 to the third quarter of 2020. On the
one hand, the presence of a long-term cointegration relationship is examined by the Johansen
cointegration test, which leads to the conclusion that such a relationship exists in all analyzed
countries. On the other hand, the study tests causality between expenditure and growth in the
short-term using the Granger causality test. The results obtained show some heterogeneity
between countries. However, the results for most of the analyzed countries confirm a
unidirectional causality from economic growth to government expenditure. The study
emphasizes the need to look for a different approach to public finance management that would
contribute to a higher rate of economic growth in these Balkan countries.
Keywords: causality, cointegration, economic growth, government expenditure
1. INTRODUCTION
In a large number of studies in the scientific literature, emphasis is placed on fiscal policy and
possible mechanisms for pursuing economic growth. More specifically, attention is focused on
the fiscal governance instruments (including taxes and government expenditure) and the
application of various econometric techniques to test whether there is a relationship between
fiscal instruments and growth. The subject of the present study is the relationship between
government expenditure and economic growth, and in this regard, the main purpose is to
determine whether there is such a relationship for selected countries in the Balkan region in the
short and long-term. Theoretical and empirical concepts that focus on the study of relationship
between government expenditure and economic growth are systematized in the first part. The
second part includes the data and methodology used. The third part focuses on the results of the
applied econometric tests, and the fourth part contains the conclusions of the study.
The scientific literature in the field of public finance often focuses whether there is a
relationship between the management of government expenditure and the achievement of
economic growth. The investigation and establishment of the existence of such a causality
between macroeconomic variables is of interest in a significant number of scientific studies.
Dependence is tested in both the short and long-term and the results obtained confirm or deny
the thesis of the existing relationship between growth and expenditure. Srinivasan (2013) uses
data for the period 1973-2012 and confirms the existence of a short and long-term relationship
for the Indian economy.
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Arpaia and Turrini (2008) investigate 15 EU member states and identify that there is long-term
relationship between government expenditure and potential output by applying cointegration
analysis. In addition, they use pooled mean group estimation and conclude that the adjustment
of government expenditure in the Nordic and Anglo-Saxon countries to changes in the potential
level of output is significantly faster than in the countries of South-Eastern Europe. The main
arguments for such a thesis may be due to the inelasticity of government expenditure relative
to the economic development of most countries in South-Eastern Europe and especially in the
Balkans (Nenkova and Angelov, 2020). Another group of authors consisting of Bağdigen and
Çetintaş (2004), Loizides and Vamvoukas (2005), Jiranyakul and Brahmasrene (2007), Liu,
Hsu and Younis (2008), Bayrakdara, Demeza and Yapara (2015), Karhan (2018), Uzoma-
Nwosu (2018), Pula and Elshani (2018), Uzoma-Nwosu (2018), Bandres and Cadea (2019)
highlight the direction of causality. Their analyses aim to determine whether government
expenditure create opportunities to boost economic growth, or rather the degree of economic
development is decisive in public finance management decisions. Some studies conclude that
government expenditure have an impact on economic growth, thus supporting the importance
of the public sector in managing the economy. Jiranyakul and Brahmasrene (2007), Ramphul
(2012) and Pula and Elshani (2018) confirm the unidirectional influence of expenditure on
growth. Liu, Hsu and Younis (2008) use data for the period 1947-2002 and also find that total
government expenditure impact the growth of the US economy, but these conclusions can not
be confirmed when they study the influence of growth on expenditure Moreover, they further
examine groups of federal expenditure and their relationship to economic growth and conclude
that no causality could be established for some of these groups (e.g. defense expenditure). For
other groups of federal expenditure, only an unidirectional causality can be found (from
expenditure to growth or from growth to expenditure), while for PR expenditure and net interest
payment, there is a bidirectional causal relationship. Nikolova (2020) emphasizes that the level
of interest payments in the structure of total government expenditures and also as a percentage
of GDP plays a key role in the sustainability of public finance and the investment activity, and
therefore can affect economic growth. Uzoma-Nwosu (2018) also establish a bidirectional
causality between expenditure and growth for the period 1970-2016 in Nigeria. Loizides and
Vamvoukas (2005) analyze the causality between economic growth and government
expenditure in the United Kingdom, Greece and Ireland in the second half of the twentieth
century. As a result, they conclude that in the UK and Greece economic growth is a significant
factor that determines government policy and budget planning, as well as the existence of a
bidirectional causal relationship between expenditure and growth. With regard to Ireland only
a unidirectional causality is established (from expenditure to growth). Dritsakis and
Adamopoulos (2004) also confirm a bidirectional causality between government expenditure
and economic development in Greece for the period 1960-2001. Karhan (2018) investigates the
relationship between expenditure and growth for Brazil, Russia, India, China, South Africa
(BRICS) and Turkey, using data for the period 1989-2017 and notices that economic growth
can be considered as a factor influencing government expenditure policy in the shor-term, while
the relationship between expenditure and growth is bidirectional in the long-term. Mehrara,
Abrishami, Boroujli and Amin (2013) reaffirm the unidirectional causality and the impact of
growth on the government expenditure of Iran in the period 1970-2010, emphasizing the need
for more efficient resource allocation and more tangible private sector involvement. The long-
term impact of economic growth on government expenditure is also verified by Bayrakdara,
Demeza and Yapara (2015). Boussalem, Boussalem and Taiba (2014) reach a similar
conclusion by examining the relationship between Algeria's economic growth, on the one hand,
and government expenditure, but represented only by health care expenditure, on the other
hand, for the period 1974-2014. In addition, there are studies in the scientific literature that deny
the existence of a causal relationship between government expenditure and economic growth.
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Bağdigen and Çetintaş (2004) come to these conclusions for the Turkish economy in the period
1965-2000. Dogan and Tang (2006) analyze data for 5 countries in Southeast Asia (Indonesia,
Malaysia, the Philippines, Singapore and Thailand) and conclude that there is no causality
between expenditure and growth in 4 of these countries. Only for the economy of the
Philippines the influence of government expenditure on the economic development of the
country is established.
3. DATA AND METHODOLOGY

In the present study, we examine the existence of a relationship between government
expenditure and economic growth using a cointegration test and a short-term causality test. The
study covers five Balkan countries that are members of the European Union (Bulgaria,
Romania, Greece, Croatia and Slovenia). For this purpose, we use quarterly data for the period
from the first quarter of 2000 to the third quarter of 2020 (2000Q1-2020Q3). The number of
observations is 83. The source of the data is the macroeconomic statistics of Eurostat. Economic
growth (RG) is presented by the available unadjusted data for Gross Domestic Product (GDP,
chain linked volumes (2015) in million euro). Government expenditure (EXP) is included in
the analysis as a ratio of GDP. Due to the fact that we use quarterly data in the study, it is
possible that there are cyclical fluctuations in the time series, which will adversely affect the
results obtained. That is why, the time series of the analyzed variables are seasonally adjusted,
and then transformed into natural logarithms (LNRG, LNEXP). At the next stage, unit root tests
are applied. In this regard, we use the Augmented Dickey–Fuller (ADF) test (which uses the
information criteria of Schwarz and Akaike) and the Phillips-Perron (PP) test. The test for
causality between government expenditure and economic growth is performed by the Granger
test (1969). The following two equations are used for this purpose:
m d
LNRGi,t = α0,i + ෍ βi,j LNRGi,t−j + ෍ γi,p LNEXPi,t−p + εi,t (1)

j=1 p=1
𝑚 𝑑
𝐿𝑁𝐸𝑋𝑃𝑖,𝑡 = 𝜂0,𝑖 + ෍ 𝜇𝑖,𝑗 𝐿𝑁𝐸𝑋𝑃𝑖,𝑡−𝑗 + ෍ 𝛿𝑖,𝑝 𝐿𝑁𝑅𝐺𝑖,𝑡−𝑝 + 𝜐𝑖,𝑡 (2)

𝑗=1 𝑝=1
where i refers to the country (where i = 1, ..., N); t refers to the time period (where t = 1, ..., T);
p and j refer respectively to the lags (where p = 1, …, d and j = 1, …, m); m and d refer
respectively to the optimal lag for variables LNRG and LNEXP; ε and 𝜐 are the residual
components. When applying the Granger test, two hypotheses are defined. The null hypothesis
(H0) states that there is no causal relationship, i.e. LNEXP is not a cause of LNRG (γ1 = γ2 =..
= γd = 0) or LNRG is not a cause of LNEXP (δ1 = δ2 =.. = δd = 0). The alternative hypothesis
(H1) assumes that government expenditure causes changes in the rate of economic growth (in
Equation 1) respectively the rate of economic growth causes changes in the level of government
expenditure (in Equation 2). If we accept the alternative hypothesis in only one of the two cases
(equations), then there is a unidirectional causality. When the alternative hypothesis is valid for
both equations above, then there is a bidirectional causality. Through the Granger test, a causal
relationship between government expenditure and economic growth can be investigated and
established in the short-term In addition, we examine whether there is a relationship between
the analyzed variables in the long-term. Therefore the Johansen cointegration test is performed
(Johansen and Juselius, 1990). The basis of Johansen's test is to check the number of
cointegrating relations, including whether such a relationship exists.
272
Two types of test statistics (trace statistics and maximum eigenvalue statistics) are used. The
trace statistic tests the null hypothesis (H0) that the number of cointegrating equations is r, where
r = 0, 1, 2 … v-1, against an alternative hypothesis (H1) for v number of cointegrating equations
(where v is the number of endogenous variables).
v
COINR trace (r |v) = −T ෍ ln (1 − λi ) (3)

i=r+1
where: T is sample size and λ is eigenvalues.
The maximum eigenvalue statistic tests the null hypothesis (H0) according to which the number
of cointegrating equations is equal to r against an alternative hypothesis (H1) that states that the
number is equal to r+1.
COINR max (r | r + 1) = −T ln (1 − λr+1 ) (4)

4.1. Results from applied unit root tests
In Table 1 are presented the results from unit root test of the analyzed variables for each of the
country under the scope of the present study. Augmented Dickey–Fuller (ADF) test and
Phillips–Perron (PP) test are applied.
ADF Test statistic PP Test statistic

Variables Schwarz Info Criterion Akaike Info Criterion Bartlett kernel
Prob.* t-statistic Prob.* t-statistic Prob.* Adj. t-Stat
Bulgaria
LNRG 0.108 -2.550 0.168 -2.321 0.114 -2.522
LNEXP 0.126 -2.474 0.591 -0.255 0.091 -2.630
Croatia
LNRG 0.110 -2.538 0.110 -2.538 0.117 -2.508
LNEXP 0.442 -0.629 0.442 -0.629 0.258 -2.069
Greece
LNRG 0.855 -0.638 0.855 -0.638 0.812 -0.804
LNEXP 0.569 -1.418 0.569 -1.418 0.418 -1.718
Romania
LNRG 0.525 -1.508 0.525 -1.508 0.528 -1.502
LNEXP 0.434 -1.686 0.251 -2.086 0.434 -1.686
Slovenia
LNRG 0.483 -1.591 0.483 -1.591 0.480 -1.595
LNEXP 0.369 -1.817 0.311 -1.945 0.233 -2.132
Table 1: Unit Root Test Results (in level)
(Source: Authors’own calculations)
As a result of the performed unit root tests at levels, it is found that the obtained probabilities
(Prob.*) for the variables used are greater than the significance level of 5 %. Therefore, all the
variables at levels I(0) are non-stationary, and this can lead to confusion about the real
relationship between the analyzed variables. To avoid such a problem, time series are
transformed using first difference I(1).
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Table 2 below presents the results of the applied unit root tests, showing that the time series of
the analyzed variables at the first difference are stationary.
ADF Test statistic PP Test statistic

Variables Schwarz Info Criterion Akaike Info Criterion Bartlett kernel
Prob.* t-statistic Prob.* t-statistic Prob.* Adj. t-Stat
Bulgaria
DLNRG 0.000 -9.996 0.047 -1.969 0.000 -9.493
DLNEXP 0.000 -7.092 0.000 -7.092 0.000 -7.238
Croatia
DLNRG 0.000 -8.939 0.000 -8.939 0.000 -9.033
DLNEXP 0.005 -3.736 0.005 -3.736 0.005 -3.749
Greece
DLNRG 0.000 -8.545 0.000 -8.545 0.000 -8.736
DLNEXP 0.000 -5.322 0.000 -5.322 0.000 -6.430
Romania
DLNRG 0.000 -8.354 0.000 -8.354 0.000 -8.352
DLNEXP 0.000 -7.495 0.000 -7.495 0.000 -7.469
Slovenia
DLNRG 0.000 -8.017 0.000 -4.671 0.000 -8.121
DLNEXP 0.000 -8.208 0.000 -4.705 0.000 -8.265
Table 2: Unit Root Test Results (in first difference)
The results presented in Table 2 allow us in Equation (1) and Equation (2) to replace the
variables LNRG and LNEXP with variables formed as their first difference, i.e. DLNRG and
DLNEXP. In this way, the relationship between the growth rate of the economy of the selected
Balkan countries, on the one hand, and the government expenditure (as a percentage of GDP),
on the other hand, can be examined. After the transformation of the variables, the Granger
causality test is used in order to establish the existence and direction of a causal relationship
between government expenditure and economic growth in Bulgaria, Croatia, Greece, Slovenia
and Romania.
4.2. Granger causality test results

By applying the Granger test, a conclusion can be reached about the relationship in the short-
term. Moreover, this test can establish not only the presence of a relationship, but also its
direction, i.e. whether expenditure affect economic growth, or economic growth is a factor,
predetermining government expenditure, or whether there is in fact a bidirectional causality.
Before applying the Granger test, it is necessary to determine the optimal number of lags. For
this purpose, we use Akaike (AIC), Hannah-Quinn (HQ) and Schwarz (SC) information criteria.
The optimal number of lags is given in Table 3 for each of the countries. The applied Granger
test leads to different conclusions with respect to the analyzed countries. It should be noted that
Croatia is the only country in the scope of this study where we establish a bidirectional causality
(at significance level of 10%), i.e. government expenditure affect the rate of economic growth,
as well as the growth of the Croatian economy leads to changes in the government expenditure
policy.
274
Variables Lag
F-Statistic Prob. Causality
Bulgaria
DLNEXP → DLNRG 0.27537 0.8929 No causality
4
DLNRG → DLNEXP 2.88868 0.0285 Unidirectional
Croatia
DLNEXP → DLNRG 2.16915 0.0497
7 Bidirectional
DLNRG → DLNEXP 1.93587 0.0794
Greece
2
DLNRG → DLNEXP 1.99817 0.1427 No causality
Romania
1
Slovenia
7
Table 3: The Pairwise Granger Causality Tests Results
The obtained results from the Granger test show that for Bulgaria, Romania and Slovenia there
is a unidirectional causal relationship for the period from the first quarter of 2000 to the third
quarter of 2020. For all three countries economic growth has been found to cause changes in
the activities of governments and their expenditure on public goods and investment. However,
the result of the Granger test does not confirm the thesis that government expenditure in these
Balkan countries causes changes in their economic development in the short-term. On the other
hand, only in Greece of the countries surveyed, no causal relationship is found between
expenditure and growth. The arguments for this result can be sought from the fact that the Greek
government generated the highest average relative share of government expenditure relative to
GDP for the period 2000Q1-2020Q3 (about 50%), but at the same time the average growth rate
of the Greek economy for the same period is the lowest. The analyzes performed on the
relationship between the activities of governments and the development of the economies of
the five Balkan countries in the short-term raise many questions about the effectiveness of the
management of their government expenditure. All countries that are the subject of this analysis
are characterized by significant public sector involvement in economic governance. Therefore,
it is important to find the better mechanism in the allocation of budgetary resources in a way
that promotes greater economic growth.
4.3. Johansen cointegration test results

In the long-term, testing for cointegration between the variables is performed using the
Johansen cointegration test. The basis of the test is to establish the number of cointegration
relations and to interpret two test statistics - Maximum Engelvalue and Trace Statistics.
According to the methodology presented in the second part of the study, the null (H0) and
alternative (H1) hypotheses are defined and tested. The results are presented in Table 4 below.
The optimal number of lags applied in the Granger causality test (in section 4.2) is also used in
the Johansen cointegration test. The obtained results allow us to conclude that in all five
countries under the scope of the study there is a long-term cointegration relationship between
government expenditure and economic growth.
275
Bulgaria
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
Eigenvalue Prob.**
No. of CE(s) Statistic Critical Value
None* 0.142339 13.34652 12.32090 0.0336
At most 1 0.017410 1.369931 4.129906 0.2829
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
Eigenvalue Prob.**
None* 0.142339 11.97659 11.22480 0.0368
At most 1 0.017410 1.369931 4.129906 0.2829
Croatia
Eigenvalue Prob.**
None* 0.300884 38.45278 25.87211 0.0008
At most 1 0.143384 11.60741 12.51798 0.0706
Eigenvalue Prob.**
None* 0.300884 26.84538 19.38704 0.0034
At most 1 0.143384 11.60741 12.51798 0.0706
Greece
Eigenvalue Prob.**
None* 0.155604 13.89261 12.32090 0.0271
At most 1 0.004514 0.361910 4.129906 0.6104
Eigenvalue Prob.**
None* 0.155604 13.53070 11.22480 0.0193
At most 1 0.004514 0.361910 4.129906 0.6104
Romania
Eigenvalue Prob.**
None* 0.233156 27.61229 20.26184 0.0040
At most 1 0.072647 6.109077 9.164546 0.1825
Eigenvalue Prob.**
None* 0.233156 21.50321 15.89210 0.0059
At most 1 0.072647 6.109077 9.164546 0.1825
Slovenia
Eigenvalue Prob.**
None* 0.168938 16.39312 12.32090 0.0099
At most 1 0.032969 2.514340 4.129906 0.1333
Eigenvalue Prob.**
None* 0.168938 13.87878 11.22480 0.0167
At most 1 0.032969 2.514340 4.129906 0.1333
Table 4: The Johansen Cointegration Test Results
276
Initial empirical tests using trace statistics and max-eigen statistics at a significance level of 5%
(prob. < 0.05) lead to the rejection of the null hypothesis of no cointegration relationship and
the acceptance of a hypothesis of such dependence (r > 0). In subsequent tests (At most 1) there
is no reason to reject the null hypothesis. Therefore, for each of the countries there is one
cointegration equation proving the relationship between the variables used. The results of
Granger and Johansen's tests show that while in the short-term government expenditure in
almost all countries has no impact on economic development, this is not the case in the long-
term. Obviously, the effects of the government activities in Bulgaria, Greece, Slovenia and
Romania are delayed. In the present study, we focus only on whether there is a long-term
relationship between expenditure and growth, but not on the outcome of this relationship, i.e.
whether government have a positive or negative effect on growth, or vice versa. This can be
verified by additional econometric valuation models known in research practice.
5. CONCLUSION
The analysis made in the present study allows us to conclude that for selected countries in the
Balkan region (Bulgaria, Croatia, Greece, Romania and Slovenia) there is a relationship
between government expenditure and economic growth in the long-term. More precisely, the
direction of causality in the short-term has been investigated, noting some similarities and
differences in terms of results obtained by country. The similarities are that for all countries
except Greece, the direction of causality is from economic growth to government expenditure.
These findings are not expected, due to the fact that within the period under review, the
countries covered by the study pursue the stimulation of economic growth through the increase
of government expenditure in priority sectors for governments. The differences in the results
obtained in the short-term are due to the fact that Croatia is the only country in which there is a
bidirectional relationship between expenditure and growth, and in Greece there is no evidence
of causality between the studied indicators.
ACKNOWLEDGEMENT: This paper contains results of a scientific project: “Problems and

challenges of fiscal policy in the Balkan region countries”, carried under contract NID NI-
4/2020 at University of National and World Economy, Sofia, Bulgaria.
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HUMAN RESOURCES MANAGEMENT UNDER THE INFLUANCE OF

COVID 19 PANDEMIC
Viera Sukalova
University of Zilina in Zilina, Univerzitna 1, 01026 Zilina, Slovakia
[email protected]
ABSTRACT
Businesses operate in an environment that changes every day. Monitoring and early detection
of changes in the external environment, which may have a negative impact on the company, is
considered the first prerequisite for its protection and increased resilience. Although the
company is unable to influence the crisis environment, it can mitigate, control and minimize
the effects of crisis situations on the operation of the company through positive thinking and
actions of top and crisis management. There are modifications in the field of legislation, quality
standards, continuous improvement of technology, or social values; in addition, businesses are
currently affected by the Covid 19 pandemic. The pandemic has had a significant impact on
businesses; represents a significant intervention in the current management of human
resources, there has been a major change in the transfer of number of work activities to the
online sphere. During the pandemic, human resource management became an even more
important part of any company, as many employees had to stay home, significantly reducing
not only their contact with each other, but also the overall ability of the company's management
to manage employees. Businesses thus strive to replace personal contact with various forms of
people management that take place in the online sphere. A pandemic represents a new risk at
work, which also affects the working conditions of employees. At present, HR professionals take
care, among other things, of the health of employees or ensure sufficient communication
between the employer and the employee regarding the company's current measures. The aim of
the article is to analyse current changes in human resource management on the example of a
critical infrastructure company in terms of personnel management functions.
Keywords: Human resources, Management, Pandemic, Work
1. INTRODUCTION
Human resources are the most important factor in any business, as they condition the use of
other resources. We can understand human resources as employees, more specifically their
knowledge and abilities, skills as well as their personal characteristics. Nowadays, when there
are rapid and frequent changes in companies, but also outside them, it is necessary to employ
people who have a positive attitude to the work performed, have professional knowledge, the
necessary skills and interest in developing them. Human resource management is an integral
part of an organization's management. Its main task is to enable management to improve
individual and collective attitudes of people to short-term but also long-term success of the
organization, create an environment that helps develop human potential and create positive
employee motivation to meet organizational goals, strengthen interpersonal relationships in the
organization, support teamwork and monitor development, affecting the fulfilment of the goals
of employees and the organisation as a whole. The traditional management approach
understood human resources as performers and focused mainly on processes. Unlike in the past,
human resource management is now rather strategic in nature and is therefore perceived mainly
in terms of people's contribution to business results. There was never any doubt about the
importance of human resources in the organizational structure of companies. In some, however,
HR managers themselves have relegated themselves to the role of statisticians or "executors"
of owner or director orders. The importance of human resource management in the organization
and how it will work is decided by the organization itself.
279
At the same time, it decides on its scope, structure and on the position of human resources
management in the hierarchy of management activities of the organization. Currently, human
resource management has a different role in organizations. It covers number of activities and
activities from searching, recruiting, selecting employees to leaving an employee in the
organization in which he works. It focuses on activities to improve working conditions in the
organization, company culture, employee care, etc. In many cases, however, 2020 marked a
major change in the way individual companies make decisions. Constant changes in the
economic and social field of society must also be reflected in the need for changes in access to
human resources. Today, human resource management faces many challenging issues and
challenges. Personnel activities need to be analysed in terms of goals, activities, strategies and
procedures necessary to meet the needs of both employers and employees. The article is focused
on case study and analysis of HRM in selected company during the Covid 19 pandemic from
aspect of chosen HRM activities.
2. HUMAN RESOURCES MANAGEMENT IN COMPANY

Human resources management can be characterized as a strategic, planned, the Behaviourism
in social responsible communication business strategy and targeted approach to managing the
most important article in the organization, its employees. Human resource management seeks
to reconcile the need for human resources with their potential. Its main task is therefore to use
the potential of employees as effectively as possible so that the goals of the company are met.
It is also necessary to ensure satisfaction and motivation for your employees, to give them space
for development and not to forget their personal lives. In the 21st century, human resource
management is gaining more and more prominence as it helps to increase the quality of
employee benefits that are important to the company's success in both the short and long term.
(Majtan, 2016)
2.1. The importance of human resources in the company

Human resources are one of the resources used in the company, necessary for the fulfilment of
its intentions. They form an important part of every company, because they are a necessary
prerequisite for its existence and further development. Therefore, human resources should be
treated at least as carefully as material, financial or information resources. Plainer describes in
his work that hard resources can be used in companies, i.e. those related to company materials
and money or human resources, which are carried by the employees themselves. Human
resources represent the characteristics of people, their abilities or attitudes and are useful in the
implementation of activities in the company. (Plamínek, 2018) Kachaňáková et al. states that
human resources are currently a key factor in the functioning and development of any company,
and their importance will increase in the future. If a company wants to move forward and ensure
its competitiveness, it must employ competent people who, even in turbulent times, can perform
the set tasks from a professional and professional point of view. Zainon (2020) identifies
employees as an important part of the company, necessary to fulfil the mission and achieve
goals in the company. He states that nowadays the achievement of business goals is
significantly influenced by, for example, technological changes, market conditions, the
economic situation, or the level of requirements imposed by the customer. Tomčíková (2020)
has a similar opinion, stating that all changes that occur are determined by one common fact,
and that is the existence of human capital in the company. Employees manage financial,
material and information resources, control them, correct errors, plan their needs and coordinate
them. The employee must be a strategic advantage and benefit for the company, which should
be reflected not only in financial results but also in operating results (e.g. customer satisfaction
or labour productivity), in which case it can be described as the most valuable resource. (Gemar,
2019) Procedure for the continuous improvement of human resource management, 2019)
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Managing human resources means assigning tasks to them and controlling their fulfilment,
providing them with information important for their work, motivating them, developing their
knowledge and skills, but also solving their problems. All this should lead to the achievement
of the company's goals. The success of human resource management lies in understanding
employees, understanding differences in their behaviour, performance. According to Vrchota
and Rehor (2019), human resource management is perceived as one of the most important parts
of the company's strategy, mainly because its main task is to work with people who are the most
important part of every company, as without them companies would not be able to meet their
goals.
2.2. Changes of the HRM in era of globalization

From the above we can conclude that human resource management has been considered an
important prerequisite for successful business since its inception, but in recent literature, more
and more emphasis is placed on people management, while the authors try to point to its gradual
development and interconnection with other areas. According to most authors, the impulses for
the development of human resource management are precisely technological advances, various
legislative changes, market conditions, changes in social values and, last but not least, natural
conditions. Today, the globalization economy has a significant impact on human resources and
their management, enabling organizations to compete with each other internationally. The
presence of globalization can lead to a competitive advantage if companies integrate local
business peculiarities and effectively transfer knowledge and technology across borders.
However, the transformation of best human resource management practices into other countries
is not always possible due to cultural and institutional differences (Cehlárová, Cocuľová, 2012).
The rapidly changing world and the globalization of the business environment are putting
enormous pressure on organizations to face the changes they face. For this reason, the ability
of the company and its management to make the necessary changes is very important.
Businesses operate in an environment that changes every day. There are modifications in the
field of legislation, quality standards, continuous improvement of technology or social values.
Such changes have the greatest impact on human resources, as they are in direct contact with
them and must respond flexibly to them so that the company can successfully advance and
develop. For this reason, investing in human resources and training is considered a safe way for
employers to increase an organization's performance. (Blaga et al.. 2020) The importance of
Human Resources in the Continuous Improvement of the Production Quality, 2020) Human
resources management should strive to achieve harmony between management procedures and
corporate goals in the field of recruitment and selection of employees, remuneration system, or
evaluation of the performance of its employees, so that these goals are met. It should also focus
on employee behaviour and its impact on business performance. (Tashtoush, 2020) The
relationship between human resource management practices and organizational citizenship
behaviour, 2020) At present, more and more experts are beginning to look at human resources
management from a different perspective. It is an effort to reconcile human resource
management and sustainable development so that the company's economic goals are achieved,
while avoiding social and environmental problems in the future. According to the author, this
compliance will be achieved through careful human resource planning, motivation and control
of the proper performance of business tasks with a view to achieving sustainable development.
(Drela, 2020) Sustainable development in the field of human resources management also
includes social sustainability, which includes not only employee management but also care for
them. The consequence of the company's inability to meet social sustainability may be a
disruption of corporate culture, the achievement of corporate goals, or the morale of employees.
Likewise, current human resource management is increasingly seeking to expand the
development of workers' professional skills to include the development of soft skills, thus
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enabling employees to broaden their horizons in the field of interpersonal relationships and
behaviour. By individual development of human resources, the company is able to ensure the
overall organizational well-being. (Battaglio, 2020) The Future of Public Human Resource
Management, 2020) The Covid 19 pandemic is currently one of the key factors for global
change and it is therefore necessary to focus on its impact on HRM.
2.3. HRM changes during the pandemic Covid 19

Covid-19 is a natural factor in the external environment that has affected businesses around the
world. It is one of the infectious diseases and first appeared in the city of Wuchan, China, in
December 2019. The virus mainly affects the respiratory system, and can lead to severe
pneumonia or even death. It is transmitted through droplets, especially when talking, coughing
or sneezing. COVID-19 pandemic has caused the most serious shocks in the global economy
since the end of World War II. At the time the virus was discovered, economists and analysts
had predicted only a partial impact on the world economy. However, the events that took place
at the beginning of 2020 brought a significant change, when all the key economies of the world
almost stopped. Selected service sectors have de facto disappeared and that many industrial and
manufacturing companies have had to deal with serious supply chain disruptions. Slovak
author, Bečka (2020), takes a similar view, arguing that the impact of the pandemic on the
global economy has caused a drop in demand for products and services, as well as sudden
complications in subcontracting. At the same time, the rapid advent of crisis management has
led to a strict approach to protecting the health and safety of employees, as well as protecting
business on a local and global scale. The sharp decline in economic activity comes with a
catastrophic impact on the global labour market. According to the International Labour
Organization (ILO), the global decline in working hours in 2020 compared to 2019 was
equivalent to the loss of 300 million full-time jobs. The International Labour Organization
estimates that up to 80% of the approximately 2 billion informally employed workers
worldwide are affected by the pandemic. (International Monetary Fund, 2020) According to
Pouliakas and Branka (2020) and Fana et al. (2020) the most vulnerable segments of the
workforce most likely to be affected by distance measures and practices as a result of the
COVID-19 pandemic are women, foreigners, people with non-standard contracts (self-
employed and temporary workers), people with low education, micro-workers. workplaces and
low-wage workers. During the pandemic, human resource management became an even more
important part of any company, as many employees had to stay from home, significantly
reducing not only their contact but also the overall ability of management to manage employees.
Businesses thus strive to replace personal contact with various forms of people management
that take place in the online sphere, such as virtual education and courses, evaluation meetings,
counselling meetings and the like. They also try to maintain good working relationships and
satisfaction on the part of employees, for example through short online game meetings, various
virtual competitions, communication exercises, providing seminars focused on stress or
anxiety, but also online exercises (e.g. meditation). All these activities strengthen the
motivation of employees and help increase their involvement. In addition to these activities,
human resources managers and managers must discuss with the company's management the
current situation so that they can provide employees with all necessary information and thus
contribute to their well-being, safety, or productivity. The human resources management
pandemic has expanded the scope of work because beyond the original activities currently have
to take care of the health and well-being of workers and also deal with redundancies much more
often. Due to the current situation, there are a number of changes in companies, and human
resources must be able to accept these changes first. At present, in addition to online
communication of employees, electronic recruitment and selection of new employees is gaining
prominence in human resource management, which enables companies to attract candidates
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from various places, without the need to travel. (Rodríguez-Sánchez et al., 2019) Human
resource management has mostly shifted to the online realm. Employees who were allowed to
do so by the nature of the work remained to work from home. In many companies, personal
contact has been replaced by e-mail communication or video conferencing. As a result, the
importance of personnel staff increased significantly during the pandemic. At present, the main
task of HR staff is to maintain the productivity and motivation of employees and to contribute
to maintaining their well-being. (Lewis, 2020) Gigauri (2020) describes the pandemic as a
factor that makes a positive contribution to human resource management, in particular by
speeding up the digitization process in companies so that employees can carry out their work
activities during this period as well. It also emphasizes that human resources are under greater
pressure during the crisis, which is increasing the personal stress of workers. Singh, like
Gigauri, states in his article that there have been significant changes in human resource
management during the pandemic, especially digitalisation, as companies have had to create a
day-to-day space for employees to work from home. Covid-19 also affected the activities of
human resources staff, who had to start recruiting candidates, interviews or training employees
through video calls. Businesses began to perceive the safety and health of their employees from
a completely different perspective, and in connection with this, new obligations were added to
employers regarding the disinfection of the workplace or the purchase of protective equipment.
In difficult times, managers should encourage, support and motivate employees to stay true to
their core values, demand feedback from employees, communicate with them openly and try to
ensure their commitment to work despite the unfavourable situation. Only in this way can the
company achieve good results. Prior to the pandemic, companies had no experience with such
situations. Most employers tried to allow employees to work from home, which, however, e.g.
in the services sector it was unrealistic.
3. RESEARCH RESULTS AND DISCUSSION

In our research we used a method case study and we analysed the impact of the Covid 19
pandemic on human resources management in the selected division of the enterprise - Energetic
distribution company in Slovakia. The company distributes electricity and provides households
and businesses with services related to the operation of distribution networks, e.g. performs
design of electrical equipment, installation of measuring and control technology and repairs
related to it, engineering activities, rental of energy equipment, energy consulting and many
other activities. The company with perceives human resources as a factor of progress, therefore
it strives for the continuous development of its employees, increasing their qualifications,
building and maintaining the trust of management and employees, supporting training and
ensuring comfort at work. As an employer, he realizes that just satisfied employees can be a
competitive advantage of the company. Our analysis we focused on one of the divisions, namely
the Customer Services division. We chose customer services mainly because the employees
within the division represent the company in a certain way, because they deal with customer
requirements on a daily basis and come into contact with them, either by phone, e-mail, etc.
The Customer Services division currently has 108 employees. As the name of the division
implies, its main tasks are customer care, provision of services, solution of requirements,
processes, processing of applications, changes of customers at collection points and many other
activities. The company within its organizational structure, it has a Human Resources section,
which, together with the managers of individual divisions, sections or departments, participates
in the management of employees. Human resources are responsible for the performance of a
number of activities, including e.g. publication of job offers, selection of candidates, their
acceptance, provision of adaptation training for new employees, organization of training,
remuneration, professional consultations, etc. The performance of personnel activities is mostly
carried out by the company independently, through its employees.
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The management of human resources in the company is implemented systematically with the
aim of increasing education and development of employees, improving communication,
information and overall growth of satisfaction of the company's employees. At present, human
resources management in the company is like in other companies, largely affected by the Covid-
19 pandemic. There have been several changes, more specifically, for example, in the area of
the process of selecting employees, their adaptation, or training and development. The working
conditions of workers have also changed to a large extent, mainly due to the fact that many
employees have started working from home. Working from home also has a significant impact
on workplace relationships, as employee contact has been minimized. As part of our research,
we conducted a questionnaire survey, which is focused on finding out the opinions of
employees, especially on how they perceive selected personnel functions and their working
conditions during a pandemic. Questionnaire, which we compiled for employees working in
offices.we handed to a total of 100 employees who work within the Customer Services division.
This questionnaire contained a total of 28 questions focused mainly on the working conditions
of employees performing work from home. 81 employees responded to the survey, which
represents an 81% return. Despite the pandemic, up to 31% of respondents go to the office at
least once a week and another 17% of workers at least twice a week. Most employees work
permanently from home and therefore do not go to their work address at all. The issue of
working time was very important; as many as 58% of respondents said that their working hours
are longer, most often citing the unfavourable and turbulent work environment they have at
home, the need to take care of other household members, slow internet, an increase in the
number of jobs or worse conditions at work from home. The same number of employees stated
that their work shift starts earlier, resp. starts later. In both cases, there were 6 employees each.
According to them, the reason for the earlier start of the work shift is primarily the time saved
when moving from home to work. On the contrary, at a later beginning, the slow connection in
connection with the weak internet was mentioned again. Some employees stated that his work
shift began later and was also longer. He stated as a reason that communication with other
employees during the performance of work tasks had changed. The prevailing opinion among
employees is that working from home does not affect their work performance (69% of
respondents). A total of 13% of employees reported an increase in their work performance,
most often citing the opportunity to work longer during the week and weekend work, which did
not occur in the office, more independence while working from home, or less disruptive effects.
On the contrary, 11% of employees stated that their work performance decreased. The main
reason is the absence of the possibility to consult with colleagues directly at the workplace, the
fact that applications go slower at home than at work, the impact of the environment, or
unsuitable working conditions. When it comes to the issue of working conditions that
employees have created at home; 25% of employees consider the working conditions of the
home office to be insufficient, 36% to be average. As many as 86% of employees stated that
their employer had provided them with the necessary means to work. Rising costs are also a
problem with working from home. The staff mostly answered in the affirmative to the question
regarding expenses due to work from home. As many as 28% of workers said their spending
had certainly increased, with another 20% choosing the "rather yes" option. A questionnaire
survey of interior workers showed us that the biggest shortcomings are a decrease in mental
well-being, motivation and satisfaction, increased costs for employees when working from
home, or the working conditions at home themselves. Many workers do not have suitable
conditions at home, have slower internet, do not have their own space with the necessary
equipment or have to engage in other activities in addition to work. On the other hand, they can
save on travel costs as well as the time they need to move to the workplace. There have also
been changes in the length of work for employees, with some working from home having a
positive effect, and thus their work performance has increased, while others have decreased.
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As already mentioned, the biggest reason in this case is the conditions at home, which each
employee has very individually. Most employees feel the impact of the pandemic and working
from home on their expenses, when the survey told us that they had increased. Expenditures on
electricity, water, heating, the Internet and the telephone grew the most. On average, these costs
increased by approximately € 20 per employee. On the positive side, despite working from
home, communication between managers and employees is at a high level, and that workers
receive sufficient feedback. The questionnaire survey also allowed us to find out that in most
cases employees would no longer welcome work from home, due to one of the above. Prior to
the pandemic, training as well as staff development were carried out on or off the company's
premises, as appropriate. In addition to mandatory training, employees could also participate in
other, above-mentioned training activities. At present, during a pandemic, any educational
activities in the society that do not result from the valid legislation were cancelled for a long
time. All mandatory training, the content of which allows it, must be carried out by
videoconference. Compulsory courses, which are carried out in order to obtain a certificate of
professional competence and it is necessary to implement them in person, must be taken under
predetermined conditions, such as ensuring a minimum distance of 2 meters between individual
employees. Based on the analysis and questionnaire survey, we were able to reveal
shortcomings in management, the elimination of which can move the company's human
resources management to a higher level. Every employer should be able to provide the
employee with favourable working conditions as well as the means necessary to carry out his
work. We propose the same contribution to cover the increased costs for each employee, as it
would be too lengthy and difficult for the company to check each employee and his invoices
for individual items separately. The allowance to cover costs would be provided to employees
who work from home for at least 10 working days a month. Another important area for ensuring
quality management of human resources in critical situations and maintaining the well-being
and motivation of employees is to ensure extracurricular activities so that employees relax in
their free time and at the same time do not feel the impact of the current situation on mental
health. Obviously, critical situations and working from home can affect everyone differently.
As we also found out through a questionnaire survey, the psychological side of some employees
is not affected by the Covid-19 pandemic in connection with working from home at all, while
others replied that their motivation, satisfaction and well-being are affected by working from
home. In this area, therefore, we propose to the company to implement online activities through
which employees come up with other ideas. For example, the implementation of various online
exercises and activities, where employees will be in contact through the MS Teams application
with the lecturer. Yoga exercises can be considered beneficial, as this activity has a positive
effect on the elimination of stress and helps prevent depression. At the same time, it contributes
to better posture and also relieves back pain, which is extremely important in sedentary work.
Another proposal in the field of online activities is intended for managers of individual
departments, who, in addition to managing employees, are expected to contribute to building
and maintaining a friendly atmosphere in the workplace. The proposal thus consists in the
introduction of regular informal online meetings. In the area of work, it is necessary to introduce
more frequent feedback from managers. Quite naturally, the company cannot expect that the
performance during work from home will be the same as those achieved under normal
circumstances, when the employee works from the office, where he has created suitable
working conditions for his work. Work performance fluctuates for employees, it can increase
for one employee and decrease for another. Assessment during crisis situations becomes even
more important, as communication between employees is very limited in these times and, as a
result, there may be weaker feedback. Evaluation of the employee's performance, his support
in solving unclear tasks and possible praise from the manager is a kind of motivation for each
employee in the future.
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We suggest that managers conduct evaluation interviews with their subordinates more often
during critical situations, specifically once a month. As part of the systemic solution of critical
situations in the interest of continuity, it is necessary to introduce security measures; these are
standard steps that are taken into account when planning business continuity in companies to
keep business processes functioning. The business continuity management program covers, in
addition to infrastructure, cyber, business, operational, communication and employee risks. A
timely analysis of risks related to threats to the physical and mental health of employees is also
a systemic measure. In the context of employee risk management, an analysis of key roles
requiring an on-site approach and addressing their absence (e.g. substitutability) is needed;
proposal of measures to ensure the management of stress and stressful situations for employees;
determining the method of locating and distributing employees at different stages of traffic
suppression and also determining the approach to employee mobility (division of shifts,
transport, etc.)
4. CONCLUSION
The Covid 19 pandemic affected the management of human resources in all companies.
Although some HRM functions have remained unchanged, more attention needs to be paid to
communication, employee control, care for working conditions and the physical and mental
health of employees. The situation regarding Covid-19 has encouraged employers to adapt
quickly and make effective use of technology to move the workforce at a distance. Many work
in the form of a home office for many months, some even for a year. Out of nowhere, the
situation changed, and from everyday getting up to work and meeting colleagues, people stayed
at home. With a computer in your kitchen or living room, at best in your office. Life changed
and was replaced by isolation and cessation of normal activities. For many months, many
employees are locked up at home. They are troubled by their stereotype, pandemic situation,
unpleasant news, some have to combine their work responsibilities with caring for children.
Health problems can also come to the fore. Whether it's various physical pains from prolonged
improper sitting at a computer, overloaded eyesight by constantly looking at the monitor, or
impaired mental health. The Covid-19 pandemic accelerated the home-office trend, but also
revealed its limitations. The success of organizations will still depend on the personal
interaction of people, their cooperation and team belonging. The most important thing is to
adopt system solutions in such crisis situations to maintain continuity, including the timely
identification of risks in the area of business operations as well as employee and communication
risks within the framework of human resources management. Further research is needed to
focus on model situations of human resources crisis management.
ACKNOWLEDGEMENT: This paper is an output of the Science project VEGA No. 1/0619/20
Fundamental research of quantitative and qualitative determinants of innovation potential and
innovation performance of a company in relation to increasing its competitiveness and VEGA
1/0064/20 Behaviorism in social responsible communication business strategy.
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THE DETERMINANTS OF COMPULSIVE BUYING: A BALKANS

CASE
Edmond Cera
Department of Business Administration, Faculty of Management and Economics,
Tomas Bata University, Zlin, Czech Republic
[email protected]
Humberto Nuno Rito Ribeiro

GOVCOPP, ESTGA, University of Aveiro, Portugal
[email protected]
Sandra Raquel Pinto Alves

[email protected]
Gentjan Cera
Department of Business Administration, Faculty of Management and Economics,
Tomas Bata University, Zlin, Czech Republic,
Faculty of Economic and Agribusiness, Agricultural University of Tirana, Albania
[email protected]; [email protected]
ABSTRACT
The level of education of consumers and, in particular, the attention that is being paid to
consumer culture, have increased the expectations and demands for contemporary evidence,
such as the use of credit cards, or financial advice. Furthermore, consumer willingness for
embracing E-banking platforms is increasing. Using a causal approach, with this research, it
has become possible to investigate the behavior towards the use of credit cards and the impact
on what is called the "compulsive buying" of the Albanian consumer. This approach also takes
into account demographic variables. This study begins with a discussion of the existing
literature, from which several factors that were considered valuable to be studied on the
Albanian consumer framework were taken into account. Hypotheses were then formulated and
developed, followed by a description of the method used and finally a discussion on the analysis
of the results. The study uses primary data as well as secondary data. The primary data was
collected from a structured questionnaire, which was handed to various individuals, from
students to professionals in various fields, including employees of several banks in Tirana, who
were very willing to answer the questionnaire. Secondary data was collected from various
published sources, namely economic journals, various scientific publications, and economic
books. The findings of this research suggest that credit card cost of usage, buying behavior,
and attitudes towards the use of credit cards, positively and significantly affect individual’s
compulsive buying behavior.
Keywords: Credit Card, Compulsive Buying, Electronic Money, Financial Literacy, Online
Banking, Balkans
1. INTRODUCTION
Individuals are increasingly using consumption as an alternative way to express and establish
their identity, or social status (Soper, 2007; Faber, 2004). Thus, in a logical chain starting with
money, as a tool that stimulates any economic mechanism, the relationship that this extremely
important tool has with the use of credit card and hasty purchases will be studied. Changing the
approach to money, from using it cash to embracing electronic payments, will be specifically
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the study area. What we are most interested in is the highlights of this report, the hasty credit
card-purchase, focusing on the factors that cause the latter. We live in an age from which we
receive and give a lot, so we interact, mostly with the economy, science, technology and with
the latter we often create relationships of dependence. Everyone tends to have the most
expensive telephone equipment, the most fashionable clothes and the social impact, it is
undoubtedly a very strong impetus. Some individuals tend to spend and be coherent in having
the latest purchases because the social impact is stimulating. Others tend to save in their bank
accounts and save them for difficult days, thus creating a social status. The status in this case is
related to the bank account and the respective amounts. However, hasty buyers (impulsive
buyers) perceive this fact differently. Yurchisin and Johnson (2004) examined the relationship
between hasty acquisition and social status, related to materialism and self-esteem. According
to them, hurried buyers were inclined to buy more, because in this way they felt better, "fought"
the stressful situations that occurred in their lives and thus, had more power in their hands. They
felt safer when collecting purchase invoices at the end of the day and this made them feel more
confident. The same logic was followed by a large number of scholars on the role of the credit
card in hasty purchases. The study spectrum becomes larger. In this case we will have to analyze
how the credit card manages to affect and does it really affect the hasty purchases. Most of the
people agree. As the domestic economy is more developed than it was a few years ago, and
attitudes towards e-money have changed, the use of credit cards and their impact on purchases
will increase respondents' credibility. In other words, as a result of the increase in the income
of Albanian consumers, thus translated with monthly salaries, different impulses, diets or
bonuses, lifestyle changes and the development of technology and marketing, makes the study
of this report more reasonable for the Albanian consumer. It should be said that, among
Albanian consumers, at least in the last five years, the concept of credit card has become more
popular. And yet, again a good part of the population, are still skeptical about using this banking
instrument. Tangible money is seen as a safer way, mostly by older age groups. Thus, the
expansion of the credit card market can help to better understand whether credit card ownership
influences the consumer's tendency to view money as a concept related to power and status, to
spend and to develop hence the concept of compulsive buying.
Hasty purchases or otherwise impulsive purchases, are considered those purchases which were
not planned in advance, ie a "break" of the normal buying model. Accelerated acquisition has
been described as "chronic and recurrent acquisition", performed as a primary response to
events or negative feelings that accompany individuals at a particular point in life O'Cuinn and
Faber (1989). Thus, many researchers link the hasty buying process with self-esteem, the desire
to feel better, and a response to stress, frustration, and self-esteem. These individuals tend to
buy as much as possible, so as not to be in contact with the surrounding environment and to
develop their social position in society. From a scientific perspective, hasty buying is often
overlooked and is classified as an impulsive control disorder Mueller (2007). However, its
relationship with consumption is seen to be delicate and with negative consequences on
personal finances, behaviors and reactions after purchasing the product and consumer self-
esteem. Often these individuals support this overcoming attempt to feel better, but they cause
major problems in their finances, where from these hasty actions, the need often arises to seek
financial advice. However, financial advice is not a very familiar term for the Albanian
consumer. Professional financial advice is mostly owned by large companies with liquidity
problems or individuals who control many businesses at once. Meanwhile, for a larger
population group, financial counselling takes the form of individual counselling regarding
personal finances with a family, friend, co-worker or even dealing with income at their own
expense.
289
However, the concept of hasty or impulsive and often unstoppable purchases should not come
as a surprise as long as over the last century, individuals in society have increasingly supported
debt or credit. If once, the term credit meant timely debt and somewhat unaffordable interest
rates, today with the development of competition and the high number of commercial banks in
the country, individuals have the opportunity to choose the bank that suits them best, at the rates
they want, at the right time and with the amount they want. Lea (1993) in his study emphasizes
the growth of the "debt culture", further expanding the analysis and placing emphasis on
consumer education in this regard. Therefore, as long as individuals are familiar with this
system, the logical connection between credit card and hasty purchases becomes possible. What
is worth noting is the fact that generally all authors use the same variables. This, in turn, makes
the analysis easier, but perhaps limits it to only a few dimensions. In order to avoid this, for the
case of this study, these variables were adjusted, since based on the socio-economic situation
of our country, some variables did not find a place in this test. From the review of selected
literature, we see that James A. Roberts and Eli Jones (2001), had as main goal of their studies,
the investigation of the role and use of credit card in hasty purchase. But, most of the attention,
they paid to the dimensions of money that they thought were essential in helping to understand
how hasty buying is caused. For the latter, Yamauchi and Templer (1982) worked hard and in
the same line in an earlier study in time and were approved by Gresham and Fontenot 1989,
Medina (1996). The highest evidence was from James A. Roberts and Eli Jones (2001), who
found 5 factors / variables, which were discussed a lot. For them, money value, financial well-
being, depression, anxiety, and low self-esteem were the main variables that encouraged
individuals to spend, become impulsive shoppers, and use credit cards more than usual.
Yamauchi and Templer’s (1982), meanwhile, dealt mostly with four dimensions they
considered extremely important, such as: prestige-power, time a consumer needs to buy,
distrust, and anxiety (same variable). According to them, people who showed high tendencies
to create power and prestige through money (as a control variable in our case), use money as a
means to influence and impress others and as a symbol of success. For them, money means
power (according to the study) and is a symbol of success, with which consumers show social
presence by displaying their material wealth, because wealth is the best indicator of power in
modern society Dittmar (2005). In the last decade, studies have been more inclined to look at
money in materialistic terms, perhaps influenced by preliminary analyzes by authors over the
years. Thus, in a detailed paper, Phau & Woo (2008) consider money or rather, consumers'
attitude towards money, power and self-confidence as a powerful indicator of their hasty buying
behavior. Aiming to research and examine the relationship to the attitude towards rushed
purchases, in a paper analyzed for a business magazine, Arpita Khare (2013) paid great attention
to the age and gender of Indian consumers highlighting many results . According to her, hasty
buying behavior is a negative form of expressing feelings through excessive purchases, which
lead to disruption of buying behavior and a destruction of everyone's portfolio. According to
her, demographic factors, including age, gender, income and marital status, influence the
attitudes of individuals towards hasty purchases, deterring the latter from making excessive
purchases. Also according to her, hasty buyers are likely to link the buying process with power,
success and status. They perceive their purchases as a way to overcome negative self-esteem
and anxiety. So there is a strong connection between the desire for power and hasty purchases.
The study also used suggestions regarding consumer education about credit card. It was noted
that credit card companies used terms such as 'power' and 'price sensitivity' to target consumers.
On the other hand, many authors considered it as the main factor, from which many variables
would be essential indicators in the relationship "credit card-hasty purchase". Seen by many
authors as a powerful tool and a powerful gauge of consumer status, specifically below will be
listed some authors who have the same opinions but also those authors who think differently.
290
Where and how the paths of those who think of this essential factor in the analysis are divided,
and how they suggest their theory. It should be noted that, specifically this analysis focuses on
foreign authors, as it was very difficult to find data from works by Albanian authors on this
issue. It was Valence et al (1988) who concluded in the fact that, hasty buyers are characterized
by low self-esteem and negative emotional states. Also, the motivation to buy frequently is
driven by the need to overcome negative emotional states and low self-esteem. Also, other
scholars drew the same conclusions, added that there is an important relationship between high
anxiety and sensitivity. Elliot (1994) also explained in his study that hasty buying behavior is a
chronic repetitive buying behavior caused by anxiety and low self-esteem, the same logic as the
authors before. Meanwhile, according to Arpita Khare (2016) age, income, education and
marital status affect hasty purchasing, thus bringing new research variables. However,
regarding the use of credit cards and the connection with hasty purchases, some authors are of
the same opinion. It was Arpita Khare (2016) who made a connection between the use of credit
cards and hasty purchases, saying that consumers' attitude towards credit cards has not affected
hasty purchases. But Phau & Woo (2008) disagreed with this conclusion, concluding from their
studies that credit card affects hasty purchases and according to them, individuals who have
credit cards are more prone to buy more many and often exceed the limit of their cards. This,
according to them, happens because individuals feel more secure when they have credit cards
and are not worried about money if they want to buy more. Thus, they place these two factors
in a direct connection between them. In their conclusions, they said rushed buyers are also the
most frequent users of credit cards and are more likely to have a better job and consequently
spend more. In several youth studies, Cliff A. Robb (2011) examined the relationship between
financial literacy and the credit card behavior of college students. According to him, students
with higher scores in a measure of personal financial knowledge, are more likely to engage in
more responsible use of the credit card. In the same line of study was Bailey Harper (2015),
where according to him a special implication in hasty purchases and credit card connection, had
financial knowledge. According to him, financial knowledge was inevitably linked to financial
stability. An individual in general, according to him, could not have a financial stability if he
did not possess financial knowledge and financial culture. The results of his analysis showed
that those who had better financial knowledge were more likely to have lower use of credit
cards and consequently of hasty purchases. Meanwhile, Jeff Wan and Jing J. Xiao (2009) who
examined the factors associated with college student credit card debt concluded that students
with a propensity for hasty purchases are more likely and those with more support large social
workers are less likely to bear credit card debts. Meanwhile, unlike any author discussed earlier,
they displayed a new trend of influence by saying that college student social networks affect
their credit card debt. However, they all came to the same conclusion that personal financial
knowledge influences the behavior of college student credit card users. While Bailey Harper
(2015), had a very interesting look at the accumulated credit card debt. He said: "Using credit
cards when buying is necessarily a recipe for high levels of debt", implying that the credit card
is a financial instrument that has a direct relationship with debt and certainly this was not a
good. Thus, in his study he put forward the idea of financial responsibility. The latter approved
as highly factual through the preliminary results of Moore & Carpenter (2009). For the latter,
financial responsibilities and financial knowledge was a key variable to consider the credit card
as an instrument of financial value and to evaluate it for the positive effects it brings.
3. METHODOLOGY
We are interested in the Albanian consumer access to the variables made available from foreign
literatures, which were carefully adjusted in the following analysis. The use of credit cards and
hasty purchases as a response to financial reflection will be the variables that have accompanied
this study.
291
In this way, it is logical for these variables to be investigated through the questionnaire. The
selection framework consists of various statements that can measure the performance of the
variables. The assertions chosen are based on the factors considered, with the focus being on
the credit card. Of course, the choice is also determined by the importance that each statement
has on each target consumer. The data collected will assist in further analysis. As long as some
research goals are formulated based on some concepts and the concepts are expressed in
corresponding variables, it is more than logical to collect data for the analysis of the
phenomenon and for the recognition of the behavior of the variables. Due to the nature of the
research of the topic, for the specifics it carries, it is difficult to find ready-made data, especially
regarding the case of Albania. Ready-made data are known as secondary data, as they are
processed and published by third parties, which may be institutions or other legal entities.
Primary data are data that are collected from the study conducted. It is understandable that this
data is not ready, therefore, the manner of data collection, analysis and reporting is the direct
responsibility of the study. Primary data were collected through a structured questionnaire,
addressed to different individuals, able to respond objectively to this questionnaire. Most of the
questions of interest that are part of the questionnaire are bipolar scaling questions, otherwise
known as liqueur scaling. These types of questions are formulated in such a way that their
answer fluctuates between the two ends and each position is associated with a number of
ascending order, being "Completely Disagree" with the number 1, "Disagree" with the number
2, “Neither diagree nor agree” with the number 3,“Agree” with the number 4, and “Fully agree”
with the number 5. Considering it reasonable, in this research bipolar scaling (liqueur scaling)
was used, which is with five scales, where the lowest scale with number 1 is known as "Not at
all", while the highest degree with number 5 is known as "Completely". It should be noted that,
each of the factors considered important for this paper, are a combination of several statements
that find place in explaining the variables within the questionnaire. They are calculated as the
average of the answers given for each statement. The grouping of factors comes as a result of
the interest to present the dimensions of the data. This happens in the case of exploratory
analyzes. The grouping of known variables as factors also helps the hypotheses raised. The
method to be used in this research is multifactorial linear regression. Regression analysis serves
to study the relationships of ratios or relationships between two or more variables. In the case
of simple regression, it can be linear and nonlinear regression. The regression equation is an
equation that defines the ratios between two variables and is used to estimate the dependent
variable (y) based on the independent variable (x). The dependent variable is the projected or
estimated variable. The independent variable is the variable that provides the basis for the
estimate. Regression analysis is used to predict the value of the dependent variable based on at
least one independent variable; explain the effects of changing the independent variable to the
dependent variable. The dependent variable is the variable we want to predict or explain, in our
case it is hasty purchases. The independent variable is the variable used to explain the dependent
variable, which in this case are the cost of use, care of expenses, attitude towards the use of the
credit card.
4. RESULTS
Using parametric testing, namely the t-test, we know that independent variables, in order to
give a statistically significant effect, should present a value greater than 1.96, which is the
critical value. Hypotheses about the importance of each variable must first be made, which are
presented as follows:
Ho: βi = 0 (non-statistically significant variable).

Ha: βi ≠ 0 (statistically significant variable).
292
This preliminary testing allowed to infer that if the variable "Cost of use" would increase by
one, then the variable "compulsive buying" would increase by 0.244 units. The obtained value
of t = 2.808 is greater than 1.96, meaning that the basic hypothesis cannot be accepted and the
variable is statistically significant. Similarly, if the variable "Buying behavior" would increase
by one, then the variable "compulsive buying" would increase by 0.285 units, being the t-test
value 3.624 and, therefore meaning the variable is statistically significant as well. Likewise,
whether the variable "Attitude towards using a credit card" would increase by one, then the
variable "Accelerated purchases" would also increase, but by 0.327 units. The value of t = 3.956
is greater than the critical value of 1.96, allowing the same interpretation as above.
Table 1, shown below, offers the fundamental the regression results of the model.
Variable B SE Beta t p
Constant 0.450 0.399 - 1.128 0.260
Gender -0.066 0.131 -0.031 -0.504 0.615
Age -0.020 0.008 -0.215 -2.624 0.009
Monthly income 0.385 0.079 0.294 4.852 0.000
Being single 0.275 0.157 0.129 1.749 0.082
Credit card usage 0.244 0.087 0.166 2.808 0.000
Buying behaviour 0.285 0.079 0.239 3.624 0.000
Attitude towards credit card usage 0.327 0.083 0.247 3.956 0.000
Table 1: Regression results
Therefore it is suggested with this research that individuals are more inclined to buy more when
using credit card. This may lead to an increase in their debts to the bank due to the increase in
hasty purchases, which respondents admit are less skeptical about product prices and buy more
when they have at least one credit card, however this does not prevent them from being hasty
buyers. Thus, we can say that according to all the data collected from the survey and analysis
conducted, we conclude that the hasty purchase among our respondents operates to a
considerable extent. Thus, in conclusion we can say the results are in consistent with theory.
The results of this research work are in proportion to the hypotheses raised at the beginning of
the study.
5. CONCLUSION
One curious finding regarding the variable "Civil Status", is that the questionnaire shows that
most individuals, who comprise the largest percentage of respondents, belong to the status
"single". Based on communication and consultation with foreign literature, which suggests that
individuals who have not yet established a responsibility for the family or their family shelter,
singles are more likely to be hasty buyers and also based on the results of the analysis ours, we
will take this assumption for granted. This assumption also takes place in this analysis. While
individuals who have created a family, try to be more prudent about purchases and not spend
too much on moment purchases influenced by different factors. During the Regression analysis,
a consistency of this theory with our results was observed. So civil status has a huge impact on
the attitude towards rushed purchases and actually makes sense. From the Regression analysis,
it was concluded that individuals are more prone to make hasty purchases when buying by
credit card, much more than when buying with Cash. This may be due to the fact that the credit
card gives them the advantage of buying even when there is not enough money in the account
and repaying this debt in a second. It also gives them the opportunity to buy faster, safely and
often with the advantage of various bonuses offered by the respective bank. Respondents
admitted that they are less worried about the price when buying with a credit card and this
293
makes it possible to increase hasty purchases, but this only happens if the credit card is the
operating factor. Otherwise, if they used Cash, they would buy fewer products and services.
Admittedly, such a result is particularly satisfactory given the fact that in our country, a good
portion of individuals, consider Cash money as a better and safer way to carry out all the
activities of their economic. What can be recommended in relation to this topic, is related to the
awareness of individuals about bank cards in general and credit card in particular. Reinforcing
the consumer culture about the benefits of online banking would help in a more constructive
analysis. Also, various instruction manuals about the pros and cons, as well as the use, so that
individuals do not risk the other benefits that a credit card actually possesses. Also, an
awareness measure should be achieved for individuals regarding hasty purchases. Today, the
Albanian consumer is not very familiar with this term, much less to have information on what
"symptoms" you should have to be called a hasty buyer. Thus, an awareness campaign should
be recommended where individuals are given more information that is extremely worrying
around the world. This is because, this phenomenon affects not only the personal income and
portfolio of everyone, but the personal finances in the long run.
ACKNOWLEDGEMENT: This paper was supported by the Internal Grant Agency of FaME
TBU No. IGA/FaME/005/21.
LITERATURE:
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age and endorsement of materialistic values as predictors. British Journal of Psychology,
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development of a diagnostic tool. Association of Consumer Research, 16, 738-744.
3. Faber, R.J., & O’Guinn, T. (1992). A clinical screener for compulsive buying. Journal of
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4. Gresham, A., & Fontenot, G. (1989). The differing attitudes of the sexes toward money: an
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7. Khare, A. (2016). Money attitudes, credit card and compulsive buying behaviour: A study
on Indian consumers. Int. J. Business Competition and Growth, (5), 49-71.
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295

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Varazdin Development and Entrepreneurship Agency and University North

Economic and Social Development

Aveiro, 24-25 May, 2021

Economic and Social Development

Aveiro, 24-25 May, 2021

Editors ◼ Marco Andre da Silva Costa, Abdelhamid Nedzhad, Danijela Lucic

Publishing Editor ◼ Spomenko Kesina, Mario Vrazic, Domagoj Cingula

Printing ◼ Online Edition

THE EFFECT OF CORPORATE INCOME TAXATION ON COMPANIES

A REVIEW OF TIME DRIVEN ACTIVITY BASED COST IN SERVICES AND

CLUSTER DYNAMICS’ FRAMEWORK .......................................................................... 21

WHAT LEADS TO BRAND HATE? ANTECEDENTS AND OUTCOMES OF BRAND

A PROPOSAL TO USE BLOCKCHAIN TECHNOLOGY IN INNOVATION

ARE FEMALE-HEADED HOUSEHOLDS IN POORER LIVING CONDITIONS THAN

FAMILY OWNED BUSINESSES AND THEIR INNOVATIVE BEHAVIOR: AN

THE BULGARIAN MODEL OF THE PROSECUTOR’S OFFICE AND THE

STRATEGIC CHALLENGES OF TRANSNATIONAL CORPORATIONS FROM

ACCOUNTANTS IN THE DIGITAL AGE, FROM PRIVATE TO PUBLIC SECTOR:

PARTICIPATION OF AZERBAIJAN IN THE WTO: PROBLEMS AND PROSPECTS

WINE WITH GRAVITY: SPARKLING VS STILL WINE ........................................... 120

THE IMPACT OF THE COVID 19 PANDEMIC ON THE BUSINESS OF THE EBAY

COMMUNITY PARTICIPATION IN LOCAL ECONOMIC DEVELOPMENT ....... 136

BLOCKCHAIN AND IMPACT INVESTMENT - CASE STUDY OF THE

TOURISM ENTREPRENEURS AND THEIR VISION FOR REOPENING WITH

THE POSSIBILITIES OF REFORMING TOURIST BOARDS INTO NEW

IS MASS CUSTOMISATION THE PATH FOR SMALL AND MEDIUM

SUSTAINABILITY DIMENSIONS ASSESSMENT: AN ESSAY FOR DOURO

ECONOMETRIC ASSESSMENT OF THE ASSOCIATIVE ACTIVITY OF THE

GROWING IMPORTANCE OF CREATIVE THINKING IN HIGHER EDUCATION

DESIGNING A DIGITAL EDUCATION ECOSYSTEM ............................................... 218

HEALTH DIPLOMACY AS A SOFT POWER TOOL OF THE PR CHINA DURING

SUICIDE REPORTING IN CROATIA (A CASE STUDY: BJELOVARSKI LIST, 2009-

TESTING FOR COMPETITION IN BULGARIA BANKING INDUSTRY: THE

CAUSALITY BETWEEN GOVERNMENT EXPENDITURE AND ECONOMIC

HUMAN RESOURCES MANAGEMENT UNDER THE INFLUANCE OF COVID 19

THE DETERMINANTS OF COMPULSIVE BUYING: A BALKANS CASE ............. 288

THE EFFECT OF CORPORATE INCOME TAXATION ON

Jose Carlos Lopes

2.1. Profitability and return on equity

2.2. Tax burden and profitability

2.3. The DuPont Model

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑠𝑎𝑙𝑒𝑠 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑅𝑂𝐸𝑖 = 𝛼 + 𝛽𝑖 𝑇𝑎𝑥 𝐸𝑓𝑓𝑒𝑐𝑡𝑖 + 𝜀 [3]

4. RESULTS AND DISCUSSION

Table 1: Statistical distribution

Figure 1: Distribution of the observation by variable on a 0 to 1 scale.

(Source: Author's elaboration)

Table 2: Pearson correlation between variables

Table 3: OLS estimation results

37. Sultan, A. (2014). Financial Statements Analysis - Measurement of Performance and

A REVIEW OF TIME DRIVEN ACTIVITY BASED COST IN SERVICES

Sandra Raquel Alves

3. RESULTS AND DISCUSSION

Table following on the next page

Table 1: Research Results

Process maps were developed for each

The study was exempt from an

It was performed a time-driven

Laboratory animal programs